-----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, SAQrw4xe/K4WmPYM2UjJ0OloQ3jfasBwKnfIp5iyCtjZZ919poRCtuVjKyl+cJQ0 sQ37DBOgbm20heVhtVzkhQ== 0000714719-99-000010.txt : 19990517 0000714719-99-000010.hdr.sgml : 19990517 ACCESSION NUMBER: 0000714719-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-11526 FILM NUMBER: 99621885 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 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------------------ (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No. 0-11526 ----------------------------------------------------- FIRST COLONIAL GROUP, INC. - ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-2228154 - ---------------------------------------- ------------------------- (STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) (IDENTIFICATION NO.) 76 S. MAIN ST., NAZARETH, PA 18064 - ------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____ ------- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,745,725 SHARES OF COMMON STOCK, $5 PAR VALUE, OUTSTANDING ON MARCH 31, 1999. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1 - Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Income 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3 - Quantitative and Qualitative Discussion About 27 Market Risk PART II - OTHER INFORMATION ITEM 5 - Other Information 31 ITEM 6 - Exhibits and Reports on Form 8-K 31 SIGNATURES 32 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) March 31 Dec. 31 ASSETS 1999 1998 --------- --------- Cash and Due From Banks $ 12,038 $ 12,259 Federal Funds Sold -- 2,000 --------- --------- Total Cash and Cash Equivalents 12,038 14,259 Interest-Bearing Deposits With Banks 6,753 3,301 Investment Securities Held-to-Maturity 15,050 17,723 (Fair Value: Mar. 31, 1999 - $15,177; Dec. 31, 1998 - $17,920) Securities Available-for-Sale at Fair Value 117,925 98,389 Mortgage Loans Held-for-Sale 1,070 603 Total Loans, Net of Unearned Discount 209,717 212,437 LESS: Allowance for Possible Loan Losses (2,669) (2,691) --------- --------- Net Loans 207,048 209,746 Premises and Equipment, Net 6,663 6,885 Accrued Interest Income 2,460 2,542 Other Real Estate Owned 601 636 Other Assets 4,952 4,412 --------- --------- TOTAL ASSETS $ 374,560 $ 358,496 ========= ========= LIABILITIES Deposits Non-Interest Bearing Deposits $ 40,941 $ 38,885 Interest-Bearing Deposits 269,653 255,664 --------- --------- Total Deposits 310,594 294,549 Securities Sold Under Agreements to Repurchase 6,075 5,094 Long-Term Debt 20,000 20,000 Accrued Interest Payable 3,563 3,536 Other Liabilities 3,680 3,600 --------- --------- TOTAL LIABILITIES 343,912 326,779 --------- --------- SHAREHOLDERS' EQUITY Preferred Stock, Par Value $5.00 a share Authorized - 500,000 shares, none issued -- -- Common Stock, Par Value $5.00 a share Authorized - 10,000,000 shares Issued - 1,748,775 shares at Mar. 31, 1999 and 1,745,725 shares at Dec. 31, 1998 8,744 8,729 Additional Paid in Capital 13,935 13,873 Retained Earnings 9,487 9,023 Employee Stock Ownership Plan Debt (1,435) (435) Accumulated Other Comprehensive Income (83) 527 --------- --------- Total Shareholders' Equity 30,648 31,717 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,560 $ 358,496 ========= =========
See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited) Three Months Ended Mar. 31, Mar. 31, 1999 1998 INTEREST INCOME Interest and Fees on Loans $4,396 $4,913 Interest on Investment Securities Taxable 1,341 1,170 Tax-Exempt 388 259 Interest on Deposits with Banks and Federal Funds Sold 99 43 ------ ------ Total Interest Income 6,224 6,385 ------ ------ INTEREST EXPENSE Interest on Deposits 2,342 2,327 Interest on Short-Term Borrowings 46 72 Interest on Long-Term Debt 280 287 ------ ------ Total Interest Expense 2,668 2,686 ------ ------ NET INTEREST INCOME 3,556 3,699 Provision for Possible Loan Losses 125 112 ------ ------ Net Interest Income After Provision for Possible Loan Losses 3,431 3,587 ------ ------ OTHER INCOME Trust Revenue 266 211 Service Charges on Deposit Accounts 372 350 Investment Securities Gains, Net 216 100 Gain on Sale of Mortgage Loans 78 40 Other Operating Income 182 159 ------ ------ Total Other Income 1,114 860 ------ ------ OTHER EXPENSES Salaries and Employee Benefits 1,640 1,614 Net Occupancy and Equipment Expense 535 551 Other Operating Expenses 1,373 1,243 ------ ------ Total Other Expenses 3,548 3,408 ------ ------ Income Before Income Taxes 997 1,039 Applicable Income Taxes 212 271 ------ ------ NET INCOME $ 785 $ 768 ====== ====== PER SHARE DATA Basic Net Income $ 0.46 $ 0.45 Diluted Net Income $ 0.46 $ 0.45 Cash Dividends $ 0.19 $ 0.18
See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Dollars in Thousands) (Unaudited) --------------------------- Three Months Ended --------------------------- Mar. 31, Mar. 31, 1999 1998 ------ ----- Net Income $ 785 $ 768 Other Comprehensive Income, Net of Tax Unrealized gains (losses) on securities Unrealized gains (losses) arising in period (403) (73) Reclassification adjustment; gain included in net income (8) (78) ----- ----- Other Comprehensive Income (411) (151) ----- ----- Comprehensive Income $ 374 $ 617 ===== =====
Other comprehensive income is shown net of tax of $(187) and $5 for March 31, 1999 and March 31, 1998, respectively. See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Three Months Ended OPERATING ACTIVITIES March 31, March 31, 1999 1998 -------- -------- Net Income $785 $768 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Possible Loan Losses 125 112 Depreciation and Amortization 255 243 Amortization of Security Discounts (36) (20) Amortization of Security Premiums 59 28 Amortization of Deferred Fees on Loans 1 (167) Mortgage Loans Originated for Sale (10,266) (19,929) Mortgage Loan Sales 9,799 19,281 Gain on Sale of Mortgage Loans (78) (40) Investment Securities Gains, Net (801) (100) Changes in Assets and Liabilities: (Increase) Decrease in Accrued Interest Income 82 (289) Increase (Decrease) in Accrued Interest Payable 27 (105) Net Increase in Other Assets (617) (846) Net Increase in Other Liabilities 440 586 ------- -------- Net Cash Used In Operating Activities (225) (478) ------- -------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 5,090 6,542 Proceeds from Maturities of Securities Held-to-Maturity 2,662 3,523 Proceeds from Sales of Securities Available-for-Sale 8,503 1,430 Proceeds from Sales of Securities Held-to-Maturity --- 248 Proceeds from Sales of Securities Held-to-Maturity Purchase of Securities Available-for-Sale (33,265) (18,423) Purchase of Securities Held-to-Maturity --- (6,540) Net Increase in Interest Bearing Deposits With Banks (3,452) (3,816) Net Decrease in Loans 2,568 11,935 Purchase of Premises and Equipment, Net (1) (63) Proceeds from Sale of Other Real Estate Owned 117 90 ------- ------- Net Cash Used In Investing Activities (17,778) (5,074) ------- ------- FINANCING ACTIVITIES Net Increase in Interest and Non-Interest Bearing Demand Deposits and Savings Accounts 2,654 7,218 Net Increase in Certificates of Deposits 13,391 902 Proceeds from Sale of Treasury Stock --- 84 Net Increase (Decrease) in Repurchase Agreements 981 (4,260) Net Increase in ESOP Debt (1,000) --- Proceeds from Issuance of Stock 77 --- Cash Dividends Paid (321) (310) ------- ------ Net Cash Provided by Financing Activities 15,782 3,634 ------- ------ Decrease in Cash and Cash Equivalents (2,221) (1,918) Cash and Cash Equivalents, January 1 14,259 14,829 ------- ------ Cash and Cash Equivalents, March 31, $12,038 $12,911 ======= =======
