-----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, AvotSE2iaXA8X8A8tPKMy5ymaDsm4BaEpkuR6kt/BnslsR3iXBlmyEjY6tIf2Ou/ gWqwEa6BWyJQ3RIxlzzQmw== 0000714719-00-000004.txt : 20000403 0000714719-00-000004.hdr.sgml : 20000403 ACCESSION NUMBER: 0000714719-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 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-K SEC ACT: SEC FILE NUMBER: 000-11526 FILM NUMBER: 589884 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for (fee required) for the fiscal year ended December 31, 1999. OR Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________. Commission File Number 0-11526 FIRST COLONIAL GROUP, INC. ----------------------------------------------------------------- (Name of Registrant as Specified 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) Registrant's telephone number, including area code 610-746-7300 ------------ Securities registered pursuant to Section 12 (b) of the Exchange Act: None Securities registered pursuant to Section 12 (g) of the Exchange Act: Common Stock, $5.00 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of voting stock held by non-affiliates of the registrant is $25,269,474. (1) The number of shares of the Issuer's common stock, par value $5.00 per share, outstanding as of March 24, 2000 was 1,853,270. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Company's Proxy Statement to be filed in connection with its 2000 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Other documents incorporated by reference are listed in the Exhibit Index. (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the registrant's Common Stock outstanding, reduced by the amount of Common Stock held by executive officers, directors and shareholders owning in excess of 10% of the registrant's Common Stock, multiplied by the last sale price for the registrant's Common Stock on March 24, 2000. Includes an aggregate of 211,521 shares, with an aggregate market value of $3,463,656, held by the Trust Department of Nazareth National Bank & Trust Company in Trust for persons other than executive officers, directors and 10% shareholders of the registrant. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder may be deemed an affiliate of the registrant or that such person is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. PART I Item 1. Business Forward Looking Information The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, statements as to litigation and the amount of reserves, statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements as to management's beliefs, expectations or opinions. Such forward looking statement are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company and the Bank, Federal and state government regulation, competition, results of litigation and the time, expense and unanticipated problems in addressing the Year 2000 issue. These and other risks, uncertainties and other factors are discussed elsewhere in this Annual Report on Form 10-K. Investment Considerations In analyzing whether to make or to continue an investment in the Company, investors should consider, among other factors, the following: Economic Conditions and Related Uncertainties. Commercial banking is affected, directly and indirectly, by local, domestic, and international economic and political conditions, and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors beyond the Company's control, may adversely affect the potential profitability of the Company. Any future rises in interest rates, while increasing the income yield on the Company's earning assets, may adversely affect loan demand and the cost of funds and, consequently, the profitability of the Company. Any future decreases in interest rates may adversely affect the Company's profitability because such decreases may reduce the amounts which the Company may earn on its assets. Economic downturns could result in the delinquency of outstanding loans. Management does not expect any one particular factor to affect the Company's results of operations. However, a downtrend in several areas, including real estate, construction and consumer spending, could have an adverse impact on the Company's ability to remain profitable. Effect of Interest Rates on the Bank and the Company. The operations of financial institutions such as the Company are dependent to a large degree on net interest income which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. An institution's net interest income is significantly affected by market rates of interest which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. At December 31, 1999 total interest earning assets maturing or repricing within one year was less than total interest bearing liabilities maturing or repricing during the same time period by $6,465,000, representing a negative cumulative one year gap of .96%. If interest rates rise, the Company could experience a decrease in net interest income. Like all financial institutions, the Company's balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U. S. Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. See "Item 7. Management's Discussion of Financial Condition and Results of Operations". Risks associated with Funeral Trust Litigation. A group of funeral directors have asserted certain claims against the Bank in connection with certain pre-need funeral trusts which were allegedly directed by funeral directors to be invested in a private placement annuity. The Company has incurred legal expenses in regard to these claims during 1999 and 1998. In 1998, the Company established a reserve of $1.5 million against these possible claims. The reserve balance, as of December 31, 1999 equaled $994,000 with respect to unsettled claims. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. However, there is no assurance that the Bank will be successful. The Company will continue to incur significant legal expenses in regard to these claims and any settlement of this case could exceed the reserve amount and thus have a negative impact on the Company's future earnings and financial condition (see "Item 3. Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note N of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data"). Federal and State Government Regulations. The operations of the Company and the Bank are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past, and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on the future business and earnings prospects of the Company. During the past several years, significant legislative attention has been focused on the regulation and deregulation of the financial services industry. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities which compete directly with traditional bank business. Accounting Standards. The operations of the Company and the Bank are affected by accounting standards issued by the Financial Accounting Standards Board ("FASB") which the Company is required to adopt. The adoption of such standards can have the effect of reducing the Company's earnings and capital. Information on current FASB standards that affect the Company can be found in the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Competition. The Company faces strong competition from many other banks, savings institutions and other financial institutions which have branch offices or otherwise operate in the Company's market area, as well as many other companies now offering a range of financial services. Most of these competitors have substantially greater financial resources than the Company including a larger capital base which allows them to attract customers seeking larger loans than the Bank is able to make. In addition, many of the Bank's competitors have higher legal lending limits than does the Bank. Particularly intense competition exists for sources of funds including savings and retail time deposits and for loans, deposits and other services that the Bank offers. Allowance for Loan Losses. The Company has established an allowance for loan losses which management believes to be adequate to offset potential losses on the Company's existing loans. However, there is no precise method of predicting loan losses. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require the Company to increase its allowance for loan losses through a charge to earnings resulting in reduced profitability. Dividends. While the Board of Directors presently intends to follow a policy of paying cash dividends, the dividend policy will be reviewed periodically in light of future earnings, regulatory restrictions and other considerations. No assurance can be given, therefore, that cash dividends will be paid in the future. See the information contained under the caption in "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". Market for Common Stock. While the Company's common stock is listed on the Nasdaq Stock Market, there is no assurance that an active trading market for the Company's common stock will exist at a particular time. See the information contained under the caption in "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". "Anti-Takeover" and "Anti-Greenmail" Provisions and Management Implications. The Articles of the Company presently contain certain provisions which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction or series of transactions. The overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to discourage, make more costly or more difficult, or prevent a future takeover offer, prevent shareholders from receiving a premium for their securities in a takeover offer, and enhance the possibility that a future bidder for control of the Company will be required to act through arms-length negotiation with the Company's Board of Directors. Copies of the Company's Articles of the Incorporation are on file with the SEC and Pennsylvania Department of State. Year 2000 Compliance. The Company has adopted a "Year 2000 Policy" and conducted a comprehensive review of its computer systems and operations to identify the areas that could be affected by the Year 2000 issue. The issue with respect to Year 2000 is whether systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause complete system failures. The Company did not experience any material problems related to Year 2000 during the first two months of 2000. The Bank had all of its branch offices open for business on January 1, 2000 with all systems operating normally. The Company's estimates the costs incurred to prepare for Year 2000 compliance were $1,066,000; however, there can be no assurance that the 2000 year problem will not have an adverse effect on the future financial condition and results of operations of the Company. