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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required) For the fiscal year ended December 31, 2000.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________.
Commission File Number 0-11526
FIRST COLONIAL GROUP, INC.
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(Name of Registrant as Specified in its charter)
Pennsylvania 23-2228154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
76 South Main Street, Nazareth, Pennsylvania 18064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-746-7300
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant is $26,491,563. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 26, 2001 was 1,967,919.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Company's Proxy Statement to be filed in connection
with its 2001 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 26, 2001. Includes an
aggregate of 226,149 shares, with an aggregate market value of $3,674,921, 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, and other statements which are not
historical facts or as to the Company's, the Bank's or management's intentions,
plans, 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, and the results of
litigation. 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, 2000, 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 $7,418,000,
representing a negative cumulative one year gap of 96%. If interest rates rise,
the Company could experience a decrease in net interest income. The Company also
has interest rate risk if interest rates decline. This risk is the result of the
investment in U. S. Agency securities that have call features. If interest rates
decline, $54,420,000 of these securities could be called; thus reducing 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", and
"Item 7.A. Quantitative and Qualitative Disclosure About Market Risk".
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. As a result of the
recent repeal of the Glass-Steagall Act which separated commercial and
investment banking industries, all banking organizations, including the Company,
are likely to face an increase in competition. See "Supervision and Regulation"
- - "Recent Regulation".
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.
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, one branch in Allentown, Pennsylvania, one branch in Trexlertown,
Pennsylvania, and one branch in Whitehall, Pennsylvania. The Bank has
twenty-seven 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, at the Best
Western Hotel in Stroudsburg, Pennsylvania, and at the Redner's mini-market on
Airport Road in Allentown, 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, 2000 the Company, on a consolidated basis, had total
assets of $442,708,000, total deposits of $353,190,000, and total shareholders'
equity of $34,188,000.
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, 2000, the Bank had total assets of $442,708,000, total
deposits of $353,190,000 and total shareholders' equity of $34,188,000. 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 seventeen 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. Three offices are 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 the Best Western Hotel in Stroudsburg, Pennsylvania, in the
Redner's mini-market in Allentown, 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, Allentown, 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, Allentown, 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, Vista Bank, headquartered in
Phillipsburg, New Jersey with branches in Easton, Pennsylvania, and 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, 2000, First C. G. Company, Inc.
had total assets of $4,455,000, of which $2,962,000 was invested in common
stocks and $1,377,000 in loans to the Bank's ESOP and most of the remaining
assets were in interest-bearing bank deposits. The total shareholders' equity at
December 31, 2000 was $4,343,000.
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.
There are various legal restrictions on the extent to which the Company and
its non-bank subsidiary can borrow or otherwise obtain credit from its banking
subsidiary. In general, these restrictions require that any such extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the Company of such non-bank subsidiary, to ten
percent of the lending bank's capital stock and surplus, and as to the Company
and its non-bank subsidiary in the aggregate, to 20 percent of such lending
bank's capital stock and surplus. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
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 R - 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 were 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 have been identical for comparably
rated institutions since January 1, 2000, at which time banks shared equally in
the FICO assessment and the BIF and SAIF funds were 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, 2000 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $35,733 15.16% $18,862 8.00% --- ---
Bank $31,161 13.03% $19,127 8.00% $23,909 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,313 14.13% $ 9,431 4.00% --- ---
Bank $28,750 12.02% $ 9,564 4.00% $14,345 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $33,313 8.00% $16,654 4.00% --- ---
Bank $28,750 6.95% $16,557 4.00% $20,697 5.00%
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 8.32% $15,324 4.00% --- ---
Bank $28,194 7.41% $15,210 4.00% $19,012 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; and (2) the holding
company must have made an effective election to be a financial holding company
to engage in activities that would not have been permissible before the Act. In
order for the election to be effective, all of the depository institution
subsidiaries must have a CRA rating of "satisfactory" or better at its most
recent examination. The Company has not yet elected to be a financial holding
company. 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.
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, 2000 and 1999 in Note
T 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 2000 and 1999. 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, 2000 the Company had approximately 211 employees, of
whom 43 were part-time. The Company considers its relationship with its
employees to be good.
Additional Information
The tables listed below, which are set forth on pages 17 through 22 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)
2000
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 4,011 $ 4,022
U. S. Government Agency 79,145 79,099
State and Political Subdivisions 28,210 28,253
Mortgage-Backed Securities 44,110 44,129
Equity Securities 8,496 8,526
------- -------
Total $163,972 $164,029
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
2000
Held-to-Maturity Securities Carrying Amount Approximate
at Amortized Fair
Cost Value
U. S. Government Agencies $ 7,937 $ 7,903
State and Political Subdivisions 8,016 7,991
Mortgage-Backed Securities 4,019 4,012
------- -------
Total $19,972 $19,906
1999
Held-to-Maturity Securities Carrying Amount Approximate
at Amortized Fair
Cost Value
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. 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
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 2000 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, 2000
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 $ 2,000 5.69 % $ 2,023 6.05 % $ -- -- %
U. S. Government Agency -- -- 13,053 6.86 36,742 6.80
Mortgage-backed Securities 1 9.00 250 5.93 6,028 6.34
State and Political
Subdivisions 145 6.29 1,465 6.98 10,357 7.00
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 2,146 5.73 % $16,791 6.76 % $53,127 6.79%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.20 3.41 7.79
==== ==== ====
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands) After 10 Years Total
Amount Yield Amount Yield
U. S. Treasury $ -- -- % $ 4,023 5.87 %
U. S. Government Agency 26,462 7.27 76,257 6.97
Mortgage-backed Securities 40,692 6.83 46,971 6.76
State and Political
Subdivisions 16,285 7.30 28,252 7.17
Equity Securities 8,526 6.07 8,526 6.07
----- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $91,965 6.97 % $164,029 6.87 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 19.58 13.85
===== =====
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 $ -- -- % $ -- -- % $ 5,125 7.04 %
Mortgage-backed Securities 3 6.50 303 6.57 671 6.63
State and Political
Subdivisions 201 7.59 1,938 6.99 1,913 7.00
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 204 7.57 % $ 2,241 6.94 % $ 7,709 7.00%
===== ==== ======= ==== ======= ====
Average Of Held-to-Maturity
Securities in years 0.54 3.60 8.10
==== ==== ====
HELD-TO-MATURITY
AT AMORTIZED COST
(Dollars in Thousands) After 10 Years Total
Amount Yield Amount Yield
U. S. Government Agency $ 2,812 7.61 % $ 7,937 7.24 %
Mortgage-backed Securities 3,043 5.93 4,020 6.10
State and Political
Subdivisions 3,963 8.77 8,015 7.89
----- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 9,818 7.56 % $ 19,972 7.27 %
======= ==== ======= ====
Average Of Held-to-Maturity
Securities in years 18.54 12.65
===== =====
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996.
Loan Portfolio by Type
(Dollars in Thousands) For the Year Ended December 31,
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
Real Estate - Residential $128,862 $112,870 $119,914 $138,539 $134,013
Real Estate - Construction 5,923 6,737 11,689 12,361 10,923
Real Estate - Commercial 27,206 26,809 29,587 34,579 39,421
Consumer/Installment 53,062 45,886 40,184 35,914 28,870
Commercial (non-Real Estate)
and Agricultural 10,214 9,538 10,900 9,086 8,715
State and Political Subdivisions 2,089 1,096 1,178 944 906
Other 19 13 10 20 28
-------------------------------------------------
TOTAL GROSS LOANS 227,375 202,949 213,462 231,443 222,876
Unearned Income (431) (691) (1,025) (1,856) (2,759)
-------------------------------------------------
Total Loans 226,944 202,258 212,437 229,587 220,117
Allowance for Possible
Loan Losses (2,411) (2,437) (2,691) (2,664) (2,532)
-------------------------------------------------
NET LOANS $224,533 $199,821 $209,746 $226,923 $217,585
=================================================
At December 31, 2000 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, 2000, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.
Loan Maturity and Interest Sensitivity
Due in Due in Due in
As of December 31, 2000 One Year One to Over
(Dollars in Thousands) or Less Five Years Five Years Total
- -------------------------------------------------------------------------------
Real Estate - Construction $ 2,033 $1,209 $ 2,681 $ 5,923
Real Estate - Commercial 15,024 9,086 3,096 27,206
Commercial (Non-Real Estate)
and Agricultural 6,215 2,445 1,554 10,214
------ ------ ------- -------
TOTAL $23,272 $12,740 $ 7,331 $43,343
====== ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $ 5,176 $ 4,028
Floating Interest Rate 7,564 3,303
------ ------
TOTAL $12,740 $ 7,331
======= =======
The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
As of December 31,
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial $ 779 $ 901 $1,350 $1,183 $ 663
Real Estate- Construction -- -- 4 6 7
Real Estate - Residential 281 212 128 191 198
Consumer/Installment 964 764 738 785 811
Unallocated 387 560 471 499 853
------ ------ ------ ------ ------
TOTAL $2,411 $2,437 $2,691 $2,664 $2,532
====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
As of December 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial 17.38 % 18.46 % 19.52 % 19.28 % 22.02 %
Real Estate - Construction 2.61 3.32 5.48 5.34 4.90
Real Estate - Residential 56.67 55.61 56.18 59.86 60.13
Consumer/Installment 23.34 22.61 18.82 15.52 12.95
----- ----- ----- ----- -----
TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31,
2000, 1999 and 1998 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
For the Year Ended December 31,
2000 1999 1998
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
Demand Deposits
Non-Interest Bearing $ 43,893 --- % $ 41,337 --- % $ 35,254 --- %
Interest Bearing 53,151 1.01 52,395 1.18 48,988 1.15
Money Market Deposits 13,461 2.79 13,827 2.76 14,366 2.81
Savings & Club Accounts 62,834 2.22 63,199 2.06 61,177 2.21
Certificates of Deposit
under $100,000 157,164 5.60 139,076 5.26 124,823 5.59
Certificates of Deposit
of $100,000 or more 5,886 5.18 5,040 4.01 4,700 3.72
------ ---- ------ ---- ------ ----
Total Deposits $336,389 $314,874 $289,308
======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
At December 31,
(Dollars in Thousands) 2000 1999
-----------------------------------
Three Months or Less $3,564 $ 252
Over Three, Through Six Months 2,656 471
Over Six, Through Twelve Months 1,577 2,547
Over Twelve Months 429 1,835
-----------------------------------
TOTAL $8,226 $5,105
===================================
There were no brokered deposits at December 31, 2000 and 1999.
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; its branch office located within Wal-Mart's at 500
Route 940, Mt. Pocono, Pennsylvania; its branch office located within the Giant
Supermarket, 2540 McArthur Road, Whitehall, Pennsylvania; and its branch office
located within the Giant Supermarket, 6900 Hamilton Boulevard, Trexlertown,
Pennsylvania..
Item 3. Legal Proceedings
The Company has reserved $2.48 million against asserted claims and claims
which have been or may be asserted against the Bank in connection with certain
pre-need funeral trust funds. Most of the claims arise from Trusts, in which the
Company was allegedly directed by funeral directors to invest in a private
placement annuity issued by EA International Trust. The Bank has settled the
asserted claims for the amount reserved.
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 Treasurer since January, Executive Vice President
59 (a) 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 None Executive Vice President
68 (b) and Senior Loan Officer
since September, 1997
Robert M. McGovern None Executive Vice President,
61 (d) 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. 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 National
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, 2000, there were 772 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 H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $13.50 in December 2000 and
$16.55 in December 1999. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of June 2000 and June 1999 (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
- -------------------------------------------------------------------------------
1999
First Quarter $26.30 $20.87 $ 0.1724
Second Quarter 22.86 19.72 0.1724
Third Quarter 23.10 17.62 0.1810
Fourth Quarter 19.05 16.37 0.1810
-------
TOTAL $ 0.7068
- -------------------------------------------------------------------------------
2000
First Quarter $18.69 $14.05 $ 0.1810
Second Quarter 16.33 12.26 0.1810
Third Quarter 17.00 12.00 0.1900
Fourth Quarter 16.50 12.75 0.1900
-------
TOTAL $ 0.7420
- -------------------------------------------------------------------------------
The Company did not sell any of its equity securities during 2000 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) 2000 1999 1998 2000/99 1999/98
- --------------------------------------------------------------------------------
At Year-End
Assets $ 443,051 $ 391,889 $ 358,496 13.1 % 9.3 %
Deposits 353,190 324,480 294,549 8.8 10.2
Loans 226,944 202,258 212,437 12.2 (4.8)
Shareholders' Equity 33,521 28,243 31,717 18.7 (11.0)
For the Year
Net Interest Income $ 15,340 $ 14,904 $ 14,496 2.9 % 2.8 %
Net Income 2,072 3,282 3,032 (36.9) 8.2
Per Share *
Basic Net Income $ 1.09 $ 1.75 $ 1.60 (37.8)% 9.4 %
Diluted Net Income 1.09 1.74 1.59 (37.5) 9.4
Dividends Paid 0.74 0.70 0.67 5.7 4.5
Book Value 17.08 15.28 18.17 11.8 (15.9)
Financial Ratios
Return on Average Assets .50% .86% .86%
Return on Average Equity 7.04% 10.90% 9.79%
Tier I Capital
to Average Assets (Leverage) 8.00% 8.32% 8.60%
* Per share data have been restated to reflect the 5% stock dividends of June
2000, June 1999 and June 1998.
