-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3NKdNqnMK6BBvZMzpn5ohjghaSLyyjaQcr0gsLKeZom+L4Kwp1uhTcM1A5W74qd Uild0EoveYaBOI5nbWLpyA== 0000714719-98-000010.txt : 19980331 0000714719-98-000010.hdr.sgml : 19980331 ACCESSION NUMBER: 0000714719-98-000010 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COLONIAL GROUP INC CENTRAL INDEX KEY: 0000714719 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232228154 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-11526 FILM NUMBER: 98578736 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: NAZARETH STATE: PA ZIP: 18064 BUSINESS PHONE: 2157467300 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: NAZARETH STATE: PA ZIP: 18064 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-KSB X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for (fee required) for the fiscal year ended December 31, 1997. Transition Report under 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. ---------------------------------------------------------------- (Name of Small Business Issuer in its charter) Pennsylvania 23-2228154 ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 76 South Main Street, Nazareth, Pennsylvania 18064 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number 610-746-7300 Securities registered under Section 12 (b) of the Exchange Act: None Securities registered under Section 12 (g) of the Exchange Act: Common Stock, $5.00 Par Value (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. The Issuer's revenues for the fiscal year ended December 31, 1997 were $29,267,000. The aggregate market value of voting stock held by non-affiliates of the registrant is $50,204,160. (1) The number of shares of the Issuer's common stock, par value $5.00 per share, outstanding as of March 18, 1998 was 1,655,101. DOCUMENTS INCORPORATED BY REFERENCE: Part III: Certain portions of the 1997 Proxy Statement (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 18, 1998. Includes an aggregate of 174,612 shares, with an aggregate market value of $6,286,032, held by the Trust Department of Nazareth National Bank & Trust Company in Trust for persons other than executive officers, directors and 10% shareholders of the registrant. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder may be deemed an affiliate of the registrant or that such person is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. Transitional Small Business Disclosure Format (Check one): Yes ; No X PART 1 Item 1. Description of Business 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, 1997 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 $14,607,000, representing a negative cumulative one year gap of 91.2%. If interest rates rise, the Company could experience a decrease in net interest income. Like all financial institutions, the Company's balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U. S. Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. See "Item 6, Management's Discussion and Analysis or Plan of Operation". 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 7, Financial Statements". Competition. The Company faces strong competition from many other banks, savings institutions and other financial institutions which have branch offices or otherwise operate in the Company's market area, as well as many other companies now offering a range of financial services. Most of these competitors have substantially greater financial resources than the Company including a larger capital base which allows them to attract customers seeking larger loans than the Bank is able to make. In addition, many of the Bank's competitors have higher legal lending limits than does the Bank. Particularly intense competition exists for sources of funds including savings and retail time deposits and for loans, deposits and other services that the Bank offers. Allowance for Loan Losses. The Company has established an allowance for loan losses which management believes to be adequate to offset potential losses on the Company's existing loans. However, there is no precise method of predicting loan losses. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require the Company to increase its allowance for loan losses through a charge to earnings resulting in reduced profitability. Dividends. While the Board of Directors presently intends to follow a policy of paying cash dividends, the dividend policy will be reviewed periodically in light of future earnings, regulatory restrictions and other considerations. No assurance can be given, therefore, that cash dividends will be paid in the future. See the information contained under the caption in "Item 5. Market for 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 Common Equity and Related Stockholder Matters". "Anti-Takeover" and "Anti-Greenmail" Provisions and Management Implications. The Articles of the Company presently contain certain provisions which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction or series of transactions. The overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to discourage, make more costly or more difficult, or prevent a future takeover offer, prevent shareholders from receiving a premium for their securities in a takeover offer, and enhance the possibility that a future bidder for control of the Company will be required to act through arms-length negotiation with the Company's Board of Directors. Copies of the Company's Articles of the Incorporation are on file with the SEC and Pennsylvania Department of State. Year 2000 Compliance. The Company has conducted a comprehensive review of its computer systems and operations to identify the areas that could be affected by the Year 2000 issue. The issue with respect to Year 2000 is whether systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause complete system failures. The Company's estimates of the cost to be incurred to prepare for Year 2000 compliance range from $100,000 to $300,000; however, there can be no assurance that the 2000 year problem will not have an adverse effect on the financial condition and results of operations of the Company. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Year 2000" in "Item 6. Management's Discussion and Analysis or Plan of Operation". 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, one branch in Stroudsburg, Pennsylvania, one branch in East Stroudsburg, Pennsylvania and one branch in Allentown, Pennsylvania. The Bank has eighteen automated teller machines (ATMs), one at each branch office (except the Main Street Nazareth branch), four free-standing drive-up machines at the Northampton Crossings Shopping Center, Easton, Pennsylvania and free-standing machines at its operation center, The First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania and at St. Luke's Hospital, Fountain Hill, 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, 1997 the Company, on a consolidated basis, had total assets of $346,738,000, total deposits of $282,255,000, and total shareholders' equity of $30,357,000. 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, Pennsylvania. The Bank is a member of the Federal Reserve System. As of December 31, 1997, the Bank had total assets of $342,068,000, total deposits of $283,287,000 and total shareholders' equity of $24,760,000. Its deposits are insured by the Bank Insurance Fund ("BIF") maintained by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent permitted by law. The Bank engages in a full service commercial and consumer banking and trust business. The Bank, with its main office at 76 South Main Street, Nazareth, Pennsylvania, also provides services to its customers through its branch network of thirteen full service banks, which includes drive-in facilities at most locations, ATMs at each branch office (except the Main Street Nazareth branch) and bank-by-mail services. Nine of the Bank's full service offices are located in Northampton County, Pennsylvania. Three offices are located in Monroe County, Pennsylvania. One office is located in Lehigh County, Pennsylvania. The Bank also has free standing ATMs located in its Operations Center, the First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of Fountain Hill, Pennsylvania and four free-standing drive-up ATM's at Northampton Crossings Shopping Center, Lower Nazareth Township, Easton, Pennsylvania. The Bank's services include accepting time, demand and savings deposits, including NOW accounts (Flex Checking), regular savings accounts, money market accounts, fixed rate certificates of deposit and club accounts, including the Vacation Club, the College Club(R) and the Christmas Club. The Bank offers Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved line of credit activated by writing checks against a checking account) and the First Colonial Club(R) and Quality Checking(R) (deposit package programs which provide checking accounts with other services including credit card protection, discount travel, shopping services and other related financial services). Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions either directly or through regional industrial development corporations, making construction and mortgage loans, and renting safe deposit facilities. Additional services include making residential mortgage loans (both fixed rate and variable rate), home equity lines of credit, loans to purchase manufactured homes, revolving credit loans with overdraft checking protection, small business loans, student loans, recreational vehicles and new and used car and truck loans. The Bank's business loans include seasonal credit and collateral loans and term loans as well as accounts receivable and inventory financing. Most of the Bank's commercial customers are small to medium size businesses operating in Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of Pennsylvania. Trust services provided by the Bank include services as executor and trustee under wills and deeds, as guardian, custodian and as trustee and agent for pension, profit sharing and other employee benefit trusts as well as various investment, pension and estate planning services. Trust services also include service as transfer agent and registrar of stock and bond issues and as escrow agent. In addition, the Bank provides discount brokerage through an outside supplier of this service, and various tax services. The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including Federal, state and local governments). The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits. Competition All phases of the Bank's business are highly competitive. The Bank's market area is the primary trade area of Northampton and Lehigh Counties (known as the Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to keep pace with its competition and the continuing growth of these areas, the Bank may, in the future, consider establishing additional new branches, although no assurance can be given that any new branches will be opened or if opened, that they will be successful. The Bank competes with local commercial banks as well as other commercial banks with branches in the Bank's market area. The Bank considers its major competition to be Lafayette Bank, headquartered in Easton, Pennsylvania, with a branch in Nazareth; First Union Bank, headquartered in Charlotte, North Carolina, with branch offices in Easton and Bethlehem, Pennsylvania; Summit Bancorporation, headquartered in Princeton, New Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; PNC Bank, headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth, Brodheadsville, Easton and Allentown, Pennsylvania; and Corestates Bank, headquartered in Philadelphia, Pennsylvania, with branches in Bethlehem, 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. 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, 1997, First C. G. Company, Inc. had total assets of $4,787,000, of which $1,023,000 was invested in tax-exempt municipal obligations and most of the remaining assets were in other taxable securities and interest-bearing bank deposits. The total shareholders' equity at December 31, 1997 was $4,113,000. 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 Insured 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 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, nonoperating basis; and, certain stock brokerage and investment advisory services are closely related to banking within the meaning of the Holding Company Act. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The Bank currently is rated "satisfactory" under the Community Reinvestment Act. Under the policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is deemed to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee that any "undercapitalized" (as such term is defined in the statute) insured depository institution subsidiary will comply with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards as of the time the institution failed to comply with such capital restoration plan. Under the Holding Company Act, the Company is required to file periodic reports and other information concerning its operations with, and is subject to examination by, the Federal Reserve Board. In addition, under the Banking Code of 1965, the Pennsylvania Department of Banking has the authority to examine the books, records and affairs of any Pennsylvania bank holding company or to require any documentation deemed necessary to ensure compliance with the Banking code. The Company is under the jurisdiction of the Securities and Exchange Commission and various state securities commissions for matters relating to the offering and sale of its securities, and is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Bank The Bank, as a national bank, is subject to The National Bank Act. The Bank is also subject to the supervision of, and is regularly examined by, the Office of the Comptroller of the Currency of the United States (the "OCC") and is required to furnish quarterly reports to the OCC. The approval of the OCC is required for the establishment of additional branch offices by any national bank, subject to applicable state law restrictions. Under current Pennsylvania law, banking institutions located in Pennsylvania, such as the Bank, may establish branches within any county in the Commonwealth, subject to the prior approval of the OCC. As a national bank, the Bank is a member of the FDIC and a member of the Federal Reserve System and, therefore, is subject to additional regulation by these agencies. Some of the aspects of the lending and deposit business of the Bank which are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The operations of the Bank are also subject to numerous Federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to interest rates on loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. The Bank is subject to certain limitations on the amount of cash dividends it can pay. See "Note S Regulatory Matters" in the Notes to Consolidated Financial Statements which appears elsewhere herein. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Company and the Company's non-bank subsidiary. Substantially all of the deposits of the Bank are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The insurance assessments are based upon a matrix that takes into account a bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits insured by the BIF to the statutory minimum of $2,000 annually for "well-capitalized" banks. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA reduced the amount of FDIC insurance premiums for savings association deposits acquired by banks to the same levels assessed for deposits insured by BIF. DIFA further provides for assessments to be imposed on all insured depository institutions with respect to deposits to pay for the cost of Financing Corporation bonds; however, banks are assessed for this purpose at only one-fifth the rate of the assessment on savings associations until December 31, 1999. As a result of these changes, the deposit insurance assessment for banks and for thrifts has been nearly equalized and will be identical for comparably rated institutions after January 1, 2000, at which time banks will share equally in the FICO assessment and the BIF and SAIF funds will be merged. Capital Regulation The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial condition and results of operation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier 1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital of 4% of average assets (leverage ratio). Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying debt instruments, and the allowance for possible loan losses. Management believes, as of December 31, 1997 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, 1997 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- --- Bank $27,200 13.97% $15,576 8.00% $19,470 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- --- Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- --- Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Adequacy Action (Dollars in Thousands) At December 31, 1996 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $28,596 15.20% $15,046 8.00% --- --- Bank $25,591 13.59% $15,065 8.00% $18,831 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $26,243 13.95% $ 7,522 4.00% --- --- Bank $22,435 11.91% $ 7,532 4.00% $11,299 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $26,243 8.35% $12,578 4.00% --- --- Bank $22,435 7.20% $12,456 4.00% $15,570 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 24, 1995. Beginning June 1, 1997, a bank may merge with a bank in another state so long as both states have not opted out of interstate branching between the date of enactment of the Interstate Act and May 31, 1997. States may enact laws opting out of interstate branching before June 1, 1997, subject to certain conditions. States may also enact laws permitting interstate merger transactions before June 1, 1997 and host states may impose conditions on a branch resulting from an interstate merger transaction that occurs before June 1, 1997, if the conditions do not discriminate against out-of-state banks, are not preempted by Federal law and do not apply or require performance after May 31, 1997. Pennsylvania has enacted a law opting in immediately to interstate merger and interstate branching transactions. Interstate acquisitions and mergers would both be subject, in general, to certain concentration limits and state entry rules relating to the age of the bank. Under the Interstate Act, the Federal Deposit Insurance Act is amended to permit the responsible Federal regulatory agency to approve the acquisition of a branch of an insured bank by an out-of-state bank or bank holding company without the acquisition of the entire bank or the establishment of a "de novo" branch only if the law of the state in which the branch is located permits out-of-state banks to acquire a branch of a bank without acquiring the bank or permits out-of-state banks to establish "de novo" branches. Pennsylvania has enacted such a law. National Monetary Policy In addition to being affected by general economic conditions, the earnings and growth of the Bank and, therefore, the earnings and growth of the Company, are affected by the policies of regulatory authorities, including the OCC, the Federal Reserve Board and the FDIC. An important function of the Federal Reserve Board is to regulate the money supply, credit conditions and interest rates. Among the instruments used to implement these objectives are open market operations in United States Government securities, setting the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of the Company and the Bank cannot be predicted. 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, 1997 and 1996 in Note U of the Notes to Consolidated Financial Statements contained under the caption, "Item 7, Financial Statements". 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 1997 and 1996. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements. The classification of securities can be found in Note B of the Notes to Consolidated Financial Statements contained under the caption, "Item 7, Financial Statements". Employees As of December 31, 1997 the Company had approximately 196 employees, of whom 46 were part-time. The Company considers its relationship with its employees to be good. Additional Information The tables listed below, which are set forth on pages 17 through 23 herein, contain unaudited information relevant to the business of the Company and the Bank: Investment Securities Investment Securities Yield by Maturity Loan Portfolio by Type Loan Maturities and Interest Sensitivity Allocation of the Allowance for Possible Loan Losses Percentage of Total Loans in each Category to Total Loans Average Deposit Balances by Major Classification Maturities of Certificates of Deposit of $100,000 or more 1997 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 9,008 $ 9,066 U. S. Government Agency 14,512 14,556 State and Political Subdivisions 16,865 17,330 Mortgage-Backed Securities 26,791 26,812 Other Debt Securities --- --- Equity Securities 3,878 5,260 ------- ------- Total $71,054 $73,024