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Year 2000" in "Item 7. Management's Discussion of Financial Condition and Results of Operations". Stock Not an Insured Deposit. Investments in the shares of the Company's common stock are not deposits insured against loss by the FDIC or any other entity. Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from recovering from the Company based upon material misrepresentations or omissions contained in the Company's disclosure documents to the extent that such documents contained sufficient cautionary statements to apprise investors of the risks of an investment in the Company's securities. The foregoing investment considerations may have the effect of bringing this document, as well as other Company disclosure documents, within the purview of the "Bespeaks Caution Doctrine". General First Colonial Group, Inc. (the "Company) is a Pennsylvania business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). The Company was incorporated on December 30, 1982 for the purpose of acquiring Nazareth National Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on November 25, 1983 when it acquired the Bank. The Bank is a wholly-owned subsidiary of the Company. In July, 1986, the Company established another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a Delaware business corporation formed for the purpose of investing in various types of securities. The Company's principal activities consist of owning and supervising the Bank, which engages in a full service commercial and consumer banking and trust business. The Company, through the Bank, derives substantially all of its income from the furnishing of banking and banking-related services. The Bank has its principal banking office as well as three branch offices in Nazareth, Pennsylvania. It also presently has two branch offices in Bethlehem, Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in Brodheadsville, Pennsylvania, two branches in Stroudsburg, Pennsylvania, one branch in East Stroudsburg, Pennsylvania, one branch in Mount Pocono, Pennsylvania and one branch in Allentown, Pennsylvania. The Bank has twenty-two automated teller machines (ATMs), one at each branch office (except the Mount Pocono branch which has two and the Main Street Nazareth branch which has none), four free-standing drive-up machines at the Northampton Crossings Shopping Center, Easton, Pennsylvania and free-standing machines at its operation center, The First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania, at St. Luke's Hospital, Fountain Hill, Pennsylvania, at C. F. Martin & Company in Nazareth, Pennsylvania and at a hardware store in Nazareth, Pennsylvania. The Company is a legal entity separate and distinct from the Bank. The rights of the Company, and thus the rights of the Company's creditors and shareholders, to participate in distributions of the assets or earnings of the Bank, are necessarily subject to the prior claims of creditors of the Bank, except to the extent that claims of the Company itself as a creditor may be recognized. Such claims on the Bank by creditors other than the Company include obligations relating to federal funds purchased and certain other borrowings, as well as deposit liabilities. The Company directs the policies and coordinates the financial resources of the Bank. The Company provides and performs various technical, advisory and auditing services for the Bank, coordinates the Bank's general policies and activities, and participates in the Bank's major business decisions. As of December 31, 1999 the Company, on a consolidated basis, had total assets of $391,889,000, total deposits of $324,480,000, and total shareholders' equity of $28,243,000. Nazareth National Bank and Trust Company History and Business The Bank was incorporated under the laws of the United States of America as a national bank in 1897 under its present name. Since that time, the Bank has operated as a banking institution doing business at several locations in Northampton County, Monroe County and Lehigh County, Pennsylvania. The Bank is a member of the Federal Reserve System. As of December 31, 1999, the Bank had total assets of $389,579,000, total deposits of $324,919,000 and total shareholders' equity of $24,544,000. Its deposits are insured by the Bank Insurance Fund ("BIF") maintained by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent permitted by law. The Bank engages in a full service commercial and consumer banking and trust business. The Bank, with its main office at 76 South Main Street, Nazareth, Pennsylvania, also provides services to its customers through its branch network of fifteen full service banks, which includes drive-in facilities at most locations, ATMs at each branch office (except the Main Street Nazareth branch) and bank-by-mail services. Nine of the Bank's full service offices are located in Northampton County, Pennsylvania. Five offices are located in Monroe County, Pennsylvania. One office is located in Lehigh County, Pennsylvania. The Bank also has free standing ATMs located in its Operations Center, the First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of Fountain Hill, Pennsylvania, at the C. F. Martin & Company, Nazareth, Pennsylvania, in a hardware store in Nazareth, Pennsylvania, and four free-standing drive-up ATM's at Northampton Crossings Shopping Center, Lower Nazareth Township, Easton, Pennsylvania. The Bank's services include accepting time, demand and savings deposits, including NOW accounts (Flex Checking), regular savings accounts, money market accounts, fixed rate certificates of deposit and club accounts, including the Vacation Club, the College Club(R) and the Christmas Club. The Bank offers Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved line of credit activated by writing checks against a checking account) and the First Colonial Club(R) and Quality Checking(R) (deposit package programs which provide checking accounts with other services including credit card protection, discount travel, shopping services and other related financial services). Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions either directly or through regional industrial development corporations, making construction and mortgage loans, and renting safe deposit facilities. Additional services include making residential mortgage loans (both fixed rate and variable rate), home equity lines of credit, loans to purchase manufactured homes, revolving credit loans with overdraft checking protection, small business loans, student loans, recreational vehicles and new and used car and truck loans. The Bank's business loans include seasonal credit and collateral loans and term loans as well as accounts receivable and inventory financing. Most of the Bank's commercial customers are small to medium size businesses operating in Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of Pennsylvania. Trust services provided by the Bank include services as executor and trustee under wills and deeds, as guardian, custodian and as trustee and agent for pension, profit sharing and other employee benefit trusts as well as various investment, pension and estate planning services. Trust services also include service as transfer agent and registrar of stock and bond issues and as escrow agent. In addition, the Bank provides discount brokerage through an outside supplier of this service, and various tax services. The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including Federal, state and local governments). The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits. Competition All phases of the Bank's business are highly competitive. The Bank's market area is the primary trade area of Northampton and Lehigh Counties (known as the Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to keep pace with its competition and the continuing growth of these areas, the Bank may, in the future, consider establishing additional new branches, although no assurance can be given that any new branches will be opened or if opened, that they will be successful. The Bank competes with local commercial banks as well as other commercial banks with branches in the Bank's market area. The Bank considers its major competition to be Ambassador/Lafayette Bank, headquartered in Easton, Pennsylvania, with branches in Nazareth, Bethlehem and Allentown, Pennsylvania, Twin Rivers Bank, headquartered in Easton, Pennsylvania with branches in Bethlehem Pennsylvania; First Union Bank, headquartered in Charlotte, North Carolina, with branch offices in Easton, Bethlehem, Stroudsburg and Allentown, Pennsylvania; Summit Bancorporation, headquartered in Princeton, New Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; and PNC Bank headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth, Brodheadsville, Stroudsburg, Easton and Allentown, Pennsylvania. The Bank, along with other commercial banks, competes with respect to its lending activities, as well as in attracting demand deposits, with savings banks, savings and loan associations, insurance companies, regulated small loan companies, credit unions and the issuers of commercial paper and other securities, such as shares in money market funds. The Bank also competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals in the corporate trust and investment management services. Many of the Bank's competitors have financial resources larger than the Bank's. As a result of the recent repeal of the Glass-Steagall Act which separated the commercial and investment banking industries, all banking organizations are likely to face an increase in competition. See "Supervision and Regulation" - "Recent Regulation". Management believes that the Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. First C. G. Company, Inc. In July 1986, the Company established a wholly-owned subsidiary, First C. G. Company, Inc., a Delaware corporation, for the purpose of investing in various types of securities. As of December 31, 1999, First C. G. Company, Inc. had total assets of $3,859,000, of which $2,185,000 was invested in common stocks and $1,320,000 in a loan to the Bank's ESOP and most of the remaining assets were in other tax-exempt and taxable securities and interest-bearing bank deposits. The total shareholders' equity at December 31, 1999 was $3,680,000. Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. The regulatory framework is intended primarily for the protection of depositors, other customers and the federal deposit insurance funds and not for the protection of shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company and the Bank. The Company The Company is registered as a "bank holding company" under the Bank Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore, subject to supervision and regulation by the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board"). The Company is also regulated by the Pennsylvania Department of Banking. Under the Holding Company Act, the Company is required to secure the prior approval of the Federal Reserve Board before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank or acquire direct or indirect ownership or control of any voting shares of any bank that is not already majority owned by it, if after such acquisition, it would directly or indirectly own or control more than 5% of the voting shares of such bank. See "Interstate Banking". The Company is generally prohibited under the Holding Company Act from engaging in, or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company can reasonably be expected to produce benefits to the public which outweigh possible adverse effects. The Federal Reserve Board has by regulation determined that certain activities including, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non operating basis; and, certain stock brokerage and investment advisory services, are closely related to banking within the meaning of the Holding Company Act. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The Bank currently is rated "satisfactory" under the Community Reinvestment Act. Under the policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is deemed to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee that any "undercapitalized" (as such term is defined in the statute) insured depository institution subsidiary will comply with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards as of the time the institution failed to comply with such capital restoration plan. Under the Holding Company Act, the Company is required to file periodic reports and other information concerning its operations with, and is subject to examination by, the Federal Reserve Board. In addition, under the Banking Code of 1965, the Pennsylvania Department of Banking has the authority to examine the books, records and affairs of any Pennsylvania bank holding company or to require any documentation deemed necessary to ensure compliance with the Banking code. The Company is under the jurisdiction of the Securities and Exchange Commission and various state securities commissions for matters relating to the offering and sale of its securities, and is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Bank The Bank, as a national bank, is subject to The National Bank Act. The Bank is also subject to the supervision of, and is regularly examined by, the Office of the Comptroller of the Currency of the United States (the "OCC") and is required to furnish quarterly reports to the OCC. The approval of the OCC is required for the establishment of additional branch offices by any national bank, subject to applicable state law restrictions. Under current Pennsylvania law, banking institutions located in Pennsylvania, such as the Bank, may establish branches within any county in the Commonwealth, subject to the prior regulatory approval. As a national bank, the Bank is a member of the FDIC and a member of the Federal Reserve System and, therefore, is subject to additional regulation by these agencies. Some of the aspects of the lending and deposit business of the Bank which are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The operations of the Bank are also subject to numerous Federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to interest rates on loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. The Bank is subject to certain limitations on the amount of cash dividends it can pay. See "Note S - Regulatory Matters" in the Notes to Consolidated Financial Statements which appears elsewhere herein. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Company and the Company's non-bank subsidiary. Substantially all of the deposits of the Bank are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The insurance assessments are based upon a matrix that takes into account a bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits insured by the BIF to the statutory minimum of $2,000 annually for "well-capitalized" banks. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA reduced the amount of FDIC insurance premiums for savings association deposits acquired by banks to the same levels assessed for deposits insured by BIF. DIFA further provides for assessments to be imposed on all insured depository institutions with respect to deposits to pay for the cost of Financing Corporation bonds; however, banks are assessed for this purpose at only one-fifth the rate of the assessment on savings associations until December 31, 1999. As a result of these changes, the deposit insurance assessment for banks and for thrifts has been nearly equalized and will be identical for comparably rated institutions after January 1, 2000, at which time banks will share equally in the FICO assessment and the BIF and SAIF funds will be merged. Capital Regulation The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial condition and results of operation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier 1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets (leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking organizations without any supervisory, financial or operational weaknesses or deficiencies and other banking organizations are expected to maintain leveral capital ratios 100 to 200 basis points above the minimum depending on their financial condition. Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying debt instruments, and the allowance for possible loan losses. Management believes, as of December 31, 1999 that the Company and the Bank meet all capital adequacy requirements to which they are subject. The following tables provide a comparison of the Company's and Bank's capital amounts, risk-based capital ratios and leverage ratios for the periods indicated. CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $34,329 16.67% $16,477 8.00% --- --- Bank $30,831 15.00% $16,446 8.00% $20,557 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,892 15.48% $ 8,239 4.00% --- --- Bank $28,194 13.71% $ 8,223 4.00% $12,334 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $31,892 8.11% $15,726 4.00% --- --- Bank $28,194 7.20% $15,655 4.00% $19,568 5.00%
CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- --- Bank $29,450 15.02% $15,684 8.00% $19,605 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- --- Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- --- Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
Interstate Banking On September 29, 1994, the President signed into law the "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act"). Among other things, the Interstate Act permits bank holding companies to acquire banks in any state after September 29, 1995. Beginning June 1, 1997, a bank may merge with a bank in another state so long as both states have not opted out of interstate branching between the date of enactment of the Interstate Act and May 31, 1997. States may enact laws opting out of interstate branching before June 1, 1997, subject to certain conditions. States may also enact laws permitting interstate merger transactions before June 1, 1997 and host states may impose conditions on a branch resulting from an interstate merger transaction that occurs before June 1, 1997, if the conditions do not discriminate against out-of-state banks, are not preempted by Federal law and do not apply or require performance after May 31, 1997. Pennsylvania has enacted a law opting in immediately to interstate merger and interstate branching transactions. Interstate acquisitions and mergers would both be subject, in general, to certain concentration limits and state entry rules relating to the age of the bank. Under the Interstate Act, the Federal Deposit Insurance Act is amended to permit the responsible Federal regulatory agency to approve the acquisition of a branch of an insured bank by an out-of-state bank or bank holding company without the acquisition of the entire bank or the establishment of a "de novo" branch only if the law of the state in which the branch is located permits out-of-state banks to acquire a branch of a bank without acquiring the bank or permits out-of-state banks to establish "de novo" branches. Pennsylvania has enacted such a law. Recent Legislation On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law, repealing the 1933 Glass-Steagall Act's separation of the commercial and investment banking industries. The Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a "Financial Holding Company", a subset of bank holding companies that satisfy the following criteria: (1) all of the depository institution subsidiaries must be well capitalized and well managed; (2) the holding company must file with the Federal Reserve Board a declaration that it elects to be a financial holding company to engage in activities that would not have been permissible before the Act; and (3) all of the depository institution subsidiaries