See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - GENERAL The accompanying financial statements, footnotes and discussion should be read in conjunction with the audited financial statements, footnotes, and discussion contained in the Company's Annual Report for the year ended December 31, 1998. The financial information presented herein is unaudited; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the unaudited financial information have been made. The results for the three ended March 31, 1999 are not necessarily indicative of results to be expected for the full year or any other interim period. NOTE B - SUBSIDIARIES First Colonial Group, Inc. (the Company) is a Pennsylvania business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956. The Company has two wholly-owned subsidiaries, Nazareth National Bank and Trust Company (the "Bank") founded in 1897 and First C. G. Company, Inc. founded in 1986. NOTE C - INVESTMENT CONSIDERATIONS In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain investment considerations more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which can be obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main Street, Nazareth, PA 18064. NOTE D - FORWARD LOOKING STATEMENTS The information contained in this Quarterly Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, the discussion in "Item 3 - - Quantitative and Qualitative Discussion About Market Risk", statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements which are not historical facts or as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in this Quarterly Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). NOTE E - CASH DIVIDENDS On February 26, 1999 the Company paid its 1999 first quarter dividend on its common stock of $.19 per share to shareholders of record on February 11, 1999. NOTE F - STOCK DIVIDEND On June 25, 1998 the Company paid a 5% stock dividend to shareholders of record on June 5, 1998. Fractional shares were paid in cash based on the closing price of $36.00 per share on the record date. Net income per share and average shares outstanding have been restated to reflect the 5% stock dividend. NOTE G - EARNINGS PER SHARE 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 disclosures of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted earnings per share are calculated as follows: For the Three Months Ended March 31, Average Income Shares Per Share (numerator) (denominator) Amount 1999 Net Income $ 785 Basic Earnings Per Share Income Available to Common Shareholders $ 785 1,705,578 $ 0.46 Effect of Dilutive Securities Stock Options 5,418 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 785 1,710,996 $ 0.46 ------ --------- ------- 1998 Net Income $ 768 Basic Earnings Per Share Income Available to Common Shareholders $ 768 1,715,325 $ 0.45 Effect of Dilutive Securities Stock Options 7,739 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 768 1,723,064 $ 0.45 ------ --------- -------
Average common shares outstanding in the three month period ending March 31, 1999 and 1998 do not include 41,349 and 23,136, respectively of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per share information have been restated to reflect the 5% stock dividend of June 1998. NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows: Three Month Period Ended March 31, 1999 1998 ---------- ---------- Beginning Balance $2,691,000 $2,664,000 Additions Provision for loan losses charged to operating expenses 125,000 112,000 Recoveries of loans 18,000 24,000 ---------- ---------- total Additions 143,000 136,000 Deductions Loans charged off 165,000 126,000 ---------- ---------- Ending Balance $2,669,000 $2,674,000
NOTE I - IMPAIRED LOANS The Company measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, impairment may be measured based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued on such loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation for credit loses related to loan impairment are as follows: At March 31, 1999 1998 -------- ---------- Principal amount of impaired loan $501,000 $1,428,000 Deferred loan costs --- 1,000 -------- ---------- 501,000 1,429,000 Less valuation allowance 173,000 504,000 -------- ---------- $328,000 $926,000
On January 1, 1995 a valuation for credit losses related to impaired loans was established. The activity in this allowance account for the quarter ending March 31, 1999 is as follows: 1999 1998 -------- -------- Valuation allowance at January 1, $303,000 $138,000 Provision for loan impairment --- 112,000 Transfer from Unallocated Allowance (112,000) 279,000 Direct charge-offs 18,000 25,000 -------- -------- Valuation allowance at March 31, $173,000 $504,000
Total cash collected on impaired loans during the three month period ended March 31, 1999 was $45,000, of which $32,000 was credited to the principal balance outstanding on such loans and $13,000 was recognized as interest income. Interest that would have been accrued on impaired loans during the first three months of 1999 was $14,000. Interest income recognized in the first three months of 1999 was $6,224,000. The valuation allowance for impaired loans of $173,000 at March 31, 1999 is included in the "Allowance for Possible Loan Losses" which amounts to $2,669,000 at March 31, 1999. There was no provision for loan impairment for the period ended March 31, 1999. NOTE J - REPORTING OF COMPREHENSIVE INCOME On January 1, 1998, the Corporation adopted the Financial Accounting Standards Board issued (SFAS) No. 130, "Reporting Comprehensive Income", which requires presenting a complete set of financial statements to include details of comprehensive income that arises in the reporting period. Comprehensive income consists of net income or loss for the current period and other comprehensive income income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. Other comprehensive income includes, for example, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investment securities. The Corporation has