1996 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 7,020 $ 7,054 U. S. Government Agency 14,272 14,161 State and Political Subdivisions 11,808 11,864 Mortgage-Backed Securities 19,131 19,145 Other Debt Securities 796 800 Equity Securities 3,226 3,755 ------- ------- Total $56,253 $56,779
1995 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 7,002 $ 7,050 U. S. Government Agency 17,066 17,159 State and Political Subdivisions 6,638 6,689 Mortgage-Backed Securities 24,529 24,689 Other Debt Securities 300 307 Equity Securities 2,727 3,155 ------- ------- Total $58,262 $59,049
1997 Held-to-Maturity Securities Carrying Amount at Approximate Amortized Fair Cost Value U. S. Treasury $ --- $ --- U. S. Government Agency 6,008 6,051 State and Political Subdivisions 3,169 3,233 Mortgage-Backed Securities 8,579 8,662 ------- ------- Total $17,756 $17,946
1996 Held-to-Maturity Securities Carrying Amount at Approximate Amortized Fair Cost Value U. S. Treasury $ 999 $ 1,003 U. S. Government Agency 10,229 10,243 State and Political Subdivisions 3,217 3,261 Mortgage-Backed Securities 6,554 6,617 ------- ------- Total $20,999 $21,124
1995 Held-to-Maturity Securities Carrying Amount at Approximate Amortized Fair Cost Value U. S. Treasury $ 2,997 $ 3,007 U. S. Government Agency 6,524 6,539 State and Political Subdivisions 2,086 2,118 Mortgage-Backed Securities 8,447 8,524 ------- ------- Total $20,054 $20,188
INVESTMENT SECURITIES YIELD BY MATURITY The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1997 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, 1997 AVAILABLE-FOR-SALE AT FAIR VALUE After 1 But After 5 But (Dollars in Thousands, Within One Year Within 5 Years Within 10 Years Unaudited) Amount Yield Amount Yield Amount Yield U. S. Treasury $ 2,994 6.05 % $ 6,072 6.12 % $ -- -- % U. S. Government Agency -- -- -- -- 11,515 6.88 Mortgage-backed Securities -- -- 1,468 5.67 1,610 6.38 State and Political Subdivisions 480 9.12 1,347 7.48 4,024 7.18 Equity Securities -- -- -- -- -- -- ----- ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 3,474 6.47 % $ 8,887 6.25 % $17,149 6.90% ===== ==== ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 0.78 2.98 7.74 ==== ==== ====
AVAILABLE-FOR-SALE AT FAIR VALUE (Dollars in Thousands, After 10 Years Total Unaudited) Amount Yield Amount Yield U. S. Treasury $ -- -- % $ 9,066 6.10 % U. S. Government Agency 3,041 7.44 14,556 7.00 Mortgage-backed Securities 23,734 6.59 26,812 6.53 State and Political Subdivisions 11,479 7.92 17,330 7.75 Equity Securities 5,260 4.06 5,260 4.06 ----- ---- ----- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $43,514 6.70 % $73,024 6.68 % ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 21.80 13.88 ===== =====
HELD-TO-MATURITY AT AMORTIZED COST After 1 But After 5 But (Dollars in Thousands, Within One Year Within 5 Years Within 10 Years Unaudited) Amount Yield Amount Yield Amount Yield U. S. Government Agency $ -- -- % $ -- -- % $ 6,008 6.79 % Mortgage-backed Securities 2 9.71 961 6.61 1,465 6.40 State and Political Subdivisions 387 8.77 1,213 6.80 1,258 7.53 ------ ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 389 8.73 % $ 2,174 6.72 % $ 8,731 6.83% ===== ==== ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 0.17 3.94 8.47 ==== ==== ====
AVAILABLE-FOR-SALE AT FAIR VALUE (Dollars in Thousands, After 10 Years Total Unaudited) Amount Yield Amount Yield U. S. Government Agency $ -- -- % $ 6,008 6.79 % Mortgage-backed Securities 6,151 7.03 8,579 6.88 State and Political Subdivisions 311 7.80 3,169 7.43 ----- ---- ----- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 6,462 7.07 % $17,756 6.94 % ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 25.54 13.96 ===== =====
LOAN PORTFOLIO BY TYPE The loan portfolio by type is summarized in the following table for the years ended December 31, 1997, 1996, 1995, 1994 and 1993. Loan Portfolio by Type (Unaudited) (Dollars in Thousands) For the Year Ended December 31, 1997 1996 1995 1994 1993 Real Estate - Residential $138,539 $134,013 $122,293 $117,205 $102,481 Real Estate - Construction 12,361 10,923 4,959 2,861 2,557 Real Estate - Commercial 34,579 39,421 35,316 35,673 36,371 Consumer/Installment 35,914 28,870 27,685 24,626 20,743 Commercial (non-Real Estate) and Agricultural 9,086 8,715 5,403 7,503 7,168 State and Political Subdivisions 944 906 1,290 288 476 Other 20 28 13 18 22 -------- -------- -------- -------- -------- TOTAL GROSS LOANS 231,443 222,876 196,959 188,174 169,818 Unearned Income (1,856) (2,759) (3,829) (2,959) (1,252) -------- -------- -------- -------- -------- Total Loans 229,587 220,117 193,130 185,215 168,566 Allowance for Possible Loan Losses (2,664) (2,532) (2,443) (2,187) (1,953) -------- -------- -------- -------- -------- NET LOANS $226,923 $217,585 $190,687 $183,028 $166,613 ======== ======== ======== ======== ========
At December 31, 1997 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, 1997, 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 (Unaudited) As of December 31, 1997 (Dollars in Thousands) Due in Due in Due in One Year One to Over or Less Five Years Five Years Total Real Estate - Construction $ 2,518 $ 1,204 $ 8,639 $12,361 Real Estate - Commercial 1,302 5,771 27,506 34,579 Commercial (Non-Real Estate) and Agricultural 800 3,681 4,605 9,086 ------- ------- ------- ------- TOTAL $ 4,620 $10,656 $40,750 $56,026 ======= ======= ======= ======= Loan Maturity After 1 Year With: Predetermined Interest Rate $ 1,253 $ 4,764 Floating Interest Rate 9,403 35,986 ------- ------- TOTAL $10,656 $40,750 ======= =======
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 (Unaudited) As of December 31, 1997 1996 1995 1994 1993 Loan Categories (Dollars in Thousands) Commercial $1,183 $ 663 $1,049 $1,142 $ 815 Real Estate- Construction 6 7 3 69 80 Real Estate - Residential 191 198 184 143 78 Consumer/Installment 785 811 534 451 393 Unallocated 499 853 673 382 587 ------ ------ ------ ------ ------ TOTAL $2,664 $2,532 $2,443 $2,187 $1,953 ====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS (Unaudited) As of December 31, 1997 1996 1995 1994 1993 Loan Categories (Dollars in Thousands) Commercial 19.28% 22.02% 21.33% 23.11% 26.12% Real Estate - Construction 5.34 4.90 2.52 1.52 1.52 Real Estate - Residential 59.86 60.13 62.09 62.28 60.80 Consumer/Installment 15.52 12.95 14.06 13.09 11.56 ------ ------ ------ ------ ------ TOTAL 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31, 1997, 1996 and 1995 are presented in the following table. AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION (Unaudited) For the Year Ended December 31, 1997 1996 1995 Average Average Average Balance Rate Balance Rate Balance Rate (Dollars in Thousands) Demand Deposits Non-Interest Bearing $ 31,074 --- % $ 27,826 --- % $ 23,782 --- % Interest Bearing 45,338 1.17 43,206 1.55 42,955 1.84 Money Market Deposits 14,380 2.81 16,297 2.82 17,639 2.81 Savings & Club Accounts 62,746 2.44 62,783 2.49 65,452 2.67 Certificates of Deposit under $100,000 118,846 5.58 103,221 5.50 90,925 5.47 Certificates of Deposit of $100,000 or more 5,014 4.19 5,167 4.84 6,184 5.24 ------ ---- ------ ---- ------ ---- Total Deposits $246,324 $258,500 $246,937 ======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE (Unaudited) At December 31, (Dollars in Thousands) 1997 1996 Three Months or Less $ 428 $ 849 Over Three, Through Six Months 1,454 1,542 Over Six, Through Twelve Months 977 1,151 Over Twelve Months 1,499 1,378 ------ ------ TOTAL $4,358 $4,920 ====== ======
There were no brokered deposits at December 31, 1997 and 1996. Item 2. Description of Property The principal banking office of the Bank and the executive offices of the Bank and the Company are located at 76 South Main Street in the Borough of Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank. In addition, the Bank owns additional properties located at 29 South Broad Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553 Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street, Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania (First Colonial Building, Computer and Operations Center), Rt. 209 Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway (Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing, drive-up ATM location). The Bank also leases facilities for its branch office located at 44 East Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at 101 South Third Street, Easton, Pennsylvania; its branch office located at 1125 N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located in the Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its branch office located within Redner's Supermarket, Airport Road, Allentown, Pennsylvania; and its branch office located within Redner's Supermarket, Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania; and its branch office located within Wal-Mart's at 355 Lincoln Avenue, East Stroudsburg, Pennsylvania. Item 3. Legal Proceedings Neither the Company, the Bank nor any of their properties is subject to 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. Appendix A to Part I: Executive Officers of the Registrant The following table sets forth certain information, as of March 28, 1998, concerning the executive officers of the Company and certain executive officers of the Bank. All executive officers are elected by the respective Boards of Directors of the Company and the Bank and hold office at the discretion of such Boards. Positions Positions Name/Age with the Company with the Bank John J. Schlamp 72(a) Chairman of the Board since Chairman of the Board January, 1987 since 1984 S. Eric Beattie 51(b) President and Chief President since 1984; Executive Officer since Chief Executive Officer January, 1987 since January, 1987 Reid L. Heeren 56 (c) Treasurer since January, Executive Vice President 1987; Vice President since and Chief Financial April, 1985 Officer since August, 1997 Senior Vice President and Chief Financial Officer since January, 1987; Cashier since November, 1984 Thomas J. Bamberger 56 (d) None Executive Vice President and Senior Loan Officer since September, 1997 Arthur Williams 52 (e) None Executive Vice President, Administration since August, 1997;Senior Vice President, Administration since November, 1988. Barbara A. Seifert 44 (f) None Vice President, Senior Trust Officer since December, 1985 (a) Mr. Schlamp was previously (i) President and Chief Executive Officer of the Company from 1983 to January, 1987, (ii) President of the Bank from 1976 to 1984 and (iii) Chief Executive Officer of the Bank from 1976 to January, 1987. (b) Mr. Beattie was previously (i) Executive Vice President of the Company from 1983 to January, 1987, (ii) Chief Operating Officer of the Bank from 1984 to January, 1987, (iii) a Senior Vice President of the Bank from 1981 to 1984 and (iv) a Senior Trust Officer of the Bank from 1979 to 1981. (c) 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). (d) 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. (e) Mr. Williams was previously Senior Vice President, Administration of the Bank from November, 1988 to August, 1997 and Vice President of the Bank, serving as branch administrator with business development and commercial lending duties, from April 1985 to November, 1988. Prior to April 1985, Mr. Williams was a Vice President of United Penn Bank, serving as Regional Administrator of its Northern Region (March 1980 to March 1985). (f) Ms. Seifert was previously Senior Trust Officer of the Bank from 1984 to December, 1985. Prior to 1984, Ms. Seifert held various officer positions in the Trust Division of the Bank beginning in December, 1981. PART II Item 5. Market for Common Equity and Related Stockholder Matters First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group". At the close of business on December 31, 1997, there were 760 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note S- Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price was $35.50 in December 1997 and $20.95 in December 1996. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of May 1996 and May 1997 (see "Note T - Equity Transactions" in the "Notes to Consolidated Financial Statements" contained in "Item 7, Financial Statements"). 1996 High Low Cash Dividends Declared First Quarter $17.91 $16.32 0.1542 Second Quarter 18.14 16.32 0.1619 Third Quarter 18.10 17.14 0.1619 Fourth Quarter 21.90 17.14 0.1619 ------ TOTAL 0.6399 1997 First Quarter $23.57 $21.19 0.1714 Second Quarter 24.50 22.38 0.1700 Third Quarter 34.25 23.50 0.1800 Fourth Quarter 35.50 34.69 0.1800 ------ TOTAL 0.7014
The Company did not sell any of its equity securities during 1997 that were not registered under the Securities Act. Item 6. Management's Discussion and Analysis or Plan of Operation Consolidated Financial Highlights (Dollars in Thousands, Percentage Change except per share data) 1997 1996 1995 1997/96 1996/95 At Year-End Assets $346,738 $322,352 $298,514 7.6% 8.0 % Deposits 282,255 267,668 254,102 5.5 5.3 Loans 229,587 220,117 193,130 4.3 14.0 Shareholders' Equity 30,357 26,805 24,767 13.3 8.2 Trust Assets 245,293 209,144 173,435 17.3 20.6 For the Year Net Interest Income $ 14,613 $ 13,557 $ 12,644 7.8% 7.2 % Net Income 3,283 2,822 1,401 16.3 101.4 Per Share * Basic and Diluted Net Income $ 2.02 $ 1.76 $ 0.89 14.8% 97.8 % Dividends Paid 0.70 0.64 0.62 9.4 3.2 Book Value 18.37 17.19 16.84 6.9 2.1 Financial Ratios Return on average assets .97% .92% .48% Return on average equity 11.67% 11.16% 5.98% Average shareholders' equity to average assets 8.30% 8.24% 8.00%
* Per share data have been restated to reflect the 5% stock dividends of May 1997 and May 1996. MANAGEMENT'S DISCUSSION AND ANLAYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review and analysis is intended to assist in understanding and evaluating the major changes in the financial condition and earnings performance of First Colonial Group, Inc. (the "Company") with a primary focus on the analysis of operating results for the years ended December 31, 1997, 1996 and 1995. 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-KSB 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 May, 1997 and May, 1996. Forward Looking Statements The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in this Annual Report or in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). Financial Performance Summary First Colonial Group celebrated 100 years of service in 1997 and recorded record net income of $3,283,000. The 1997 net income is 16.3% or $461,000 higher than 1996 net income of $2,822,000. Net income in 1995 was $1,401,000. The basic and diluted earnings per share were $2.02, $1.76 and $0.89 in 1997, 1996 and 1995, respectively. The Company has adopted the Financial Accounting Standards Board Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share" which requires the Company to present both basic and diluted earnings per share. Diluted earnings per share include the effect of common stock equivalents such as options. The Company's basic and diluted earnings per share numbers were substantially the same for the years ended 1997, 1996 and 1995 (see Note A.11 of the "Notes to Consolidated Financial Statements"). The Company continued to achieve improvement on return on average assets and return on average equity in 1997. The return on average assets rose to .97% in 1997 from .92% in 1996 and .48% in 1995. The return on average equity was 11.67%, 11.16% and 5.98% in 1997, 1996 and 1995, respectively. The Company continued to achieve growth in total assets, loans and deposits. Total assets at December 31, 1997 were $346,738,000 as compared to $322,352,000 at year end 1996. This is an increase of $24,386,000 or 7.6%. During 1997 total deposits grew by 5.5% or $14,587,000 to a year-end total of $282,255,000. Total deposits at December 31, 1996 were $267,668,000. Total loans amounted to $229,587,000 and $220,117,000 at December 31, 1997 and 1996, respectively. The loan increase in 1997 was $9,470,000 or 4.3%. The principal factors contributing to higher earnings in 1997 were a $1,056,000 increase in net interest income, an increase in other income, including service charges, Trust revenues and net gains on the sales of securities and mortgages, of $1,181,000 and a $65,000 decrease in the provision for possible loan losses offset in part by a $1,681,000 increase in other operating expenses and higher Federal income taxes of $160,000. These changes were the result of the Company's continued growth in all areas, including the addition of a new supermarket branch in East Stroudsburg. The 1996 earnings increase was the result of a $1,128,000 reduction in the provision for possible loan losses, a $913,000 increase in net interest income and an increase in other income of $368,000. Partially reducing earnings were an increase in operating expenses of $367,000 and an increase in Federal income taxes of $1,421,000. SELECTED FINANCIAL DATA (Dollars in Thousands, except per share data) For the Year Ended December 31, 1997 1996 1995 1994 1993 CONSOLIDATED SUMMARY OF INCOME: Interest Income $ 25,444 $ 23,135 $ 21,896 $ 18,986 $ 18,525 Interest Expense 10,831 9,578 9,252 7,152 7,568 --------- --------- --------- --------- --------- Net Interest Income 14,613 13,557 12,644 11,834 10,957 Provision for Possible Loan Losses 605 670 1,798 420 765 Gains (Losses) on the Sale of Mortgage Loans 178 (30) 22 37 417 Other Income, Excluding Securities and Loan Sale Gains 3,044 2,364 2,230 1,896 1,705 Securities Gains, Net 601 308 22 97 208 Other Expense 13,252 11,571 11,204 10,084 9,845 --------- --------- --------- --------- --------- Income Before Income Taxes and Cumulative Effect of Accounting Method Change 4,579 3,958 1,916 3,360 2,677 Applicable Income Taxes 1,296 1,136 515 1,018 769 --------- --------- --------- --------- --------- Net Income $ 3,283 $ 2,822 $ 1,401 $ 2,342 $1,908 --------- --------- --------- --------- --------- Cash Dividends Paid $ 1,139 $ 1,011 $ 972 $ 936 $ 812 Cash Dividends Paid Per Share 0.70 0.64 0.62 0.60 0.60 Dividends Paid to Net Income 34.69% 35.82% 69.38% 39.97% 42.56% PER SHARE DATA: Basic Income $ 2.02 $ 1.76 $ 0.89 $ 1.51 $ 1.40 Diluted Net Income 2.02 1.76 0.89 1.51 1.40 Basic Average Common Shares Outstanding 1,620,627 1,600,883 1,579,428 1,555,678 1,359,981 Dilutive Average Common Shares Outstanding 1,625,456 1,603,590 1,579,802 1,555,678 1,359,981 CONSOLIDATED BALANCE SHEET DATA: Total Assets $346,738 $322,352 $298,514 $284,553 $268,738 Loans (Net of Unearned Discount) 229,587 220,117 193,130 185,215 168,566 Mortgage Loans Held-for-Sale 759 721 1,006 69 15,378 Deposits 282,255 267,668 254,102 247,532 235,565 Securities Sold Under Agreements to Repurchase 8,804 3,795 6,096 9,027 4,711 Debt (Short-Term and Long-Term) 18,390 18,512 7,643 1,612 1,331 Shareholders' Equity 30,357 26,805 24,767 22,400 21,994 Book Value Per Share 18.37 17.19 16.84 15.39 15.26 SELECTED CONSOLIDATED RATIOS: Net Income To: Average Total Assets .97% .92% .48% .85% .76% Average Shareholders' Equity 11.67% 11.16% 5.98% 10.51% 10.43% Average Shareholders' Equity to Average Assets 8.30% 8.24% 8.00% 8.10% 7.24%