must have a CRA rating of "satisfactory" or better. Financial holding companies may engage in any activity that (i) is financial in nature or incidental to such financial activity or (ii) is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Act specifies certain activities that are financial in nature. These activities include - acting as principal, agent or broker for insurance; - underwriting, dealing in or making a market in securities; and - providing financial and investment advice. The Federal Reserve Board and the Secretary of the Treasury have authority to decide whether other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services and so on. These new financial activities authorized by the Act may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, the Act requires each of the parent bank (and its sister-bank affiliate) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. The Act establishes a system of financial regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and bank's financial subsidiaries, the Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. The Act also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. The Act has only recently became law. Regulations of the banking agencies implementing the legislative changes can be expected in the near future. Except for the increase in competitive pressures faced by all banking organizations that is a likely consequence of the Act, the legislation and implementing regulations are likely to have a more immediate impact on large regional and national institutions than on community-based institutions engaged principally in traditional banking activities. Because the legislation permits bank holding companies to engage in activities previously prohibited altogether or severely restricted because of the risks they posed to the banking system, implementing regulations can be expected to impose strict and detailed prudential safeguards on affiliations among banking and nonbanking companies in a holding company organization. Additionally, because the legislation allows various affiliates within a single holding company organization to serve a broader array of customers' financial goals, including their banking, insurance and investment goals, implementing regulations can be expected to impose strict safeguards on sharing of customer information among affiliated entities within an organization. The foregoing discussion is qualified in its entirety be reference to the statutory provisions of the Act and the implementing regulations which are adopted by various government agencies pursuant to the Act. The exact impact of the Act on the Company and its subsidiaries, if any, cannot be predicted at this time. National Monetary Policy In addition to being affected by general economic conditions, the earnings and growth of the Bank and, therefore, the earnings and growth of the Company, are affected by the policies of regulatory authorities, including the OCC, the Federal Reserve Board and the FDIC. An important function of the Federal Reserve Board is to regulate the money supply, credit conditions and interest rates. Among the instruments used to implement these objectives are open market operations in United States Government securities, setting the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of the Company and the Bank cannot be predicted. Fair Value of Financial Instruments The Financial Accounting Standards Board ("FASB") issued statement of financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments", which requires all entities to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. Financial instruments consist primarily of securities, loans and deposits. The Company has provided these disclosures as of December 31, 1999 and 1998 in Note U of the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Accounting for Investment Securities The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Trading securities are measured at fair value with unrealized holding gains and losses included in income. The Company had no trading securities in 1999 and 1998. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements. The classification of securities can be found in Note B of the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Employees As of December 31, 1999 the Company had approximately 213 employees, of whom 39 were part-time. The Company considers its relationship with its employees to be good. Additional Information The tables listed below, which are set forth on pages 18 through 23 herein, contain unaudited information relevant to the business of the Company and the Bank: Investment Securities Investment Securities Yield by Maturity Loan Portfolio by Type Loan Maturities and Interest Sensitivity Allocation of the Allowance for Possible Loan Losses Percentage of Total Loans in each Category to Total Loans Average Deposit Balances by Major Classification Maturities of Certificates of Deposit of $100,000 or more INVESTMENT SECURITIES Summary of Available-for-Sale and Held-to-Maturity Securities at December 31, (Dollars in Thousands) 1999 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 4,001 $ 3,992 U. S. Government Agency 53,112 49,747 State and Political Subdivisions 29,147 27,879 Mortgage-Backed Securities 47,332 46,030 Equity Securities 5,312 4,708 ------- ------- Total $138,904 $132,356
1998 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 7,026 $ 7,125 U. S. Government Agency 24,482 24,441 State and Political Subdivisions 27,860 28,466 Mortgage-Backed Securities 33,322 33,141 Equity Securities 4,900 5,216 ------- ------- Total $97,590 $98,389
1997 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 9,008 $ 9,066 U. S. Government Agency 14,512 14,556 State and Political Subdivisions 16,865 17,330 Mortgage-Backed Securities 26,791 26,812 Equity Securities 3,878 5,260 ------- ------- Total $71,054 $73,024
1999 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Treasury $ --- $ --- U. S. Government Agency 6,894 6,588 State and Political Subdivisions 7,974 7,583 Mortgage-Backed Securities 5,019 4,952 ------- ------- Total $19,887 $19,123
1998 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Treasury $ --- $ --- U. S. Government Agency 4,992 5,026 State and Political Subdivisions 6,770 6,943 Mortgage-Backed Securities 5,961 5,951 ------- ------- Total $17,723 $17,920
1997 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Treasury $ --- $ --- U. S. Government Agency 6,008 6,051 State and Political Subdivisions 3,169 3,233 Mortgage-Backed Securities 8,579 8,662 ------- ------- Total $17,756 $17,946
INVESTMENT SECURITIES YIELD BY MATURITY The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 1999 are presented in the following table. Weighted average yields on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a tax rate of 34%. All average yields were calculated on the book value of the related securities. Equity and other securities having no stated maturity have been included in the "After 10 Years" category. Available-for-Sale and Held-to-Maturity Investment Securities Yield by Maturity, at December 31, 1999 AVAILABLE-FOR-SALE AT FAIR VALUE After 1 But After 5 But (Dollars in Thousands) Within One Year Within 5 Years Within 10 Years Amount Yield Amount Yield Amount Yield U. S. Treasury $ 2,004 6.22 % $ 1,989 5.69 % $ -- -- % U. S. Government Agency -- -- 5,086 5.90 26,085 6.50 Mortgage-backed Securities 196 5.50 315 5.99 3,911 6.24 State and Political Subdivisions -- -- 1,295 7.23 8,234 7.03 Other Debt Securities -- -- -- -- 491 6.74 Equity Securities -- -- -- -- -- -- ----- ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 2,200 6.15 % $ 8,685 6.05 % $38,721 6.59% ===== ==== ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 0.53 3.36 9.16 ==== ==== ====
AVAILABLE-FOR-SALE AT FAIR VALUE (Dollars in Thousands) After 10 Years Total Amount Yield Amount Yield U. S. Treasury $ -- -- % $ 3,993 5.95 % U. S. Government Agency 20,580 7.07 51,751 6.70 Mortgage-backed Securities 41,607 6.70 46,029 6.65 State and Political Subdivisions 15,855 7.11 25,384 7.09 Other Debt Securities --- -- 491 6.74 Equity Securities 4,708 4.17 4,708 4.17 ----- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $82,750 6.74 % $132,356 6.64 % ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 20.42 15.54 ===== =====
HELD-TO-MATURITY AT AMORTIZED COST After 1 But After 5 But (Dollars in Thousands) Within One Year Within 5 Years Within 10 Years Amount Yield Amount Yield Amount Yield U. S. Government Agency $ -- -- % $ 1,000 7.03 % $ 4,124 6.98 % Mortgage-backed Securities -- -- 433 6.59 830 6.64 State and Political Subdivisions 245 6.81 912 7.48 2,200 7.00 Equity Securities -- -- -- -- -- -- ------ ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 245 6.81 % $ 2,345 7.12 % $ 7,154 6.95% ===== ==== ======= ==== ======= ==== Average Of Held-to-Maturity Securities in years 0.53 4.24 8.64 ==== ==== ====
HELD-TO-MATURITY AT AMORTIZED COST (Dollars in Thousands) After 10 Years Total Amount Yield Amount Yield U. S. Government Agency $ 1,770 7.34 % $ 6,894 7.08 % Mortgage-backed Securities 3,756 5.93 5,019 6.11 State and Political Subdivisions 4,617 8.56 7,974 7.95 Equity Securities -- -- -- -- ----- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $10,143 7.37 % $ 19,887 7.18 % ======= ==== ======= ==== Average Of Held-to-Maturity Securities in years 19.58 13.60 ===== =====
LOAN PORTFOLIO BY TYPE The loan portfolio by type is summarized in the following table for the years ended December 31, 1999, 1998, 1997, 1996 and 1995. (Dollars in Thousands) For the Year Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Real Estate - Residential $112,870 $119,914 $138,539 $134,013 $122,293 Real Estate - Construction 6,737 11,689 12,361 10,923 4,959 Real Estate - Commercial 26,809 29,587 34,579 39,421 35,316 Consumer/Installment 45,886 40,184 35,914 28,870 27,685 Commercial (non-Real Estate) and Agricultural 9,538 10,900 9,086 8,715 5,403 State and Political Subdivisions 1,096 1,178 944 906 1,290 Other 13 10 20 28 13 ------------------------------------------------- TOTAL GROSS LOANS 202,949 213,462 231,443 222,876 196,959 Unearned Income (691) (1,025) (1,856) (2,759) (3,829) ------------------------------------------------- Total Loans 202,258 212,437 229,587 220,117 193,130 Allowance for Possible Loan Losses (2,437) (2,661) (2,664) (2,532) (2,443) ------------------------------------------------- NET LOANS $199,821 $209,746 $226,923 $217,585 $190,687 =================================================