elected to report comprehensive income on a separate scheduled titled "Statement of Comprehensive Income". NOTE K - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 established standards for the method that public business enterprises report selected information regarding operating segments in financial reports issued to shareholders. The disclosure information required consists of a measure of segment profit and loss, certain revenue and expense items and segment assets based upon specified quantitative thresholds, as it is reported internally to the chief operating decision maker on both an interim and annual basis. The statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Corporation consists of one segment: community banking. NOTE L - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. The Company is currently reviewing the provisions of SFAS No. 133. NOTE M - COMMITMENTS AND CONTINGENCIES The Company has reserve $1.5 million against possible claims which may be asserted against the Bank in connection with certain pre-need funeral trusts which were allegedly directed by funeral directors to be invested in a private placement annuity issued by EA International Trust. In April, 1999, two funeral directors whose funds were invested in this annuity commenced suit against the Bank; if all funeral directors whose funds were invested in this annuity were to pursue claims, the Bank's maximum exposure would be approximately $5.5 million plus interest and costs. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. The Bank has discontinued its involvement in this annuity and is pursuing indemnification for some or all of these possible losses from its insurance carriers and from EA International Trust. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following financial review and analysis is of the financial condition and earnings performance of the Company and its wholly owned subsidiaries for the three month period ended March 31, 1999. The information contained in this Quarterly Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, the discussion in "Item 3 - - Quantitative and Qualitative Discussion About Market Risk", statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements which are not historical facts or as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in this Quarterly Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain investment considerations more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which can be obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main Street, Nazareth, PA 18064. Liquidity and Capital Resources Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of liquidity are money market investments, securities available-for-sale, funds received from the repayment of loans, short-term borrowings and borrowings from the Federal Home Loan Bank. At March 31, 1999, cash, due from banks, Federal funds sold and interest bearing deposits with banks totaled $18,791,000, and securities maturing within one year totaled $5,361,000. At December 31, 1998, cash, due from banks, Federal funds sold and interest bearing deposits with banks, totaled $17,560,000, and securities maturing within one year were $4,493,000. Securities sold under an agreement to repurchase totaled $6,075,000 at March 31, 1999 and $5,094,000 at December 31, 1998. The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The Bank had interest bearing demand deposits at the Federal Home Loan Bank of Pittsburgh in the amount of $6,480,000 at March 31, 1999 and $3,193,000 at December 31, 1998. These deposits are included in due from banks on the Company's financial statements. As a result of this relationship, the Company places most of its short-term funds at the Federal Home Loan Bank of Pittsburgh. There were no Federal funds sold at March 31, 1999. The Company has $2,000,000 in Federal funds sold at December 31, 1998. The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000 at March 31, 1999, subject to certain collateral requirements. The Bank had no short-term (overnight) borrowings against this line at March 31, 1999 or at December 31, 1998. The Bank had additional borrowings from the Federal Home Loan Bank at March 31, 1999 totaling $20,000,000 of which $8,000,000 is due in August 2000, $5,000,000 is due in December 2001 and $7,000,000 is due in October 2003. Cash flows for the three months ended March 31, 1999 consisted of cash used in investing activities of $17,778,000 and cash used by operating activities of $225,000 offset in part by cash provided by financing activities of $15,782,000 resulting in a decrease in cash and cash equivalents of $2,221,000. Cash used by operating activities was the result of mortgage loans originated for sale of $10,266,000 and an increase in other assets of $617,000, partially offset by mortgage loan sales of $9,799,000, net operating income of $785,000, an increase in other liabilities of $440,000, depreciation and amortization of $255,000 and a provision for possible loan losses of $125,000. Cash was used in investing activities for the purchase of securities available-for-sale of $33,265,000 and a net increase in interest-bearing deposits with banks of $3,452,000, partially offset by proceeds from sales of securities available-for-sale of $8,503,000, proceeds from maturities of securities available-for-sale and held-to-maturity of $5,090,000 and $2,662,000, respectively and a net decrease in loans of $2,568,000. Cash provided by financing activities consisted principally of an increase in certificates of deposit of $13,391,000, increases in interest and non-interest bearing demand deposits and savings accounts of $2,654,000 and an increase in repurchase agreements of $981,000, partially offset by an increase in ESOP debt of $1,000,000 and the payment of cash dividends of $321,000. The Company recognizes the importance of maintaining adequate capital levels to support sound, profitable growth and to encourage depositor and investor confidence. Shareholders' equity at March 31, 1999 was $30,648,000 as compared to $31,717,000 at December 31, 1998, for a decrease of $1,069,000, or 3.4%. This decrease was attributable to an increase of $1,000,000 in debt related to Employee Stock Ownership Plan, a decrease of $610,000 in the value of the securities available for sale (see discussion on "Investment Securities"), and the payment of cash dividends of $321,000, offset in part by net income for the first three months of 1999 of $785,000 and proceeds from the sale of common stock pursuant to the Dividend Reinvestment Plan of $77,000. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During the first three months of 1999, 3,050 shares of common stock were purchased from authorized and unissued shares at an average price of $25.29 per share for proceeds of approximately $77,000. The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital of at least 3%to 5% of average assets (leverage ratio). Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying debt instruments, and the allowance for possible loan losses. Management believes, that as of March 31, 1999, the Company and the Bank met all capital adequacy requirements to which they were subject. Capital Ratios To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At March 31, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,025 16.55% $15,964 8.00% --- --- Bank $29,845 15.03% $15,886 8.00% $19,857 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $30,475 15.27% $ 7,983 4.00% --- --- Bank $29,961 13.58% $ 7,930 4.00% $11,912 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $30,475 8.37% $14,564 4.00% --- --- Bank $26,961 7.47% $14,437 4.00% $18,046 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Adequacy Action (Dollars in Thousands) At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- --- Bank $29,450 15.02% $15,684 8.00% $19,605 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- --- Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- --- Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
The Company is not aware of any trends, events or uncertainties that will have a material effect on the Company's liquidity, capital resources or operations, except for higher interest rates which could cause deposit disintermediation and an increase in interest expense and the possibility of inflationary trends, the results of which cannot be determined at this time. The Company is not under any agreement with the regulatory authorities nor is it aware of any current recommendation by regulatory authorities which, if they were implemented, would have a material adverse effect on liquidity, capital resources, or the operations of the Company. Assets and Liabilities Total assets at March 31, 1999 were $374,560,000, representing an increase of 4.5% over total assets of $358,496,000 at December 31, 1998. Deposits increased by $16,045,000 or 5.4% from $294,549,000 on December 31, 1998 to $310,594,000 on March 31, 1999. Contributing to this increase were increases in certificates of deposit of $13,391,000, non-interest bearing checking deposits of $2,056,000 and savings and money market deposits of $865,000, partially offset by a decline in interest bearing checking deposits of $267,000. Loans outstanding at March 31, 1999 were $209,717,000 as compared to $212,437,000 at December 31, 1998. This is a decrease of $2,720,000 or 1.3%. The decline in loans was primarily the result of a decrease of $3,954,000 or 4.9% in residential real estate loans. During the first three months of 1999, $9,800,000 of residential real estate loans were sold. Most of the loans sold were fixed rate with 30 or 15 year maturities. These loans were sold to reduce the Company's interest-rate risk and to provide liquidity for future lending opportunities. Most of the loans sold were originated in the first quarter of 1999. The Bank continues to service all of these loans. There were $1,070,000 and $603,000 of residential real estate loans identified as held-for-sale at March 31, 1999 and December 31, 1998, respectively. Additionally, the net decrease in loans during the first three months of 1999 included a $854,000 or 1.4% decrease in commercial loans partially offset by a $2,088,000 or 2.9% increase in consumer loans. The loan to deposit ratio was 67.5% at March 31, 1999 and 72.1% at December 31, 1998. Premises and equipment decreased by $222,000 to $6,663,000 at March 31, 1999 from $6,885,000 at December 31, 1998. The Company had long-term debt totaling $20,000,000 at March 31, 1999 and December 31, 1998 from the Federal Home Loan Bank of Pittsburgh. Of this amount $8,000,000 matures in August 2000, $5,000,000 matures in December 2001 and the remaining $7,000,000 matures on 2008. The interest rates associated with these loans are 5.89% fixed, 5.08% variable (at LIBOR plus 3 basis points) and 4.86% fixed to December 2003 at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, respectively. The loans are secured by the Bank's investment and residential real estate loans and securities. These funds were borrowed to improve liquidity and to fund loans. During the first quarter of 1999, the Company's Employee Stock Ownership Plan (ESOP) borrowed $1,000,000 from the Company's subsidiary, First C. G. Company, payable over twenty years with interest due quarterly and principal annually in October. The interest rate on this loan is at the Bank's prime rate (7.75% at March 31, 1999). The proceeds from this loan were used to purchase 35,500 shares of the Company's common stock. In the second quarter of 1998, the ESOP borrowed $500,000 from First C. G. Company. This loan is due in 2005 with interest due quarterly and principal annually in October. The interest rate on this loan is at the Bank's prime rate (7.75% at March 31, 1999 and December 31, 1998). The balance outstanding on these ESOP loans was $1,435,000 at March 31, 1999 and $435,000 at December 31, 1998. At March 31, 1999 and December 31, 1998 the Bank had no short-term borrowings from the Federal Home Loan Bank of Pittsburgh against a line of credit of $25,000,000. Results of Operations The net income for the three months ended March 31, 1999 was $785,000, a 17,000 or 2.2% increase compared to net income of $768,000 for the same period in 1998. The earnings improvement is attributable to an increase in total other income of $100,000 or 13.9%, exclusive of investment security gains of $216,000 and gains on the sale of mortgages of $78,000 and a decrease in Federal income taxes of $59,000 or 21.8% partially offset by a decrease in net interest income of $143,000 or 3.9%, an increase in other expenses of $140,000 or 4.1% and a $13,000 or 11.6% increase in the provision for possible loan losses. Basic earnings per share for the three months ended March 31, 1999 were $0.46 as compared to $0.45 for the corresponding period in 1998. Average shares outstanding during this three month period were 1,710,996 in 1999 and 1,723,064 in 1998. Diluted earnings per share for the three month period ended March 31, 199 were $0.46 compared to $0.45 for the same period in 1998. Per share earnings and average shares outstanding have been restated to reflect the 5% stock dividend paid on June 25, 1998. (see Note F) Net Interest Income The "Rate/Volume Analysis" table segregates, in detail, the major factors that contributed to the changes in net interest income, for the quarter ended March 31, 1999 as compared to the quarter ended March 31, 1998, into amounts attributable to both rate and volume variances. In calculating the variances, the changes were first