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) For the Year Ended December 31, 1997 1996 1995 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 $ 1,252 $ 71 5.67% $1,313 $ 78 5.96% $ 2,313 $ 133 5.75% Fed Funds Sold 18 1 5.56 16 2 5.43 139 6 4.32 Inv Sec Taxable 69,876 4,592 6.57 67,241 4,386 6.42 73,712 4,477 6.07 Non-Tax(1) 16,653 1,268 7.62 12,318 935 7.59 8,408 583 6.94 Loans(1(2) 229,205 19,972 8.71 206,378 18,083 8.76 190,874 16,927 8.87 Allow for Loan Losses (2,614) --- --- (2,500) --- --- (2,708) --- --- -------- ------ -------- ------ -------- ------ Net Loans 226,591 19,972 8.81 203,878 18,083 8.87 188,166 16,927 9.00 -------- ------ -------- ------ -------- ------ Total Int- Earn Assets 314,390 25,904 8.24 284,766 23,484 8.25 272,738 22,126 8.11 Non-Int Earn Assets 24,391 --- --- 22,305 --- --- 24,466 --- --- -------- ------ -------- ------ -------- ------ TOTAL ASSETS, INTEREST INCOME $338,781 25,904 7.65 $307,071 23,484 7.65 $293,204 22,126 7.55 -------- ------ -------- ------ -------- ------ LIABILITIES INTEREST-BEARING LIABILITIES Int-Bearing Deposits Demand Deposits $ 45,338 532 1.17 $ 43,206 670 1.55 $ 42,955 791 1.84 Money Market Deposits 14,380 404 2.81 16,297 460 2.82 17,639 496 2.81 Savings & Club Deposits 62,746 1,530 2.44 62,783 1,566 2.49 65,452 1,750 2.67 CD's over $100,000 5,014 210 4.19 5,167 250 4.84 6,184 324 5.24 All Other Time Dep 118,846 6,636 5.58 103,221 5,675 5.50 90,925 4,970 5.47 -------- ------ -------- ------ -------- ------ Total Int- Bearing Deposits 246,324 9,312 3.78 230,674 8,622 3.74 223,155 8,331 3.73 Securities Sold Under Agreements to Repurchase 6,459 240 3.72 4,740 149 3.14 9,298 346 3.72 Other Short- Term Borrowings 2,792 181 6.48 8,648 487 5.63 5,743 338 5.89 Long-Term Debt17,955 1,098 6.12 4,171 320 7.67 2,207 236 10.69 -------- ------ -------- ------ -------- ------ Total Int- Bearing Liabilities 273,530 10,831 3.96 248,233 9,578 3.86 240,403 9,251 3.85 NON-INTEREST BEARING LIABILITIES Non-Int- Bearing Deposits 31,074 --- --- 27,826 --- --- 23,782 --- --- Other Liab 6,054 --- --- 5,724 --- --- 5,575 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB 310,658 10,831 3.49 281,783 9,578 3.40 269,760 9,251 3.43 SHAREHOLDERS' EQUITY 28,123 --- --- 25,288 --- --- 23,444 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB & SHAREHOLDERS' EQUITY, INTEREST EXPENSE $338,781 10,831 3.20 $307,071 9,578 3.12 $293,204 9,251 3.16 NET INTEREST INCOME $ 15,073 $13,906 $12,875 -------- ------- ------- Net Interest Spread (3) 4.28 4.39 4.26 Effect of Int-Free Sources Used to Fund Earnings Assets 0.51 0.49 0.46 NET INTEREST MARGIN (4) 4.79% 4.88% 4.72% -- ---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable equivalent basis. The taxable equivalent adjustments included above are $460,000, $349,000 and $231,000 for the years 1997, 1996 and 1995, respectively. The effective tax rate used for the taxable equivalent adjustment was 34%. (2) Loan fees of $377,000, $303,000 and $101,000 for the years 1997, 1996 and 1995, respectively, are included in interest income. Average loan balances include non-accruing loans and average loans held-for-sale of $1,781,000, $2,212,000 and $682,000 for 1997, 1996 and 1995, respectively. (3) Net interest spread is the arithmetic difference between yield on interest-earning assets and the rate paid on interest-bearing liabilities. (4) Net interest margin is computed by dividing net interest income by averaging interest-earning assets. Average Balances The "Consolidated Comparative Statement Analysis" table sets forth a comparison of average daily balances, interest income and interest expense on a fully taxable equivalent basis and interest rates calculated for each major category of interest-earning assets and interest-bearing liabilities. For purposes of this analysis, the computations in the "Consolidated Comparative Statement Analysis" were prepared using the Federal statutory rate of 34%; there are no state or local taxes on income applicable to the Company. For further information relating to the effective income tax rate of the Company, see Note J of the "Notes to Consolidated Financial Statements". Interest income on loans includes loan fees of $377,000, $303,000 and $101,000 for the years ended December 31, 1997, 1996 and 1995, 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, increases in this category are considered by management to be essential to the continued growth in the overall net income of the Company. The net interest income, on a fully taxable equivalent basis, amounted to $15,073,000 for 1997, an increase of 8.4% or $1,167,000 over $13,906,000 in 1996. As shown in the "Rate/Volume Analysis" table, the increase in net interest income in 1997 was attributable to higher net interest income from changes in volume of $860,000 and changes in rates of $307,000. The volume-related change resulted primarily from increased average balances for loans including mortgage loans held-for-sale; (see discussions on "Loan Portfolio" and "Mortgage Loans Held-for-Sale") and an increase in long-term debt and other time deposits, partially offset by a decline in short-term borrowings. The rate-related change was primarily the result of the decrease of interest expense being greater than the decrease on interest earned on assets. Net interest income, on a fully taxable equivalent basis, in 1996 increased 8.0% or $1,031,000 over the 1995 figure of $12,875,000. This increase was the result of the increase in interest rates earned on assets exceeding the increase of rates paid on deposits and debt. Also affecting 1996 net interest income was the growth in loans and non-interest- bearing deposits. 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 4.79% for 1997, 4.88% for 1996 and 4.72% for 1995. The decrease in 1997 was the result of an increase in the average rate paid for interest-bearing deposits and debt. Also, there was a small decline in the average 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 4.28%, 4.39% and 4.26% for 1997, 1996 and 1995, respectively. 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, 1997 and 1996, 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, 1997 to 1996 1996 to 1995 Change Due to: Change Due To: TOTAL RATE VOLUME TOTAL RATE VOLUME ----- --- ----- ----- ----- ----- Interest Income Interest-Bearing Balances With Banks $ (7) $ (3) $ (4) $ (55) $ 3 $ (58) Federal Funds Sold (1) (1) --- (4) 1 (5) Investment Securities 539 73 466 261 419 (158) Loans 1,889 (140) 2,029 1,156 (88) 1,244 ----- --- ----- ----- ----- ----- Total Interest Income 2,420 (71) 2,491 1,358 335 1,023 ----- --- ----- ----- ----- ----- Interest Expense Demand Deposits, Savings & Clubs (231) (235) 4 (340) (250) (90) Time Deposits 921 75 846 631 16 615 Securities Sold Under Agreements to Repurchase 91 37 54 (197) (27) (170) Short-Term Borrowings (306) 24 (330) 135 (43) 178 Long-Term Borrowings 778 (279) 1,057 98 (100) 198 ----- --- ----- ----- ----- ----- Total Interest Expense 1,253 (378) 1,631 327 (404) 731 ----- --- ----- ----- ----- ----- Increase in Net Interest Income $1,167 $307 $ 860 $1,031 $ 739 $ 292
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 (60.3% of total loans) and commercial loans supported by real estate (15.1% of total loans) in its loan portfolio (see Note Q of the "Notes to Consolidated Financial Statements"). These loans are subject to interest and economic risks. The Bank also originates residential real estate loans for sale in the secondary market. Such loans are identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not own any trading assets and does not have any hedging transactions in place such as interest rate swaps (see discussions on "Investment Securities" and "Securities Available-for-Sale"). Interest Rate Sensitivity Interest rate sensitivity is a measure of the extent to which net interest income would change due to changes in the level of interest rates. The objective of interest rate sensitivity management is to reduce a company's vulnerability to future interest rate fluctuations and to enhance consistent growth of net interest income. The Bank's Asset/Liability Management Committee meets semi-monthly to examine, among other subjects, interest rates for various products and interest sensitivity. Rate sensitivity arises from the difference between the volumes of assets which are rate-sensitive as compared to the volumes of liabilities which are rate-sensitive. A comparison of interest-rate-sensitive assets to interest-rate-sensitive liabilities is monitored by the Bank on a regular basis using several time periods. The mismatch of assets and liabilities in a specific time frame is referred to as interest sensitivity gap. Generally, in an environment of rising interest rates, a negative gap 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, 1997, assets of $151,613,000 (44% 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 $149,441,000 (46.4% of total assets) at the end of 1996 and $124,779,000 (41.8% of total assets) at the end of 1995. Liabilities subject to rate change within one year were $166,220,000, $167,266,000 and $133,068,000 in 1997, 1996 and 1995, respectively. A negative one-year gap position of $14,607,000 existed as of December 31, 1997. The gap positions at December 31, 1996 and 1995 were negative $17,825,000 and negative $8,289,000, respectively. The ratio of rate-sensitive assets to rate-sensitive liabilities for the one-year time frame was .91 at the end of 1997, compared to .89 at the end of 1996 and .94 at the end of 1995. The "Interest Sensitivity Analysis" in the following table presents a sensitivity gap analysis of the Company's assets and liabilities at December 31, 1997 for five time-intervals. The Company's liability-sensitive position decreased in 1997 as a result of an increase in non-interest-bearing demand deposits and interest-bearing demand deposits. This change in the deposit mix was due to marketing programs to increase demand deposits. Also affecting an increase in the liability-sensitive position were increases in some longer term 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 (Dollars in Thousands) as of December 31, 1997 0-90 91-180 181-365 1-5 Over Days Days Days Years 5 years Total Interest-Bearing Deposits with Banks $ 395 $ --- $ --- $ --- $ --- $ 395 Federal Funds Sold 2,200 --- --- --- --- 2,200 Inv Securities 17,236 8,108 19,812 31,969 13,655 90,780 Loans Held-for-Sale 759 --- --- --- --- 759 Loans 47,400 13,218 29,856 74,853 61,596 226,923 Other Assets 12,629 --- --- --- 13,052 25,681 ------- -------- -------- ------- -------- -------- TOTAL ASSETS $80,619 $21,326 $ 49,668 $106,822 $ 88,303 $346,738 ------- -------- -------- ------- -------- -------- Non-Interest-Bearing Deposits (1) $ --- $ --- $ --- $ --- $ 32,800 $ 32,800 Int-Bearing Deposits 83,282 22,887 32,857 49,005 61,424 249,455 Securities Sold Under Agreements to Repurchase 8,804 --- --- --- --- 8,804 Short-Term Borrowings --- 5,000 --- --- --- 5,000 Long-Term Debt 390 --- 13,000 --- --- 13,390 Other --- --- --- --- 6,932 6,932 Capital --- --- --- --- 30,357 30,357 ------- -------- -------- ------- -------- -------- TOTAL LIABILITIES AND CAPITAL $ 92,476 $27,887 $ 45,857 $49,005 $131,513 $346,738 ------- -------- -------- ------- -------- -------- Net Interest Sensitivity Gap $(11,857) $(6,561)$ 3,811 $57,817 $(43,210) $ --- Cumulative Int Sensitivity Gap $(11,857)$(18,418)$(14,607) $43,210 $ --- $ --- Cumulative Gap RSA/RSL 87.2% 84.7% 91.2% 120.1% 100.0%
(1) Historically, non-interest-bearing deposits reflect insignificant change in deposit trends and, therefore, the Company classifies these deposits over five years. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest-rate changes that are characteristic of various interest-rate-sensitive assets and liabilities. Consequently, even though the Company currently has a negative gap position because of the unequal sensitivity of these assets and liabilities, management believes that this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the Bank's net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance sheet instruments. The calculated estimates of changes in the market value of portfolio value at December 31, 1997 are as follows: Dollars in Thousands at December 31, 1997 Market Value of Percent of Changes in Rate Portfolio Equity Change + 400 basis points 22,176 (17.4)% + 300 basis points 23,417 (12.8) + 200 basis points 24,774 (7.7) + 100 basis points 26,275 (2.1) Flat Rate 26,840 --- - 100 basis points 28,438 5.9 - 200 basis points 33,184 23.6 - 300 basis points 40,913 52.4 - 400 basis points 49,456 84.3
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 $1,134,000 in 1997 compared to $1,083,000 in 1996 and $1,034,000 in 1995. In 1997, the service charges increased by $51,000 or 4.7% over 1996 and the 1996 increase over 1995 was $49,000 or 4.7%. The increases in 1997 and 1996 were primarily the result of increases in the number of deposit accounts and increases in some deposit-related fees. In 1997, the Company had a gain on the sale of mortgage loans of $178,000 as compared to a loss of $30,000 in 1996. In 1995, there was a gain of $22,000 (see discussion on "Mortgage Loans Held-for-Sale"). Other operating income was $860,000 in 1997, an increase of $275,000 or 47.0% compared to $585,000 in 1996. Other operating income for 1995 was $560,000. The increase in 1997 was primarily from transaction fees earned from a new debit card that was offered to customers in July 1997, transaction charges assessed to non-customers using the Bank's automated teller machines and certain new loan fees. Investment Management and Trust Division Revenue from the Bank's Investment Management and Trust Division operations was $1,050,000 in 1997, representing an increase of $354,000 or 50.9% over revenue of $696,000 in 1996. In comparison, the Investment Management and Trust Division revenue for 1996 increased by 9.4% or $60,000 over the 1995 revenue of $636,000. 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. Trust assets were $245,293,000 and $209,144,000 at December 31, 1997 and 1996, respectively, an increase of 17.3%. The market value of Trust assets increased by 22.8% from $252,990,000 in 1996 to $310,773,000 in 1997. The increase in 1997 Trust revenue was the result of the addition of new accounts and increased market values. Other Expenses Salaries and employee benefits represent a significant portion of non-interest expense. These expenses, amounting to $6,033,000, increased by $418,000 or 7.4% in 1997 compared to $5,615,000 in 1996. These expenses in 1996 amounted to an increase of 9.4% over the $5,132,000 reported in 1995. The increase in 1997 was primarily due to salary increases of approximately 4% and the addition of staff for the new East Stroudsburg branch opened in January, 1997. Salary expense in 1996 increased due to normal salary increases of approximately 4% and a full year's expense for the new branches added in 1995. Occupancy and equipment expenses were $2,178,000 in 1997, which was $6,000 less than the 1996 amount of $2,184,000. The 1996 amount was 9.7% more than the 1995 occupancy and equipment expense of $1,991,000. The decrease in 1997 was achieved through the implementation of expense control measures which offset the added expenses of the new East Stroudsburg branch and the installation of check image equipment. Most of the increase in 1996 was related to a full year's expense of two new branches opened in 1995 and some major maintenance work on other facilities. Other operating expenses (such as advertising, publicity, litigation costs, deposit insurance premiums, data processing fees, legal, accounting, supplies, postage and telephone) in 1997 were $5,041,000, compared to $3,772,000 in 1996 and $4,081,000 in 1995. The increase in 1997 of $1,269,000 or 33.6% was primarily due to higher legal and professional fees and advertising expenses as a result of the implementation of a new marketing program. The decrease in 1996 of $309,000 or 7.6% was the result of a reduction in Federal Deposit Insurance premiums and legal fees offset in part by higher data processing, business development, auditing and supply expenses. The Company's advertising costs are expensed as incurred. Advertising costs were $524,000, $299,000 and $294,000 for the years ended December 31, 1997, 1996 and 1995, respectively (see Notes A.15 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 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 1997 and 1996. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements (see Notes A.2. and B of the "Notes to Consolidated Financial Statements"). Held-to-maturity securities totaled $17,756,000 at December 31, 1997 and $20,999,000 at December 31, 1996. The Company has the intent and ability to hold these securities until maturity. The fair value of these securities was $17,946,000 and $21,124,000 at December 31, 1997 and 1996, respectively. The Company, at December 31, 1997 and 1996, did not hold any securities identified as derivatives in the form of Collateralized Mortgage Obligations (CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps, futures or options. At December 31, 1997 and 1996, the Company held $1,000,000 in various U. S. Agency Step-up or Multi Step-up securities. These Step-up securities are direct obligations of U. S. Government Agencies that have a fixed coupon for an established time period with a call option at the end of that time period. The initial yield is higher than another security with the same end maturity but without the call/step-up feature. If the security is not called, it will step-up to a higher predetermined coupon that may be below the current market yield at the time of the step-up. Management understands the characteristics of these securities and monitors their performance in comparison to U. S. Treasury securities. The Company held adjustable rate mortgage-backed securities issued by U. S. Government Agencies totaling $27,426,000 at December 31, 1997 ($21,723,000 in available-for-sale and $5,703,000 in held-to-maturity) and $19,395,000 at December 31, 1996 ($15,554,000 in available-for-sale and $3,841,000 in held-to-maturity). The interest rates on most of these securities are tied to various indexes, are subject to various caps, and adjust annually. The Company also held fixed rate mortgage-backed securities issued by U. S. Government Agencies totaling $7,943,000 at December 31, 1997 ($5,067,000 in available-for-sale and $2,876,000 in held-to-maturity) and $7,290,000 at December 31, 1996 ($4,578,000 in available-for-sale and $2,712,000 in held-to-maturity). Securities Available-for-Sale The Company had $73,024,000 of securities available-for-sale at December 31, 1997, as compared to $56,779,000 at December 31, 1996. At December 31, 1997, the net unrealized gain on these securities was $1,300,000, net of the tax effect of $670,000. There was a net unrealized gain of $347,000, net of the tax effect of $179,000 on the available-for-sale securities at December 31, 1996. 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 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 1997, $13,279,000 of securities available-for-sale were sold, resulting in a total net gain of $601,000, which was recorded in income and includes net gains on equity securities held by First C. G. of $560,000. The securities sold were primarily U. S. Treasury, U. S. Agency, mortgage-backed and municipal bonds held by the Bank and equity securities held by First C. G. The sales by the Bank were executed to provide liquidity and improve future interest income. The sales of equity securities by First C. G. were made to recognize certain gains and reposition the equity portfolio. Securities purchased by the Company in 1997 totaled $46,283,000. Included in these purchases were $20,374,000 in U. S. Agency mortgage-backed bonds, $16,023,000 in U. S. Agency fixed rate bonds, $6,629,000 in municipal securities, $1,989,000 in U. S. Treasury bonds, and $1,268,000 in equity securities. The securities sold in 1996 totaling $19,842,000 were primarily U. S. Treasury, U. S. Agency, mortgage-backed and municipal bonds held by the Bank and equity securities held by First C. G. The 1996 sales resulted in net gains of $308,000. These gains include net gains of $293,000 on equity securities held by First C. G. The sales were made to provide liquidity, improve future income and diversify the equity portfolio. Security purchases in 1996 amounted to $39,591,000 which were primarily U. S. Agency fixed-rate, U. S. Treasury bonds, municipal securities and U. S. Agency mortgage-backed bonds. In 1995, a net gain on security transactions of $22,000 was recorded on sales of $11,177,000. Loan Portfolio At December 31, 1997, total loans (net of unearned discounts of $1,856,000 in 1997 and $2,759,000 in 1996) of $229,587,000 were $9,470,000, or 4.3% higher than the 1996 amount of $220,117,000. The growth in loans in 1997 was primarily the result of an increase of $7,044,000 or 24.4% in consumer loans, an increase of $4,526,000 or 3.4% in residential real estate loans and an increase of $1,438,000 or 13.2% in real estate construction loans partially reduced by a $4,842,000 or 12.3% decline in real estate commercial loans. Total residential real estate loans were $138,539,000 at December 31, 1997 compared to $134,013,000 at December 31, 1996. Consumer loans totaled $35,914,000 and $28,870,000 at December 31, 1997 and 1996, respectively. At December 31, real estate construction loans were $12,361,000 in 1997 versus $10,923,000 in 1996. Commercial real estate loans were $34,579,000 at December 31, 1997 as compared to the December 31, 1996 total of $39,421,000. Other commercial loans also increased by $371,000 or 4.3% to $9,086,000 at December 31, 1997, as compared to $8,715,000 at December 31, 1996. Municipal loans were $944,000 and $906,000 at December 31, 1997 and 1996, respectively. This was an increase of $38,000 or 4.2%. 