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 are 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, 2000, 1999 and 1998. 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 2000,
1999 and 1998.
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
future loan and deposit volumes, 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,
and other statements which are not historical facts or as to the Company's, the
Bank's or management's intentions, plans, beliefs, expectations or opinions.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements including, without
limitation, the effect of economic conditions and related uncertainties, the
effect of interest rates on the Company and the Bank, Federal and state
government regulation, competition, and the results of litigation. 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,
2000, a copy of which may be obtained from the Company upon request and without
charge (except for the exhibits thereto).
Financial Performance Summary
In 2000, First Colonial Group recorded net income of $2,072,000. The 2000
net income was $1,210,000 or 36.9% lower than 1999 net income of $3,282,000. The
Company's net income in 1998 was $3,032,000.
The basic earnings per share were $1.09, $1.75 and $1.60 in 2000, 1999 and
1998, respectively. The diluted earnings per share were $1.09 in 2000, $1.74 in
1999 and $1.59 in 1998. Diluted earnings per share include the effect of common
stock equivalents such as options (see Note P of the "Notes to Consolidated
Financial Statements").
The Company's return on average assets was .50% in 2000 as compared to .86%
in 1999 and .86% in 1998. The return on average equity was 7.04%, 10.90% and
9.79% in 2000, 1999 and 1998, respectively.
The principal factor affecting the decline in earnings in 2000 was a
$2,272,000 or 15.5% increase in total other expenses. Included in this increase
in expenses was an addition of $1,012,000 to the special reserve for Funeral
Trust litigation (see discussion on Liquidity and Capital Resources). Also
affecting earnings was a decrease of $389,000 or 69.1% in net gains on the sale
of securities and a $98,000 or 62.4% decline on the gains on the sale of
residential real estate loans. These reductions in income were offset in part by
increases of $436,000 or 2.9% in net interest income and $454,000 or 12.5% in
other income, exclusive of the net gains on the sales of investment securities
and real estate loans held-for-sale. Also impacting earnings in 2000 was a
reduction of $659,000 or 71% in Federal income taxes.
The change in 1999 earnings was the result of a $408,000 increase in net
interest income and an increase of $175,000 in other income, exclusive of net
gains on the sale 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. Offsetting the earnings increases were a decline in net gains on the
sale of securities and mortgage loans of $400,000 and higher operating expenses
of $110,000.
The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 2000 were $443,051,000 as compared to $391,889,000 at
year end 1999. This was an increase of $51,162,000 or 13.1%. During 2000, total
deposits grew by 8.8% or $28,710,000 to a year-end total of $353,190,000. Total
deposits at December 31, 1999 were $324,480,000. Total loans amounted to
$226,944,000 and $202,258,000 at December 31, 2000 and 1999, respectively. The
loan increase in 2000 was $24,686,000 or 12.2%.
- -------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in Thousands,
except per share data)
For the Year Ended
December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 29,287 $ 26,353 $ 25,367 $ 25,444 $ 23,135
Interest Expense 13,947 11,449 10,871 10,831 9,578
--------- --------- --------- --------- ---------
Net Interest Income 15,340 14,904 14,496 14,613 13,557
Provision for Possible
Loan Losses 375 375 450 605 670
Gains (Losses) on the
Sale of Mortgage Loans 59 157 398 178 (30)
Other Income, Excluding
Securities and Loan
Sale Gains 4,089 3,635 3,460 3,044 2,364
Securities Gains, Net 174 563 722 601 308
Other Expense 16,945 14,673 14,563 13,252 11,571
--------- --------- --------- --------- ---------
Income Before Income Taxes 2,342 4,211 4,063 4,579 3,958
Income Taxes 270 929 1,031 1,296 1,136
--------- --------- --------- --------- ---------
Net Income $ 2,072 $ 3,282 $ 3,032 $ 3,283 $2,822
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,406 $ 1,321 $ 1,275 $ 1,139 $ 1,011
Cash Dividends Paid Per Share 0.74 0.70 0.67 0.61 0.55
Dividends Paid to Net Income 67.86% 40.25% 42.05% 34.69% 35.82%
PER SHARE DATA:
Basic Income $ 1.09 $ 1.75 $ 1.60 $ 1.74 $ 1.52
Diluted Net Income 1.09 1.74 1.59 1.74 1.52
Basic Average Common
Shares Outstanding 1,899,702 1,875,320 1,895,304 1,876,078 1,853,222
Dilutive Average Common
Shares Outstanding 1,901,823 1,878,777 1,903,543 1,881,667 1,856,356
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $443,051 $391,889 $358,496 $346,738 $322,352
Loans (Net of
Unearned Discount) 226,944 202,258 212,437 229,587 220,117
Mortgage Loans
Held-for-Sale --- --- 603 759 721
Deposits 353,190 324,480 294,549 282,255 267,668
Securities Sold Under
Agreements to Repurchase 7,215 1,730 5,094 8,804 3,795
Debt (Short-Term
and Long-Term) 39,695 30,000 20,000 18,390 18,512
Shareholders' Equity 33,521 28,243 31,717 30,357 26,805
Book Value Per Share 17.08 15.28 18.17 17.49 16.37
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets 0.50% 0.86% 0.86% 0.97% 0.92%
Average Shareholders' Equity 7.04% 10.90% 9.79% 11.67% 11.16%
Tier 1 Capital
to Average Assets (Leverage) 8.00% 8.32% 8.60% 8.33% 8.35%
- -------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year
Ended December 31,
2000 1999 1998
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 $ 2,281 $ 141 6.18% $3,928 $ 196 4.99% $ 3,060 $ 176 5.75%
Fed Funds
Sold 328 23 7.01 975 47 4.82 641 34 5.30
Inv Sec
Taxable 139,283 9,440 6.78 107,054 6,829 6.38 80,939 5,002 6.18
Non-Tax(1) 30,142 2,374 7.88 31,668 2,787 7.22 26,155 1,923 7.35
Loans(1(2) 214,856 18,171 8.46 212,993 17,817 8.36 219,357 18,910 8.62
Allow for
Loan Losses (2,474) --- --- (2,669) --- --- (2,710) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 212,382 18,171 8.56 210,324 17,817 8.47 216,647 18,910 8.73
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 384,416 30,149 7.84 353,949 27,176 7.68 327,442 26,045 7.95
Non-Int
Earn Assets 31,926 --- --- 29,513 --- --- 25,419 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $416,342 30,149 7.24 $383,102 27,176 7.09 $352,861 26,045 7.38
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 53,151 536 1.01 $ 52,395 619 1.18 $ 48,988 562 1.15
Money
Market
Deposits 13,461 375 2.79 13,827 382 2.76 14,366 404 2.81
Savings &
Club
Deposits 62,834 1,392 2.22 63,199 1,304 2.06 61,177 1,350 2.21
CD's over
$100,000 5,886 305 5.18 5,040 202 4.01 4,700 175 3.72
All Other
Time Dep 157,164 8,806 5.60 139,076 7,312 5.26 124,823 6,975 5.59
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 292,496 11,414 3.90 273,537 9,819 3.59 254,054 9,466 3.73
Securities
Sold Under
Agreements
to Repurchase 7,226 332 4.59 5,994 194 3.24 5,821 210 3.61
Other Short-
Term
Borrowings 3,994 256 6.41 1,721 89 5.17 974 55 5.65
Long-Term
Debt 31,377 1,945 6.20 23,534 1,347 5.72 18,631 1,140 6.12
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 335,093 13,947 4.16 304,786 11,449 3.76 279,480 10,871 3.89
NON-INTEREST
BEARING
LIABILITIES
Non-Int-
Bearing
Deposits 43,893 --- --- 41,337 --- --- 35,254 --- ---
Other Liab 7,913 --- --- 6,843 --- --- 7,157 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 386,899 13,947 3.60 352,966 11,449 3.24 321,891 10,871 3.38
SHAREHOLDERS'
EQUITY 29,443 --- --- 30,136 --- --- 30,970 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $416,342 13,947 3.35 $383,102 11,449 2.99 $352,861 10,871 3.08
-------- ------ -------- ------ -------- ------
NET INTEREST
INCOME $ 16,202 $15,727 $15,174
-------- ------- -------
Net Interest
Spread (3) 3.68 3.92 4.06
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.53 0.52 0.57
NET INTEREST
MARGIN (4) 4.21% 4.44% 4.63%
---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The taxable equivalent adjustments included above are
$862,000, $823,000 and $678,000 for the years 2000, 1999 and 1998, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $285,000, $212,000 and $358,000 for th years 2000, 1999 and
1998, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $1,237,000,
$2,581,000 and $3,736,000 for 2000, 1999 and 1998, 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 average
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 J
of the "Notes to Consolidated Financial Statements". Interest income on loans
included loan fees of $285,000, $212,000 and $358,000 for the years ended
December 31, 2000, 1999 and 1998, 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 $16,202,000 for 2000, an increase
of $475,000 over $15,727,000 in 1999. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 2000 was attributable to higher
net interest income of $485,000 due to changes in volume and a reduction in net
interest income of $10,000 due to changes in rates. The volume-related change
resulted primarily from increases in investment securities and average balances
for loans (see discussions on "Loan Portfolio" and "Mortgage Loans
Held-for-Sale"), partially offset by an increase in time deposits and debt. The
rate-related change was primarily the result of the increase of interest paid on
time deposits and debt, offset in part by increases in the interest rate earned
on investments and loans.
Net interest income, on a fully taxable equivalent basis, in 1999 increased
$553,000 over the 1998 figure of $15,174,000. 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 1999 was the decrease in interest rates 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.
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 4.21% for 2000, 4.44% for 1999 and 4.63% for 1998. The
decrease in 2000 was the result of the 0.4% increase in the average rate paid
on interest-bearing liabilities being greater than the 0.16% increase in the
average interest rate earned on interest-earning assets. 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 3.68%, 3.92% and
4.06% for 2000, 1999 and 1998, respectively. The impact on earnings by the
reduction in the interest spread was diminished in part by the $2,556,000
increase in 2000 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, 2000 and 1999, 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,
2000 to 1999 1999 to 1998
Change Due to: Change Due To:
TOTAL RATE VOLUME TOTAL RATE VOLUME
----- --- ----- ----- ----- -----
Interest Income
Interest-Bearing Balances
With Banks $ (55) $ 27 $ (82) $ 20 $ (30) $ 50
Federal Funds Sold (24) 7 (31) 13 (5) 18
Investment Securities 2,698 680 2,018 2,191 146 2,045
Loans 354 180 174 (1,093) (580) (513)
----- --- ----- ----- ----- -----
Total Interest Income 2,973 894 2,079 1,131 (469) 1,600
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (2) (2) - (11) (102) 91
Time Deposits 1,597 610 987 364 (442) 806
Securities Sold Under
Agreements to Repurchase 138 98 40 (16) (22) 6
Short-Term Borrowings 167 49 118 34 (8) 42
Long-Term Borrowings 598 149 449 207 (93) 300
----- --- ----- ----- ----- -----
Total Interest Expense 2,498 904 1,594 578 (667) 1,245
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $ 475 $ (10) $ 485 $ 553 $ 198 $ 355
Market Risk
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since most of
the Company's interest-bearing assets and liabilities are located at the Bank,
the majority of the Company's interest rate risk is at the Bank level. As a
result, most interest rate risk management procedures are performed at the Bank
level (see discussion on "Interest Rate Sensitivity").
The Company and the Bank operate as a community banking institution
primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a
result of its location and nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Bank makes real estate
loans primarily in the counties adjacent to its operations and thus is subject
to risks associated with those local economies. The Bank holds a concentration
of residential real estate loans (56.8% of total loans) and commercial loans
supported by real estate (12% of total loans) in its loan portfolio. In
addition, 49.3% of the Bank's consumer, installment loans are for recreational
vehicles. These loans represent 11.5% of total loans (see Note Q of the "Notes
to Consolidated Financial Statements"). These loans are subject to interest and
economic risks. The Bank also originates residential real estate loans for sale
in the secondary market. Such loans are identified as "Mortgage Loans
Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate
risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not
own any trading assets and does not have any hedging transactions in place such
as interest rate swaps (see discussions on "Investment Securities" and
"Securities Available-for-Sale").
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income. The Bank's Asset/Liability Management Committee meets
semi-monthly to examine, among other subjects, interest rates for various
products and interest sensitivity.