segregated into (1) changes in volume (change in volume times the old rate), (2) changes in rate (changes in rate times the old volume) and (3) changes in rate/volume (changes in rate times the change in volume). The changes in rate/volume have been allocated in their entirety to the change in rates. The interest income included in the "Rate/Volume Analysis" table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. Non accruing loans have been used in the daily average balances to determine changes in interest income due to volume. Loan fees included in the interest income calculation are not material. Net interest income amounted to $3,556,000 for the three months ended March 31, 1999 as compared to $3,699,000 for the three months ended March 31, 1998, a decrease of $143,000 or 4.0%. This decrease is the result of lower loan volumes combined with a smaller decline in interest expense. Total taxable-equivalent interest income declined $93,000 primarily the result of the lower volumes in the loan category. Taxable equivalent income from loans for the first quarter declined $517,000 or 10.5% over the same period in 1998. This was comprised of a $1,352,000 decrease due to volume partially offset by an $835,000 increase as a result of an increase in rate/volume. Average year-to-date earning assets increased to $337,108,000 at March 31, 1999 from $322,528,000 at March 31, 1998, a 4.5% increase. Total interest expense declined $18,000 during the first three months of 1999, compared to the same period in 1998. This decline was principally the result of lower interest rates on deposit accounts and borrowed money. Interest expense attributed to time deposits increased $23,000 during the first three months of 1999, compared to the first three months of 1998. The increase in time deposit interest expense was due to a higher level of interest-bearing deposits. Partially offsetting this growth in interest expense were lower interest rates paid on all deposit accounts and borrowings as a result of repricing due to market conditions (see Item 3. - Quantitative and Qualitative Discussion About Market Risk). The following table sets forth a "Rate/Volume Analysis" which segregates in detail the major factors that contributed to the changes in net interest income for the three months ended March 31, 1999 compared to the same period in 1998. The interest income included in the table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. RATE/VOLUME ANALYSIS (Dollars in Thousands) (Unaudited) Three Months Ended March 31, 1999 Over / (Under) March 31, 1998 CHANGE DUE TO: TOTAL RATE VOLUME (Fully Taxable Equivalent) INTEREST INCOME Interest-Bearing Balances With Banks $ 57 $ (172) $ 229 Federal Funds Sold (1) (12) 11 Investment Securities 368 (1,194) 1,562 Loans Held for Sale 17 (25) 42 Loans (534) 860 (1,394) ------- ------- ------- Total Interest Income (93) (543) 450 ------- ------- ------- INTEREST EXPENSE Demand Deposits, Savings & Clubs (8) (52) 44 Time Deposits 23 (374) 397 Federal Funds Purchased and Securities (24) 29 (53) Sold Under Agreements to Repurchase Short-Term Borrowings (2) (2) -- Long-Term Borrowings (7) (108) 101 ------- ------- ------- Total Interest Expense (18) (507) 489 ------- ------- ------- Net Increase (Decrease) in Interest Income $ (75) $ (36) $ (39)
Other Income and Other Expenses Other income for the three months ended March 31, 1999 including service charges, trust fees, gains on the sale of mortgage loans and other miscellaneous income, but exclusive of securities gains or losses, was $898,000 as compared to $760,000 for the same period in 1998. This was an increase of $138,000 or 18.2%. The revenues from the Trust Department operations were $211,000 for the three months ended March 31, 1998 compared to $266,000 for the three months ended March 31, 1999, an increase of $55,000 or 26.1%. There were $78,000 in gains on the sale of mortgage loans for the three month period ended March 31, 1999 as compared to $40,000 for the same period in 1998, an increase of $38,000 or 95.0%. Total other expenses for the three month period ended March 31, 1999 increased by $140,000 or 4.1% to $3,548,000 over total other expenses for the same period in 1998 of $3,408,000. Included in this increase is a $26,000 or 1.6% increase in salary and benefit expenses which were $1,640,000 as compared to $1,614,000 in 1998. These increases are primarily due to general salary increases of approximately 4% and additional staff necessitated by current and planned future growth. Occupancy and equipment expenses were $535,000 for the three months ended March 31, 1999 and $551,000 for the three months ended March 31, 1998, a decrease of $16,000 or 2.9%. Other operating expenses for the three month period ended March 31, 1999 were $1,373,000, an increase of $130,000 or 10.5% over the $1,243,000 in other expenses for the same period in 1998. Investment Securities The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company had no trading securities at March 31, 1999 and December 31, 1998. Available-for-sale securities are carried at fair value with the net unrealized gains or losses reported in equity. The Company had $117,925,000 in available-for-sale securities at March 31, 1999 with a net unrealized loss of $83,000. At December 31, 1998 available-for-sale securities amounted to $98,389,000 with a net unrealized gain of $527,000. Held-to-maturity securities totaling $15,050,000 at March 31, 1999 are carried at cost. At December 31, 1998, the held-to-maturity securities totaled $17,723,000. The Company has the intent and ability to hold the held-to-maturity securities until maturity. The Company, at March 31, 1999, did not hold any securities identified as derivatives. Allowance and Provision for Possible Loan Losses The provision is based on management's analysis of the adequacy of the allowance for loan losses. In its evaluation, management considers past loan experience, overall characteristics of the loan portfolio, current economic conditions and other relevant factors. Management currently believes that the allowance is adequate to absorb known and inherent losses in the loan portfolio. Ultimately, however, the adequacy of the allowance is largely dependent upon economic conditions which are beyond the scope of management's control. For the first three months of 1999, the provision for loan losses was $125,000 compared to $112,000 for the same period in 1998. Net charge offs were $147,000 for the three months ended March 31, 1999 compared with $102,000 for the three months ended March 31, 1998. The ratio of the allowance for loan losses to total loans at March 31, 1999 was 1.27% compared to 1.27% at December 31, 1998. This was primarily the result of a decline in total loans to $209,717,000 at March 31, 1999 from $212,437,000 at December 31, 1998. This decline was the result of the sale of $9,800,000 of mortgage loans during the first three months of 1999. The allowance for possible loan losses at March 31, 1999 totaled $2,669,000, a decrease of $22,000 or 0.8% over the December 31, 1998 amount of $2,691,000. As provided by SFAS No. 114, as amended by SFAS No. 118, $173,000 of the Allowance for Possible Loan Losses is allocated to impaired loans at March 31, 1999 (See Note I "Impaired Loans"). Transactions in the allowance for loan losses are as follows: ALLOWANCE FOR LOAN LOSSES 1999 1998 ---------- ---------- Balance, January 1, $2,691,000 $2,664,000 Provision charged to Operating Expenses 125,000 112,000 Loans Charged Off (165,000) (126,000) Recoveries 18,000 24,000 ---------- ---------- Balance March 31, $2,669,000 $2,674,000