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 81.3% at December 31, 1997, and 82.2% at December 31, 1996. Funds used by the increase in loans were provided primarily by the increase in deposits. Additional information concerning loans is shown in Note C of the "Notes to Consolidated Financial Statements". Mortgage Loans Held-for-Sale In 1997, management continued a program of selling most of its newly originated residential real estate loans in the secondary market. The market. The purpose of this plan is to reduce the Company's interest rate risk and to provide funds to support a higher level of loan originations. The sales of residential real estate loans in the secondary market for 1997 amounted to $27,145,000. The amount of these loans originated in 1997 was $10,754,000, with the remaining $16,391,000 being originated in prior years of which $721,000 was identified as held-for-sale at December 31, 1996. A net gain of $178,000 was recorded on these sales. In addition, $759,000 of residential real estate loans was identified as held-for-sale at December 31, 1997. All of these loans were originated during 1997. An unrealized loss of $13,000 on these loans is included in other operating expenses for 1997. In 1996, the Company originated $18,504,000 of residential real estate loans which were sold in the secondary market. In addition, during 1996, $1,006,000 of these loans that were originated in prior years were sold. A net loss of $30,000 was recognized on these sales in 1996. At December 31, 1996, $721,000 of residential real estate loans were identified as held-for-sale. Included in other operating expenses in 1996 is an unrealized loss of $10,000 on these loans. During 1995, the Company had net gains of $22,000 on the sale of $6,336,000 of residential real estate loans. The other operating expenses for 1995 include an unrealized loss of $4,000 on mortgage loans held-for-sale of $1,006,000 at year-end 1995. The Company intends to continue to originate residential real estate loans in 1998 and to sell most of the fixed-rate loans in the secondary market. The Company services all of its sold residential mortgage loans and plans to continue this practice. Non-Performing Loans The following discussion relates to the Bank's non-performing loans which consist of those on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. The Company views these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Interest on these loans is recognized only when received. The table "Non-Accrual Loans" on page 23 shows the balance and the effect on interest income of non-accrual loans for each of the periods indicated. There were $813,000 of loans on a non-accrual status at December 31, 1997. The decrease in non-accrual loans during 1997 of $627,000 resulted from the completion of collection efforts on certain loans and a general improvement in economic conditions. The Company does not have any significant loans that qualify as "Troubled Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and Creditors for Troubled Debt Restructuring", at December 31, 1997 and 1996. Non-Accrual Loans (Dollars in Thousands) at December 31, 1997 1996 1995 1994 1993 Non-accrual loans on a cash basis $ 813 $1,440 $2,181 $1,724 $1,569 ------ ------ ------ ------ ------ Non-accrual loans as a percentage of total loans .35% .65% 1.13% .93% .93% ------ ------ ------ ------ ------ Interest which would have been recorded at original rate $ 64 $ 210 $ 214 $ 168 $ 134 Interest that was reflected in income 111 40 44 --- --- ------ ------ ------ ------ ------ Net impact on int income $ 47 $ (170) $ (170) $(168) $ (134)
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, 1997 1996 1995 1994 1993 Accruing loans past due 90 days or more $802 $ 986 $1,115 $1,069 $ 672 Accruing loans past due 90 days or more as a percentage of total loans .35% .45% .58% .58% .40%
The Company measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, impairment may be measured based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued in such loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation for credit loses related to loan impairment at December 31, 1997 and 1996 are as follows: (Dollars in Thousands) at December 31, 1997 1996 Principal amount of impaired loans $ 523 $ 1,149 Accrued interest --- --- Deferred loan costs 1 7 --- ----- 524 1,156 Less valuation allowance at December 31, (138) (128) --- ----- $ 386 $ 1,028
The activity in the allowance account for credit losses related to impaired loans is as follows: (Dollars in thousands) for the year ended 1997 1996 Valuation allowance at January 1, $128 $238 Provision for loan impairment 158 206 Direct charge-offs (148) (325) Recoveries --- 9 ---- ---- Valuation allowance at December 31, $138 $128
Total cash collected on impaired loans during 1997 was $768,000, of which $657,000 was credited to the principal balance outstanding on such loans, and $111,000 was recognized as interest income. Total cash collected on impaired loans during 1996 was $1,486,000, of which $1,446,000 was credited to the principal balance outstanding on such loans and $40,000 was recognized as interest income. Interest that would have been accrued on impaired loans was $64,000 and $210,000 in 1997 and 1996, respectively. The valuation allowance for impaired loans of $138,000 at December 31, 1997 and $128,000 at December 31, 1996 is included in the "Allowance for Possible Loan Losses" which amounts to $2,664,000 and $2,532,000 at December 31, 1997 and 1996, respectively. Shown in the following table is the amount of "Other Real Estate Owned" as of the end of each of the periods indicated recorded as an asset on the Company's books as the result of the foreclosure of certain non-performing real estate loans. OTHER REAL ESTATE OWNED (Dollars in 1997 1996 1995 1994 1993 Thousands) at December 31, Other Real Estate $ 284 $ 595 $ 364 $ 373 $ 738 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, 1997, the allowance for possible loan losses was $2,664,000 as compared to the December 31, 1996 amount of $2,532,000 and the December 31, 1995 amount of $2,443,000. The allowance for possible loan losses as a percentage of total loans outstanding as of December 31, 1997 was 1.16%. This compares to 1.15% at the end of 1996 and 1.26% at the end of 1995. The increase in the allowance for possible loan losses of $132,000 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 $1,615,000 as of December 31, 1997 as compared to $2,426,000 as of December 31, 1996 (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 $473,000 in 1997 or $108,000 less than the 1996 amount of $581,000. The 1997 charge-offs were the result of losses on commercial, consumer and residential real estate loans. The net charge-offs in 1996 were primarily the result of losses on commercial and consumer loans. Net loans charged-off in 1995 were $1,542,000. The ratio of net loan charge-offs to average loans outstanding was .21%, .28% and .81% in 1997, 1996 and 1995, respectively. The provision for loan losses for the year ended December 31, 1997 was $605,000 as compared to $670,000 for the year ended December 31, 1996, and $1,798,000 for the year ended December 31, 1995. The decrease in 1997 from 1996 was $65,000. In 1996, the decrease in the provision was $1,128,000 from 1995. The higher level in 1995 was principally the result of the increase in net charge-offs due to an overdraft loss. 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. Management ranks loans or portions thereof which present unfavorable factors according to the degree of collectibility. Such analysis and examinations form the principal foundation on which management makes an ongoing evaluation as to the adequacy of the allowance for possible loan losses. ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in Thousands) For the Year Ended December 31, 1997 1996 1995 1994 1993 Allowance for Loan Losses at Beginning of Year $ 2,532 $ 2,443 $ 2,187 $ 1,953 $ 1,840 -------- -------- -------- -------- ------- Loans Charged-Off by Category: Commercial 249 365 161 259 392 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 20 31 -- 35 3 Consumer/Installment 301 271 319 144 348 Other -- -- 1,278 -- -- -------- -------- -------- -------- ------- 570 667 1,758 438 743 -------- -------- -------- -------- ------- Loans Recovered by Category: Commercial 19 39 105 170 57 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 1 -- -- -- -- Consumer/Installment 77 47 97 82 34 Other -- -- 14 -- -- -------- -------- -------- -------- ------- 97 86 216 252 91 -------- -------- -------- -------- ------- Net Loans Charged-Off 473 581 1,542 186 652 -------- -------- -------- -------- ------- Provision Charged to Expense 605 670 1,798 420 765 -------- -------- -------- -------- ------- Allowance for Loan Losses at End of Period $ 2,664 $ 2,532 $ 2,443 $ 2,187 $ 1,953 ======== ======== ======== ======== ======== Total Loans Average $228,245 $206,378 $190,874 $178,624 $180,850 Year-End $229,587 $220,117 $193,130 $185,215 $168,566 Net Loans Charged Off to: Average Loans .21% .28% .81% .10% .36% Loans at Year-End .21% .26% .80% .10% .39% Allowance for Possible Loan Losses at Year-End 17.76% 22.95% 63.12% 8.50% 33.38% Provision for Possible Loan Losses 78.18% 86.72% 85.76% 44.29% 85.23% Allowance for Possible Loan Losses at Year-End to: Average Loans 1.17% 1.23% 1.28% 1.22% 1.08% Loans at Year-End 1.16% 1.15% 1.26% 1.18% 1.16%
Deposits Deposits are the primary source of the Company's funds. During 1997, deposits increased by $14,587,000 or 5.5% to a total of $282,255,000 at December 31, 1997, from a total of $267,668,000 at December 31, 1996. Average deposits for 1997 were $277,398,000, an increase of $18,898,000 or 7.3% over the average total deposits for 1996 of $258,500,000. Contributing to the increase in deposits was the strong growth of certificates of deposit as consumers responded to some special higher interest rates offered by the Bank and continued growth in non-interest bearing and interest-bearing checking deposits as a result of the Bank's marketing programs for Quality Checking(R) and Quality Checking Gold(R). Quality Checking(R) is a non-interest bearing account that provides a package of services, including common-carrier accidental death insurance, credit card protection and a discount travel book. Quality Checking Gold(R) is an interest-bearing account that provides all the benefits of Quality Checking(R) plus Travelers Advantage(R) and Shoppers Advantage(R) for a monthly fee of $6.00. The deposit growth in certificates of deposit and checking deposits was partially offset by declines in savings accounts, money market accounts and certificates of deposit over $100,000. The continued growth of deposits by the Company and the banking industry in general could be adversely affected by the flow of funds into mutual funds and other investment options. The Bank's time deposits, excluding certificates of deposit under $100,000, increased in 1997 with average balances of $118,846,000, which was $15,625,000 or 15.1% higher than the 1996 average balance of $103,221,000. Non-interest bearing deposits averaged $31,074,000 in 1997 as compared to $27,826,000 in 1996, an increase of $3,248,000 or 11.7%. In addition, there was an increase in average interest-bearing demand deposits of $2,132,000 or 4.9% to $45,338,000 in 1997 from $43,206,000 in 1996. Offsetting some of this growth were declines in average savings and club deposits of $37,000 or 0.6% from an average balance of $62,783,000 in 1996 to an average balance of $62,746,000 in 1997, and declines in average money market deposits which averaged $14,380,000 in 1997 as compared to $16,297,000 in 1996, a decrease of $1,917,000 or 11.8%. Average certificates of deposit over $100,000 were $5,014,000 in 1997 as compared to $5,167,000 in 1996, a decline of $153,000 or 3.0%. Short-Term Borrowings The Bank had securities sold under agreements to repurchase totaling $8,804,000 at December 31, 1997 and $3,795,000 at December 31, 1996. At December 31, 1997 and 1996, there were no short-term borrowings in the form of Federal funds purchased, Federal Reserve Bank discount borrowings or Federal Home Loan Bank borrowings. Additional information relating to short-term borrowings can be found in Note G of the "Notes to Consolidated Financial Statements". Liquidity and Capital Resources Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of asset liquidity are money market investments, short-term investment securities, and funds received from the repayment of loans and short-term borrowings. At year-end 1997, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $15,224,000, and securities maturing within one year totaled $3,861,000. At year-end 1996, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $14,214,000, and securities maturing within one year were $2,858,000. 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 $110,000 at December 31, 1997, and $81,000 at December 31, 1996. 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 $12,895,000, all of which was available at December 31, 1997. The Bank had three long-term loans from the Federal Home Loan Bank of Pittsburgh totaling $18,000,000 at December 31, 1997. All of these loans were originated in 1996 with the proceeds used to fund the growth in residential real estate loans. The loans are for $5,000,000 due November, 1998, at a fixed rate of 5.96%, $8,000,000 due August, 2000, at a fixed rate of 5.89% until August, 1998, at which time the rate may be converted at the option of the lender to a variable rate at LIBOR plus 6 basis points; and $5,000,000 due December, 2001, at a variable rate of 5.86%. This rate changes quarterly in January, April, July and October at LIBOR plus 8 basis points. If the lender elects to convert the fixed rate loan to a variable rate, the Bank may prepay the loan in full at the time of conversion without a penalty. The Bank had the same three long-term loans totaling $18,000,000 from the Federal Home Loan Bank at December 31, 1996 (see Note H of the "Notes to Consolidated Financial Statements"). Cash flows for the year ended December 31, 1997 consisted of Cash Provided by Operating Activities of $3,691,000 and Cash Provided by Financing Activities of $18,740,000, offset in part by Cash Used In Investing Activities of $21,531,000; resulting in a net increase in cash and cash equivalents of $900,000. The Cash Provided by Operating Activities was comprised principally of proceeds from mortgage loan sales of $27,145,000, net income of $3,283,000, depreciation and amortization of $884,000 and a provision for possible loan losses of $605,000 reduced in part by mortgage loans originated for sale of $27,183,000 and amortization of deferred fees on loans of $601,000. The Cash Used in Investing Activities was primarily for the purchase of $40,485,000 of available-for-sale securities, and $5,838,000 of held-to-maturity securities, a net increase in loans to customers of $10,130,000 and the purchase of $1,126,000 of premises and equipment. These cash uses were partially offset by the proceeds from the sale of securities available-for-sale of $13,279,000, proceeds from the maturities of securities available-for-sale of $13,961,000 and proceeds from the maturities of securities held-to-maturity of $8,047,000. The Cash Provided by Financing Activities was comprised of a net increase in certificates of deposit of $10,783,000, a net increase in interest and non-interest bearing demand deposits of $3,804,000 and a net increase in repurchase agreements of $5,009,000. The sale of common shares and treasury shares pursuant to the Dividend Reinvestment Plan resulted in proceeds of $394,000. Partially offsetting these increases were cash dividends paid of $1,139,000 and the purchase of treasury stock of $107,000. 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, 1997 was $30,357,000 as compared to $26,805,000 at December 31, 1996, an increase of $3,552,000 or 13.3%. This increase was primarily attributable to retained earnings and the sale of common shares pursuant to the Dividend Reinvestment Plan. At December 31, 1997, unrealized gains on securities available-for-sale, which are included in shareholders' equity, amounted to $1,300,000 (net of tax effect of $670,000). Included in shareholders' equity at December 31, 1996 was $347,000 (net of tax effect of $179,000) of unrealized losses on securities available-for-sale (see discussion on "Securities Available-for-Sale"). On June 19, 1997, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on May 30, 1997. Fractional share9s were paid in cash based on a per share price of $23.625. The Company also paid a 5% stock dividend on June 19, 1996 to shareholders of record on May 31, 1996. 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 1997, 11,696 common shares were purchased pursuant to this Plan at an average price of $24.51 for total proceeds of $287,000. The shares purchased in 1997 were comprised of 10,292 new common shares at an average price of $24.73 for proceeds of $254,000 and 1,404 common shares from Treasury shares at an average price of $22.86 for proceeds of $33,000. In 1996, 14,449 common shares were purchased pursuant to the Plan at an average price of $17.16 per share. The total proceeds were $248,000. New common shares purchased in 1996 totaled 10,701 at an average price of $17.24 for proceeds of $184,000. The remaining purchase of 3,749 shares were from Treasury shares at an average price of $17.09 for proceeds of $64,000. A Non-Employee Director Stock Option Plan was adopted by the Company in 1994. This plan provides for the awarding of stock options to the Company's non-employee directors. No options were issued under this Plan in 1997. Pursuant to this plan, in 1996, options to purchase 1,157 shares of the Company's common stock at a price of $17.62 per share were granted to a certain non-employee director. A non-employee director exercised options for 868 shares in 1997 at a price of $14.69 per share. During 1996, options for 289 shares of the Company's common stock were exercised by a non-employee director at a price of $14.69 per share. The Company also has a "Stock Option Plan" that was originally adopted in 1986 and the "1996 Stock Option Plan" that was adopted in 1996 which provide for the granting of options to acquire the Company's common stock to officers and key employees. In 1997, options to purchase 19,000 shares of the Company's common stock at a price of $23.50 per share were granted to certain officers. There were no options granted under these Plans in 1996. In 1997, options for 5,742 shares of the Company's common stock issued under the 1986 Plan were exercised at an average price of $16.46 per share. During 1996, options for 5,742 shares of the Company's common stock issued pursuant to the 1986 Plan were exercised at an average price of $17.75 per share. In January 1998, options to purchase 29,500 shares of the Company's common stock at a price of $37.00 per share were granted to certain officers. On January 1, 1996, the Company adopted the 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. The adoption of SFAS No. 123 had no material effect on the Company's consolidated financial position or results of operations. Additional information relating to the Company's Stock Option Plans can be found in Notes A.8. and N of the "Notes to Consolidated Financial Statements". The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Additional information relating to the Company's and Bank's capital requirements and capital ratios can be found in Note S of the "Notes to Consolidated Financial Statements". Impact of Inflation and Changing Prices The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previously, management is attempting to maintain an essentially balanced position between interest-sensitive assets and liabilities in order to protect against wide interest-rate fluctuations. Year 2000 During 1997, the Company conducted a comprehensive review of its computer systems and operations to identify the areas that could be affected by the "Year 2000" issue. The Company is in the process of implementing a plan to address all "Year 2000" issues. To date, confirmations have been received from the Company's primary computer software and processing vendors that they are addressing the "Year 2000" issue. Current estimates of the cost to be incurred to prepare for the "Year 2000" range from $100,000 to $300,000. The Bank has contacted its major customers to advise them to review their own systems for possible "Year 2000" problems. In making credit decisions for major borrowers, the Bank will consider the impact of "Year 2000" issues. The "Year 2000" potential problems create risk for the Company from unforeseen problems in its own computer systems and from third parties; such as other financial institutions, the Federal government, Federal agencies, vendors and customers. Failures of the Company's or third parties' computer systems could have a material effect on the Company's abilities to conduct business and especially to process and account for the transfer of funds electronically. Earnings Per Common Share During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS 128)". SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the 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. Accounting for the Impairment of Long-Lived Assets On January 1, 1996, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain intangibles and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no material effect on the Company's consolidated financial position or results of operations. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company has adopted the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets and extinguishment of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Adoption of this statement had no material impact on the Company's consolidated financial position or results of operations Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which is effective for years beginning after December 15, 1997. 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 effect of adopting SFAS No. 130 is not expected to be material. Disclosures About Segments of an Enterprise and Related Information In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for all periods beginning after December 15, 1997. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements. 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 May, 1997 and May, 1996. QUARTERLY FINANCIAL DATA (Unaudited) Dollars in Thousands, except per share data Three Months Ended 1997 Dec. 31 Sept. 30 June 30 March 31 Interest income $6,471 $6,631 $6,312 $6,030 Net interest income 3,673 3,833 3,634 3,473 Provision for possible loan losses 162 143 187 113 Net gain (loss) on sale of securities and mortgages 424 72 144 139 Income before income taxes 1,289 1,191 1,132 967 Net income $ 912 $ 855 $ 812 $ 704 ====== ====== ====== ====== Net income per share of common stock $ 0.56 $ 0.52 $ 0.50 $ 0.44 ====== ====== ====== ====== 1996 Dec. 31 Sept. 30 June 30 March 31 Interest income $6,000 $5,904 $5,652 $5,579 Net interest income 3,522 3,478 3,322 3,235 Provision for possible loan losses 155 105 305 105 Net gain (loss) on sale of securities and mortgages (17) 18 145 132 Income before income taxes 1,151 980 970 857 Net income $ 815 $ 702 $ 690 $ 615 ======= ====== ====== ======= Net income per share of common stock $ 0.50 $ 0.44 $ 0.43 $ 0.39 ======= ====== ====== =======