Rate sensitivity arises from the difference between the volumes of assets
which are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. A comparison of interest-rate-sensitive assets to interest-rate-
sensitive liabilities is monitored by the Bank on a regular basis using several
time periods. The mismatch of assets and liabilities in a specific time frame is
referred to as interest sensitivity gap. Generally, in an environment of rising
interest rates, a negative gap (interest sensitive liabilities being greater
than interest sensitive assets in a given period of time) will decrease net
interest income, and in an environment of falling interest rates, a negative gap
will increase net interest income.
Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 2000,
assets of $162,221,000 (37% 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 $157,197,000 (40% of total assets) at the end of 1999
and $143,809,000 (40% of total assets) at the end of 1998. Liabilities subject
to rate change within one year were $169,639,000, $163,662,000 and $175,047,000
in 2000, 1999 and 1998, respectively. A negative one-year gap position of
$7,418,000 existed as of December 31, 2000. The gap positions at December 31,
1999 and 1998 were negative $6,465,000 and negative $31,238,000, respectively.
The ratio of rate-sensitive assets to rate-sensitive liabilities for the
one-year time frame was .96 at the end of 2000, compared to .96 at the end of
1999 and .82 at the end of 1998. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at December 31, 2000 for five time-intervals. The Company's negative
gap position for the one-year time frame increased in 2000 as a result of an
increase in interest-bearing demand deposits and short-term borrowings 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 $ 95 $ --- $ --- $ --- $ --- $ 95
Inv Securities 43,828 11,114 16,377 60,893 51,789 184,001
Loans 34,036 14,992 24,041 99,630 51,834 224,533
Other Assets 17,738 --- --- --- 16,684 34,422
------- -------- -------- ------- -------- --------
TOTAL ASSETS $95,697 $26,106 $ 40,418 $160,523 $120,307 $443,051
------- -------- -------- ------- -------- --------
Non-Interest-Bearing
Deposits (1) $ --- $ --- $ --- $ --- $ 48,748 $ 48,748
Int-Bearing
Deposits 33,266 50,511 67,952 48,355 104,358 304,442
Securities Sold
Under Agreements
to Repurchase 7,215 --- --- --- --- 7,215
Short-Term Debt 5,695 --- --- --- --- 5,695
Long-Term Debt 5,000 --- --- 17,000 12,000 34,000
Other --- --- --- --- 9,430 9,430
Capital --- --- --- --- 33,521 33,521
------- -------- -------- ------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $ 51,176 $50,511 $ 67,952 $65,355 $208,057 $443,051
------- -------- -------- ------- -------- --------
Net Interest
Sensitivity Gap $ 44,521 $(24,405)$(27,534) $95,168 $(87,750) $ ---
Cumulative Int
Sensitivity Gap $ 44,521 $ 20,116 $ (7,418) $87,750 $ --- $ ---
Cumulative Gap
RSA/RSL 187.0% 119.8% 95.6% 137.3% 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 because 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 equity at December 31, 2000 are as
follows:
- -------------------------------------------------------
at December 31, 2000
- -------------------------------------------------------
Percent of Change
in Market Value
Changes in Rate of Portfolio Equity
- --------------------------- ----------------------
+ 400 basis points (17.7)%
+ 300 basis points (9.5)%
+ 200 basis points (2.1)%
+ 100 basis points 3.9 %
Flat Rate 0.0
- 100 basis points (8.8)%
- 200 basis points (21.6)%
- 300 basis points (36.5)%
- 400 basis points (54.2)%
- -------------------------------------------------------
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.
Service Charges and Other Income
Service charge income on deposit accounts amounted to $2,019,000 in 2000
compared to $1,682,000 in 1999 and $1,594,000 in 1998. In 2000, the service
charges on deposit accounts increased by $337,000 or 20% over 1999 and the 1999
increase over 1998 was $88,000 or 5.5%. The increases in 2000 and 1999 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 2000, the Company had a gain on the sale of mortgage loans of $59,000 as
compared to a gain of $157,000 in 1999. In 1998, there was a gain on the sale of
mortgage loans of $398,000 (see discussion on "Mortgage Loans Held-for-Sale").
Other operating income was $825,000 in 2000, as compared to $707,000 in
1999. This was an increase of $118,000 or 16.7%. Other operating income for 1998
was $641,000.
Investment Management and Trust Division
Revenue from the Bank's Investment Management and Trust Division operations
was $1,245,000 in 2000, as compared to $1,246,000 in 1999. The Investment
Management and Trust Division revenue for 1999 increased by 1.7% or $21,000 over
the 1998 revenue of $1,225,000. 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. 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 $7,437,000, increased by
$657,000 or 9.7% in 2000 compared to $6,780,000 in 1999. These expenses in 1999
amounted to an increase of $395,000 or 6.2% over the $6,385,000 reported in
1998. The increase in 2000 was primarily due to salary increases of
approximately 3.5%, the addition of staff related to the new branches opened in
Mount Pocono, Whitehall and Trexlertown during the year and a cash bonus paid to
non-officer employees, reduced in part by staff reductions during the fourth
quarter in Operations and Administration. Salary expense in 1999 increased due
to normal salary increases of approximately 3.5%, the addition of staff in the
Trust Division, and the opening of the Stroudsburg branch.
Occupancy and equipment expenses were $2,392,000 in 2000 which was $221,000
or 10.2% greater than the 1999 amount of $2,171,000. The 1999 amount was $53,000
greater than the 1998 occupancy and equipment expense of $2,118,000. The
increase in 2000 was primarily due to the establishment of the new branches in
Mount Pocono, Whitehall and Trexlertown and a complete year of occupancy
expenses for the Stroudsburg branch opened in 1999. The increase in 1999 was the
result of the Stroudsburg branch and new equipment relating to the Y2K issue.
Other operating expenses (such as the provision for the special reserve,
the write-down of other real estate owned, advertising, publicity, litigation
costs, deposit insurance premiums, data processing fees, legal, accounting,
supplies, postage and telephone) in 2000 were $7,116,000, compared to $5,722,000
in 1999 and $6,060,000 in 1998. The increase of $1,394,000 or 24.4% in other
operating expense during 2000 was primarily due to a provision of $1,012,000 to
the special reserve for Funeral Trust litigation, a $184,000 write-down of other
real estate owned, the deductible of $100,000 on losses due to theft, and
increases in consulting fees of $79,000, supplies of $54,000, legal and
litigation expenses of $54,000, data processing fees of $40,000 and Federal
Deposit Insurance premiums of $36,000, offset in part by reductions in some
other expenses. The decrease in 1999 of $338,000 or 5.6% was the result of the
$943,000 decrease 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 Company's advertising costs
are expensed as incurred. Advertising costs were $546,000, $574,000 and $597,000
for the years ended December 31, 2000, 1999 and 1998, respectively (see Notes
A.14 and I of the "Notes to Consolidated Financial Statements").
Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 2000 and 1999. 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 $19,972,000 at December 31, 2000 and
$19,887,000 at December 31, 1999. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$19,906,000 and $19,123,000 at December 31, 2000 and 1999, respectively.
The Company, at December 31, 2000 and 1999, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
Conduits (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 $19,980,000 at December 31, 2000
($16,937,000 in available-for-sale and $3,043,000 in held-to-maturity) and
$19,904,000 at December 31, 1999 ($16,147,000 in available-for-sale and
$3,757,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and are adjusted
annually. The Company also held fixed rate mortgage-backed securities issued by
U. S. Government Agencies totaling $28,168,000 at December 31, 2000 ($27,191,000
in available-for-sale and $977,000 in held-to-maturity) and $31,145,000 at
December 31, 1999 ($29,882,000 in available-for-sale and $1,263,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $164,029,000 of securities available-for-sale at December
31, 2000, as compared to $132,356,000 at December 31, 1999. At December 31,
2000, the net unrealized gain on these securities was $37,000, net of the tax
effect of $20,000. There was a net unrealized loss of $4,322,000, net of the tax
effect of $2,226,000 on the available-for-sale securities at December 31, 1999.
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 2000, $8,120,000 of securities available-for-sale were sold,
resulting in a total net gain of $174,000, which was recorded in income and
includes net gains on equity securities sold by First C. G. of $157,000. The
securities sold were primarily U. S. Treasury, U. S. Agency 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 the loans to the Bank's
Employee Stock Ownership Plan (see Note K of the "Notes to Consolidated
Financial Statements"). Securities purchased by the Company in 2000 totaled
$47,959,000. Included in these purchases were $32,106,000 in U. S. Agency bonds,
$8,281,000 in U. S. Agency mortgage-backed bonds, $3,732,000 in municipal
securities, $3,011,000 in U. S. Treasury bonds and $829,000 in equity
securities. The securities sold in 1999 totaling $16,295,000 were primarily U.
S. Treasury, U. S. Agency mortgage-backed bonds held by the Bank and equity
securities held by First C. G. The 1999 sales resulted in net gains of $563,000.
These gains include net gains of $401,000 on equity securities sold by First C.
G. The sales were made to provide liquidity to fund a $1,000,000 loan to the
Bank's Employee Stock Ownership Plan, improve future income and invest in a
broader list of equity securities. Security purchases in 1999 amounted to
$78,709,000 which were primarily U. S. Agency mortgage-backed bonds, U. S.
Agency fixed rate bonds, municipal securities and U. S. Treasury bonds. In 1998,
a net gain on security transactions of $722,000 was recorded on sales of
$11,342,000.
Loan Portfolio
At December 31, 2000, total loans (net of unearned discounts of $431,000 in
2000 and $691,000 in 1999) of $226,944,000 were $24,686,000, or 12.2% greater
than the 1999 amount of $202,258,000. The increase in loans in 2000 was
primarily the result of an increase of $15,992,000 or 14.2% in residential real
estate loans, an increase of $7,176,000 or 15.6% in consumer loans, an increase
of $1,675,000 or 15.7% in commercial and municipal loans, and an increase of
$397,000 or 1.5% in commercial real estate loans partially offset by an $814,000
or 12.1% decrease in real estate construction loans.
Loans Outstanding at December 31
by Major Category are as follows:
- --------------------------------------------------------
Dollars in Thousands at Dec. 31, 2000 1999
- --------------------------------------------------------
Real Estate Residential $ 128,862 $ 112,870
Real Estate Construction 5,923 6,737
Real Estate Commercial 27,206 26,809
Consumer 53,062 45,886
Municipal 2,089 1,096
Commercial & Other 10,233 9,551
--------- ---------
Total 227,375 202,949
Unearned Discount (431) (691)
--------- ---------
Net $ 226,944 $ 202,258
- --------------------------------------------------------
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 64.3% at December 31, 2000 and 62.3% at
December 31, 1999. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or estimated fair value. Gains and losses
on sales of loans are also accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 134, "Accounting for Mortgage
Securities Retained After the Securitizations of Mortgage Loans Held-for-Sale by
a Mortgage Banking Enterprise". This new statement requires that an entity
engaged in mortgage banking activities classify the retained mortgage-backed
security or other interest, which resulted from the securitizations of a
mortgage loan held-for-sale based upon its ability and intent to sell or hold
these investments.
In 2000, management continued a program to sell some of its newly
originated residential real estate loans in the secondary market. The purpose
of these sales was 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 2000
amounted to $7,718,000. All of these loans were originated in 2000. A net gain
of $59,000 was recorded on the total amount of loans sold. At December 31, 2000,
there were no residential real estate loans identified as held-for-sale.
In 1999, the Company originated $17,091,000 of residential real estate
loans which were sold in the secondary market. In addition, during 1999,
$20,977,000 of residential real estate loans originated in prior years were
sold. A net gain of $157,000 was recognized on the total loans sold in 1999. At
December 31, 1999, there were no residential real estate loans identified as
held-for-sale.
During 1998, the Company had a net gain of $398,000 on the sale of
$42,879,000 of residential real estate loans. The other operating expenses for
1998 include an unrealized loss of $1,000 on mortgage loans held-for-sale of
$603,000 at year-end 1998.
The Company intends to continue to originate residential real estate loans
in 2001 and to sell some of these loans in the secondary market. The Company
services all of the residential mortgage loans 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.
Loans on non-accrual status totaled $1,048,000 at December 31, 2000. This
balance represented a $263,000 decrease in non-accrual loans during 2000 due to
the collection efforts on 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 significantloans that qualify as "Troubled
Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructuring", at December 31, 2000 and 1999.
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.