The following table sets forth an allocation of the allowance for loan losses by loan category: At March 31, 1999 - ----------------- Commercial $903,000 Residential Real Estate 140,000 Consumer 749,000 Unallocated 877,000 ---------- Total $2,669,000
Non-Performing Loans The following discussion relates to the Bank's non-performing loans which consist of those on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection effort, that the borrower's financial condition is such that the collection of interest is doubtful. The Company views these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Interest on these loans is recognized only when received. The following table shows the balance of non-performing loans for each of the periods indicated. Non performing assets (non accruing loans and loans past due over 90 days) were 1.08% of total loans at March 31, 1999 compared to 1.13% at March 31, 1998. The decrease in this ratio is the result of a $203,000 or 8.3% increase in non performing loans to $2,254,000 over the one year period ending March 31, 1999. The ratio of the allowance for loan losses to non performing assets was 118.4% at March 31, 1999 compared to 108.8% at March 31, 1998. Non accruing loans at March 31, 1999 of $1,096,000 decreased from March 31, 1998 level of $1,926,000. This $830,000 decrease was primarily the result of a commercial loan payoff of $225,000 and a commercial real estate foreclosure in the amount of $579,000. These loans are secured by commercial real estate. At the present time, management is of the opinion that these loans present a minimal amount of exposure to the bank. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and expected to be restored to a current status in the near future. As of March 31, 1999, loans past due 90 days or more and still accruing interest were $1,158,000 compared to $531,000 at March 31, 1998. The $627,000 increase in loans past due 90 days from March 31, 1998 to March 31, 1999 was the result of increases in mortgage and consumer loans past due 90 days or more of $492,000 and $191,000, respectively. This was offset in part by a decrease in commercial loans of $56,000. NON-PERFORMING LOANS March 31, December 31, March 31, 1999 1998 1998 Non-accrual loans on a cash basis $1,096,000 $1,245,000 $1,926,000 Non-accrual loans as a percentage of total loans 0.52% 0.59% 0.88% Accruing loans past due 90 days or more $1,158,000 $1,021,000 $ 531,000 Accruing loans past due 90 days or more as a percentage of total loans 0.55% 0.48% 0.24% Other Real Estate Owned from Foreclosed Property $ 601,000 $ 636,000 $ 194,000 Allowance for loan losses to nonperforming loans 118.40% 118.80% 108.83% Nonperforming assets to total loans 1.07% 1.07% 1.13% Allowance for loan losses to total loans 1.27% 1.27% 1.23%
There are no significant loans classified for regulatory purposes that have not been included in the above table of non-performing loans. The Company has no significant loans that qualify as "Troubled Debt Restructuring" as defined by the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 15 "Accounting for Debtors and Creditors for Troubled Debt Restructuring" at March 31, 1999. YEAR 2000 The Company has adopted a Year 2000 policy to address the "Year 2000" Issue concerning the inability of certain information systems and automated equipment to properly recognize and process dates containing the Year 2000 and beyond. If not corrected, these systems and equipment could produce inaccurate or unpredictable results commencing on January 1, 2000. The Company, similar to most financial services providers, is particularly vulnerable to the potential impact of the Year 2000 Issue due to the nature of financial information. Potential impacts to the Company may arise from software, computer hardware, and other equipment both within the Company's direct control and outside of the Company's ownership, yet with which the Company electronically or operationally interfaces. In order to address the Year 2000 Issue, the Company has developed and implemented a five phase compliance plan divided into the following major components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation. The Company has completed the first three phases of the plan for all of its mission-critical systems and is currently working on the final two phases. The Company has identified its mission-critical systems as those that affect the Company's ability to process banking transactions and its general accounting systems. Such systems include deposit, loan and trust accounting, check and deposit processing and branch teller equipment. The Company purchases most of its computer software from major outside providers of bank software. A significant component of the Year 2000 plan is to install the Year 2000 compliant software provided by these vendors and also to test these supplied systems. The Company's major software providers have informed the Company that, based on tests they have conducted and continue to conduct, they believe their respective systems to be Year 2000 compliant. In addition, the Company is conducting its own tests on these systems provided by vendors. The Company also has some internally generated programmed software. This software has been corrected for Year 2000 and is in final testing. The Company anticipates that all mission-critical systems will be tested by June 1999. The Company has reviewed the impact of Year 2000 on other equipment and systems such as heating, air conditioning, telecommunications, electric service, vaults, photocopiers, personal computers, printers and other equipment where necessary. Some of this equipment, such as personal computers, has been replaced. Other items such as vaults, heating, air conditioning, photocopiers and printers have been tested and found "not date sensitive". The Company's providers of telecommunications and electric service have been contacted. These providers have indicated they do