At December 31, 1999 there were no categories of loans exceeding 10% of total loans which are not otherwise disclosed as the categories of loans listed in the above table. LOANS MATURITIES AND INTEREST SENSITIVITY The maturity ranges of items in the loan portfolio (excluding residential mortgages of 1 to 4 family residences and consumer loans) of the Bank and the amount of loans with predetermined interest rates and floating interest rates due after one year, as of December 31, 1999, are summarized in the table set forth below. The determination of maturities included in the table are based upon contract terms. Demand loans that do not have a defined repayment term are reported as maturing within one year. In situations where a rollover is appropriate, the Bank's policy in this regard is to evaluate the credit for collectibility consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customers' use of their lines of credit with the Bank that are at floating interest rates. Management continues to emphasize the granting of floating interest rate loans to better match the interest sensitivity of deposits. Due in Due in Due in As of December 31, 1999 One Year One to Over (Dollars in Thousands) or Less Five Years Five Years Total - ------------------------------------------------------------------------------- Real Estate - Construction $ 3,108 $1,062 $ 2,567 $ 6,737 Real Estate - Commercial 15,899 8,735 2,175 26,809 Commercial (Non-Real Estate) and Agricultural 6,148 2,155 1,235 9,538 ------ ------ ------- ------- TOTAL $25,155 $11,952 $ 5,977 $43,084 ====== ======= ======= ======= Loan Maturity After 1 Year With: Predetermined Interest Rate $ 4,738 $ 4,674 Floating Interest Rate 7,214 1,303 ------ ------ TOTAL $11,952 $ 5,977 ======= =======
The following table details the Allocation of the Allowance for Possible Loan Losses by the various loan categories. The allocation is not necessarily indicative of the categories in which future loan losses will occur, and the entire allowance is available to absorb losses in any category of loans. As of December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Loan Categories (Dollars in Thousands) Commercial $ 901 $1,350 $1,183 $ 663 $1,049 Real Estate- Construction -- 4 6 7 3 Real Estate - Residential 212 128 191 198 184 Consumer/Installment 764 738 785 811 534 Unallocated 560 471 499 853 673 ------ ------ ------ ------ ------ TOTAL $2,437 $2,691 $2,664 $2,532 $2,443 ====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS As of December 31, 1999 1998 1997 1996 1995 ---------------------------------------------------------------------------- Loan Categories (Dollars in Thousands) Commercial 18.46 % 19.52 % 19.28 % 22.02 % 21.33 % Real Estate - Construction 3.32 5.48 5.34 4.90 2.52 Real Estate - Residential 55.61 56.18 59.86 60.13 62.09 Consumer/Installment 22.61 18.82 15.52 12.95 14.06 ----- ----- ----- ----- ----- TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % ====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31, 1999, 1998 and 1997 are presented in the following table. AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION For the Year Ended December 31, 1999 1998 1997 Average Average Average Balance Rate Balance Rate Balance Rate (Dollars in Thousands) Demand Deposits Non-Interest Bearing $ 41,337 --- % $ 35,254 --- % $ 31,074 --- % Interest Bearing 52,395 1.18 48,988 1.15 45,338 1.17 Money Market Deposits 13,827 2.76 14,366 2.81 14,380 2.81 Savings & Club Accounts 63,199 2.06 61,177 2.21 62,746 2.44 Certificates of Deposit under $100,000 139,076 5.26 124,823 5.59 118,846 5.58 Certificates of Deposit of $100,000 or more 5,040 4.01 4,700 3.72 5,014 4.19 ------ ---- ------ ---- ------ ---- Total Deposits $314,874 $289,308 $277,398 ======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE At December 31, (Dollars in Thousands) 1999 1998 ----------------------------------- Three Months or Less $ 252 $ 821 Over Three, Through Six Months 471 1,380 Over Six, Through Twelve Months 2,547 1,508 Over Twelve Months 1,835 1,017 ----------------------------------- TOTAL $5,105 $4,726 ===================================
There were no brokered deposits at December 31, 1999 and 1998. Item 2. Description of Property The principal banking office of the Bank and the executive offices of the Bank and the Company are located at 76 South Main Street in the Borough of Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank. In addition, the Bank owns additional properties located at 29 South Broad Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553 Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street, Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania (First Colonial Building, Computer and Operations Center), Rt. 209 Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway (Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing, drive-up ATM location). The Bank also leases facilities for its branch office located at 44 East Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at 101 South Third Street, Easton, Pennsylvania; its branch office located at 1125 N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located at 713 Main Street, Stroudsburg, Pennsylvania; its branch office located in the Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its branch office located within Redner's Supermarket, Airport Road, Allentown, Pennsylvania; and its branch office located within Redner's Supermarket, Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania; its branch office located within Wal-Mart's at 355 Lincoln Avenue, East Stroudsburg, Pennsylvania; and its branch office located within Wal-Mart's at 500 Route 940, Mt. Pocono, Pennsylvania. Item 3. Legal Proceedings The Company has reserved $994,000 against unsettled claims which have been or may be asserted against the Bank in connection with certain pre-need funeral trust funds which were allegedly directed by funeral directors to be invested in a private placement annuity issued by EA International Trust. As of December 31, 1999, nine funeral directors whose funds were invested in this annuity commenced suit against the Bank; if all funeral directors whose funds were invested in this annuity were to pursue claims, the Bank's maximum exposure for unsettled claims would be approximately $4.1 million principal loss plus punitive damages, interest, costs and attorney fees. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. The Bank has discontinued its involvement in this annuity and is pursuing indemnification for some or all of these possible losses from its insurance carriers and from EA International Trust. From time-to-time, the Company and the Bank are parties to routine litigation incidental to their business. Neither the Company, the Bank nor any of their properties is subject to any other material legal proceedings, nor are any such proceedings known to be contemplated by any governmental authorities. Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- No matter was submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report. Item 4.1: Executive Officers of the Registrant The following table sets forth certain information, as of March 30, 2000, concerning the executive officers of the Company and certain executive officers of the Bank who are not also Directors. Positions Positions Name/Age with the Company with the Bank Reid L. Heeren 58 (a) Treasurer since January, Executive Vice President 1987; Vice President since and Chief Financial April, 1985 Officer since August, 1997 Senior Vice President and Chief Financial Officer since January, 1987; Cashier since November, 1984 Tomas J. Bamberger 58 (b) None Executive Vice President and Senior Loan Officer since September, 1997 Arthur Williams 54 (c) None Executive Vice President, Administration since August, 1997; Senior Vice President, Administration since November, 1988. Robert M. McGovern 61 (d) None Executive Vice President, Senior Trust Officer since February, 1999 (a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer and Cashier of the Bank from January 1987 to August 1997 and Vice President, Finance of the Bank from November, 1984 to January, 1987. Prior to November, 1984, Mr. Heeren was employed by the American Bank and Trust Company, headquartered in Reading, Pennsylvania, as Vice President for Financial Management (September, 1982 to November, 1984) and was Vice President, Community Banking, Chester County, Pennsylvania (March, 1982 to September, 1982). (b) Mr. Bamberger was previously Executive Vice President and Senior Loan Officer of First Valley Bank/Summit Bank (PA) from February 1984 to September 1997. Prior to that, he was Senior Vice President and Senior Loan Officer of the First National Bank of Allentown from March 1982 to February 1984. Mr. Bamberger started his banking career in October 1967 at Girard Bank in Philadelphia. He was a Vice President and Divisional Manager in commercial lending when he left in February 1982. (c) Mr. Williams was previously Senior Vice President, Administration of the Bank from November, 1988 to August, 1997 and Vice President of the Bank, serving as branch administrator with business development and commercial lending duties, from April 1985 to November, 1988. Prior to April 1985, Mr. Williams was a Vice President of United Penn Bank, serving as Regional Administrator of its Northern Region (March 1980 to March 1985). (d) Mr. McGovern was previously Vice President and Senior Trust Specialist of First Union National Bank from April 1998 to February 1999. Prior to that, Mr. McGovern was Vice President/Trust of CoreStates Bank from 1996 to 1998. From 1985 until 1996, Mr. McGovern was employed by Meridian Bank, most recently as Vice President until it was acquired by CoreStates Bank in 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------ --------------------------------------------------------------------- First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group". At the close of business on December 31, 1999, there were 726 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note G - Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price was $17.375 in December 1999 and $27.738 in December 1998. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of June 1999 and June 1998 (see "Note S - Equity Transactions" in the "Notes to Consolidated Financial Statements" contained in "Item 8. Financial Statements and Supplementary Data"). - ------------------------------------------------------------------------------- Cash Dividends High Low Declared - ------------------------------------------------------------------------------- 1998 First Quarter $33.56 $31.07 $ 0.1724 Second Quarter 34.76 31.74 0.1724 Third Quarter 34.29 25.48 0.1810 Fourth Quarter 28.33 25.48 0.1810 ------- TOTAL $ 0.7068 - ------------------------------------------------------------------------------- 1999 First Quarter $27.62 $21.91 $ 0.1810 Second Quarter 24.00 20.71 0.1810 Third Quarter 24.25 18.50 0.1900 Fourth Quarter 20.00 17.19 0.1900 ------- TOTAL $ 0.7420 - -------------------------------------------------------------------------------