Non-Accrual Loans
- -------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
Non-accrual loans on
a cash basis $ 1,048 $ 1,311 $ 1,245 $ 813 $ 1,440
Non-accrual loans
as a percentage
of total loans .46% .65% .59% .35% .65%
Interest which would
have been recorded
at original rate $ 38 $ 56 $ 144 $ 64 $ 210
Interest that was
reflected in income 42 35 23 111 40
Net impact on
interest income $ 4 $ (21) $ (121) $ 47 $ (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, 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Accruing loans past due
90 days or more $ 1,469 $1,491 $1,021 $ 802 $ 986
Accruing loans past due
90 days or more
as a percentage
of total loans .65% .74% .48% .35% .45%
- --------------------------------------------------------------------------------
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, 2000 and 1999 are
as follows:
- ------------------------------------------------------------
(Dollars in Thousands)
at December 31, 2000 1999
- ------------------------------------------------------------
Principal amount of impaired loans $339 $370
Accrued interest --- ---
Deferred loan costs 1 ---
------- -------
340 370
Less valuation allowance
at December 31, (78) (74)
-------- --------
$262 $296
- ------------------------------------------------------------
The activity in the allowance account for credit losses related to impaired
loans is as follows:
- -----------------------------------------------------------------
(Dollars in Thousands)
for the year 2000 1999
- -----------------------------------------------------------------
Valuation allowance at January 1, $ 74 $303
Provision for loan impairment 39 ---
Direct charge-offs --- (161)
Recoveries --- ---
Transfers to Unallocated Reserve (35) (68)
------- -------
Valuation allowance at December 31, $ 78 $ 74
- -----------------------------------------------------------------
Total cash collected on impaired loans during 2000 was $201,000, of which
$159,000 was credited to the principal balance outstanding on such loans, and
$42,000 was recognized as interest income.
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. Interest that would have been accrued
on impaired loans was $38,000 and $56,000 in 2000 and 1999, respectively. The
valuation allowance for impaired loans of $78,000 at December 31, 2000 and
$74,000 at December 31, 1999 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,411,000 and $2,437,000 at December 31, 2000 and
1999, respectively.
Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated and 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, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------
Other Real Estate $ 325 $ 571 $ 636 $ 284 $ 585
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, 2000, the
allowance for possible loan losses was $2,411,000 as compared to the December
31, 1999 amount of $2,437,000 and the December 31, 1998 amount of $2,691,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 2000 was 1.06%. This compares to 1.20% at the end
of 1999 and 1.27% at the end of 1998. The decrease in the allowance for possible
loan losses of $26,000 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
$2,517,000 as of December 31, 2000 as compared to $2,802,000 as of December 31,
1999 (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 $401,000 in 2000 or $228,000 less than the 1999 amount of $629,000.
The 2000 charge-offs were the result of losses on commercial, consumer and
residential real estate loans. The net charge-offs in 1999 were primarily the
result of losses on commercial, consumer and residential loans. Net loans
charged-off in 1998 were $423,000. The ratio of net loan charge-offs to average
loans outstanding was .19%, .30% and .19% in 2000, 1999 and 1998, respectively.
The provision for loan losses was $375,000 for the years ended December 31,
2000 and December 31, 1999 and $450,000 for the year ended December 31, 1998. In
1999, the decrease in the provision was $75,000 from 1998.
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, 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------
Allowance for Loan Losses
at Beginning of Year $ 2,437 $ 2,691 $ 2,664 $ 2,532 $ 2,443
Loans Charged-Off by Category:
Commercial 17 255 133 249 365
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 219 147 59 20 31
Consumer/Installment 325 330 348 301 271
Other -- -- -- -- --
-------- -------- -------- -------- -------
Total Loans Charged-Off 561 732 540 570 667
-------- -------- -------- -------- -------
Loans Recovered by Category:
Commercial 5 30 42 19 39
Real Estate - Construction -- -- -- -- --
Real Estate - Residential 100 29 1 1 --
Consumer/Installment 55 44 74 77 47
Other -- -- -- -- --
-------- -------- -------- -------- --------
Total Loans Recovered 160 103 117 97 86
-------- -------- -------- -------- --------
Net Loans Charged-Off 401 629 423 473 581
-------- -------- -------- -------- --------
Provision Charged to Expense 375 375 450 605 670
-------- -------- -------- -------- --------
Allowance for Loan Losses
at End of Period $ 2,411 $ 2,437 $ 2,691 $ 2,664 $ 2,532
======== ======== ======== ======== ========
Total Loans
Average $214,856 $212,993 $217,191 $228,245 $206,378
Year-End $226,944 $202,258 $212,437 $229,587 $220,117
Net Loans Charged Off to:
Average Loans .19% .30% .19% .21% .28%
Loans at Year-End .18% .31% .20% .21% .26%
Allowance for Possible
Loan Losses at Year-End 16.63% 25.81% 15.72% 17.76% 22.95%
Provision for Possible
Loan Losses 106.93% 167.73% 94.00% 78.18% 86.72%
Allowance for Possible Loan Losses at Year-End to:
Average Loans 1.12% 1.14% 1.24% 1.17% 1.23%
Loans at Year-End 1.06% 1.20% 1.27% 1.16% 1.15%
- -------------------------------------------------------------------------------
Deposits
Deposits are the primary source of the Company's funds. During 2000,
deposits increased by $28,710,000 or 8.8% to a total of $353,190,000 at December
31, 2000, from a total of $324,480,000 at December 31, 1999. Average deposits
for 2000 were $336,389,000, an increase of $21,515,000 or 6.8% over the average
total deposits for 1999 of $314,874,000. Contributing to the increase in average
deposits was the acquisition of approximately $10,000,000 in deposits as the
result of the purchase of the Whitehall and Trexlertown branches from another
financial institution. There was no premium paid for the acquisition of these
deposits. Also contributing to the growth in deposits were increases in
certificates of deposit and checking products in response to marketing campaigns
to attract these types of deposits. The deposit growth in checking deposits and
certificates of deposits was partially offset by a small decline in savings
accounts and 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 other banks, credit unions, mutual funds and other investment
options.
The Bank's time deposits, excluding certificates of deposit over $100,000,
increased in 2000 with average balances of $157,164,000, which was $18,088,000
or 13.0% higher than the 1999 average balance of $139,076,000. Non-interest
bearing deposits averaged $43,893,000 in 2000 as compared to $41,337,000 in
1999, an increase of $2,556,000 or 6.2%. In addition, there was an increase in
average interest-bearing demand deposits of $756,000 or 1.4% to $53,151,000 in
2000 from $52,395,000 in 1999, and an increase in average certificates of
deposit over $100,000 which averaged $5,886,000 in 2000 as compared to
$5,040,000 in 1999, an increase of $846,000 or 16.8%. Partially offsetting this
growth was a $366,000 or 2.6% decline in average money market deposits and a
decline of $365,000 or 0.6% in savings and club deposits. Average money market
deposits were $13,461,000 and $13,827,000 in 2000 and 1999, respectively.
Average savings and club deposits were $62,834,000 in 2000 as compared to
$63,199,000 in 1999.
Short-Term Borrowings
The Bank had securities sold under agreements to repurchase totaling
$7,215,000 at December 31, 2000 and $1,730,000 at December 31, 1999. The Bank's
short-term (overnight) borrowing at December 31, 2000 from the Federal Home Loan
Bank amounted to $5,695,000 against a line of credit of $25,000,000. There were
no short-term borrowings from the Federal Home Loan Bank outstanding at December
31, 1999. At December 31, 2000 and 1999, there were no short-term borrowings in
the form of Federal funds purchased, or Federal Reserve Bank discount
borrowings. Additional information relating to short-term borrowings can be
found in Note G of the "Notes to Consolidated Financial Statements".
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to raise funds to support
asset growth, meet deposit withdrawal and other borrowing needs, maintain
reserve requirements and otherwise operate the Company on an ongoing basis. The
Company manages its assets and liabilities to maintain liquidity and earnings
stability. Among the sources of asset liquidity are money market investments,
short-term investment securities, and funds received from the repayment of loans
and short-term borrowings. At year-end 2000, cash, due from banks, Federal funds
sold and interest-bearing deposits with banks totaled $17,833,000, and
securities maturing within one year totaled $2,345,000. 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 were $2,249,000.
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 $94,000 at December 31, 2000, and $5,548,000
at December 31, 1999. 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,
of which $19,305,000 was available at December 31, 2000.
The Bank had four long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $34,000,000 at December 31, 2000 and four long-term loans
totaling $30,000,000 at December 31, 1999. The loans outstanding at December 31,
2000 were originated in 2000, 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 $5,000,000 originated in December, 1996 and due December, 2001, at
a variable rate at LIBOR plus 3 basis points (6.895% at December 31, 2000),
$7,000,000 originated in October, 1998 and due October, 2008, at a fixed rate of
4.86% until October, 2003, at which time the rate may be converted at the option
of the lender to a variable rate of LIBOR plus 15 basis points, $10,000,000
originated in August, 1999, and due in August, 2004, at a fixed rate of 6.06%
until August 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, in the LIBOR rate is
is 7.5% or higher and $12,000,000 originated in August 2000, and due in August
2010, at a fixed rate of 6.23% until August 2000, 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 8.0% 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, 1999 in the amount of
$8,000,000 that was paid in full in August 2000. This loan was originated in
1996 and had a fixed interest rate of 5.89% (see Note H of the "Notes to
Consolidated Financial Statements").
Cash flows for the year ended December 31, 2000, consisted of cash provided
by financing activities of $42,738,000 and cash provided by operating activities
of $4,053,000 offset in part by cash used in investing activities of $45,325,000
resulting in a net increase in cash and cash equivalents of $1,466,000. The cash
provided by financing activities was comprised of a net increase in certificates
of deposit of $16,636,000, a net increase in interest and non-interest bearing
demand and savings deposits of $12,074,000, a net increase in repurchase
agreements of $5,485,000, an increase in short-term (overnight) debt of
$5,695,000, a net increase in long-term debt of $4,000,000 and proceeds from the
sale of common stock of $313,000. Partially offsetting these increases were the
payment of cash dividends of $1,406,000 and a net increase to the ESOP debt of
$57,000. The cash provided by operating activities was comprised principally of
the proceeds from mortgage loan sales of $7,718,000, net income of $2,072,000,
an increase in other liabilities of $1,181,000 which includes a $1,012,000
increase in the special reserve for Funeral Trust litigation, depreciation and
amortization of $1,120,000, an increase in accrued interest payable of $794,000
and the provision for possible loan losses of $375,000, reduced in part by
mortgage loans originated for sale of $7,718,000, an increase in accrued
interest income of $781,000, net investment securities gains of $174,000, an
increase of $389,000 in deferred taxes, a net increase in other assets of
$439,000 and net gains on the sale of mortgage loans of $59,000. The cash used
in investing activities was primarily for the purchase of securities
available-for-sale in the amount of $45,625,000, the purchase of securities
held-to-maturity in the amount of $2,334,000, a net increase in loans of
$25,949,000 and the purchase of premises and equipment in the amount of
$703,000. These cash uses were partially offset by the proceeds from the
maturities of securities available-for-sale of $13,747,000, proceeds from the
sales of securities available-for-sale of $8,294,000, proceeds from the
maturities of securities held-to-maturity of $1,128,000 and a net decrease in
interest-bearing deposits with banks of $5,494,000.
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, 2000 was $33,521,000
as compared to $28,243,000 at December 31, 1999, an increase of $5,278,000 or
18.7%. This increase was attributable to an increase of $4,358,000 in
accumulated other comprehensive income (see Note A.6 of the "Notes to
Consolidated Financial Statements"), and increases of $1,283,000 in paid in
capital and $572,000 in common stock. The increases in paid in capital and
common stock was the result of the sale of common shares pursuant to the
Dividend Reinvestment Plan and the 5% stock dividend. These increases were
partially offset by an $878,000 reduction in retained earnings as a result of
the payment of cash dividends and the 5% stock dividend. Total shareholders'
equity, exclusive of accumulated other comprehensive income was $33,484,000 and
$32,564,000 at December 31, 2000 and 1999, respectively. This was an increase of
$920,000 or 2.8%. The accumulated other comprehensive income was comprised of
the unrealized gains or losses on securities available-for-sale. The unrealized
gain on securities available-for-sale at December 31, 2000 amounted to $37,000
(net of tax effect of $20,000). Included in shareholders' equity at December 31,
1999 was $4,321,000 (net of tax effect of $2,226,000) 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 22, 2000 to all shareholders of record at the close
of business on June 2, 2000. On June 24, 1999, 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 4, 1999. The Company
also paid a 5% stock dividend on June 25, 1998 to shareholders of record on June
5, 1998. 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
2000, 21,646 new common shares were purchased pursuant to this Plan at an
average price of $14.44 for total proceeds of $313,000. In 1999, 15,814 new
common shares were purchased pursuant to the Plan at an average price of $19.98
per share. The total proceeds were $316,000.
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
or the awarding of stock options to the Company's non-employee directors. In
2000, options to purchase 2,680 shares of the Company's common stock at an
average price of $16.43 were granted to certain non-employee directors. During
2000, options for 1,340 shares of the Company's common stock issued pursuant to
the plan were exercised at an average price of $12.69 per share. During 1999,
options for 8,037 shares of the Company's common stock were granted to
non-employee directors at a price of $20.77 per share. A non-employee director
exercised options for 1,340 shares of the Company's common stock at a price of
$12.69 per share in 1999.
The Company also has a Stock Option Plan that was 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.