not expect any interruption of service in the Year 2000. Other important segments of the Year 2000 plan are to identify those suppliers and customers whose possible lack of Year 2000 preparedness might expose the Company to financial loss. Included in this process was communications to all the Company's customers and identification of loan and deposit customers whose failure to address the Year 2000 Issue might impact their banking relationship. As a result of this communication, the Company has identified those customers who may be affected by the Year 2000. Risk factors have been assigned to these customers. The Company does not anticipate any significant loss as a result of these risks. The Company has initiated communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company has developed contingency plans to address any or all systems that, despite all testing, still do not operate correctly in the Year 2000. The contingency plans provide for manual and personal computer based systems to process checks, deposits and loan transactions. The Company will increase its inventories of the various required supplies, such as new account and loan forms, deposit withdrawal forms and other pre-printed forms, available at the Company's Main Office and branch offices. Alternative communications systems have been established and alternative power sources are being investigated. These plans will be finalized and tested during the first half of 1999. At this time, the Company cannot estimate the cost, if any, that might be required to implement such contingency plans. During the first quarter of 1999, the Company spent $30,000 on Year 2000 compliance matters. As of March 31, 1999, $881,000 has been spent on this project. These expenses are comprised of the replacement of branch teller and new account systems for $645,000, replacement of personal computers for $205,000, replacement of mortgage lending software for $19,000 and enhancements to banking and trust systems of $12,000. Additional expenses expected in 1999 include $80,000 for an alternative electric power system, $40,000 for replacing an automated teller machine, $25,000 for branch new account systems, $15,000 for check processing software and $50,000 for other banking systems. The expenses related to Year 2000 are financed by the general revenues of the Company and are included in the Company's other operating expenses in the Company's financial statement. The Company anticipates that its total Year 2000 project cost will not exceed $1,100,000. This estimated project cost is based upon currently available information. The aforementioned Year 2000 project cost estimate also may change as the Company progresses in its Year 2000 program and obtains additional information and conducts further testing. At this time, no significant projects have been delayed as a result of the Company's Year 2000 effort. Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams. The Federal banking agencies have highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The Federal banking agencies have been conducting Year 2000 compliance examinations. The failure to implement an adequate Year 2000 program can be identified as an unsafe and unsound banking practice. The Company and the Bank are subject to regulation and supervision by the Federal Reserve Bank and the Comptroller of the Currency which regularly conducts reviews of the safety and soundness of the Company's operations, including the Company's progress in becoming Year 2000 compliant. The regulatory agencies have established examination procedures which contain three categories of ratings: "Satisfactory", "Needs Improvement" and "Unsatisfactory". Institutions that receive a Year 2000 rating of Unsatisfactory may be subject to formal enforcement action, supervisory agreements, cease and desist orders, civil money penalties, or the appointment of a conservator. In addition, Federal banking agencies will be taking into account Year 2000 compliance programs when reviewing applications and may deny an application based on Year 2000 related issues. Failure by the Company to adequately prepare for Year 2000 issues could negatively impact the Company's banking operations, including the imposition of restrictions upon its operations by the Comptroller of the Currency. Despite the Company's activities in regards to the Year 2000 Issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Company's business, financial condition, results of operations, and business prospects. There is also no guarantee that the hardware, software and systems of third parties such as utility companies, other banks, computer services and supply companies, the Federal Reserve Bank, other Federal agencies and other vendors who provide services and supplies to the Company will be free of unfavorable Year 2000 issues. The failure of such third parties could have a material adverse impact upon the Company. ITEM 3. Quantitative and Qualitative Discussion About Market Risk As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since most of the Company's interest-bearing assets and liabilities are located at the Bank, the majority of the Company's interest rate risk is at the Bank level. As a result, most interest rate risk management procedures are performed at the Bank level (see discussion on "Interest Rate Sensitivity"). The Company and the Bank operate as a community banking institution primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a result of its location and nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Bank makes real estate loans primarily in the counties adjacent to its operations and thus is subject to risks associated with those local economies. The Bank holds a concentration of residential real estate loans (36.3% of total loans) and commercial loans supported by real estate (24.3% of total loans) in its loan portfolio. These loans are subject to interest and economic risks. The Bank also originates residential real estate loans for sale in the secondary market. Such loans are identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate risk (see discussion on "Assets and Liabilities"). The Company does not own any trading assets and does not have any hedging transactions in place such as interest rate swaps. Interest Rate Sensitivity The following table "Consolidated Comparative Statement Analysis" sets forth a comparison of average daily balances, interest income and interest expense on a fully taxable equivalent basis and interest rates calculated for each major category of interest-earning assets and interest-bearing liabilities. For the purposes of this analysis, the computations in the "Consolidated Comparative Statement Analysis" were prepared using the Federal statutory rate of 34%; there were no state or local taxes on income applicable to the Company. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) (Unaudited) Three Months Ended, March 31, 1999 1998 Int Avg Int Avg Avg Inc/ Yield/ Avg Inc/ Yield/ Bal Exp Rate Bal Exp Rate ASSETS: INTEREST-EARNING ASSETS Int-Bearing Deposits with Banks $ 7,278 $ 85 4.68% $ 2,393 $ 28 4.68% Federal Funds Sold 1,267 14 4.40 1,067 15 5.64 Investment Securities Taxable 87,181 1,341 6.16 74,798 1,169 6.24 Non-Taxable (1) 32,134 588 7.32 20,615 392 7.60 Net Loans Held for Sale 2,963 26 3.52 1,360 9 2.64 Loans (1) (2) 209,018 4,377 8.36 225,002 4,911 8.72 Reserve for Loan Losses (2,733) -- -- (2,707) -- -- --------- ----- -------- ----- Net Loans 206,285 4,377 8.48 222,295 4,911 8.84 --------- ----- -------- ----- Total Interest-Earning Assets 337,108 6,431 7.64 322,528 6,524 8.08 Non-Interest Earning Assets 27,124 -- -- 24,162 -- -- --------- ----- -------- ----- TOTAL ASSETS, INT INCOME $ 364,232 6,431 7.08 $346,690 6,524 7.52 --------- ----- -------- ----- LIABILITIES INTEREST-BEARING LIABILITIES Interest-Bearing Deposits Demand Deposits $ 49,448 132 1.08 $ 47,463 136 1.16 Money Market Deposits 13,620 92 2.72 14,423 101 2.80 Savings & Club Deposits 61,998 336 2.16 60,801 331 2.16 CD's over $100,000 4,295 41 3.80 4,780 46 3.84 All Other Time Deposits 131,073 1,741 5.32 123,367 1,713 5.56 --------- ----- -------- ----- Total Int-Bearing Deposits 260,434 2,342 3.60 250,834 2,327 3.72 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 5,695 42 2.96 7,141 66 3.68 Short-Term Borrowings 321 4 5.00 321 6 7.48 Long-Term Borrowings 20,000 280 5.60 18,374 287 6.24 --------- ----- -------- ----- Total Int-Bearing Liabilities 286,450 2,668 3.72 276,670 2,686 3.88 NON-INTEREST-BEARING LIABILITIES Non-Interest-Bearing Deposits 38,990 -- -- 32,315 -- -- Other Liabilities 7,660 -- -- 7,365 -- -- --------- ----- -------- ----- TOTAL LIABILITIES 333,100 2,668 3.20 316,350 2,686 3.40 SHAREHOLDERS' EQUITY 31,132 -- -- 30,340 -- -- --------- ----- -------- ----- TOTAL LIABILITIES AND EQUITY $ 364,232 2,668 2.92 $346,690 2,686 3.80 NET INTEREST INCOME $ 3,763 $ 3,838 ----- ----- Net Interest Spread 3.92 4.20 Effect of Interest-Free Sources Used to Fund Earnings Assets 0.56 0.56 Net Interest Margin 4.48% 4.76% ---- ----
The net interest margin of 4.48% for the three month period ended March 31, 1999, decreased from the 4.76% net interest margin for the first three months of 1998. The yield on interest earning assets was 7.64% during the first three months of 1998 as compared to 8.08% in 1998. The average interest rate paid on interest bearing deposits and other borrowings was 3.72% for the first three months of 1999 as compared to 3.88% in 1998. Interest rate sensitivity is a measure of the extent to which net interest income would change due to changes in the level of interest rates. The objective of interest rate sensitivity management is to reduce a company's vulnerability to future interest rate fluctuations and to enhance consistent growth of net interest income Rate sensitivity arises from the difference between the volumes of assets which are rate-sensitive as compared to the volumes of liabilities which are rate-sensitive. The mismatch of assets and liabilities in a specific time frame is referred to as interest sensitivity gap. Generally, in an environment of rising interest rates, a negative gap will decrease net interest income, and in an environment of falling interest rates, a negative gap will increase net interest income. Assets and liabilities are allocated to a specific time period based on their scheduled repricing date or on an historical basis. At March 31, 1999, assets of $151,163,000 (40.4% of total assets) were subject to interest rate changes within one year. Liabilities subject to rate change within one year were $178,089,000. A negative one-year gap position of $26,926,000 existed as of March 31, 1999. The ratio of rate-sensitive assets to rate-sensitive liabilities for the one-year time frame was 84.9%. The "Interest Sensitivity Analysis" in the following table presents a sensitivity gap analysis of the Company's assets and liabilities at March 31, 1999. - ------------------------------------------------------------------------------- INTEREST SENSITIVITY ANALYSIS (Dollars in Thousands) as of March 31, 1999 - ------------------------------------------------------------------------------- 0-90 91-180 181-365 1-5 Over Days Days Days Years 5 years Total Interest-Bearing Deposits with Banks $ 6,753 $ --- $ --- $ --- $ --- $ 6,753 Inv Securities 29,247 11,154 20,680 52,141 19,753 132,975 Loans Held-for-Sale 1,070 --- --- --- --- 1,070 Loans 31,760 13,833 24,628 74,103 62,724 207,048 Other Assets 12,038 --- --- --- 14,676 26,714 ------- -------- -------- ------- -------- -------- TOTAL ASSETS $80,868 $24,987 $ 45,308 $126,244 $ 97,153 $374,560 ------- -------- -------- ------- -------- -------- Non-Interest-Bearing Deposits (1) $ --- $ --- $ --- $ --- $ 40,941 $ 40,941 Int-Bearing Deposits 96,143 21,468 49,403 40,089 62,550 269,653 Securities Sold Under Agreements to Repurchase 6,075 --- --- --- --- 6,075 Long-Term Debt 5,000 --- --- 15,000 --- 20,000 Other --- --- --- --- 7,243 7,243 Capital --- --- --- --- 30,648 30,648 ------- -------- -------- ------- -------- -------- TOTAL LIABILITIES AND CAPITAL $107,218 $21,468 $ 49,403 $55,089 $141,382 $374,560 ------- -------- -------- ------- -------- -------- Net Interest Sensitivity Gap $(26,350) $ 3,519 $ (4,095) $71,155 $(44,229) $ --- Cumulative Int Sensitivity Gap $(26,350)$(22,831)$ (26,926) $44,229 $ --- $ --- Cumulative Gap RSA/RSL 75.42% 82.26% 84.88% 118.97% 100.0%
- ------------------------------------------------------------------------------- (1) Historically, non-interest-bearing deposits reflect insignificant changes in deposit trends and, therefore, the Company classifies these deposits over five years. PART II - OTHER INFORMATION ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8K No reports on Form 8K were filed for the quarter during which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COLONIAL GROUP, INC. DATE: May 15, 1999 BY: /S/ S. ERIC BEATTIE -------------------- ---------------------- S. ERIC BEATTIE PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE: May 15, 1999 BY: /S/ REID L. HEEREN -------------------- ------------------- REID L. HEEREN VICE PRESIDENT (PRINCIPAL FINANCIAL OFFICER) EX-27 2 FDS --
9 0000714719 First Colonial Group 1,000 3-Mos Dec-31-1999 Mar-31-1999 12,038 6,753 0 0 117,925 15,050 15,177 209,717 2,669 374,560 310,594 6,075 7,243 20,000 0 0 8,744 21,904 374,560 4,396 1,729 99 6,224 2,342 2,668 3,556 125 216 3,548 997 785 0 0 785 0.46 0.46 4.48 1,096 1,158 0 0 2,691 165 82 2,669 1,792 0 877
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