The Company did not sell any of its equity securities during 1999 that were not registered under the Securities Act. Item 6. Selected Financial Data Consolidated Financial Highlights - -------------------------------------------------------------------------------- (Dollars in Thousands, Percentage Change except per share data) 1999 1998 1997 1999/98 1998/97 - -------------------------------------------------------------------------------- At Year-End Assets $ 391,889 $ 358,496 $ 346,738 9.3 % 3.4% Deposits 324,480 294,549 282,255 10.2 4.4 Loans 202,258 212,437 229,587 (4.8) (7.5) Shareholders' Equity 28,243 31,717 30,357 (11.0) 4.5 For the Year Net Interest Income $ 14,904 $ 14,496 $ 14,613 2.8 % (0.8)% Net Income 3,282 3,032 3,283 8.2 (7.6) Per Share * Basic Net Income $ 1.84 $ 1.68 $ 1.83 9.5 % (8.2)% Diluted Net Income 1.83 1.67 1.83 9.6 (8.7) Dividends Paid 0.74 0.70 0.64 5.7 9.4 Book Value 15.28 18.17 17.49 (15.9) 3.9 Financial Ratios Return on average assets .86% .86% .97% Return on average equity 10.90% 9.79% 11.67% Average shareholders' equity to average assets 8.11% 8.60% 8.33%
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review and analysis is intended to assist in understanding and evaluating the major changes in the financial condition and earnings performance of First Colonial Group, Inc. (the "Company") with a primary focus on the analysis of operating results for the years ended December 31, 1999, 1998 and 1997. The Company's consolidated earnings are derived primarily from the operations of Nazareth National Bank and Trust Company (the "Bank") and First C. G. Company, Inc. ("First C. G."). The information below should be read in conjunction with the Company's consolidated financial statements and accompanying notes thereto, and other detailed information appearing elsewhere in this report. Additional financial information can be found in the Company's Form 10-K report, a copy of which may be obtained upon request. During the two most recent fiscal years, there have been no changes in or disagreements with the Company's accountants on accounting and financial disclosure. The information concerning share and per share data included in this discussion has been restated to reflect the 5% stock dividends of June 1999, June 1998, and May 1997. Forward Looking Statements The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, statements as to litigation and the amount of reserves, statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company and the Bank, Federal and state government regulation, competition, results of itigation, and the time, expense and unanticipated problems in unanticipated problems in addressing the Year 2000 issue. These and other risks, uncertainties and other factors are discussed in this Annual Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). Financial Performance Summary In 1999, First Colonial Group recorded net income of $3,282,000. The 1999 net income is $250,000 or 8.2% higher than 1998 net income of $3,032,000. Net income in 1998 included a provision expense of $1,000,000 to the special reserve for possible losses resulting from specific pre-need funeral trusts which the Bank had been directed to invest in a private placement annuity. The Company's net income in 1998, exclusive of this special reserve, would have been $3,692,000. Net income in 1997 was $3,283,000. The basic earnings per share were $1.84, $1.68 and $1.83 in 1999, 1998 and 1997, respectively. The diluted earnings per share were $1.83 in 1999, $1.67 in 1998 and $1.83 in 1997. Diluted earnings per share include the effect of common stock equivalents such as options (see Note A.13 of the "Notes to Consolidated Financial Statements"). The basic and diluted earnings per share, exclusive of the special reserve in 1998, would have been $2.04. The Company's return on average assets was .86% in 1999 as compared to .86% in 1998 and .97% in 1997. The return on average equity was 10.90%, 9.79% and 11.67% in 1999, 1998 and 1997, respectively. The Company continued to achieve growth in total assets and deposits. Total assets at December 31, 1999 were $391,889,000 as compared to $358,496,000 at year end 1998. This is an increase of $33,393,000 or 9.3%. During 1998 total deposits grew by 10.2% or $29,931,000 to a year-end total of $324,480,000. Total deposits at December 31, 1998 were $294,549,000. Total loans amounted to $202,258,000 and $212,437,000 at December 31, 1999 and 1998, respectively. The loan decrease in 1999 was $10,179,000 or 4.8%. This decrease is attributed in part to the sale of $38,068,000 of residential real estate loans and a $4,140,000 or 10.2% decline in commercial loans during 1999. The principal factors affecting earnings in 1999 were a $408,000 or 2.8% increase in net interest income, higher other income of $175,000 or 5.1% exclusive of net gains on the sales of securities and mortgages, a decrease in the provision for possible loan losses of $75,000 and a reduction in Federal income taxes of $102,000. These earnings improvement factors were partially reduced by a decline in net gains on the sales of securities and mortgage loans of $400,000 and higher operating expenses of $110,000. The change in 1998 earnings was the result of a $757,000 increase in other income, a decrease in the provision for possible loan losses of $155,000 and a $265,000 reduction in Federal income taxes. Offsetting the earnings increases were a decline in net interest income of $117,000 and higher operating expenses of $1,311,000, including the provision for the special reserve of $1,000,000. - ------------------------------------------------------------------------------- SELECTED FINANCIAL DATA (Dollars in Thousands, except per share data) For the Year Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- CONSOLIDATED SUMMARY OF INCOME: Interest Income $ 26,353 $ 25,367 $ 25,444 $ 23,135 $ 21,896 Interest Expense 11,449 10,871 10,831 9,578 9,252 --------- --------- --------- --------- --------- Net Interest Income 14,904 14,496 14,613 13,557 12,644 Provision for Possible Loan Losses 375 450 605 670 1,798 Gains (Losses) on the Sale of Mortgage Loans 157 398 178 (30) 22 Other Income, Excluding Securities and Loan Sale Gains 3,635 3,460 3,044 2,364 2,230 Securities Gains, Net 563 722 601 308 22 Other Expense 14,673 14,563 13,252 11,571 11,204 --------- --------- --------- --------- --------- Income Before Income Taxes and Cumulative Effect of Accounting Method Change 4,211 4,063 4,579 3,958 1,916 Applicable Income Taxes 929 1,031 1,296 1,136 515 --------- --------- --------- --------- --------- Net Income $ 3,282 $ 3,032 $ 3,283 $ 2,822 $1,401 --------- --------- --------- --------- --------- Cash Dividends Paid $ 1,321 $ 1,275 $ 1,139 $ 1,011 $ 972 Cash Dividends Paid Per Share 0.74 0.70 0.64 0.58 0.56 Dividends Paid to Net Income 40.25% 42.05% 34.69% 35.82% 69.38% PER SHARE DATA: Basic Income $ 1.84 $ 1.68 $ 1.83 $ 1.60 $ 0.80 Diluted Net Income 1.83 1.67 1.83 1.60 0.80 Basic Average Common Shares Outstanding 1,786,019 1,805,051 1,786,741 1,764,973 1,741,319 Dilutive Average Common Shares Outstanding 1,789,311 1,812,898 1,792,064 1,767,958 1,741,732 CONSOLIDATED BALANCE SHEET DATA: Total Assets $391,889 $358,496 $346,738 $322,352 $298,514 Loans (Net of Unearned Discount) 202,258 212,437 229,587 220,117 193,130 Mortgage Loans Held-for-Sale --- 603 759 721 1,006 Deposits 324,480 294,549 282,255 267,668 254,102 Securities Sold Under Agreements to Repurchase 1,730 5,094 8,804 3,795 6,096 Debt (Short-Term and Long-Term) 30,000 20,000 18,390 18,512 7,643 Shareholders' Equity 28,243 31,717 30,357 26,805 24,767 Book Value Per Share 15.28 18.17 17.49 16.37 16.04 SELECTED CONSOLIDATED RATIOS: Net Income To: Average Total Assets 0.86% 0.86% 0.97% 0.92% 0.48% Average Shareholders' Equity 10.90% 9.79% 11.67% 11.16% 5.98% Average Shareholders' Equity to Average Assets 8.11% 8.60% 8.33% 8.35% 8.20% - -------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) For the Year Ended December 31, 1999 1998 1997 Int Avg Int Avg Int Avg Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/ Bal Exp Rate Bal Exp Rate Bal Exp Rate ASSETS INT-EARNING ASSETS Int-Bearing Balances with Banks $ 3,928 $ 196 4.99% $3,060 $ 176 5.75% $ 1,252 $ 71 5.67% Fed Funds Sold 975 47 4.82 641 34 5.30 18 1 5.56 Inv Sec Taxable 107,054 6,829 6.38 80,939 5,002 6.18 69,876 4,592 6.57 Non-Tax(1) 31,668 2,787 7.22 26,155 1,923 7.35 16,653 1,268 7.62 Loans(1(2) 212,993 17,817 8.36 219,357 18,910 8.62 229,205 19,972 8.71 Allow for Loan Losses (2,669) --- --- (2,710) --- --- (2,614) --- --- -------- ------ -------- ------ -------- ------ Net Loans 210,324 17,817 8.47 216,647 18,910 8.73 226,591 19,972 8.81 -------- ------ -------- ------ -------- ------ Total Int- Earn Assets 353,949 27,176 7.68 327,442 26,045 7.95 314,390 25,904 8.24 Non-Int Earn Assets 29,153 --- --- 25,419 --- --- 24,391 --- --- -------- ------ -------- ------ -------- ------ TOTAL ASSETS, INTEREST INCOME $383,102 27,176 7.09 $352,861 26,045 7.38 $338,781 25,904 7.65 -------- ------ -------- ------ -------- ------ LIABILITIES INTEREST-BEARING LIABILITIES Int-Bearing Deposits Demand Deposits $ 52,395 619 1.18 $ 48,988 562 1.15 $ 45,338 532 1.17 Money Market Deposits 13,827 382 2.76 14,366 404 2.81 14,380 404 2.81 Savings & Club Deposits 63,199 1,304 2.06 61,177 1,350 2.21 62,746 1,530 2.44 CD's over $100,000 5,040 202 4.01 4,700 175 3.72 5,014 210 4.19 All Other Time Dep 139,076 7,312 5.26 124,823 6,975 5.59 118,846 6,636 5.58 -------- ------ -------- ------ -------- ------ Total Int- Bearing Deposits 273,537 9,819 3.59 254,054 9,466 3.73 246,324 9,312 3.78 Securities Sold Under Agreements to Repurchase 5,994 194 3.24 5,821 210 3.61 6,459 240 3.72 Other Short- Term Borrowings 1,721 89 5.17 974 55 5.65 2,325 132 5.68 Long-Term Debt 23,534 1,347 5.72 18,631 1,140 6.12 18,422 1,147 6.23 -------- ------ -------- ------ -------- ------ Total Int- Bearing Liabilities 304,786 11,449 3.76 279,480 10,871 3.89 273,530 10,831 3.96 NON-INTEREST BEARING LIABILITIES Non-Int- Bearing Deposits 41,337 --- --- 35,254 --- --- 31,074 --- --- Other Liab 6,843 --- --- 7,157 --- --- 6,054 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB 352,966 11,449 3.24 321,891 10,871 3.38 310,658 10,831 3.49 SHAREHOLDERS' EQUITY 30,136 --- --- 30,970 --- --- 28,123 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB & SHAREHOLDERS' EQUITY, INTEREST EXPENSE $383,102 11,449 2.99 $352,861 10,871 3.08 $338,781 10,831 3.20 NET INTEREST INCOME $ 15,727 $15,174 $15,073 -------- ------- ------- Net Interest Spread (3) 3.92 4.06 4.28 Effect of Int-Free Sources Used to Fund Earnings Assets 0.52 0.57 0.51 NET INTEREST MARGIN (4) 4.44% 4.63% 4.79% ---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable equivalent basis. The taxable equivalent adjustments included above are $678,000, $460,000 and $349,000 for the years 1998, 1997and 1996, respectively. The effective tax rate used for the taxable equivalent adjustment was 34%. (2) Loan fees of $358,000, $377,000 and $303,000 for the years 1998, 1997 and 1996, respectively, are included in interest income. Average loan balances include non-accruing loans and average loans held-for-sale of $3,726,000, $1,781,000 and $2,212,000 for 1998, 1997 and 1996, respectively. (3) Net interest spread is the arithmetic difference between yield on interest-earning assets and the rate paid on interest-bearing liabilities. (4) Net interest margin is computed by dividing net interest income by averaging interest-earning assets. Average Balances The "Consolidated Comparative Statement Analysis" table sets forth a comparison of average daily balances, interest income and interest expense on a fully taxable equivalent basis and interest rates calculated for each major category of interest-earning assets and interest-bearing liabilities. For purposes of this analysis, the computations in the "Consolidated Comparative Statement Analysis" were prepared using the Federal statutory rate of 34%; there are no state or local taxes on income applicable to the Company. For further information relating to the effective income tax rate of the Company, see Note I of the "Notes to Consolidated Financial Statements". Interest income on loans includes loan fees of $212,000, $358,000 and $377,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Net Interest Income Net interest income is the difference between the interest income on loans, investments and other interest-earning assets, and the interest paid on deposits and other interest-bearing liabilities. Net interest income is the primary source of earnings for the Company. Therefore, changes in this category can be essential to the overall net income of the Company. The net interest income, on a fully taxable equivalent basis, amounted to $15,727,000 for 1999, an increase of $553,000 over $15,174,000 in 1998. As shown in the "Rate/Volume Analysis" table, the increase in net interest income in 1999 was attributable to higher net interest income from changes in volume of $355,000 and changes in rates of $198,000. The volume-related change resulted primarily from increases in investment securities partially offset by decreased average balances for loans (see discussions on "Loan Portfolio" and "Mortgage Loans Held-for-Sale") and an increase in time deposits. The rate-related change was primarily the result of the decrease of interest paid on deposits and debt and an increase in the interest rate earned on investments, offset in part by a decline in the interest rates earned on loans. Net interest income, on a fully taxable equivalent basis, in 1998 increased $101,000 over the 1997 figure of $15,073,000. This increase was the result of growth in investments, reduced in part by a decrease in loans and an increase in time deposits. Also affecting 1998 was the decrease in interest rates earned on loans and investments exceeding the decrease on the interest rates paid on interest-bearing liabilities. The net interest margin, a measure of net interest income performance, is determined by dividing net interest income by total interest-earning assets. The net interest margin was 4.44% for 1999, 4.63% for 1998 and 4.79% for 1997. The decrease in 1999 was the result of the 0.27% decrease in the average rate earned on interest-earning assets being greater than the 0.13% decrease in the average interest rate paid on interest-bearing liabilities. The result was a decline in the interest spread, the difference of interest earned on assets less the interest paid on deposits and debt. The interest spread was 3.92%, 4.06% and 4.28% for 1999, 1998 and 1997, respectively. The impact on earnings by the reduction in the interest spread was diminished in part by the $6,083,000 increase in 1999 of non-interest-bearing deposits. The following table sets forth a "Rate/Volume Analysis", which segregates in detail the major factors that contributed to the changes in net interest income for the years ended December 31, 1999 and 1998, as compared to the respective previous periods, into amounts attributable to both rate and volume variances. In calculating the variances, the changes were first segregated into (1) changes in volume (change in volume times the old rate), (2) changes in rates (change in rate times the old volume) and (3) changes in rate/volume (changes in rate times the change in volume). The changes in rate/volume have been allocated in their entirety to the change in rates. The interest income included in the "Rate/Volume Analysis" table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. Non-accruing loans have been used in the daily average balances to determine changes in interest income due to volume. Loan fees included in the interest income calculation are not material. RATE/VOLUME ANALYSIS (Dollars in Thousands) (Fully Taxable Equivalent) Increase (Decrease) in Year Ended December 31, 1999 to 1998 1998 to 1997 Change Due to: Change Due To: TOTAL RATE VOLUME TOTAL RATE VOLUME ----- --- ----- ----- ----- ----- Interest Income Interest-Bearing Balances With Banks $ 20 $ (30) $ 50 $ 105 $ 2 $ 103 Federal Funds Sold 13 (5) 18 33 (2) 35 Investment Securities 2,191 146 2,045 1,065 (328) 1,393 Loans (1,093) (580) (513) (1,062) (146) (916) ----- --- ----- ----- ----- ----- Total Interest Income 1,131 (469) 1,600 141 (474) 615 ----- --- ----- ----- ----- ----- Interest Expense Demand Deposits, Savings & Clubs (11) (102) 91 (150) (192) 42 Time Deposits 364 (442) 806 304 (9) 313 Securities Sold Under Agreements to Repurchase (16) (22) 6 (30) (6) (24) Short-Term Borrowings 34 (8) 42 (77) - (77) Long-Term Borrowings 207 (93) 300 (7) (20) 13 ----- --- ----- ----- ----- ----- Total Interest Expense 578 (667) 1,245 40 (227) 267 ----- --- ----- ----- ----- ----- Increase in Net Interest Income $ 553 $ 198 $ 355 $ 101 $ (247) $ 348
Service Charges and Other Income Service charge income on deposit accounts amounted to $1,682,000 in 1999 compared to $1,594,000 in 1998 and $1,349,000 in 1997. In 1999, the service charges on deposit accounts increased by $88,000 or 5.5% over 1999 and the 1998 increase over 1997 was $245,000 or 18.2%. The increases in 1999 and 1998 were primarily the result of increases in the number of deposit accounts and increases in some deposit-related fees, including charges for the use by non-depositors of the Bank's automated teller machines and the Bank's debit card. In 1999, the Company had a gain on the sale of mortgage loans of $157,000 as compared to a gain of $398,000 in 1998. In 1997, there was also a gain of $178,000 (see discussion on "Mortgage Loans Held-for-Sale") Other operating income was $707,000 in 1999, as compared to $641,000 in 1998. Other operating income for 1997 was $645,000. Investment Management and Trust Division Revenue from the Bank's Investment Management and Trust Division operations was $1,246,000 in 1999, representing an increase of $21,000 or 1.7% over revenue of $1,225,000 in 1998. The Investment Management and Trust Division revenue for 1998 increased by 16.7% or $175,000 over the 1997 revenue of $1,050,000. Trust assets are held by the Bank for its customers in a fiduciary or agency capacity, and thus, are not included in the financial statements of the Company. The increase in 1999 and 1998 Trust revenue was the result of the addition of new accounts and increased market values. Fees are assessed by the Trust Division to some customers based on the market value of the assets held in the customers' account. As a result, changing market values will impact the revenues earned from Trust operations. Other Expenses Salaries and employee benefits represent a significant portion of non-interest expense. These expenses, amounting to $6,780,000, increased by $395,000 or 6.2% in 1999 compared to $6,385,000 in 1998. These expenses in 1998 amounted to an increase of $352,000 or 5.8% over the $6,033,000 reported in 1997. The increase in 1999 was primarily due to salary increases of approximately 3.5%, the addition of staff related to the new branch opened in Stroudsburg during the year and increases in