No new options may be issued under the 1986 Stock Option Plan. In 2000 and 1999
no options were issued under the 1996 Stock Option Plan. No options were
exercised under these plans in 2000 and 1999. On January 19, 2001, options to
purchase 39,500 shares of the Company's common stock at a price of $17.41 were
issued to certain officers under the 1996 Stock Option Plan.
The Company's stock option plans are accounted for under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees"
and its related interpretations. This accounting method is permitted under
Financial Accounting Standards Board standard SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows an entity to use a fair-value based
method for valuing stock-based compensation which measures compensation cost at
the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the Standard permits entities to continue accounting for employee
stock options and similar instruments under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair-value based method of accounting defined in
SFAS No. 123 had been applied. The Company's stock option plans are accounted
for under APB Opinion No. 25. Additional information relating to the Company's
Stock Option Plans can be found in Notes A.9 and N of the "Notes to Consolidated
Financial Statements".
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory a nd possible
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".
The Company, in March 2001, settled claims by a group of funeral directors,
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. In 1998, the Company established a reserve of $1.5 million against
these possible claims. The Company added an additional $960,000 to this reserve
as of December 31, 2000. The reserve balance, as of December 31, 2000 equaled
$2.48 million. The Company expects the reserve to be sufficient to cover the
settlement. The Company has incurred legal expenses in regard to these claims
during 2000, 1999 and 1998. The Company will continue to incur significant legal
expenses in regard to these claims during 2001, primarily in the first quarter
(see Note O 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 (see discussion on
"Market Risk" and "Interest Rate Sensitivity").
Earnings Per Common Share
The Company has 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.12 and P of the "Notes to Consolidated Financial Statements").
Revenue Recognition in Financial Statements
In December, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Company is required to adopt
SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to
have a material impact on the 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
In September 2000, the Financial Accounting Standards Board has adopted
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
revises the standards for accounting for the securitizations and other transfers
of financial assets and collateral. This new standard also requires certain
disclosures, but carries over most of the provisions of SFAS 125. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. However, for recognition and
reclassification of collateral and for disclosures relating to securitizations
transactions and collateral this statement is effective for fiscal years ending
after December 15, 2000 with earlier application not allowed and is to be
applied prospectively. The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial statements.
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.6 of the "Notes to Consolidated Financial
Statements").
Disclosures About Segments of an Enterprise and Related Information
The Statement of Financial Accounting Standards Board (SFAS) No. 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in subsequent
interim financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. The statement also requires that public enterprises report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. It also requires that information be reported about revenues
derived from the enterprises' products or services, or about the countries in
which the enterprises earn revenues and hold assets, and about major customers,
regardless of whether that information is used in making operating decisions.
The Company has one reportable segment, "Community Banking". All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133", and in June, 2000, by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
(collectively SFAS 133). SFAS 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS 133, an entity
may designate a derivative as a hedge of exposure to either changes in: (a) fair
value of a recognized asset or liability or firm commitment, (b) cash flows of a
recognized or forecasted transaction, or (c) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of the
hedge and/or the transaction being hedged, and changes in the fair value of the
derivative instrument is either recognized in earnings in the current year,
deferred to future periods, or recognized in other comprehensive income. Changes
in the fair value of all derivative instruments not recognized as hedge
accounting are recognized in current year earnings. SFAS 133 is required for all
fiscal quarters or fiscal years beginning after June 15, 2000. The Company
adopted SFAS 133 effective July 1, 2000. No adjustment was required as a result
of the change in accounting principle.
Statement of Financial Accounting Standards No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS
119") requires disclosures about financial instruments, which are defined as
futures, forwards, swap and option contracts and other financial instruments
with similar characteristics. On the balance sheet, receivables and payables are
excluded from this definition. The Company did not hold any derivative financial
instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998.
Item 7.A Quantitative and Qualitative Disclosure About Market Risks
Contained in Item 7 "Management's Discussion and Analysis of
Financial Condition And Results of Operation".
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, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require 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, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
Philadelphia, Pennsylvania
March 8, 2001
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands) At December 31, 2000 1999
- -------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 17,738 $ 14,272
Federal Funds Sold --- 2,000
-------- --------
Total Cash and Cash Equivalents 17,738 16,272
Interest-Bearing Deposits With Banks 95 5,589
Investments Securities Held-to-Maturity
(Fair Value: 2000 - $19,906; 1999 - $19,123) 19,972 19,887
Investment Securities Available-for-Sale 164,029 132,356
Total Loans 226,944 202,258
Less: Allowance for Possible Loan Losses (2,411) (2,437)
-------- --------
Net Loans 224,533 199,821
Premises and Equipment, Net 6,832 7,116
Accrued Interest Income 3,826 3,045
Other Real Estate Owned 325 571
Other Assets 5,701 7,232
-------- --------
TOTAL ASSETS $ 443,051 $ 391,889
========= =========
LIABILITIES
Deposits
Non-Interest-Bearing Deposits $ 48,748 $ 41,813
Interest-Bearing Deposits
(Includes Certificates of Deposit in Excess
of $100: 2000 - $8,008; 1999 - $5,105) 304,442 282,667
-------- --------
Total Deposits 353,190 324,480
Securities Sold Under Agreements to Repurchase 7,215 1,730
Short-Term Debt 5,695 ---
Long-Term Debt 34,000 30,000
Accrued Interest Payable 5,002 4,208
Other Liabilities 4,428 3,228
-------- --------
TOTAL LIABILITIES 409,530 363,646
-------- --------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $5.00 a share
Authorized: 500,000 shares, none issued --- ---
Common Stock, Par Value $5.00 a share
Authorized: 10,000,000 shares
Issued: 1,962,699 shares in 2000 and
1,848,437 shares in 1999 9,814 9,242
Additional Paid-In Capital 16,957 15,674
Retained Earnings 8,090 8,968
Employee Stock Ownership Plan Debt (1,377) (1,320)
Accumulated Other Comprehensive Income (Loss) 37 (4,321)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 33,521 28,243
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 443,051 $ 391,889
========= =========
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, 2000 1999 1998
- -------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $18,116 $ 17,772 $18,885
Interest on Investment Securities
Taxable 9,440 6,829 5,002
Tax-Exempt 1,567 1,509 1,269
Interest on Deposits with Banks and
Federal Funds Sold 164 243 211
------- ------- -------
Total Interest Income 29,287 26,353 25,367
------- ------- -------
INTEREST EXPENSE
Interest on Deposits 11,414 9,819 9,466
Interest on Short-Term Borrowings 588 283 265
Interest on Long-Term Debt 1,945 1,347 1,140
------- ------- -------
Total Interest Expense 13,947 11,449 10,871
------- ------- -------
NET INTEREST INCOME 15,340 14,904 14,496
Provision for Possible Loan Losses 375 375 450
------- ------- -------
Net Interest Income After Provision
for Possible Loan Losses 14,965 14,529 14,046
------- ------- -------
OTHER INCOME
Trust Revenue 1,245 1,246 1,225
Service Charges on Deposit Accounts 2,019 1,682 1,594
Investment Securities Gains, Net 174 563 722
Gains on Sale of Mortgage Loans 59 157 398
Other Operating Income 825 707 641
------- ------- -------
Total Other Income 4,322 4,355 4,580
------- ------- -------
OTHER EXPENSES
Salaries and Employee Benefits 7,437 6,780 6,385
Net Occupancy and Equipment Expense 2,392 2,171 2,118
Other Operating Expenses 7,116 5,722 6,060
------- ------- -------
Total Other Expenses 16,945 14,673 14,563
------- ------- -------
Income Before Income Taxes 2,342 4,211 4,063
Income Taxes 270 929 1,031
------- ------- -------
NET INCOME $ 2,072 $ 3,282 $ 3,032
======= ======= =======
PER SHARE DATA
Net Income - Basic $ 1.09 $ 1.75 $ 1.60
Net Income - Diluted $ 1.09 $ 1.74 $ 1.59
Cash Dividends $ 0.74 $ 0.70 $ 0.67
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, 1998 $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 Div
Reinv Plan
(2,779 shs) 94 94
Cash Div Paid (1,275) (1,275)
Stock Div
of 5%
(82,701 shs) 414 2,564 (2,978) ---
Cash Pd 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 shs) 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
Sec 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
Stock 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 Pd in
Lieu of
Fractional
Shares (4) (4)
ESOP Loan
Pymt 115 115
Loan to ESOP (1,000) (1,000)
Unall 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
2000
Comprehensive
Income
Net Income 2,072 2,072
Change in
Unrealized
Gains
(Losses), Net 4,358 4,358
------
Total
Comprehen-
sive Income 6,430
Sale of
Common
Stock
under
Dividend
Reinv
Plan
(21,177
shares) 106 207 313
Sale of
Common
Stock
under
Directors
Stk Option
Plan
(332
shares) 2 2
Cash
Dividends
Paid (1,406) (1,406)
Stock
Dividend
of 5%
(92,752
shares) 464 1,078 (1,542) ---
Cash Pd in
Lieu of
Fractional
Shares (2) (2)
ESOP Loan
Payment 115 115
Loan to ESOP (172) (172)
Unallocated
ESOP Shares
Committed
to Employees
(6,334 shares) (2) (2)
------ ------- ------ --- ----- ---- -------
Balance
at Dec
31, 2000 $9,814 $16,957 $8,090 $-- $(1,377) $ 37 $33,521
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, 2000 1999 1998
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,072 $ 3,282 $ 3,032
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 375 375 450
Depreciation and Amortization 1,120 1,027 1,004
Accretion of Security Discounts (430) (267) (78)
Amortization of Security Premiums 239 251 242
Deferred Taxes (389) 90 (395)
Amortization of Deferred Fees on Loans 479 12 (136)
(Gain) Loss on Sale of
Other Real Estate Owned (119) (39) 4
Loss from Writedown of Other
Real Estate Owned 184 -- --
Investment Securities Gains, Net (174) (563) (722)
Gain on Sale of Mortgage Loans (59) (157) (398)
Mortgage Loans Originated for Sale (7,718) (37,460) (42,723)
Mortgage Loan Sales 7,718 38,068 42,879
Changes in Assets and Liabilities
Increase in Accrued Interest Income (781) (503) (310)
Increase in Accrued Interest Payable 794 672 70
Increase in Other Assets (439) (970) (740)
Increase in Other Liabilities 1,181 71 397
-------- -------- -------
Net Cash Provided by Operating Activities 4,053 3,889 2,576
-------- -------- -------
INVESTING ACTIVITIES
Proceeds from Maturities of
Securities Available-for-Sale 13,747 15,331 29,744
Proceeds from Maturities of Securities
Held-to-Maturity 1,128 3,622 9,403
Proceeds from Sales of Securities
Available-for-Sale 8,294 16,858 11,094
Proceeds from Sales of Securities
Held-to Maturity -- --- 248
Purchase of Securities Available-for-Sale (45,625) (72,150) (66,712)
Purchase of Securities Held-to-Maturity (2,334) (6,559) (9,722)
Net Decrease (Increase) in Interest-Bearing
Deposits With Banks 5,494 (2,288) (2,906)
Net (Increase) Decrease in Loans (25,949) 9,412 16,614
Purchase of Premises and Equipment (703) (1,143) (494)
Proceeds from Sale of Other Real Estate Owned 623 382 290
-------- -------- -------
Net Cash Used in Investing Activities (45,325) (36,535) (12,441)
-------- ------- -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest Bearing
Demand Deposits and Savings Accounts 12,074 2,058 10,669
Net Increase in Certificates of Deposit 16,636 27,873 1,625
Net Increase in Long-Term Debt 4,000 10,000 1,610
Net Increase in ESOP Debt (57) (885) (45)
Net Increase (Decrease) in
Repurchase Agreements 5,485 (3,364) (3,710)
Increase in Short-Term Debt 5,695 -- --
Proceeds from Issuance of Common Stock 313 302 333
Proceeds from Sale of Treasury Stock -- -- 94
Cash Dividends Paid (1,406) (1,321) (1,275)
Cash in Lieu of Fractional Shares (2) (4) (6)
-------- ------- -------
Net Cash Provided by Financing Activities 42,738 34,659 9,295
-------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents 1,466 2,013 (570)
Cash and Cash Equivalents, January 1, 16,272 14,259 14,829
-------- -------- -------
Cash and Cash Equivalents, December 31, $ 17,738 $ 16,272 $ 14,259
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 seventeen 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. Basis of Financial Statement Presentation
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.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
The Company has one reportable segment, "Community Banking". All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
In December, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The Company is required to adopt
SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to
have a material impact on the consolidated financial statements.
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. 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. 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".
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 originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or estimated fair value. Gains and losses
on the sales of loans are also accounted for in accordance with SFAS No. 134,
"Accounting for Mortgage Securities Retained after the Securitizations of
Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". This new
statement requires that an entity engaged in mortgage banking activities
classify the retained mortgage-backed security or other interest, which resulted
from the securitizations of a mortgage loan held-for-sale based upon its ability
and intent to sell or hold these investments.