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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion of these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania January 9, 1998 Item 7. Financial Statements FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) At December 31, 1997 1996 ASSETS Cash and Due From Banks $ 12,629 $ 11,729 Federal Funds Sold 2,200 2,200 --------- --------- Total Cash and Cash Equivalents 14,829 13,929 Interest-Bearing Deposits With Banks 395 285 Investment Securities (Fair Value: 1997 - $17,946; 1996- $21,124) 17,756 20,999 Securities Available-for-Sale at Fair Value 73,024 56,779 Mortgage Loans Held-for-Sale 759 721 Total Loans, Net of Unearned Discount 229,587 220,117 Less: Allowance for Possible Loan Losses (2,664) (2,532) --------- --------- Net Loans 226,923 217,585 Premises and Equipment, Net 7,299 7,030 Accrued Interest Income 2,232 2,020 Other Real Estate Owned 284 595 Other Assets 3,237 2,409 --------- --------- TOTAL ASSETS $ 346,738 $ 322,352 ========= ======== LIABILITIES Deposits Non-Interest-Bearing Deposits $ 32,800 $ 31,450 Interest-Bearing Deposits (Includes Certificates of Deposit in Excess of $100: 1997 - $4,358; 1996 - $4,920) 249,455 236,218 --------- --------- Total Deposits 282,255 267,668 Securities Sold Under Agreements to Repurchase 8,804 3,795 Long-Term Debt 18,390 18,512 Accrued Interest Payable 3,466 3,205 Other Liabilities 3,466 2,367 --------- --------- TOTAL LIABILITIES 316,381 295,547 --------- --------- 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: 1,655,413 shares in 1997 and 1,560,634 shares in 1996 8,277 7,803 Additional Paid-in Capital 11,014 9,212 Retained Earnings 10,250 9,975 Less: Treasury Stock at Cost: 2,779 shares in 1997 and 861 in 1996 (94) (20) Employee Stock Ownership Plan Debt (390) (512) Net Unrealized Gain on Securities Available-for-Sale 1,300 347 --------- --------- TOTAL SHAREHOLDERS' EQUITY 30,357 26,805 --------- --------- TOTAL LIAB AND SHAREHOLDERS' EQUITY $ 346,738 $322,352 ========= ========
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, 1997 1996 1995 INTEREST INCOME Interest and Fees on Loans $ 19,943 $ 18,052 $ 16,896 Interest on Investment Securities Taxable 4,592 4,386 4,477 Tax-Exempt 837 617 384 Interest on Deposits with Banks and Federal Funds Sold 72 80 139 ------ ------ ------ Total Interest Income 25,444 23,135 21,896 ------ ------ ------ INTEREST EXPENSE Interest on Deposits 9,312 8,622 8,332 Interest on Short-Term Borrowings 421 636 684 Interest on Long-Term Debt 1,098 320 236 ------ ------ ------ Total Interest Expense 10,831 9,578 9,252 ------ ------ ------ NET INTEREST INCOME 14,613 13,557 12,644 Provision for Possible Loan Losses 605 670 1,798 ------ ------ ------ Net Interest Income After Provision for Possible Loan Losses 14,008 12,887 10,846 ------ ------ ------ OTHER INCOME Trust Revenue 1,050 696 636 Service Charges on Deposit Accounts 1,134 1,083 1,034 Investment Securities Gains, Net 601 308 22 Gains (Loss) on Sale of Mortgage Loans 178 (30) 22 Other Operating Income 860 585 560 ------ ------ ------ Total Other Income 3,823 2,642 2,274 ------ ------ ------ OTHER EXPENSES Salaries and Employee Benefits 6,033 5,615 5,132 Net Occupancy and Equipment Expense 2,178 2,184 1,991 Other Operating Expenses 5,041 3,772 4,081 ------ ------ ------ Total Other Expenses 13,252 11,571 11,204 ------ ------ ------ Income Before Income Taxes 4,579 3,958 1,916 Applicable Income Taxes 1,296 1,136 515 ------ ------ ------ NET INCOME $ 3,283 $ 2,822 $ 1,401 ======== ======== ======== PER SHARE DATA Basic and Diluted Net Income $ 2.02 $ 1.76 $ 0.89 Cash Dividends $ 0.70 $ 0.64 $ 0.62
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in Thousands) Unreal. Net Gain Add. (Loss) on Common Paid-In Retained Treas. ESOP Sec. Avail Stock Capital Earnings Stock Debt for Sale Total Balance at Jan 1, 1995 $ 7,277 $ 7,794 $ 9,138 $ --- $ (775) $(1,034) $22,400 1995 Net Income 1,401 1,401 Sale of Common Stock under Dividend Reinv Plan (15,573 shares) 78 171 249 Cash Dividends Paid (972) (972) ESOP Loan Pymt 132 132 Unall ESOP Shares Committed to Employees (4,724 shares) 3 3 Unreal Net Gain on Sec Avail- for-Sale 1,554 1,554 ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1995 7,355 7,968 9,567 --- (643) 520 24,767 1996 Net Income 2,822 2,822 Sale of Common Stock under Dividend Reinv Plan (10,191 shares) 51 133 184 Sale of Common Stock under Stock Option Plan (5,731 shs) 28 78 106 Purchase of Treasury Stock (4,431 shs) (102) (102) Sale of Treasury Stock under Div Reinv Plan (3,570) (18) 82 64 Cash Div Paid (1,011) (1,011) Stock Div Paid of 5% (73,712 shs) 369 1,032 (1,401) --- Cash in Lieu of Fractional Shares (2) (2) ESOP Loan Pymt 131 131 Unall ESOP Shares Committed to Employees (5,636 shs) 19 19 Unreal Net Loss on Sec Avail- for-Sale (173) (173) ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1996 7,803 9,212 9,975 (20) (512) 347 26,805 1997 Net Income 3,283 3,283 Sale of Common Stock under Dividend Reinv Plan (10,036 shares) 50 204 254 Sale of Common Stock under Stock Option Plan (6,610 shares) 33 74 107 Purchase of Treasury Stock (3,279) shares) (107) (107) Sale of Treas Stock under Dividend Reinv Plan (1,361 shares) 33 33 Cash Dividends Paid (1,139) (1,139) Stock Dividend of 5% (78,132 shares) 391 1,474 (1,865) --- Cash in Lieu of Fractional Shares (4) (4) ESOP Loan Pymt 122 122 Unall ESOP Shares Committed to Employees (4,415 shares) 50 50 Unreal Net Gain on Sec Avail- for-Sale 953 953 ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1997 $ 8,277 $11,014 $10,250 $ (94)$ (390) $1,300 $30,357
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 Dec 31, 1997 1996 1995 OPERATING ACTIVITIES Net Income $ 3,283 $ 2,822 $ 1,401 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Provision for Possible Loan Losses 605 670 1,798 Depreciation and Amortization 884 748 624 Accretion of Security Discounts (70) (130) (152) Amortization of Security Premiums 124 179 186 Deferred Taxes (277) (99) (156) Amortization of Deferred Fees on Loans (170) (110) 48 Investment Securities Gains, Net (601) (308) (22) Loss (Gain) on Sale of Mortgage Loans (178) 30 (22) Mortgage Loans Originated for Sale (27,183) (24,690) (7,273) Mortgage Loan Sales 27,145 19,509 6,336 Changes in Assets and Liabilities: Increase in Accrued Interest Income (212) (142) (130) Increase (Decrease) in Accrued Interest Payable 261 (220) 743 Decrease (Increase) in Other Assets (545) 1 75 Increase (Decrease) in Other Liabilities 625 (6) 384 -------- -------- ------- Net Cash Provided by (Used in) Operating Activities 3,691 (1,746) 3,840 -------- -------- ------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 13,986 15,401 11,055 Proceeds from Maturities of Securities Held-to-Maturity 8,047 5,671 3,284 Proceeds from Sales of Securities Available-for-Sale 13,279 19,842 11,177 Purchase of Securities Available-for-Sale (40,485) (32,686) (19,306) Purchase of Securities Held-to-Maturity (5,838) (6,905) (2,836) Net (Increase) Decrease in Interest- Bearing Deposits With Banks (110) 550 (434) Net Increase in Loans (10,130) (22,614) (9,937) Purchase of Premises and Equipment (1,126) (997) (1,508) Proceeds from Sale of Other Real Estate Owned 846 361 463 -------- -------- ------- Net Cash Used in Investing Activities (21,531) (21,377) (8,042) -------- -------- ------- FINANCING ACTIVITIES Net (Decrease) Increase in Interest and Non-Interest-Bearing Demand Deposits and Savings Accounts 3,804 3,143 (12,555) Net Increase in Certificates of Deposit 10,783 10,423 19,125 Net Increase (Decrease) in Long-Term Debt --- 18,000 (87) Net Increase (Decrease) in Repurchase Agreements 5,009 (2,302) (2,931) Net Increase (Decrease) in Short-Term Borrowings --- (7,000) 6,250 Proceeds from Issuance of Common Stock 361 290 252 Purchase of Treasury Stock (107) (102) --- Proceeds from Sale of Treasury Stock 33 64 --- Cash Dividends Paid (1,139) (1,011) (972) Cash in Lieu of Fractional Shares (4) (2) --- -------- -------- ------- Net Cash Provided by Financing Activities 18,740 21,503 9,082 -------- -------- ------- Increase (Decrease) in Cash and Cash Equivalents 900 (1,620) 4,880 Cash and Cash Equivalents, January 1, 13,929 15,549 10,669 -------- -------- ------- Cash and Cash Equivalents, December 31, $ 14,829 $ 13,929 $15,549 ======== ======== =======
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) December 31, 1997 and 1996 NOTE A - SUMMARY OF ACCOUNTING POLICIES First Colonial Group, Inc. (the "Company") is a one bank holding company of Nazareth National Bank and Trust Company (the "Bank"). The Bank is an independent community bank providing retail and commercial banking services through its thirteen offices in Northampton, Lehigh, and Monroe counties in northeastern Pennsylvania. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and for various types of loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Company and the Bank are subject to regulations of certain state and federal agencies, and accordingly, they are periodically examined by those regulatory agencies. As a consequence of the extensive regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and federal legislation and regulation which may have the effect of increasing the cost of doing business. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All significant inter-company balances and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods. Therefore, actual results could differ significantly from those estimates. 2. Investment Securities As required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies debt and marketable equity securities in three categories: trading, available-for-sale and held-to-maturity. Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company does not have any securities classified as trading securities. Available-for-sale securities are measured at fair value, with unrealized gains and losses, net of tax effect, reported in equity. Held-to-maturity securities are carried at amortized cost, and the Company has the positive intent and ability to hold such securities until maturity. The Company's classification of its investment securities into these categories is detailed in "Note B - Investment Securities". Investment securities held-to-maturity are principally debt securities and are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method over the period to maturity. Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. 3. Mortgages Held-for-Sale Mortgage loans held-for-sale are carried at the lower of aggregate cost or fair value. Unrealized losses are included in other operating expenses. Realized gains and losses from mortgage loan sales are included in total other income. Interest and fee income earned during the holding period are included in interest and fees on loans. 4. Loans and Allowance for Possible Loan Losses Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for possible loan losses. Interest income on loans is accrued using various methods which approximate a constant yield. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Upon such discontinuance, all unpaid accrued interest is reversed. The allowance for possible loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. As required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that, as a practical expedient, impairment may be measured based on the observable market price of a loan, or the fair value of the collateral if the loan is collateral dependent. The Company measures impairment based on the fair value of the collateral when it determines that foreclosure is probable (see Note E). 5. Loan Fees and Related Costs Certain origination and commitment fees, and certain direct loan origination costs are deferred and amortized over the contractual life of the related loans. This results in an adjustment of the yield on the related loan. 6. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of buildings and land improvements is computed principally on the straight-line method, and for equipment, principally on an accelerated method, over the estimated useful lives of the assets. 7. Income Taxes The Company, in accordance with SFAS No. 109, "Accounting for Income Taxes", computes the tax expense using the liability method where deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are accumulated depreciation, loan origination fees, provision for possible loan losses, unrealized gains and deferred expenses. 8. Stock Option Plans Under Stock Option Plans, options to acquire shares of common stock are granted to certain officers and directors. On January 1, 1996, the Company adopted 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. The adoption of SFAS No. 123 had no material effect on the Company's consolidated financial position or results of operations (see Note N). 9. 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. Effective January 1, 1994, the Company adopted new accounting 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) in November 1993. The adoption of SOP 93-6 was applied to shares acquired by the ESOP after December 31, 1992, which did not have a material effect on the Company's financial statements. For issuances of stock to the ESOP after December 15, 1989, but prior to December 31, 1992, the shares allocated method is used to recognize expense in the Company's financial statements. For issuances of stock prior to December 15, 1989, the Company will continue the cash contribution method of recognizing expense to the extent that it exceeds the cumulative expense that would be recognized under the shares allocated method (see Note K). Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that each employee contributes. The Company also has an executive compensation plan which provides additional death, medical and retirement benefits to certain officers (see Note L). The Company has a deferred compensation plan involving the Directors of the Company. This plan provides defined annual payments for 15 years beginning at age 65 or death in exchange for the Directors deferring the payment of a portion of their fees (see Note L). The Company records the cost of post-retirement medical benefits on the accrual basis as employees render service to earn the benefits and records a liability for the unfunded accumulated post-retirement benefit obligation. The transition obligation, representing the unfunded and unrecognized accumulated past-service benefit obligation for all plan participants, will be amortized on a straight-line basis over a 20-year period (see Note M). 10. 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. 11. Per Share Information During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted earnings per share are calculated as follows. There is no difference between basic and diluted earnings per share for the years ended December 31, 1997, 1996 and 1995. For the Year Ended December 31, Average Income Shares Per Share (numerator) (denominator) Amount 1997 Net Income $3,283 Basic Earnings Per Share Income Available to Common Shareholders $3,283 1,620,627 $ 2.02 Effect of Dilutive Securities Stock Options 4,829 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $3,283 1,625,456 $ 2.02 ------ --------- ------- 1996 Net Income $2,822 Basic Earnings Per Share Income Available to Common Shareholders $2,822 1,600,883 $ 1.76 Effect of Dilutive Securities Stock Options 2,707 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $2,822 1,603,590 $ 1.76 ------ --------- ------- 1995 Net Income $1,401 Basic Earnings Per Share Income Available to Common Shareholders $1,401 1,579,428 $ 0.89 Effect of Dilutive Securities Stock Options 174 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $1,401 1,579,602 $ 0.89 ------ --------- -------
Average common shares outstanding in 1997, 1996 and 1995 do not include 23,138, 26,688 and 30,587, respectively of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6 (see Note A.8.). Share and per share information have been restated to reflect the 5% stock dividends of May, 1997 and May, 1996. 12. 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 $11,120,000, $9,798,000 and $8,509,000, for the years ended December 31, 1997, 1996 and 1995, respectively. Cash paid for taxes was $1,465,000 in 1997, $1,353,000 in 1996 and $440,000 in 1995. 13. Financial Instruments The estimated fair value as of December 31, 1997 and 1996 of the Company's assets and liabilities considered to be financial instruments, which consist primarily of securities, loans and deposits as required by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", are provided in Note U. 14. Contributions In 1996, the Company adopted SFAS No. 116, "Accounting for Contributions Received and Made". This statement requires that unconditional promises to make contributions be recognized as expenses in the period the promise is made. The present value of contribution commitments was $5,000, $18,000 and $38,000 at December 31, 1997, 1996 and 1995, respectively. These amounts were included in the Company's total contribution expense of $61,000, $51,000 and $142,000 for 1997, 1996 and 1995, respectively. 15. Advertising Costs The AICPA's Accounting Standards Executive Committee issued Statement of Position (SOP) 93-7, "Reporting on Advertising Costs", which requires disclosures regarding an entity's advertising activities. The Company's advertising costs are expensed as incurred. Advertising costs were $524,000, $299,000 and $294,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 16. Intangibles On January 1, 1996, the Company adopted the Financial Accounting Standards Board (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 on 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. 17. Transfer and Servicing of Assets and Extinguishments of Liabilities The Financial Accounting Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishments of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets, and extinguishments of liabilities occurring after December 31, 1996. Adoption of this new statement did not have a material impact on the Company's consolidated financial position or results of operations. 18. Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which is effective for years beginning after December 15, 1997. 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 effect of adopting SFAS No. 130 is not expected to be material. 19. Disclosures About Segments of an Enterprise and Related Information In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for all periods beginning after December 15, 1997. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements. 20. Stock Dividend The Company reduced retained earnings and increased additional paid-in-capital for the year ended December 31, 1994 to charge retained earnings for the stock dividends paid at the fair value of additional shares issued which were previously recorded at par value. 21. Reclassifications Certain reclassifications of prior years amounts have been made to conform to the 1997 presentation. NOTE B - INVESTMENT SECURITIES The Company classifies debt and marketable equity securities in three categories: trading, available-for-sale and held-to-maturity as required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company had no trading securities in 1997, 1996 and 1995. Available-for-sale securities are measured at fair value, with unrealized gains and losses reported, net of tax, as a component in equity. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities had unrealized holding gains of $1,300,000 (net of the tax effect of $670,000) in 1997 and unrealized holding gains of $347,000 (net of the tax effect of $179,000) in 1996. At December 31, the equity securities in the available-for-sale category include Federal Reserve Bank stock in the amount of $239,000 in 1997 and 1996, and Federal Home Loan Bank stock in the amount of $1,699,000 in 1997 and $1,659,000 in 1996 which are carried at cost. The amortized cost, unrealized gains and losses, and fair value of the Company's available-for-sale and held-to-maturity securities at December 31, 1997 and 1996 are summarized as follows. 1997 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 9,008 $ 58 $ -- $ 9,066 U. S. Government Agency 14,512 72 28 14,556 State and Political Subdivisions 16,865 465 -- 17,330 Mortgage-Backed Securities 26,791 116 95 26,812 Other Debt Securities --- --- -- --- Equity Securities 3,878 1,393 11 5,260 ------- ------- ------- ------- Total $71,054 $ 2,104 $ 134 $73,024