4. Loans and Allowance for Possible Loan Losses
Loans receivable that the Company has the intent and ability to hold for
the foreseeable future or until maturity or payoff 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.
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.
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. 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.
6. 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)
2000
- -----------------------------------
Unrealized Gains on Securities:
Unrealized Holding Gains
Arising During Period $ 6,778 $ (2,305) $ 4,473
Less: Reclassification
Adjustment for Gains
Realized in Net Income (174) 59 (115)
-------------------------------------------
Other Comprehensive Income, Net $ 6,604 $ (2,246) $ 4,358
-------------------------------------------
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)
-------------------------------------------
7. Accounting for Derivative Instruments and
Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", and in June, 2000, by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", (collectively SFAS 133).
SFAS 133 requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate as a hedge of
exposure to either changes in: (a) fair value of a recognized asset or liability
or firm commitment, (b) cash flows of a recognized for forecasted transaction,
or (c) foreign currencies of a net investment in foreign operations, firm
commitments, available-for-sale securities or a forecasted transaction.
Depending upon the effectiveness of the hedge and/or the transaction being
hedged, any changes in the fair value of the derivative instrument is either
recognized in earnings in the current year, deferred to future periods, or
recognized in other comprehensive income. Changes in the fair value of all
derivative instruments not recognized as hedge accounting are recognized in
current year earnings. SFAS 133 is required for all fiscal quarters or fiscal
years beginning after June 15, 2000. The Company adopted SFAS 133 effective
January 1, 2001. No adjustment was required as a result of the change in
accounting principle.
Statement of Financial Accounting Standards No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS
119") requires disclosures about financial instruments, which are defined as
futures, forwards, swap and option contracts and other financial instruments
with similar characteristics. On balance sheet receivables and payables are
excluded from this definition. The Company did not hold any derivative financial
instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998.
8. Income Taxes
Under the liability method called for in SFAS No. 109, "Accounting for
Income Taxes", 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.
9. 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's Stock Option Plans are accounted for under SFAS No. 123,
"Accounting for Stock-Based Compensation". This standard contains 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. The Company's stock option plans are accounted for under APB
Opinion No. 25.
10. Employee Benefit Plans
The Company has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service as defined by the ESOP. The
Company accounts for its ESOP in accordance with Statement of Position (SOP)
93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the
Accounting Standards Division of the American Institute of Certified Public
Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after
December 31, 1992. For issuances of stock to the ESOP after December 15, 1989,
but prior to December 31, 1992, the shares allocated method is used to recognize
expense in the Company's financial statements. For issuances of stock prior to
December 15, 1989, the Company will continue the cash contribution method of
recognizing expense to the extent that it exceeds the cumulative expense that
would be recognized under the shares allocated method.
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.
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.
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.
11. Trust Assets and Revenue
Assets held by the Trust Department of the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
balance sheets since such assets are not assets of the Company. Operating
revenue and expenses of the Trust Department are included under their respective
captions in the accompanying consolidated statements of income and are recorded
on the accrual basis.
12. Per Share Information
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". 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. Share and per share amounts have been retroactively restated
to reflect the three 5% stock dividends in June 2000, 1999 and 1998. 13.
Statement of Cash Flows
The Company considers cash, due from banks and Federal funds sold as cash
equivalents for the purposes of the Consolidated Statements of Cash Flows.
Cash paid for interest was $13,153,000, $10,777,000 and $10,801,000, for
the years ended December 31, 2000, 1999 and 1998, respectively. Cash paid for
taxes was $500,000 in 2000, $1,060,000 in 1999 and $1,458,000 in 1998.
14. Advertising Costs
The Company expenses advertising costs as incurred.
15. Transfer and Servicing of Assets and
Extinguishments of Liabilities
In September, 2000, the Financial Accounting Standards Board has adopted
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
and revises the standards for accounting for the securitizations and other
transfers of financial assets and collateral. This new standard also requires
certain disclosures, but carries over most of the provisions of SFAS 125. SFAS
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. However, for
recognition and reclassification of collateral and for disclosures relating to
securitizations transactions and collateral this statement is effective for
fiscal years ending after December 15, 2000 with earlier application not allowed
and is to be applied prospectively. The adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
statements.
16. Reclassifications
Certain reclassifications of prior years amounts have been made to conform
to the 2000 presentation.
NOTE B - INVESTMENT SECURITIES
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,
2000 and 1999 are summarized as follows.
2000
Available-for-Sale Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury $ 4,011 $ 13 $ (2) $ 4,022
U. S. Government Agency 79,145 672 (718) 79,099
State and Political Subdivisions 28,210 233 (190) 28,253
Mortgage-Backed Securities 44,110 309 (290) 44,129
Equity Securities 8,496 417 (387) 8,526
------- ------- ------- -------
Total $163,972 $ 1,644 $(1,587) $164,029
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 $ 124 $(6,672) $132,356
2000
Held-to-Maturity Securities Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government Agency $ 7,937 $ 15 $ (49) $ 7,903
State and Political Subdivisions 8,016 45 (70) 7,991
Mortgage-Backed Securities 4,019 23 (30) 4,012
------- ------- ------- -------
Total $19,972 $ 83 $ (149) $19,906
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
At December 31, the equity securities in the available-for-sale category
include Federal Reserve Bank stock in the amount of $258,000 in 2000 and
$259,000 in 1999, and Federal Home Loan Bank stock in the amount of $2,306,000
in 2000 and $2,265,000 in 1999 which are carried at cost.
The following table lists the maturities of debt securities at December 31,
2000, 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, 2000 Available-For-Sale Held-To-Maturity
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- --------
Due in one year or less $ 2,146 $ 2,145 $ 200 $ 202
Due after one year
through five years 16,330 16,541 1,939 1,942
Due after five years
through ten years 50,029 49,941 7,040 7,056
Due after ten years 42,861 42,747 6,774 6,694
------- ------- ------- -------
111,366 111,374 15,953 15,894
Mortgage-Backed Securities 44,110 44,129 4,019 4,012
Equity Securities 8,496 8,526 -- --
------- ------- ------- -------
Total Investments $163,972 $164,029 $19,972 $19,906
Investment securities with a carrying amount of $7,651,000 and $13,950,000
at December 31, 2000 and 1999, 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 2000, 1999 and 1998 were $8,294,000, $16,858,000 and
$11,342,000, respectively. Gross gains of $252,000 and gross losses of $78,000
were realized on those sales in 2000. Gross gains of $716,000 and gross losses
of $153,000 were realized on the sales in 1999. In 1998, gross realized gains
were $740,000 and gross realized losses were $18,000.
NOTE C - LOANS Major classifications of loans at December 31, 2000 and 1999
are as follows.
2000 1999
Real Estate/Residential $128,862 $ 112,870
Real Estate/Construction 5,923 6,737
Real Estate/Commercial 27,206 26,809
Consumer/Installment 53,062 45,886
Commercial (Non-Real Estate)
and Agricultural 10,214 9,538
State and Political Subdivisions 2,089 1,096
Other 19 13
-------- ---------
Total Gross Loans 227,375 202,949
Less: Unearned Discount (431) (691)
-------- ---------
Total Loans $226,944 $ 202,258
The Company makes loans to its directors and executive officers. 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 2000 activity of these loans follows.
Balance, January 1, 2000 $ 1,040
New loans 116
Repayments 425
-------
Balance, December 31, 2000 $ 731
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Beginning Balance $ 2,437 $ 2,691 $ 2,664
Provisions charged to
charged to operating expenses 375 375 450
Recoveries 160 103 117
Loans charged-off (561) (732) (540)
------- ------- -------
Ending Balance $ 2,411 $ 2,437 $ 2,691
There were loans totaling $1,048,000 on which the accrual of interest has
been discontinued or reduced at December 31, 2000. During 2000, an average of
$1,147,000 of loans was on non-accrual status. Non-accrual loans at December 31,
1999 amounted to $1,311,000 and averaged $1,091,000 during 1999. Loans 90 days
and over past due and still accruing totaled $1,469,000 at December 31, 2000 and
$1,491,000 at December 31, 1999.
The recorded investment in impaired loans was $339,000, $370,000 and
$524,000 at December 31, 2000, 1999 and 1998, 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 $78,000, $74,000 and
$303,000 at December 31, 2000, 1999 and 1998, respectively. The average recorded
investment in impaired loans during the years ended December 31, 2000, 1999 and
1998 was approximately $317,000, $469,000 and $897,000, 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 $42,000, $35,000 and $23,000 on impaired loans in 2000,
1999 and 1998, respectively.
NOTE E - PREMISES AND EQUIPMENT
Major classifications of these assets at December 31, 2000 and 1999 are
summarized as follows.
- -------------------------------------------------------------------------------
Estimated
Useful Lives 2000 1999
- -------------------------------------------------------------------------------
Land --- $ 939 $ 939
Premises 10-20 years 7,556 7,370
Equipment 3-10 years 6,900 6,408
------ -----
15,395 14,717
Accumulated depreciation
and amortization (8,563) (7,601)
------ -------
Total Premises and Equipment $ 6,832 $ 7,116
Depreciation and amortization expense amounted to $987,000, $912,000 and
$908,000 in 2000, 1999 and 1998, respectively.
NOTE F - DEPOSIT MATURITIES
At December 31, 2000, the schedule of maturities of certificates of
deposit is as follows:
2001 $ 137,452
2002 23,769
2003 8,852
2004 1,915
2005 1,008
Thereafter 224
---------
$ 173,220
NOTE G - SHORT-TERM BORROWINGS
Short-term debt consists of the following Federal Home Loan Bank advances:
- -------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Balance outstanding at December 31, $ 5,695 $ -- $ --
Maximum amount outstanding at
any month-end during the year $11,255 $12,425 $ 1,422
Average amount outstanding $ 3,994 $ 1,721 $ 974
Average interest rate during the year 6.41% 5.17% 5.65%
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of
credit in the amount of $25,000,000, of which $19,305,000 was available at
December 31, 2000.
There were no short-term borrowings in the form of Federal Reserve Discount
borrowings and Federal Funds purchased at December 31, 2000, 1999 and 1998.
Securities sold under agreements to repurchase consist of the following:
- --------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Balance outstanding at December 31, $ 7,215 $ 1,730 $ 5,094
Maximum amount outstanding at
any month-end during the year $12,950 $ 8,682 $ 8,166
Average amount outstanding $ 7,226 $ 5,994 $ 5,821
Average interest rate during the year 4.59% 3.24% 3.61%
NOTE H - LONG-TERM DEBT
The Company had long-term borrowings from the Federal Home Loan Bank of
Pittsburgh totaling $34,000,000 at December 31, 2000 and $30,000,000 at December
31, 1999. These loans will mature in one to ten eight years. The weighted
average interest rate on these loans was 6.0% and 5.78% at December 31, 2000 and
1999, respectively.
The Company also has an obligation as a party to the Employee Stock
Ownership Plan debt, which is discussed in Note K. The principal payments due on
the Company's debt at December 31, 2000 are as follows.
- --------------------------------------------------------------------------------
ESOP Debt FHLB Debt Total Debt
- --------------------------------------------------------------------------------
2001 $ 142 $ 5,000 $ 5,142
2002 142 - 142
2003 142 - 142
2004 142 10,000 10,142
2005 142 - 142
2006 and beyond 627 19,000 19,627
----- -------- --------
Total $1,337 $ 34,000 $ 35,337
- --------------------------------------------------------------------------------
NOTE I- OTHER OPERATING EXPENSES
Other operating expenses consists of the following:
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
Advertising $ 546 $ 574 $ 597
Consulting Fees $ 588 $ 511 $ 416
Data Processing Services $ 813 $ 773 $ 583
Litigation Costs and Legal Fees $ 723 $ 669 $ 418
Loan Collection $ 240 $ 298 $ 346
Printing, Stationery and Supplies $ 320 $ 318 $ 328
Provisions for Trust Reserve $1,012 $ 57 $1,000
All Other $2,874 $2,522 $2,372
------ ------ ------
Total Other Operating Expenses $7,116 $5,722 $6,060
- -------------------------------------------------------------------------------
NOTE J- INCOME TAXES
Income tax expense (benefit) is as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Federal
Current $ 659 $ 840 $ 1,426
Deferred (benefit) (389) 89 (395)
----- ------- -------
Total $ 270 $ 929 $ 1,031
- -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed statutory Federal
rate is as follows.
- -------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Federal tax expense
at statutory rate $ 796 $ 1,432 $ 1,385
Increase (decrease)
in taxes resulting from:
Tax-exempt investment
securities income (582) (569) (363)
Tax-exempt interest
on loans (37) (29) (23)
Other, net 93 95 32
------- ------- -------
Applicable Income Taxes $ 270 $ 929 $ 1,031
Deferred tax assets and liabilities consist of the following.