1996 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 7,020 $ 37 $ 3 $ 7,054 U. S. Government Agency 14,272 16 127 14,161 State and Political Subdivisions 11,808 121 65 11,864 Mortgage-Backed Securities 19,131 155 141 19,145 Other Debt Securities 796 4 -- 800 Equity Securities 3,226 529 -- 3,755 ------- ------- ------- ------- Total $56,253 $ 862 $ 336 $56,779
1997 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ --- $ -- $ -- $ --- U. S. Government Agency 6,008 46 3 6,051 State and Political Subdivisions 3,169 64 -- 3,233 Mortgage-Backed Securities 8,579 99 16 8,662 ------- ------- ------- ------- Total $17,756 $ 209 $ 19 $17,946
1996 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 999 $ 4 $ -- $ 1,003 U. S. Government Agency 10,229 38 24 10,243 State and Political Subdivisions 3,217 46 2 3,261 Mortgage-Backed Securities 6,554 85 22 6,617 ------- ------- ------- ------- Total $20,999 $ 173 $ 48 $21,124
The following table lists the maturities of debt securities at December 31, 1997 and 1996, 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, 1997 Available-for-Sale Held-to-Maturity Carrying Fair Carrying Fair Value Value Value Value Debt Securities Due in one year or less $ 3,459 $3,474 $ 387 $ 389 Due after one year through five years 7,342 7,419 1,213 1,226 Due after five years through ten years 15,450 15,539 7,266 7,343 Due after ten years 14,134 14,520 311 326 -------- ------- ------ ------ 40,385 40,952 9,177 9,284 Mortgage-backed securities 26,791 26,812 8,579 8,662 Equity securities 3,878 5,260 --- --- -------- ------- ------ ------ Total investments $ 71,054 $73,024 $17,756 $17,946
Maturities of Debt Securities At December 31, 1967 Available-for-Sale Held-to-Maturity Carrying Fair Carrying Fair Value Value Value Value Debt Securities Due in one year or less $ 900 $ 904 $ 1,954 $ 1,951 Due after one year through five years 10,814 10,878 3,475 3,498 Due after five years through ten years 11,293 11,213 7,566 7,598 Due after ten years 10,889 10,884 1,450 1,460 -------- ------- ------ ------ 33,896 33,879 14,445 14,507 Mortgage-backed securities 19,131 19,145 6,554 6,617 Equity securities 3,226 3,755 --- --- -------- ------- ------ ------ Total investments $ 56,253 $56,779 $20,999 $21,124
Investment securities with a carrying amount of $14,001,000 and $7,994,000 at December 31, 1997 and 1996, 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 1997, 1996 and 1995 were $13,279,000, $19,842,000 and $11,177,000, respectively. Gross gains of $615,000 and gross losses of $14,000 were realized on those sales in 1997. Gross gains of $418,000 and gross losses of $110,000 were realized on the sales in 1996. In 1995, gross realized gains were $93,000 and gross realized losses were $71,000. NOTE C - LOANS Major classifications of loans at December 31, 1997 and 1996 are as follows: 1997 1996 Real Estate/Residential $ 138,539 $ 134,013 Real Estate/Construction 12,361 10,923 Real Estate/Commercial 34,579 39,421 Consumer/Installment 35,914 28,870 Commercial (Non-Real Estate) and Agricultural 9,086 8,715 State and Political Subdivisions 944 906 Other 20 28 --------- --------- Total Gross Loans 231,443 222,876 Less Unearned Discount (1,856) (2,759) --------- --------- Total Loans $ 229,587 $ 220,117
Included in total gross loans are unamortized loan fees totaling $137,000 at December 31, 1997 and $395,000 at December 31, 1996. There were loans totaling $813,000 on which the accrual of interest has been discontinued or reduced at December 31, 1997. During 1997, an average of $821,000 of loans was on non-accrual status. Non-accrual loans at December 31, 1996 amounted to $1,440,000 and averaged $1,979,000 during 1996. Loans 90 days and over past due and still accruing totaled $802,000 at December 31, 1997 and $1,283,000 at December 31, 1996. NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows. Year Ended December 31, 1997 1996 1995 Beginning Balance $ 2,532 $ 2,443 $ 2,187 Additions Provisions for loan losses charged to operating expenses 605 670 1,798 Recoveries of loans 97 86 216 ------- ------- ------- Total Additions 702 756 2,014 Deductions Loans charged-off (570) (667) (1,758) ------- ------- ------- Ending Balance $ 2,664 $ 2,532 $ 2,443
NOTE E - IMPAIRED LOANS The recorded investment in impaired loans and the valuation for credit losses related to loan impairment are as follows. At December 31, 1997 1996 1995 Principal amount of impaired loans $ 523 $ 1,149 $ 2,035 Accrued Interest --- --- --- Deferred loan costs 1 7 4 ------ -------- -------- 524 1,156 2,039 Less valuation allowance (138) (128) (238) ------ -------- -------- $ 386 $ 1,028 $ 1,801
At December 31, 1997 1996 1995 Cash collected on impaired loans credited to principal balance $ 657 $ 1,446 $ 138 Recognized as interest income 111 40 44 ----- ------ ------ Total $ 768 $ 1,486 $ 182 Interest that would have accrued on impaired loans $ 64 $ 210 $ 214
The valuation allowance for impaired loans at December 31, 1997, 1996 and 1995 is included in the "Allowance for Possible Loan Losses" which amounts to $2,664,000, $2,532,000 and $2,443,000, respectively. On January 1, 1995, a valuation for credit losses related to impaired loans was established as a part of the allowance for possible loan losses. The activity in this allowance account is as follows. Year ended December 31, 1997 1996 1995 Valuation allowance at January 1, $ 128 $ 238 $ 160 Provision for loan impairment 158 206 187 Direct charge-offs (148) (325) (125) Recoveries --- 9 16 ------ ---- ---- Valuation allowance at December 31, $ 138 $128 $238
NOTE F - PREMISES AND EQUIPMENT Major classifications of these assets at December 31, 1997 and 1996 are summarized as follows. Estimated Useful Lives 1997 1996 Land ---- $ 939 $ 939 Premises 10 - 20 years 6,948 6,855 Equipment 3 - 10 years 5,329 4,337 ------ ------ 13,216 12,131 Accumulated depreciation and amortization (5,917) (5,101) ------ ------ Total Premises and Equipment $7,299 $7,030
Depreciation and amortization expense amounted to $857,000, $730,000 and $607,000 in 1997, 1996 and 1995, respectively. NOTE G - SHORT-TERM BORROWINGS FEDERAL RESERVE DISCOUNT BORROWINGS Year Ended December 31, 1997 1996 1995 Balance outstanding at December 31, $ --- $ --- $ --- Maximum amount outstanding at any month-end during the year $ --- $ --- $ --- Average amount outstanding during the year $ --- $ 10 $ --- Average interest rate during the year ---% 5.12% ---%
FEDERAL HOME LOAN BANK BORROWINGS Year Ended December 31, 1997 1996 199 Balance outstanding at December 31, $ --- $ --- $ 7,000 Maximum amount outstanding at any month-end during the year $ 6,890 $10,000 $11,000 Average amount outstanding during the year $ 1,217 $ 3,400 $ 6,109 Average interest rate during the year 5.85% 5.51% 6.34%
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $12,895,000, all of which was available at December 31, 1997. There were no short-term borrowings in the form of Federal Funds purchased at December 31, 1997, 1996 and 1995. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Year Ended December 31, 1997 1996 1995 Balance outstanding at December 31, $ 8,804 $ 3,795 $ 6,096 Maximum amount outstanding at any month-end during the year $ 14,290 $ 7,087 $12,332 Average amount outstanding during the year $ 6,459 $ 4,740 $ 9,298 Average interest rate during the year 3.72% 3.14% 3.72%
NOTE H - LONG-TERM DEBT The Company had long-term borrowings from the Federal Home Loan Bank of Pittsburgh totaling $18,000,000 at December 31, 1997 and $18,000,000 at December 31, 1996. These loans will mature in one to four years. The weighted average interest rate on these loans was 5.94% and 5.65% at December 31, 1997 and 1996, 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, 1997 are as follows. ESOP FHLB Total Debt Debt Debt 1998 $ 65 $ 5,000 $ 5,065 1999 65 --- 65 2000 65 8,000 8,065 2001 65 5,000 5,065 2002 65 --- 65 2003 and beyond 65 --- 65 ----- ------- ------- Total $ 390 $18,000 $18,390
NOTE I - OTHER OPERATING EXPENSES The following items which are greater than 1% of the aggregate of "Total Interest Income" and "Total Other Income" are included in "Other Operating Expenses" for the respective years indicated. 1997 1996 1995 Advertising $ 524 $ 299 $ 294 Consulting Fees $ 530 $ 269 $ 276 Data Processing Services $ 607 $ 594 $ 515 Federal Deposit Insurance Premiu $ 34 $ 2 $ 288 Litigation Costs and Legal Fees $ 587 $ 147 $ 405 Postage $ 247 $ 247 $ 258 Printing, Stationery and Supplie $ 363 $ 343 $ 299
NOTE J - INCOME TAXES The Company uses the liability method of accounting for income taxes. Applicable income tax expense (benefit) in the consolidated statements of income is as follows. Year Ended December 31, 1997 1996 1995 Federal Current $1,573 $ 1,235 $ 671 Deferred (benefit) (277) (99) (156) ------ ------ ---- Total $1,296 $1,136 $515
The income tax provision reconciled to the tax computed statutory Federal rate is as follows. Year Ended December 31, 1997 1996 1995 Federal tax expense at statutory rate $1,557 $1,346 $651 Increase (decrease) in taxes resulting from: Tax-exempt investment securities income (261) (195) (124) Tax-exempt interest on loans (16) (18) (19) Other, net 16 3 7 ------ -------- ---- Applicable Income Taxes $1,296 $ 1,136 $515
Deferred tax assets and liabilities consist of the following. At December 31, 1997 1996 Deferred Tax Assets: Loan Loss Reserve $ 614 $ 561 Deferred Compensation 428 433 Post-Retirement Benefits 59 51 Deferred Loan Fees 67 84 Depreciation 30 21 Miscellaneous Reserves 220 --- Other 15 40 --------- ---------- Total 1,433 1,190 --------- ---------- Deferred Tax Liability: Unrealized Securities Gains 670 179 Other --- 35 --------- ---------- Total 670 214 --------- ---------- Net $ 763 $ 976
Based on management's evaluation of the likelihood of realization, no valuation allowance has been provided. NOTE K- EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of eligible employees. In 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The interest rate on this loan is that bank's prime rate plus 1.25% (for an interest rate of 9.75% at December 31, 1997 and 9.50% at December 31, 1996). The balance outstanding on this loan was $390,000 at December 31, 1997. During 1997, the ESOP made the final principal payments on two additional loans. In 1985, the ESOP borrowed $350,000 from a commercial bank. The loan was payable over twelve years, with interest and principal due quarterly. This loan had interest at a rate of 87.5% of prime plus 1/4% which was 7.47% at December 31, 1996. This loan was paid in full at maturity on March 31, 1997. The ESOP borrowed an additional $385,000 in August 1987 from a commercial bank. This loan was payable over ten years, with interest and principal due quarterly. The loan had an interest rate of 92% of the prime rate (for an interest rate of 7.59% at December 31, 1996). This loan matured on July 1, 1997 and was paid in full. The ESOP's total outstanding debt at December 31, 1996 was $512,000. 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 $41,000, $52,000 and $67,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Compensation expense related to the ESOP amounted to $275,000, $229,000 and $178,000 for the years ended December 31, 1997, 1996 and 1995, respectively. As provided by SOP 93-6 (see Note A.8.), the ESOP compensation expense includes $50,000 in 1997 and $18,000 in 1996 and $3,000 in 1995, which is the fair market value of the shares related to the August 1993 loan that were allocated to the employees during these years. The number of shares released was 4,415 in 1997, 5,637 in 1996 and 4,724 in 1995. Dividends on unallocated shares used for debt service were $23,000, $38,000 and $37,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The total shares held by the ESOP were 215,066 and 213,446 at December 31, 1997 and 1996, respectively. ESOP shares have been restated to reflect the 5% stock dividends of May, 1997 and May, 1996. NOTE L - OTHER BENEFIT PLAN Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. A participating employee may contribute a maximum of 8% of his or her compensation. The Company will contribute $.50 for each $1.00 up to the first 5% that each employee contributes. Company payments are charged to current operating expenses. These contributions were $84,000, $71,000 and $55,000 in 1997, 1996 and 1995, respectively. The Company also has an executive compensation plan (the "Officers' Supplemental Retirement Plan") which provides additional death, medical and retirement benefits to certain officers. The Company has a deferred compensation plan (the "Deferred Directors' Plan") involving Directors of the Company. The plan requires defined annual payments for 15 years beginning at age 65 or death. The annual benefit is based upon the amount deferred plus interest. The Company has recorded the deferred compensation liabilities using the present value method. The following table sets forth the funded status of the Officers' Supplemental Retirement Plan and the Deferred Directors' Plan and the amounts recognized in the Company's balance sheets at December 31, 1997 and 1996. Actuarial present value of benefit obligations is as follows: Officers' Deferred Supplemental Directors' Retirement Plan Plan at December 31, 1997 1996 1997 1996 Accumulated benefit obligation, all of which is vested $ 55 $ 47 $ 477 $ 495 Projected benefit obligation for service rendered to date $(366) $(200) $(477) $(495) Plan assets at fair value -- -- -- -- ----- ----- ----- ----- Projected benefit obligation in excess of plan assets (366) (200) (477) (495) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (43) (207) 5 6 Prior service cost not yet recognized in net periodic pension cost -- -- -- -- Unrecognized net assets at December 31, being recognized over 15 years (5) (5) -- -- Adjustment to recognize additional minimum liability -- -- (5) (6) ----- ----- ----- ----- Accrued Pension Cost $(414) $(412) $(477) $(495)
The weighted average assumed discount rate and weighted average rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 6.0%, respectively, in 1997, 1996 and 1995 for the Officers' Supplemental Retirement Plan. The weighted average assumed discount rate used in determining the actuarial present value of the projected benefit obligation for the Deferred Directors' Plan was 7.5% in 1997, 1996 and 1995. The weighted average expected long-term rate of return on assets was 8% for 1997, 1996 and 1995 for the Officers' Supplemental Retirement Plan and 9.0% in each of those years for the Deferred Directors' Plan. Net pension cost included the following components. Officers' Deferred Supplemental Directors' Retirement Plan Plan at December 31, 1997 1996 1995 1997 1996 1995 Service cost - benefits earned during the period $ 10 $ 15 $ 14 $ -- $ -- $ -- Interest cost on projected benefit obligation 11 15 15 36 36 36 Net amortization and deferral (19) (10) (11) -- -- -- ---- ---- ---- ---- ---- ---- Net Periodic Pension Cost $ 2 $ 20 $ 18 $ 36 $ 36 $ 36
NOTE M - POST-RETIREMENT BENEFIT The Company sponsors a post-retirement plan that covers a certain number of retired employees and a limited group of current employees. This plan provides medical insurance benefits to a group of previously qualified retirees and spouses and to current full-time employees who were 60 years of age or older on January 1, 1992 and who have retired from the Company after attaining age 65 and are fully vested in the ESOP at the time of retirement. This plan is currently unfunded. As permitted by SFAS No. 106, the Company elected to delay the recognition of the transition obligation by aggregating $308,000, which arose from adopting SFAS No. 106, and amortize this amount on a straight-line basis over 20 years. This election is recorded in the financial statements as a component of net periodic post-retirement benefit cost. The Company has determined the actuarially computed expense associated with this benefit for 1997, 1996 and 1995. The components of the net periodic post-retirement benefit cost for the years ended December 31 were as follows. Year Ended December 31, 1997 1996 1995 Service cost - benefits earned during the period $ --- $ --- $ 5 Interest cost on accumulated benefit obligation 14 15 25 Amortization of transition obligation 8 8 15 ------ ------ ----- Net periodic post-retirement benefit cost $ 22 $ 23 $ 45
The assumptions used to develop the net periodic post-retirement benefit cost and the accrued post-retirement benefit cost were as follows. 1997 1996 1995 Discount rate 7.00% 7.00% 7.00% Medical care cost trend rate 10.00% 11.00% 12.00%
The medical care cost trend rate used in the actuarial computation ultimately is reduced to 7.0% in the year 2000 and subsequent years. This was accomplished using 1.0% decrements for the years 1993 through 2000. The table of actuarially computed plan assets and benefit obligations for the Company is presented below. At December 31, 1997 1996 Accumulated post-retirement benefit obligation: Retirees $203 $181 Active, eligible employees --- 36 Active, not-yet-eligible employees --- -- ---- ---- Accumulated post-retirement benefit obligation 203 217 Plan assets at fair value --- --- ---- ---- Accumulated benefit obligation in excess of plan assets 203 217 Unrecognized transition obligation (232) (247) Unrecognized net gain (loss) 93 92 ---- ---- Accrued post-retirement benefit cost $ 64 $ 62