- ------------------------------------------------------------------------
At December 31, 2000 1999
- ------------------------------------------------------------------------
Deferred Tax Assets:
Unrealized Securities Losses $ -- $ 2,226
Loan Loss Reserve 514 523
Deferred Compensation 428 429
Post-Retirement Benefits 75 71
Depreciation 74 64
Miscellaneous Reserves 931 531
Other 152 120
------- -------
Total $ 2,174 $ 3,964
------- -------
Deferred Tax Liability:
Unrealized Securities Gains $ 20 $ --
------- -------
Total $ 20 $ --
------- -------
Net $ 2,154 $ 3,964
- ------------------------------------------------------------------------
NOTE K - EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan (ESOP) for the
benefit of eligible employees.
In October 2000, the ESOP borrowed $71,875 from the Company's subsidiary,
First C. G., payable over ten years. The proceeds from this loan were used to
purchase shares from the market. In December 2000, the ESOP borrowed an
additional $100,000 from the Company's subsidiary, First C. G., payable over
five years. The proceeds from this loan were used to purchase the shares from
the account of a former employee pursuant to the provisions of the Plan. The
interest on these loans is at the Bank's prime rate (an interest rate of 9.50%
at December 31, 2000). The balance on these loans was $71,875 and $100,000,
respectively at December 31, 2000.
In 1999, the ESOP borrowed $1,000,000 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 9.50% at December 31, 2000 and 8.50% at December
31, 1999). The balance outstanding on this loan was $900,000 at December 31,
2000 and $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. The interest rate on this loan is at the bank's prime rate (an interest rate
of 9.50% at December 31, 2000 and 8.50% at December 31, 1999). The balance
outstanding on this loan was $305,000 at December 31, 2000 and $370,000 at
December 31, 1999.
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
$121,000, $85,000 and $40,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
Compensation expense related to the ESOP amounted to $238,000, $210,000 and
$310,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As
provided by SOP 93-6, the ESOP compensation expense includes a $2,000 credit in
2000 and a $20,000 credit in 1999 and an expense of $100,000 in 1998, 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 6,334 in
2000, 3,972 in 1999 and 5,902 in 1998.
Dividends on unallocated shares used for debt service were $41,000, $45,000
and $19,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The total shares held by the ESOP were 297,166 and 291,667 at December 31,
2000 and 1999, respectively. ESOP shares have been restated to reflect the three
5% stock dividends of June, 2000, 1999 and 1998.
NOTE L - OTHER BENEFIT PLANS
Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. A participating employee may contribute a maximum of 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 $91,000, $86,000 and $75,000 in
2000, 1999 and 1998, 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 five to fifteen 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 changes in benefit obligations and plan
assets of the Officers' Supplemental Retirement Plan and the Deferred Directors'
Plan.
Actuarial present value of benefit obligations is as follows.
Officers' Deferred
Supplemental Directors'
Retirement Plan Plan
At December 31, 2000 1999 2000 1999
Benefit obligation at beginning of year $ 227 $ 200 $ 468 $ 491
Service cost 46 43 - -
Interest cost 27 18 30 32
Actual (gain) loss 88 (34) (2) (2)
Benefits paid - - (53) (53)
----- ----- ----- -----
Benefits obligation at end of year 388 227 443 468
Change in plan assets:
Fair value of plan assets at beginning
of year - - - -
Actual return on plan assets - - - -
Employer contribution - - 53 53
Benefits paid - - (53) (53)
----- ----- ----- -----
Fair value of plan assets at end of year - - - -
Funded status (388) (227) (443) (468)
Unrecognized net transition asset (3) (4) - -
Unrecognized net actuarial (gain) loss (161) (260) 35 37
Unrecognized prior service cost - - - -
Adjustment to recognize
additional minimum liability -- -- (35) (37)
----- ----- ----- -----
Accrued benefit cost $(552) $(491) $(443) $(468)
The weighted average assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were 7.0% in 2000
and 6.75% in 1999 and 6.50% in 1998 for the Officers' Supplemental Retirement
Plan, and 7.0% in 2000, 1999 and 1998 for the Deferred Directors' Plan. The
weighted average expected long-term rate of return on assets was 8.0% for 2000,
1999 and 1998 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 2000, 1999 and
1998.
Components of the net periodic benefit costs is as follows for both plans.
- --------------------------------------------------------------------------------
OFFICERS' SUPPLEMENTAL RETIREMENT PLAN
at December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ 46 $ 43 $ 37
Interest cost 27 18 15
Net amortization and
deferral of prior service costs (12) (21) (15)
---- ---- ---
Net Periodic Benefit Cost $ 61 $ 40 $37
DEFERRED DIRECTORS' PLAN
at December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ - $ - $ --
Interest cost 30 32 34
Net amortization and
deferral of prior service costs -- -- --
---- ---- ---
Net Periodic Benefit Cost $ 30 $ 32 $ 34
- --------------------------------------------------------------------------------
NOTE M - POST-RETIREMENT BENEFIT
The Company sponsors a post-retirement plan that covers a certain number of
retired employees and a limited group of current employees. This plan provides
medical insurance benefits to a group of previously qualified retirees and
spouses and to current full-time employees who were 60 years of age or older on
January 1, 1992 and who have retired from the Company after attaining age 65 and
are fully vested in the ESOP at the time of retirement. This plan is currently
unfunded.
As permitted by SFAS No. 106, the Company elected to delay the recognition
of the transition obligation by aggregating $308,000, which arose from adopting
SFAS No. 106, and amortize this amount on a straight-line basis over 20 years.
This election is recorded in the financial statements as a component of net
periodic post-retirement benefit cost.
The components of the net periodic post-retirement benefit cost are as
follows.
- -------------------------------------------------------------------------------
POST-RETIREMENT PLAN
Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Interest cost $ 9 $ 11 $ 11
Amortization of transition
obligation 3 7 6
----- ----- -----
Net Periodic Benefit Cost $ 12 $ 18 $ 17
- -------------------------------------------------------------------------------
The assumptions used to develop the net periodic post-retirement benefit
cost are as follows.
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
Discount Rate 7.00% 6.75% 6.50%
Medical care cost
trend rate 8.50% 8.50% 8.50%
- -------------------------------------------------------------------------------
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.
POST-RETIREMENT PLAN 2000 1999
Change in benefit obligation:
Benefit obligation at beginning of year $ 174 $ 164
Service cost - -
Interest cost 8 11
Actual gain - -
Change due to change in experience (40) 13
Change due to change in assumption - 2
Benefits paid (14) (16)
----- -----
Benefits obligation at end of year 128 174
----- -----
Change in plan assets:
Fair value of plan assets at beginning
of year - -
Actual return on plan assets - -
Employer contribution - -
Benefits paid - -
----- -----
Fair value of plan assets at end of year - -
Funded status (128) (174)
Unrecognized net transition obligation 185 201
Unrecognized net gain (122) (93)
----- -----
Accrued benefit cost $ (65) $ (66)
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 $9,000 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 $13,000, $16,000 and $20,000 in 2000,
1999 and 1998, respectively. The cost is accrued over the service periods of
employees expected to receive benefits.
NOTE N - STOCK OPTIONS
The Company adopted a Stock Option Plan in 1996 that was similar to the
Stock Option Plan established in 1986. Under the Stock Option Plans, options to
acquire shares of common stock may be granted to the officers and key employees.
The Stock Option Plans provide for the granting of options at the fair market
value of the Company's common stock at the time the options are granted. Each
option granted under the Stock Option Plans may be exercised within a period of
ten years from the date of grant. However, no option may be exercised within one
year from date of grant. In 2000 and 1999, no options were awarded under this
plan. On January 19, 2001 options to purchase 39,500 shares of the Company's
common stock at a price of $17.41 per share were issued to certain officers
under this plan. The aggregate number of shares which may be issued under these
plans are 330,055 shares of common stock.
The Non-Employee Directors Stock Option 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 1,340 shares of the Company's common stock at the fair market value of
the Company's common stock of $12.69 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 1,340
shares of the Company's common stock at a price of $20.08. 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 1,340 shares of the Company's common stock. Such persons who continue
to be non-officer directors shall also be granted additional options to purchase
1,340 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. In 2000, options
to purchase 2,680 shares of the Company's common stock at a price of $16.43 per
share were granted to certain non-employee directors pursuant to the provisions
of this plan. Options to purchase 8,037 shares at a price of $20.77 were granted
1999 to non-employee directors. The aggregate number of shares which may be
issued under the Non-Employee Directors Stock Option Plan is 26,800 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, 2000 1999 1998
- -------------------------------------------------------------------------------
Net Income As reported $ 2,072 $ 3,282 $ 3,032
Pro forma $ 1,937 $ 3,194 $ 3,015
Basic earnings per share As reported $ 1.09 $ 1.75 $ 1.60
Pro forma $ 1.01 $ 1.70 $ 1.59
Diluted earnings per share As reported $ 1.09 $ 1.74 $ 1.59
Pro forma $ 1.01 $ 1.69 $ 1.58
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 2000, 1999 and 1998, respectively: dividend yield
of 2.8% for all years; expected volatility of 27.0%, 39.0% and 39.0%; risk-free
interest rates of 6.07%, 6.3% and 5.7%; and expected lives of 10 years.
A summary of the status of the Company's Employee Stock Option Plans as of
December 31, 2000, 1999 and 1998, and changes during the years ending on those
dates is presented below.
EMPLOYEE STOCK OPTION PLAN
Year Ended December 31, 2000
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 61,746 $ 25.57
Granted --- ---
Expired --- ---
------ --------
Outstanding at end of year 61,746 $ 25.57
Options exercisable at year-end 40,042 $ 23.71
Weighted average fair value of
options granted during the year $ ---
Year Ended December 31, 1999
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 62,903 $ 25.69
Granted --- ---
Expired (1,157) 31.96
------ --------
Outstanding at end of year 61,746 $ 25.57
Options exercisable at year-end 26,439 $ 21.88
Weighted average fair value of
options granted during the year $ ---
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 29,332 $ 18.50
Granted 34,150 31.96
Expired (579) 31.96
------ --------
Outstanding at end of year 62,903 $ 25.69
Options exercisable at year-end 12,837 $ 16.20
Weighted average fair value of
options granted during the year $ 31.96
The following table summarizes information concerning employee stock
options outstanding at December 31, 2000:
- -------------------------------------------------------------
Options outstanding
- -------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life (years) Price
- -------------- ----------- ----------- ---------
$ 13.12 7,338 3.98 $ 13.12
$ 20.30 21,995 6.44 $ 20.30
$ 31.96 32,413 7.02 $ 31.96
------
61,746
- -------------------------------------------------
Options Exercisable
- --------------------------------------------------
Weighted
Average
Number Exercise
Exercisable Price
----------- --------
7,338 $ 13.12
16,497 $ 20.30
16,207 $ 31.96
------
40,042
A summary of the status of the Company's Non-Employee Directors Stock Option
Plan as of December 31, 2000 and 1999, and changes during the years ending on
those dates are presented below.
NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
Year Ended December 31, 2000
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 17,413 $ 16.56
Granted 2,680 16.43
Exercised (1,340) 12.69
Expired (1,340) 20.08
------ --------
Outstanding at end of year 17,413 $ 16.56
Options exercisable at year-end 9,714 $ 14.36
Weighted average fair value of
options granted during the year $ 16.43
Year Ended December 31, 1999
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 10,716 $ 12.91
Granted 8,037 20.77
Exercised (1,340) 12.69
Expired --- ---
------ --------
Outstanding at end of year 17,413 $ 16.56
Options exercisable at year-end 9,045 $ 12.87
Weighted average fair value of
options granted during the year $ 20.77
Year Ended December 31, 1998
Weighted
Average
Excercise
Shares Price
Outstanding at beginning of year 10,716 $ 12.91
Granted --- ---
Exercised --- ---
Expired --- ---
------ --------
Outstanding at end of year 10,716 $ 12.91
Options exercisable at year-end 9,380 $ 12.80
Weighted average fair value of
options granted during the year $ ---
The following table summarizes information concerning non-employee director
options outstanding at December 31, 2000.
- ------------------------------------------------------------------
Options outstanding
- ------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life (years) Price
-------------- ----------- ----------- ---------
$12.34 - $16.43 10,717 5.34 $ 13.85
$20.08 - $22.14 6,696 8.38 $ 20.90
-----
17,413
- -------------------------------------------------
Options Exercisable
- --------------------------------------------------
Weighted
Average
Number Exercise
Exercisable Price
----------- --------
8,040 $ 12.99
1,674 $ 20.90
------
9,714
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating lease agreements in excess of one
year with respect to various buildings and equipment. The minimum annual rental
commitments at December 31, 2000 are payable as follows.
- --------------------------------------------
Operating Leases
- --------------------------------------------
2001 $ 546
2002 529
2003 516
2004 527
2005 476
2006 and beyond 1,258
-------
Total $ 3,852
- --------------------------------------------
The total rental expense was $479,000, $397,000 and $378,000 in 2000, 1999
and 1998, respectively.