At December 31, 1997, $173,000 of the accrued post-retirement benefit cost is included in "Total Other Liabilities". The effect of a one percentage point increase in each future year's assumed medical care cost trend rate, holding all other assumptions constant, would have been to increase the net periodic post-retirement benefit cost by $16,000 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 $22,000, $22,000 and $28,000 in 1997, 1996 and 1995, respectively. The cost is accrued over the service periods of employees expected to receive benefits. Past-service costs are being amortized principally over 30 years NOTE N - STOCK OPTIONS The Company adopted a Stock Option Plan in 1996 that was similar to the Stock Option Plan established in 1986. Under the Stock Option Plans, options to acquire shares of common stock may be granted to the officers and key employees. The Stock Option Plans provide for the granting of options at the fair market value of the Company's common stock at the time the options are granted. Each option granted under the Stock Option Plans may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from date of grant. In 1997, options to purchase 19,000 common shares of the Company's stock at a price of $23.50 per share were awarded under this plan. No options were granted under these Plans in 1996. In January of 1998, options to purchase 29,500 shares of the Company's common stock at a price of $37.00 per share were awarded. The aggregate number of shares which may be issued under these plans are 287,706 shares of common stock. In 1994, a Non-Employee Directors Stock Option Plan was adopted. This Plan provides for the awarding of stock options to the Company's Directors. Pursuant to this Plan, on May 1, 1994, each non-employee director of the Company was automatically granted an option to purchase 1,157 shares of the Company's common stock at the fair market value of the Company's common stock of $14.69 per share. The Plan additionally provides that any non-employee director who is first elected by the shareholders as a director of the Company or any subsidiary after May 1, 1994, shall, as of that date of such election, automatically be granted an option to purchase 1,157 shares of the Company's common stock. In addition, on the fifth anniversary of the initial option grant, persons who continue to be non-officer directors shall each be granted additional options to purchase 1,157 shares of the Company's common stock. The aggregate number of shares which may be issued under the Non-Employee Director Stock Option Plan is 23,152 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, 1997 1996 1995 Net Income As reported $3,283 $2,822 $1,401 Pro forma $3,265 $2,814 $1,385 Basic earnings per share As reported $ 2.02 $ 1.76 $ 0.89 Pro forma $ 2.01 $ 1.76 $ 0.88 Diluted earnings per share As reported $ 2.02 $ 1.76 $ 0.89 Pro forma $ 2.01 $ 1.75 $ 0.88
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 1997, 1996 and 1995, respectively: dividend yield of 2.1%, 3.1% and 3.8%; expected volatility of 39.0%, 39.5% and 54.3%; risk-free interest rates of 6.7%, 7.0% and 7.2%; and expected lives of 10 years. A summary of the status of the Company's Employee Stock Option Plans as of December 31, 1997 and 1996, and changes during the years ending on those dates is presented below. The number of shares and price per share have been restated to reflect the 5% stock dividends of May, 1997 and May, 1996. Year Ended December 31, 1997 Weighted Average Excercise Shares Price Outstanding at beginning of year 12,079 $ 15.29 Granted 19,000 23.50 Exercised 5,742 16.46 ------ -------- Outstanding at end of year 25,337 $ 21.42 Options exercisable at year-end 4,753 Weighted average fair value of options granted during the year $ 23.50
Year Ended December 31, 1996 Weighted Average Excercise Shares Price Outstanding at beginning of year 17,821 $ 16.43 Granted None --- Exercised 5,742 17.75 ------ -------- Outstanding at end of year 12,079 $ 15.79 Options exercisable at year-end 8,913 Weighted average fair value of options granted during the year N/A
Year Ended December 31, 1995 Weighted Average Excercise Shares Price Outstanding at beginning of year 17,821 $ 16.43 Granted None --- Exercised None --- ------ -------- Outstanding at end of year 17,821 $ 16.43 Options exercisable at year-end 15,721 Weighted average fair value of options granted during the year N/A
The following information applies to options outstanding at December 31, 1997. EMPLOYEE STOCK OPTION PLAN Number outstanding 25,337 Range of exercise prices $15.19 - $23.50 Weighted-average exercise price $21.42 Weighted-average remaining contractual life 9.12 years A summary of the status of the Company's Non-Employee Director Stock Option Plan as of December 31, 1997 and 1996, and changes during the years ending on those dates are presented below. The number of shares and price per share have been restated to reflect the 5% stock dividends of May, 1997 and May, 1996. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Year Ended December 31, 1997 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,413 $ 14.92 Granted None --- Exercised 868 14.69 Expired 289 14.69 ----- -------- Outstanding at end of year 9,256 $ 14.96 Options exercisable at year-end 5,785 Weighted average fair value of options granted during the year N/A
Year Ended December 31, 1996 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,413 $ 14.60 Granted 1,157 17.62 Exercised 289 14.69 Expired 868 14.69 ----- -------- Outstanding at end of year 10,413 $ 14.92 Options exercisable at year-end 3,858 Weighted average fair value of options granted during the year $ 17.62
Year Ended December 31, 1995 Weighted Average Excercise Shares Price Outstanding at beginning of year 9,256 $ 14.69 Granted 2,314 14.29 Exercised None --- Expired 1,157 14.69 ----- -------- Outstanding at end of year 10,413 $ 14.60 Options exercisable at year-end 2,025 Weighted average fair value of options granted during the year $ 14.29
The following information applies to options outstanding at December 31, 1997. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Number outstanding 9,256 Range of exercise prices $14.29 - $17.62 Weighted-average exercise price $14.96 Weighted-average remaining contractual life 6.78 years NOTE O - COMMITMENTS AND CONTINGENCIES The Company has non-cancellable operating lease agreements in excess of one year with respect to various buildings and equipment. The minimum annual rental commitments at December 31, 1997 are payable as follows. Operating Leases 1998 $ 381 1999 373 2000 388 2001 406 2002 394 2003 and beyond 1,947 ------- Total $ 3,889 The total rental expense was $421,000, $530,000 and $594,000 in 1997, 1996 and 1995, respectively. NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The contract or notional amounts as of December 31, 1997 are as follows. Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $18,354 Standby letters of credit $ 5,330 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 87.3% as of December 31, 1997. NOTE Q - CONCENTRATIONS OF CREDIT RIS 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, 1997, the Bank had residential real estate loans outstanding totaling $138,539,000, which is 60.3% of total loans. The Bank also had real estate related commercial loans outstanding at December 31, 1997 totaling $34,579,000, which is 15.1% of total loans. Loans to various residential apartment building owners totaling $8,368,000 are included in the Bank's total real estate commercial loans. These loans represent 24% of the total real estate related commercial loans. NOTE R - RELATED PARTY TRANSACTIONS The amount of loans by the Company to its directors and executive officers was approximately $1,311,000 and $3,087,000 at December 31, 1997 and 1996, respectively. These loans were made in the ordinary course of business at substantially the same terms and conditions as those with other borrowers. An analysis of the 1997 activity of these loans follows. Balance, January 1, 1997 $ 3,087 New loans 203 Repayments (1,979) -------- Balance, December 31, 1997 $ 1,311 NOTE S - REGULATORY MATTERS The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 1997, that the Bank could declare, without the approval of the Comptroller of the Currency, amounted to approximately $3,227,000. 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, 1997, the Company and the Bank met all capital adequacy requirements to which they were 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, 1997 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- --- Bank $27,200 13.97% $15,576 8.00% $19,470 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- --- Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- --- Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Adequacy Action (Dollars in Thousands) At December 31, 1996 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $28,596 15.20% $15,046 8.00% --- --- Bank $25,591 13.59% $15,065 8.00% $18,831 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $26,243 13.95% $ 7,522 4.00% --- --- Bank $22,435 11.91% $ 7,532 4.00% $11,299 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $26,243 8.35% $12,578 4.00% --- --- Bank $22,435 7.20% $12,456 4.00% $15,570 5.00%
The Company is not aware of any known trends, events or uncertainties that will have a material effect on the Company's liquidity, capital resources or operations. The Company is not under any agreement with the regulatory authorities nor is it aware of any current recommendation by regulatory authorities which, if they were implemented, would have a material effect on liquidity, capital, resources, or the operations of the Company. Restrictions on cash and due from bank accounts are placed upon the banking subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are required to be on hand or on deposit at the Federal Reserve Bank based upon deposit levels and other factors. The average and year-end amount of the reserve balance for 1997 was approximately $4,305,000 and $4,702,000, respectively. For 1996, the average reserve balance was $3,585,000 and the year-end amount was $3,857,000. NOTE T - EQUITY TRANSACTIONS The Company paid a 5% stock dividend on its common stock from authorized but unissued shares on June 19, 1997 to all shareholders of record at the close of business on May 30, 1997. On June 19, 1996, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on May 31, 1996. 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 1997, 11,696 common shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $24.51 per share for total proceeds of $287,000. The shares purchased in 1997 were comprised of 10,292 new common shares at an average price of $24.73 for proceeds of $254,000 and 1,404 shares from Treasury shares at an average price of $22.86 for proceeds of $33,000. In 1996, 14,449 common shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $17.16 for proceeds of $248,000. NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments (other than available-for-sale) to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data which management considered the best available, as generally provided in the Company's FRY-9C Regulatory Reports, and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies and resulting fair values, and recorded carrying amounts at December 31, 1997 and 1996 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. 1997 1996 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Cash and cash equivalents $ 14,829 $ 14,829 $ 13,929 $ 13,929 Investment securities 17,946 17,756 21,124 20,999 Securities available-for-sale 73,024 73,024 56,779 56,779 Mortgage loans held-for-sale 759 759 721 721
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. 1997 1996 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Assets: Interest-bearing deposits with banks $ 395 $ 395 $ 285 $ 285 Liabilities: Deposits with stated maturities 127,673 127,350 117,400 117,485 Securities sold under agreements to repurchase 8,804 8,804 3,795 3,795 Short-term borrowings 4,925 5,000 --- --- Long-term debt 12,805 13,390 17,994 18,512
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand). 1997 1996 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Deposits with no stated maturities $ 154,905 $ 154,905 $ 150,268 $150,268
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. 1997 1996 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Total loans $228,278 $229,587 $219,180 $220,117
There is no material difference between the carrying amount and the estimated fair value of off-balance-sheet items totaling $23,684,000 at December 31, 1997 and $20,643,000 at December 31, 1996 which are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS No. 107. NOTE V - FIRST COLONIAL GROUP, INC. (PARENT COMPANY ONLY) Condensed Balance Sheets December 31, 1997 1996 ASSETS Cash and Due from Banks $ 8 $ 16 Interest-Bearing Deposits with Banks 904 656 Loan to Banking Subsidiary 1,000 1,000 Investment in Banking Subsidiary 24,760 22,633 Investment in Other Subsidiary 4,113 3,073 Other Assets 12 12 ------- ------- TOTAL ASSETS $30,797 $27,390 LIABILITIES Long-Term Debt $ 390 $ 512 Other Liabilities 50 73 ------- ------- TOTAL LIABILITIES 440 585 SHAREHOLDERS' EQUITY 30,357 26,805 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,797 $27,390
Condensed Statement of Income For the Year Ended December 31, 1997 1996 1995 INCOME Dividends from Subsidiaries $ 1,139 $ 1,111 $ 829 Interest on Loan to Subsidiary 89 114 149 Interest on Deposits with Banks 21 12 5 ------- ------- ------- Total Income 1,249 1,237 983 ------- ------- ------- EXPENSES Interest on Long-Term Debt 41 52 67 Other Expenses 99 105 77 ------- ------- ------- Total Expenses 140 157 144 ------- ------- ------- Income Before Taxes and Equity in Undistributed Net Earnings of Subsidiaries 1,109 1,080 839 Federal Income Tax (Credit) (10) (11) 3 ------- ------- ------- Income Before Equity in Undistributed Net Earnings of Subsidiaries 1,119 1,091 836 Equity in Undistributed Net Earnings of Subsidiaries 2,164 1,731 565 ------- ------- ------- NET INCOME $ 3,283 $ 2,822 $ 1,401
Condensed Statement of Cash Flows For The Year Ended December 31, 1997 1996 1995 OPERATING ACTIVITIES Net Income $ 3,283 $ 2,822 $ 1,401 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Distribution in Excess of Undistributed Net Earnings of Subsidiaries (2,164) (1,731) (565) Changes in Assets and Liabilities: (Increase) Decrease in Interest-Bearing Deposits with Banks (248) (366) (94) (Increase) Decrease in Other Assets --- (10) 40 Increase (Decrease) in Other Liabilities 23 7 (7) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 848 722 775 ------- ------- ------- INVESTING ACTIVITIES Repayment of Note from Bank Subsidiary -- 1,600 -- Issuance of Note Receivable to Bank Subsidiary -- (1,000) -- Capital Contribution to Bank Subsidiary -- (600) -- ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES -- -- -- ------- ------- ------- FINANCING ACTIVITIES Repayment of Long-Term Debt -- -- (87) Purchase of Treasury Stock (107) (102) -- Proceeds from the Sale of Treasury Stock 33 64 -- Proceeds from Issuance of Common Stock 361 290 252 Cash Dividends Paid (1,139) (1,011) (972) Cash in Lieu of Fractional Shares (4) (3) -- ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES (856) (762) (807) ------- ------- ------- Decrease in Cash and Cash Equivalents 8 (40) (32) Cash and Cash Equivalents, January 1, 16 56 88 ------- ------- ------- Cash and Cash Equivalents, December 31, $ 8 $ 16 $ 56 ------- ------- -------
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 7, 1998 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, 1997, there were 760 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note S- Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price in December 1997 was $35.50 and in December 1996 was $20.95. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of May, 1997 and May, 1996 (see "Note T - Equity Transactions" in the "Notes to Consolidated Financial Statements"). 1996 High Low Cash Dividends Declared First Quarter $17.91 $16.32 $ 0.1542 Second Quarter 18.14 16.32 0.1619 Third Quarter 18.10 17.14 0.1619 Fourth Quarter 21.90 17.14 0.1619 -------- TOTAL $ 0.6399
1997 First Quarter $23.57 $21.19 $ 0.1714 Second Quarter 24.50 22.38 0.1700 Third Quarter 34.25 23.50 0.1800 Fourth Quarter 35.50 34.69 0.1800 -------- TOTAL $ 0.7014
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-KSB for the year ended December 31, 1997. FORM 10-KSB Shareholders, analysts and others seeking a copy of Form 10-KSB without charge (except for exhibits) or additional financial information about First Colonial Group, Inc. should send a written request to: Reid L. Heeren, Vice President First Colonial Group, Inc. 76 South Main Street Nazareth, PA 18064 MARKET MAKERS The following investment brokerage houses currently make a market in First Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Hopper, Soliday & Co., Inc.; Ryan, Beck & Co.; and Wheat First Securities, Inc. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16 (a) of the Exchange Act The information contained under the captions "Election Of Directors" and "Compliance with Section 16 (a) of the Securities i Exchange Act of 1934" in the Company's 1998 Proxy Statement and "Executive Officers of the Registrant" in Appendix A to Part I of this Form 10-KSB is incorporated herein by reference therefrom. Item 10. Executive Compensation The information contained under the caption "Executive Compensation" in the Company's 1998 Proxy Statement is incorporated herein by reference therefrom. Item 11. Security Ownership of Certain Beneficial Owners and Management The information contained under the caption "Voting Securities and Principal Holders Thereof" in the Company's 1998 Proxy Statement is incorporated herein by reference therefrom. Item 12. Certain Relationships and Related Transactions The information contained under the caption "Certain Relationships and Related Transactions" in the Company's 1997 Proxy Statement is incorporated herein by reference therefrom. PART IV Item 13. Exhibits 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 7, Financial Statements". Report of Independent Certified Public Accountants Consolidated Balance Sheets for the Years Ended 12/31/97 and 12/31/96 Consolidated Statements of Income for the Years Ended 12/31/97, 12/31/96 and 12/31/95 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended 12/31/97, 12/31/96 and 12/31/95 Consolidated Statements of Cash Flows for the Years Ended 12/31/97, 12/31/96 and 12/31/95 Notes to Consolidated Financial Statements 2. Exhibits: Number Title 3.1 (7) Restated Articles of Incorporation of the Company, as amended. 3.2 (7) Bylaws of the Company, as amended. 4.1 (1) Specimen Common Stock Certificate of the Company. *10.1 (1) Deferred Compensation Plan for Directors. 10.2 Intentionally omitted. *10.3 (1) Form of Executive Benefit Program Agreement. *10.4 (6) Employee Stock Ownership Plan. 10.5 (1) Loan Agreement (including Exhibits thereto), dated October 5, 1984, by and between the Company and Commonwealth Bank and Trust Company, N.A. *10.6 (3) First Colonial Group, Inc. Stock Option Plan. 10.7 (2) Loan Agreement, dated July 17, 1987, by and between the Company and Commonwealth Bank and Trust Company, N.A. *10.8 (8) Restated Optional Deferred Salary Plan (401(k)). *10.9(10) 1994 Stock Option Plan for Non-Employee Directors, as amended *10.10(9) Severance Agreement dated July 19, 1994 by and between the Bank and S. Eric Beattie *10.10.1(12 Amendment No. 1 to Severance Agreement by and between the Board and S. Eric Beattie *10.11(9) Severance Agreement dated July 19, 1994 by and between the Bank and Reid L. Heeren Number Title *10.11.1(12) Amendment No. 1 to Severance Agreement by and between the Board and Reid L. Heeren *10.12 (9) Severance agreement dated July 19, 1994 by and between the Bank and Arthur Williams *10.12.112) Amendment No. 1 to Severance Agreement by and between the Board and Arthur Williams *10.13 (9) Severance dated July 19, 1994 by and between the Bank and Gerald E. Kemmerer *10.14 (10) Amendment No. 1 dated September 27, 1994 to the Bank's Employee Stock Ownership Plan *10.15 (10) Amendment No. 1 dated September 22, 1994 to the Optional Deferred Salary Plan (401K) *10.16 (11) Amendment Number 1 to the 1994 Stock Option Plan for Non-Employee Directors *10.17 (11) 1996 Employee Stock Option Plan *10.18 Severance Agreement dated September 22, 1997 by and between the Board and Tomas J. Bamberger 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. (b) Reports on Form 8-K No reports on Form 8-K were filed in the fourth quarter of the year ended December 31, 1997. 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, 1998 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/ John J. Schlamp JOHN J. SCHLAMP Chairman of the Board and Director March 30, 1998 By: /s/ S. Eric Beattie S. ERIC BEATTIE President, Chief Executive Officer and Director (Principal Executive Officer) March 30, 1998 By: /s/ Reid L. Heeren REID L. HEEREN Executive Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 30, 1998 By: /s/ Robert J. Bergren ROBERT J. BERGREN Director March 30, 1998 By: /s/ Gordon Mowrer GORDON MOWRER Director March 30, 1998 By: /s/ Daniel B. Mulholland DANIEL B. MULHOLLAND Director March 30, 1998 By: /s/ Robert C. Nagel ROBERT C. NAGEL Director March 30, 1998 By: /s/ Charles J. Peischl CHARLES J. PEISCHL, ESQUIRE Director March 30, 1998 By: /s/ Richard Stevens RICHARD STEVENS Director March 30, 1998 By: /s/ Maria Zumas Thulin MARIA ZUMAS THULIN Director March 30, 1998 EX-10.10.1 2 AMEND TO SEVERANCE AGREEMENT FOR S. ERIC BEATTIE Exhibit 10.10.1 AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994 BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND S. ERIC BEATTIE Reference is made to a Severance Agreement dated as of July 19, 1994 by and between Nazareth National Bank and Trust Co. and S. Eric Beattie (the "Severance Agreement"). Section 1 of the Severance Agreement provides that the Severance Agreement will continue until the earliest of certain dates set forth therein, and clause (e) of Section 1 states as follows: "(e) three years from the date hereof." Clause (e) of Section 1 of the Severance Agreement is hereby amended to read in full as follows: "(e) December 31, 2000." In all other respects the Severance Agreement shall continue in full force and effect. The parties intend to be legally bound hereby. NAZARETH NATIONAL BANK & TRUST CO. (Corporate Seal) BY: /s/ John J. Schlamp ATTEST: /s/ Judith S. Files Witness: /s/ Judith S. Files /s/ S. Eric Beattie (Seal) S. ERIC BEATTIE FIRST COLONIAL GROUP, INC., a Pennsylvania Corporation, hereby consents to this Amendment No. 1. FIRST COLONIAL GROUP, INC. BY: /s/ John J. Schlamp ATTEST: /s/ Judith S. Files EX-10.11.1 3 AMEND TO SEVERANCE AGREEMENT FOR REID L. HEEREN Exhibit 10.11.1 AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994 BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND REID L. HEEREN Reference is made to a Severance Agreement dated as of July 19, 1994 by and between Nazareth National Bank and Trust Co. and Reid L. Heeren (the "Severance Agreement"). Section 1 of the Severance Agreement provides that the Severance Agreement will continue until the earliest of certain dates set forth therein, and clause (e) of Section 1 states as follows: "(e) three years from the date hereof." Clause (e) of Section 1 of the Severance Agreement is hereby amended to read in full as follows: "(e) December 31, 2000." In all other respects the Severance Agreement shall continue in full force and effect. The parties intend to be legally bound hereby. NAZARETH NATIONAL BANK & TRUST CO. (Corporate Seal) BY: /s/ S. Eric Beattie ATTEST: /s/ Judith S. Files Witness: /s/ Judith S. Files /s/ Reid L. Heeren (Seal) REID L. HEEREN EX-10.12.1 4 AMEND TO SEVERANCE AGREEMENT FOR ARTHUR WILLIAMS Exhibit 10.12.1 AMENDMENT NO. 1 TO SEVERANCE AGREEMENT DATED AS OF JULY 19, 1994 BETWEEN NAZARETH NATIONAL BANK & TRUST CO. AND ARTHUR WILLIAMS Reference is made to a Severance Agreement dated as of July 19, 1994 by and between Nazareth National Bank and Trust Co. and Arthur Williams (the "Severance Agreement"). Section 1 of the Severance Agreement provides that the Severance Agreement will continue until the earliest of certain dates set forth therein, and clause (e) of Section 1 states as follows: "(e) three years from the date hereof." Clause (e) of Section 1 of the Severance Agreement is hereby amended to read in full as follows: "(e) December 31, 2000." In all other respects the Severance Agreement shall continue in full force and effect. The parties intend to be legally bound hereby. NAZARETH NATIONAL BANK & TRUST CO. (Corporate Seal) BY: /s/ S. Eric Beattie ATTEST: /s/ Judith S. Files Witness: /s/ Judith S. Files /s/ Arthur Williams (Seal) ARTHUR WILLIAMS EX-10.18 5 SEVERAGE AGREEMENT FOR TOMAS J. BAMBERGER Exhibit 10.18 SEVERANCE AGREEMENT Agreement made this 22nd day of September 1997, by and between Nazareth National Bank and Trust Company, a banking association organized under the laws of the United States ("Bank") and Tomas J. Bamberger, an individual ("Employee"). BACKGROUND Employee is currently employed by the Bank in the position of Executive Vice President and Chief Lending Officer. In consideration of Employee's past, present and future services to the Bank, the Bank desires to provide for the payment of certain compensation and other benefits to Employee upon the occurrence of certain events, all as more fully set forth below. In consideration of the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Term. This Agreement shall continue for a period beginning on the day hereof and ending on the earliest of the following dates (the "Term"): (a) the date Employee dies or becomes permanently disabled (i.e., upon his failure to render services of the character which he had previously rendered to the Bank, because of his physical or mental illness or other incapacity beyond his control for a continuous period of six months or for shorter periods aggregating six months in any twelve month period); (b) termination of Employee's employment with the Bank for cause (as hereinafter defined); (c) mutual agreement of the Bank and Employee; (d) subject to Section 2 hereof, termination by Employee of Employee's employment with the Bank by resignation or otherwise; or (e) December 31, 2000. In the event the Employee's employment with the Bank is terminated during the Term other than as set forth in Section 2 hereof, the Employee shall have no rights or benefits under this Agreement, but shall be entitled to any other rights or benefits to which he or she might otherwise be entitled to. For purposes of this Agreement, the term "cause" shall mean (i) conviction of Employee for any felony, fraud or embezzlement or (ii) Employee failing or refusing to comply with the written policies or directives of the Bank's Board of Directors or the Employee being guilty of misconduct in connection with the performance of his duties for the Bank and the Employee fails to cure such non-compliance or misconduct within twenty days after receiving written notice from the Bank's Board of Directors specifying such non-compliance or misconduct. 2. Termination. If during the Term hereof, the Employee's employment with the Bank is terminated as set forth below, the Bank will pay to Employee the amount set forth in Section 3 hereof and Employee shall be entitled to the benefits set forth in Section 4 hereof: (a) the Bank terminates Employee's employment with the Bank without cause; or (b) the Employee terminates Employee's employment with the Bank due to the fact that the nature and scope of Employee's duties and authority or his responsibilities with the Bank or the surviving or acquiring person are materially reduced to a level below that which he enjoys on the date hereof, his then current base annual salary is materially reduced to a level below that which he enjoys on the date hereof, the fringe benefits which the Bank provides Employee on the date hereof are materially reduced, Employee's position or title with the Bank or the surviving or acquiring person is materially reduced from his current position or title with the Bank, or without Employee's consent, Employee's principal place of employment with the Bank is changed to a location greater than eighty miles from his current principal place of employment with the Bank, provided, however, that for any termination by Employee under this clause (b) the Employee shall have first given Bank ten (10) days written notice of his intention to termination his employment pursuant to this clause (ii), specifying the reason(s) for such termination, and provided further, that the Bank shall not have cured or remedied the reason(s) specified in such notice prior to the expiration of ten (10) days after receipt of such written notice. 3. Termination Payments to Employee. Commencing not later than 30 days after the date Employee's employment with the Bank is terminated pursuant to Section 2 hereof (the "Termination Date") and subject to Employee's compliance with Section 8 hereof, the Bank shall pay compensation to Employee for a one year period following the Termination Date (the "Compensation Period") at a per annum rate equal to 100% of Employee's "base annual salary" on the Termination Date. For purposes of this Agreement, the term "base annual salary" shall mean the Employee's annual compensation rate on the Termination Date exclusive of cash bonuses and payments under the Bank's Annual Incentive Bonus Plan. The Bank agrees that it will make the payments due under this Section 3 on the first day of each month following the Termination Date in an amount equal to 1/12 of 100% of Employee's base annual salary on the Termination Date. Such payments to Employee shall be reduced each month by the sum of the following: (a) by the amount of any pension or annuity benefits Employee receives under the Bank's Defined Benefit Pension Plan as the same shall be amended from time to time, if Employee had retired at age 65 (regardless of when he actually retired) and had elected the single life annuity benefit (regardless of the benefit he actually elected), and (b)in the event Employee commences employment within the Compensation Period, by the amount of base annual salary to which he is then entitled by virtue of his new employment. The intent of this paragraph is that the sum of payments made under this Section 3 in any year, when added to payments received under the Bank's Defined Benefit Pension Plan and base annual salary received by virtue of other employment, will not exceed the Employee's base annual salary on the Termination Date. The Employee covenants and agrees that upon the termination of the Employee's employment with the Bank, the Employee shall use his best efforts to secure new employment. 4. Other Benefits. In addition to the compensation set forth in Section 3 hereof, Employee shall be entitled to the following benefits from the Bank: (a) for a period of one year following the Termination Date, reimbursement for all reasonable expenses incurred by Employee in connection with the search for new employment, including, without limitation, those of a placement agency or service; provided, however, in no event shall the Bank be obligated to reimburse Employee hereunder in excess of 1/3 of his base annual salary on the Termination Date. (b) for a period of one year following the Termination Date, reimbursement for all reasonable relocation expenses incurred by Employee in connection with securing new employment; provided, however, in no event shall the Bank be obligated to reimburse Employee hereunder in excess of 1/3 of his base annual salary on the Termination Date. (c) for a period of one year following the Termination Date, Employee shall be entitled to participate in the following programs of the Bank: (i) All medical, hospitalization and life insurance benefits shall be continued for the Compensation Period except that should subsequent employment be accepted during the Compensation Period, continuation of any medical, hospitalization and life insurance benefits will be offset by coverages provided through the Employee's subsequent employer. (ii) If permitted under the terms thereof, Employee will remain a participant under the Bank's Defined Benefit Pension Plan, however, benefits will be actuarially reduced based upon the number of years remaining until Employee's normal retirement date had he remained an employee of the Bank. 5. Withholding. The Bank may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 6. Source of Payment. All payments provided under this Agreement shall be paid in cash from the general funds of the Bank. No special or separate fund shall be required to be established by the Bank and the Employee shall have no right, title or interest whatsoever in or to any investment which the Bank may make to aid the Bank in meeting its obligations hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Bank and Employee or any other person. 7. (a) Nonassignability. Neither this Agreement nor any right or interest hereunder shall be assignable by Employee or his legal representatives without the Bank's prior written consent. (b) Attachment. Except as required by law, the right to receive payments under this Agreement shall not be subject of anticipation, sale, encumbrance, charge, levy, or similar process or assignment by operation of law. 8. Confidentiality and Non-Competition. All payments to Employee under this Agreement shall be subject to Employee's compliance with the provisions of this Section 8. If Employee fails to comply with such provisions, his right to any future payments under this Agreement shall terminate and the Bank's obligations under this Agreement to make such payments and provide such benefits shall cease. (a) Employee covenants and agrees that he will not, during the term of his employment and at any time thereafter, except with the express prior written consent of the Bank or pursuant to the lawful order of any judicial or administrative agency of government, directly or indirectly, disclose, communicate or divulge to any person, or use for the benefit of any person, any knowledge or information with respect to the conduct or details of the Bank's business which he, acting reasonably, believes or should believe to be of a confidential nature and the disclosure of which not to be in the Bank's interest. (b) Employee covenants and agrees that he will not, during the term of his employment and for a period of one year thereafter, except with the express prior written consent of the Bank, directly or indirectly, whether as employee, employer, owner, partner, consultant, agent, director, officer, shareholder or in any other capacity, engage in or assist any person to engage in any act or action which he, acting reasonably, believes or should believe would be harmful or inimical to the interests of the Bank. (c) Employee covenants and agrees that he will not, during the term of his employment and for a period of one year thereafter, except with the express prior written consent of the Bank, in any capacity (including, but not limited to, owner, partner, shareholder, consultant, agent, employee, employer, officer, director or otherwise), directly or indirectly, for his own account or for the benefit of any person, engage or participate in or otherwise be connected with any commercial bank which has its principal office in either Northampton or Lehigh Counties, Pennsylvania or Warren County, New Jersey except that the foregoing shall not prohibit Employee from owning as a shareholder less than l% of the outstanding stock of an issuer whose stock is publicly traded. (d) The parties agree that any breach by Employee of any of the covenants or agreements contained in this Section 8 will result in irreparable injury to the Bank for which money damages could not adequately compensate the Bank and therefore, in the event of any such breach, the Bank shall be entitled (in addition to any other rights and remedies which it may have at law or in equity) to have an injunction issued by any competent court enjoining and restraining Employee and/or any other person involved therein from continuing such breach. The existence of any claim or cause of action which Employee may have against the Bank or any other person (other than a claim for the Bank's breach of this Agreement for failure to make payments hereunder) shall not constitute a defense or bar to the enforcement of such covenants. In the event of an alleged breach by Employee of any of the covenants or agreements contained in this Section 8, the Bank shall continue any and all of the payments due Employee under this Agreement until such time as a court shall enter a final and unappealable order finding such a breach; provided, however, that the foregoing shall not preclude a court from ordering Employee to repay such payments made to him for the period after the breach is determined to have occurred or from ordering that payments hereunder be permanently terminated in the event of a material and willful breach. (e) If any portion of the covenants or agreements contained in this Section 8, or the application thereof, is construed to be invalid or unenforceable, the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions to the fullest extent possible. If any covenant or agreement in this Section 8 is held unenforceable because of the area covered, the duration thereof, or the scope thereof, then the court making such deter mination shall have the power to reduce the area and/or duration and/or limit the scope thereof, and the covenant or agreement shall then be enforceable in its reduced form. (f) For purposes of this Section 8, the term "the Bank" shall include the Bank, any successor to the Bank under Section 9 hereof, and all present and future direct and indirect subsidiaries and affiliates of the Bank. 9. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which may acquire, directly or indirectly, by merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Bank, and shall otherwise inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. Nothing in the Agreement shall preclude the Bank from consolidating or merging into or with or transferring all or substantially all of its assets to another person. In that event, such other person shall assume this Agreement and all obligations of the Bank hereunder. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Bank" as used herein, shall mean such other person and this Agreement shall continue in full force and effect. 10. Waivers Not to be Continued. Any waiver by a party of any breach of this Agreement by another party shall not be construed as a continuing waiver or as a consent to any subsequent breach by the other party. 11. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other address as either party may designate by like notice: If to Employee, to: Tomas J. Bamberger 510 East Station Avenue Coopersburg, Pennsylvania 18036 If to the Bank, to: Nazareth National Bank and Trust Company 76 South Main Street Nazareth, Pennsylvania 18064 Attn: Board of Directors and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice. 12. Applicable Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the Commonwealth of Pennsylvania with respect to contracts executed in and to be wholly performed therein. Bank and Employee consent to the exclusive jurisdiction of the Court of Common Pleas, Northampton County, Commonwealth of Pennsylvania and the United States District Court for the Eastern District of Pennsylvania in any and all actions arising hereunder and irrevoc ably consent to service of process as set forth in Section 11 hereof. 13. General Provisions. (a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior agreements between the parties. No amendment, waiver or termination of any of the provisions hereof shall be effective unless in writing and signed by the party against whom it is sought to be enforced. Any written amendment, waiver or termination hereof executed by the Bank and Employee shall be binding upon them and upon all other persons, without the necessity of securing the consent of any other person and no person shall be deemed to be a third party beneficiary under this Agreement. (b) This Agreement shall not limit or infringe upon the right of the Bank to terminate the employment of Employee at any time for any reason, nor upon the right of Employee to terminate his employment with the Bank. (c) The term "person" as used in this Agreement means a natural person, joint venture, corporation, sole proprietorship, trust, estate, partnership, cooperative, association, non-profit organization or any other legally cognizable entity. (d) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same Agreement. (e) No failure on the part of any party hereto to exercise and no delay in exercising any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other rights, power or remedy. (f) The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof. (g) Nothing contained herein shall be construed to require the Bank to violate applicable law, including, but not limited to, applicable banking laws and regulations, and all obligations of the Bank under this Agreement shall be deemed to be qualified accordingly. ATTEST: NAZARETH NATIONAL BANK AND TRUST COMPANY By:/s/ Judith S. Files By:/s/ S. Eric Beattie , Secretary S. Eric Beattie, President Witness: /s/ Reid L. Heeren /s/ Tomas J. Bamberger (SEAL) Tomas J. Bamberger EX-23.1 6 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 9, 1998 accompanying the consolidated financial statements included in the 1997 Annual Report to Shareholders which is incorporated by reference in the Annual Report of First Colonial Group, Inc. and Subsidiaries on Form 10-KSB for the year ended December 31, 1997. We hereby consent to the incorporation by reference of said reporting the Registration Statements of First colonial Group, Inc. and Subsidiaries on Form S-3 (File No. 33-21126, effective July 6, 1989) and on Form S-8 (File No. 33-84400, effective September 27, 1994). /S/ GRANT THORNTON Philadelphia, Pennsylvania March 25, 1998 EX-27 7 FDS --
9 0000714719 FIRST COLONIAL GROUP 1,000 12-MOS DEC-31-1997 DEC-31-1997 12,629 395 2,200 0 73,024 17,756 17,946 229,587 2,664 346,738 282,255 8,804 6,932 18,390 0 0 8,277 22,080 346,738 19,943 5,429 72 25,444 9,312 10,831 14,613 605 601 13,252 4,579 3,283 0 0 3,283 2.02 2.02 4.79 813 802 0 0 2,532 570 97 2,664 2,165 0 499
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