The Company has reserved $2.48 million against asserted claims and claims
which have been or may be asserted against the Bank in connection with certain
pre-need funeral trust funds. Most of the claims arise from Trusts, in which the
Company was allegedly directed by funeral directors to invest in a private
placement annuity issued by EA International Trust. The Bank has settled the
asserted claims for the amount reserved.
NOTE P - EARNINGS PER SHARE
- -------------------------------------------------------------------------------
Income Average Shares Per Share
For the Year Ended December 31, (numerator) (denominator) Amount
-------------------------------------
2000
- ------------------------------------------
Net Income $ 2,072
Basic Earnings Per Share
Income Available to Common Shareholders $ 2,072 1,899,702 $ 1.09
Effect of Dilutive Securities
Stock Options 2,121
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 2,072 1,901,823 $ 1.09
-------------------------------------
1999
- ------------------------------------------
Net Income $ 3,282
Basic Earnings Per Share
Income Available to Common Shareholders $ 3,282 1,875,320 $ 1.75
Effect of Dilutive Securities
Stock Options 3,457
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 3,282 1,878,777 $ 1.74
-------------------------------------
1998
- ------------------------------------------
Net Income $ 3,032
Basic Earnings Per Share
Income Available to Common Shareholders $ 3,032 1,895,304 $ 1.60
Effect of Dilutive Securities
Stock Options 8,239
-------------------------------------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 3,032 1,903,543 $ 1.59
-------------------------------------
Average common shares outstanding in 2000, 1999 and 1998 do not include 55,174,
59,428 and 27,407, respectively, of average weighted unallocated shares held by
the ESOP. The exclusion of these unallocated shares held by the ESOP is due to
the Company's adoption of SOP 93-6. Share and per share information have been
retroactively restated to reflect the three 5% stock dividends of June, 2000,
1999 and 1998.
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT 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, 2000 and 1999 are as
follows.
Financial instruments whose contract amounts represent credit risk:
2000 1999
Commitments to extend credit $ 31,773 $ 36,119
Standby letters of credit $ 2,222 $ 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
67.0% as of December 31, 2000.
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, 2000, the Bank had residential real estate loans
outstanding totaling $128,862,000, which was 56.8% of total loans. The Bank also
had real estate related commercial loans outstanding at December 31, 2000
totaling $27,206,000, which was 12.0% of total loans. Loans to various borrowers
for land development totaling $2,153,000 are included in the Bank's total real
estate commercial loans. These loans represented 7.9% of the total real estate
related commercial loans. Loans to individuals for recreational vehicles totaled
$26,165,000 at December 31, 2000. This was 11.5% of total loans and 49.3% of the
Bank's consumer and installment loans which totaled $53,062,000 at December 31,
2000.
NOTE R - REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. The dividends, as
of December 31, 2000, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $2,092,000.
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 2000 was approximately $6,706,000 and $7,421,000, respectively. For
1999, the average reserve balance was $6,150,000 and the year-end amount was
$6,558,000.
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, 2000, the Company and
the Bank met all capital adequacy requirements to which they were subject.
As of December 15, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized, the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
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, 2000 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $35,733 15.16% $18,862 8.00% --- ---
Bank $31,161 13.03% $19,127 8.00% $23,909 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $33,313 14.13% $ 9,431 4.00% --- ---
Bank $28,750 12.02% $ 9,564 4.00% $14,345 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $33,313 8.00% $16,654 4.00% --- ---
Bank $28,750 6.95% $16,557 4.00% $20,697 5.00%
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 8.32% $15,324 4.00% --- ---
Bank $28,194 7.41% $15,210 4.00% $19,012 5.00%
NOTE S - EQUITY TRANSACTIONS
The Company paid a 5% stock dividend on its common stock from authorized
but unissued shares on June 22, 2000 to all shareholders of record at the close
of business on June 2, 2000. On June 24, 1999, 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 4, 1999. The Company
also paid a 5% stock dividend on June 25, 1998 to shareholders of record on June
5, 1998. 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 2000, 21,646 common new shares
were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at
an average cost of $14.44 per share for total proceeds of $313,000. In 1999,
15,814 common shares were purchased pursuant to the Dividend Reinvestment and
Stock Purchase Plan at an average cost of $19.98 for proceeds of $316,000.
NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of 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, 2000 and 1999 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.
2000 1999
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Cash and cash equivalents $ 17,738 $ 17,738 $ 16,272 $ 16,272
Investment securities 183,935 184,001 151,479 152,243
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. Fair value of financial
instrument liabilities with no stated maturities has been estimated to equal the
carrying amount (the amount payable on demand).
2000 1999
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Assets:
Interest-bearing deposits
with banks $ 95 $ 95 $ 5,589 $ 5,589
Liabilities:
Deposits with stated
maturities 173,828 173,220 154,771 156,584
Deposits with no stated
maturities 139,252 179,971 167,691 167,896
Securities sold under
agreements to repurchase 7,215 7,215 1,730 1,730
Short-term debt 5,695 5,695 -- --
Long-term debt 34,068 34,000 29,519 30,000
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.
2000 1999
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
Total loans $233,994 $226,944 $199,738 $202,258
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totaling $33,995,000 at December
31, 2000 and $38,283,000 at December 31, 1999 which were 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 - 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, 2000, June, 1999 and June, 1998.
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in Thousands)
except per share data
Three Months Ended
2000 Dec. 31 Sept. 30 June 30 March 31
Interest income $7,791 $7,471 $7,169 $6,856
Net interest income 3,946 3,851 3,837 3,706
Provision for possible
loan losses 125 125 125 --
Net gain on sale
of securities and mortgages 20 56 110 47
Income (loss) before income taxes (150) 724 744 1,024
Net income $ 54 $ 603 $ 619 $ 796
Basic net income per share $ 0.03 $ 0.32 $ 0.32 $ 0.42
Diluted net income per share $ 0.03 $ 0.32 $ 0.32 $ 0.42
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 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 $ 0.37 $ 0.47 $ 0.50 $ 0.42
Diluted net income per share $ 0.37 $ 0.47 $ 0.49 $ 0.42
NOTE V - FIRST COLONIAL GROUP, INC.
(PARENT COMPANY ONLY)
- -----------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31, 2000 1999
- -----------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 31 $ 14
Interest-Bearing Deposits
with Banks 609 369
Loan to Banking Subsidiary 1,000 1,000
Investment in Banking
Subsidiary 28,937 24,544
Investment in Other
Subsidiary 4,343 3,680
Other Assets 20 35
--------- ---------
TOTAL ASSETS $ 33,521 $ 29,642
LIABILITIES
Long-Term Debt $ 1,377 $ 1,320
Other Liabilities 42 79
-------- ---------
TOTAL LIABILITIES 1,419 1,399
SHAREHOLDERS' EQUITY 33,521 28,243
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 34,940 $ 29,642
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
INCOME
Dividends from Subsidiaries $ 1,405 $1,321 $ 688
Interest on Loan
to Subsidiary 97 85 89
Interest on Deposits
with Banks 13 6 5
------- ------ ------
TOTAL INCOME 1,515 1,412 782
------- ------ ------
EXPENSES
Interest on Long-Term Debt 121 105 39
Other Expenses 39 81 94
------- ----- ------
TOTAL EXPENSES 160 186 133
------- ----- ------
Income Before Taxes and
Equity in Undistributed Net
Earnings of Subsidiaries 1,355 1,226 649
Federal Income Tax (Credit) (17) (32) (12)
------- ----- ------
Income Before Equity in
Undistributed Net Earnings
of Subsidiaries 1,372 1,258 661
Equity in Undistributed Net
Earnings of Subsidiaries 700 2,024 2,371
------- ------- -------
NET INCOME $ 2,072 $ 3,282 $ 3,032
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,072 $ 3,282 $ 3,032
Adjustments to Reconcile
Net Income to Net Cash
Provided by Operating
Activities:
Distribution in Excess
of Undistributed Net
Earnings of Subsidiaries (687) (2,005) (2,467)
Changes in Assets and
Liabilities:
(Increase) Decrease in
Interest-Bearing Deposits
with Banks (240) (239) 774
(Increase) Decrease in
Other Assets 15 (22) (1)
Increase (Decrease) in
Other Liabilities (47) 1 28
------- ------- ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,113 1,017 1,366
------- ------- ------
INVESTING ACTIVITIES
Capital Contribution to
Bank Subsidiary - - (500)
-------- ------- ------
NET CASH PROVIDED BY
INVESTING ACTIVITIES - - (500)
-------- ------- ------
FINANCING ACTIVITIES
Increase in Long-Term Debt 57 885 45
Increase in ESOP Debt (57) (885) (45)
Proceeds from the Sale of
Treasury Stock - - 94
Proceeds from Issuance
of Common Stock 312 302 333
Cash Dividends Paid (1,406) (1,321) (1,275)
Cash in Lieu of
Fractional Shares (2) (4) (6)
-------- ------ -------
NET CASH USED IN
FINANCING ACTIVITIES (1,096) (1,023) (854)
-------- ------ -------
Increase (Decrease) in Cash
and Cash Equivalent 17 (6) 12
Cash and Cash Equivalent,
January 1, 14 20 8
-------- ------ -------
Cash and Cash Equivalent,
December 31, $ 31 $ 14 $ 20
- -------------------------------------------------------------------------------
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 17, 2001 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, 2000, there were 772 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 H- Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price in December, 2000 was $13.50 and
in December, 1999 was $16.55. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of June 2000 and June 1999.
1999
First Quarter $26.30 $20.87 $ 0.1724
Second Quarter 22.86 19.72 0.1724
Third Quarter 23.10 17.62 0.1810
Fourth Quarter 19.05 16.37 0.1810
--------
TOTAL $ 0.7068
2000
First Quarter $18.69 $14.05 $ 0.1810
Second Quarter 16.33 12.26 0.1810
Third Quarter 17.00 12.00 0.1900
Fourth Quarter 16.50 12.75 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, 2000.
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.; Monroe
Securities, Inc.; Ryan, Beck & Co.; and Spear Leeds & Kellogg Capital Markets.
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
12/31/00 and 12/31/99
Consolidated Statements of Income and Comprehensive Income
for the Years Ended 12/31/00, 12/31/99 and 12/31/98
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended 12/31/00, 12/31/99 and 12/31/98
Consolidated Statements of Cash Flows for the Years Ended
12/31/00, 12/31/99 and 12/31/98
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, 1984, by and between the
Company and Commonwealth Bank and Trust Company, N.A.
* 10.6 (3) First Colonial Group, Inc. Stock Option Plan.
10.7 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 Severance Agreement dated January 1, 2001 by and between
the Bank and S. Eric Beattie
*10.11 Severance Agreement dated January 1, 2001 by and between
the Bank 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
Number Title Page No.
------ ----- --------
*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 Severance Agreement dated January 1, 2001 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 Severance Agreement dated January 1, 2001 by and between
the Board and Robert McGovern
10.21 (16) Loan Agreement dated February 8, 1999 by and between
First C. G. Company and the Employee Stock Ownership Plan
10.22 Loan Agreement dated October 19, 2000 by and between
First C. G. Company and the Employee Stock Ownership Plan
10.23 Loan Agreement dated December 22, 2000 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.
(16) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-11526) for the fiscal year ended December 31, 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, 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST COLONIAL GROUP, INC.
Dated: March 30, 2001 By: /s/ S. Eric Beattie
------------------------------------
S. ERIC BEATTIE, President
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Richard Stevens, III
-----------------------------------------------------------
RICHARD STEVENS, III
Chairman of the Board
and Director
March 30, 2001
By: /s/ S. Eric Beattie
-----------------------------------------------------------
S. ERIC BEATTIE
President, Chief Executive Officer
and Director (Principal Executive Officer)
March 30, 2001
By: /s/ Reid L. Heeren
-----------------------------------------------------------
REID L. HEEREN
Executive Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 30, 2001
By: /s/ Robert J. Bergren
-----------------------------------------------------------
ROBERT J. BERGREN
Director
March 30, 2001
By: /s/ Christian F. Martin, IV
-----------------------------------------------------------
CHRISTIAN F. MARTIN, IV
Director
March 30, 2001
By: /s/ Gordon B. Mowrer
-----------------------------------------------------------
GORDON B. MOWRER
Director
March 30, 2001
By: /s/ Daniel B. Mulholland
-----------------------------------------------------------
DANIEL B. MULHOLLAND
Director
March 30, 2001
By: /s/ Charles J. Peischl
-----------------------------------------------------------
CHARLES J. PEISCHL, ESQUIRE
Director
March 30, 2001
By: /s/ John H. Ruhle, Jr.
-----------------------------------------------------------
JOHN H. RUHLE, JR.
Director
March 30, 2001
By: /s/ Maria Zumas Thulin
-----------------------------------------------------------
MARIA Z. THULIN
Director
March 30, 2001