the Trust Division staff. Salary expense in 1998 increased due to normal salary increases of approximately 4% and the addition of staff in the Lending Division. Occupancy and equipment expenses were $2,171,000 in 1999 which was $53,000 greater than the 1998 amount of $2,118,000. The 1998 amount was $60,000 less than the 1997 occupancy and equipment expense of $2,178,000. The increase in 1999 was primarily due to the establishment of the new branch in Stroudsburg and new equipment related to the Y2K issue. The decrease in 1998 was the result of cost control measures which offset the added expenses of a new teller system and Trust system. Other operating expenses (such as the provision for the special reserve, advertising, publicity, litigation costs, deposit insurance premiums, data processing fees, legal, accounting, supplies, postage and telephone) in 1999 were $5,722,000, compared to $6,060,000 in 1998 and $5,041,000 in 1997. The decrease of $338,000 or 5.6% in other operating expense during 1999 was primarily due to a $943,000 decrease in the provision to the special reserve for Trust operations offset in part by increases of $251,000 in legal and litigation expenses, $190,000 in data processing fees and $95,000 in consulting fees. The increase in 1998 of $1,019,000 or 20.2% was the result of the provision to the special reserve for Trust Operations of $1,000,000 and higher legal and loan collection costs. The Company's advertising costs are expensed as incurred. Advertising costs were $574,000, $597,000 and $524,000 for the years ended December 31, 1999, 1998 and 1997, respectively (see Notes A.15 and H of the "Notes to Consolidated Financial Statements"). Investment Securitie The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company had no trading securities in 1999 and 1998. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements (see Notes A.2 and B of the "Notes to Consolidated Financial Statements"). Held-to-maturity securities totaled $19,887,000 at December 31, 1999 and $17,723,000 at December 31, 1998. The Company has the intent and ability to hold these securities until maturity. The fair value of these securities was $19,123,000 and $17,920,000 at December 31, 1999 and 1998, respectively. The Company, at December 31, 1999 and 1998, did not hold any securities identified as derivatives in the form of Collateralized Mortgage Obligations (CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps, futures or options. The Company held adjustable rate mortgage-backed securities issued by U. S. Government Agencies totaling $19,904,000 at December 31, 1999 ($16,147,000 in available-for-sale and $3,757,000 in held-to-maturity) and $19,844,000 at December 31, 1998 ($15,776,000 in available-for-sale and $4,068,000 in held-to-maturity). The interest rates on most of these securities are tied to various indexes, are subject to various caps, and adjust annually. The Company also held fixed rate mortgage-backed securities issued by U. S. Government Agencies totaling $31,145,000 at December 31, 1999 ($29,882,000 in available-for-sale and $1,263,000 in held-to-maturity) and $19,258,000 at December 31, 1998 ($17,365,000 in available-for-sale and $1,893,000 in held-to-maturity). Securities Available-for-Sale The Company had $132,356,000 of securities available-for-sale at December 31, 1999, as compared to $98,389,000 at December 31, 1998. At December 31, 1999, the net unrealized loss on these securities was $4,322,000, net of the tax effect of $2,226,000. There was a net unrealized gain of $527,000, net of the tax effect of $272,000 on the available-for-sale securities at December 31, 1998. The net unrealized gain or loss is included in shareholders' equity (see Notes A.2 and B of the "Notes to Consolidated Financial Statements"). These securities are being held to meet the liquidity needs of the Company and to provide flexibility to support earnings in changing interest rate environments. The tax-free municipal securities in the available-for-sale category will also be used to assist in managing the Company's Federal Tax position. While management has the intent and the ability to hold available-for-sale securities on a long-term basis or to maturity, they may sell these securities under certain circumstances. Such occurrences could include, but are not limited to, meeting current liquidity needs, adjusting maturities or repricing periods to reduce interest rate risk, reducing Federal Income Tax liability, improving current or future interest income, adjusting risk-based capital position, changing portfolio concentrations, and providing funds for increased loan demand or deposit withdrawals. Upon the sale of an available-for-sale security, the actual gain or loss is included in income. During 1999, $16,295,000 of securities available-for-sale were sold, resulting in a total net gain of $563,000, which was recorded in income and includes net gains on equity securities sold by First C. G. of $401,000. The securities sold were primarily U. S. Treasury, U. S. Agency mortgage-backed bonds and municipal bonds held by the Bank and equity securities held by First C. G. The sales by the Bank were executed to provide liquidity and improve future interest income. The sales of equity securities by First C. G. were made to recognize certain gains, reposition the equity portfolio and provide funds for a $1,000,000 loan to the Bank's Employee Stock Ownership Plan (see Note J of the "Notes to Consolidated Financial Statements"). Securities purchased by the Company in 1999 totaled $78,275,000. Included in these purchases were $36,323,000 in U. S. Agency fixed rate bonds, $3,086,000 in U. S. Agency adjustable rate bonds, $27,690,000 in U. S. Agency mortgage-backed bonds, $8,016,000 in municipal securities, $215,000 in public housing bonds, $1,000,000 in U. S. Treasury bonds, $494,000 in corporate bonds and $1,451,000 in equity securities. The securities sold in 1998 totaling $10,620,000 were primarily U. S. Treasury, U. S. Agency and mortgage-backed bonds held by the Bank and equity securities held by First C. G. The 1998 sales resulted in net gains of $722,000. These gains include net gains of $694,000 on equity securities held by First C. G. The sales were made to provide liquidity to fund a $500,000 loan to the Bank's Employee Stock Ownership Plan, improve future income and invest in a broader list of equity securities. Security purchases in 1998 amounted to $76,280,000 which were primarily U. S. Agency mortgage-backed bonds, U. S. Agency fixed rate bonds, municipal securities and U. S. Treasury bonds. In 1997, a net gain on security transactions of $601,000 was recorded on sales of $13,279,000. Loan Portfolio At December 31, 1999, total loans (net of unearned discounts of $691,000 in 1999 and $1,025,000 in 1998) of $202,258,000 were $10,179,000, or 4.8% less than the 1998 amount of $212,437,000. The decline in loans in 1999 was primarily the result of a decrease of $7,044,000 or 5.9% in residential real estate loans, a decrease of $4,952,000 or 42.4% in real estate construction loans, a decrease of $2,778,000 or 9.4% in commercial real estate loans and a decrease of $1,441,000 or 11.9% in commercial and municipal loans partially offset by a $5,702,000 or 14.2% increase in consumer loans. Loans Outstanding at December 31 by Major Category are as follows: - -------------------------------------------------------- Dollars in Thousands at Dec. 31, 1999 1998 - -------------------------------------------------------- Real Estate Residential $ 112,870 $ 119,914 Real Estate Construction 6,737 11,689 Real Estate Commercial 26,809 29,587 Consumer 45,886 40,184 Municipal 1,096 1,178 Commercial & Other 9,551 10,910 --------- --------- Total 202,949 213,462 Unearned Discount (691) (1,025) --------- --------- Net $ 202,258 $ 212,437 - --------------------------------------------------------
The decline in residential real estate loans was the result of management's decision to sell $20,977,000 of these loans originated in the prior year to reduce the Bank's interest rate risk and concentration in these types of loans (see discussion on "Mortgage Loans Held-for-Sale"). The Company's primary geographic area for its lending activities includes Monroe, Northampton and Lehigh counties, Pennsylvania. Making loans to businesses and individuals entails risks to the Company, including ascertaining cash flows, evaluating the credit history, assets and liabilities of a potential borrower, and determining the value of the various types of collateral pledged as security. Lending involves determining risks, managing those risks and charging an appropriate interest rate to compensate for taking such risks, and to cover the cost of funds (see previous discussion on "Market Risk"). The loan to deposit ratio was 62.3% at December 31, 1999 and 72.1% at December 31, 1998. Additional information concerning loans is shown in Note C of the "Notes to Consolidated Financial Statements". Mortgage Loans Held-for-Sale In 1999, management continued a program of selling most of its newly originated residential real estate loans in the secondary market. The purpose of this plan is to reduce the Company's interest rate risk and to provide funds to support a higher level of loan originations. The sales of residential real estate loans in the secondary market for 1999 amounted to $38,068,000. The amount of these loans originated in 1999 was $17,091,000, with the remaining $20,977,000 being originated in prior years of which $603,000 was identified as held-for-sale at December 31, 1998. The sale of prior years loans in excess of those identified as held-for-sale was done to restructure the loan portfolio, reducing interest rate risk and the level of concentration in residential real estate loans. A net gain of $157,000 was recorded on the total amount of loans sold. At December 31, 1999, there were no residential real estate loans identified as held-for-sale. In 1998, the Company originated $21,316,000 of residential real estate loans which were sold in the secondary market. In addition, during 1998, $21,564,000 of residential real estate loans originated in prior years were sold. A net gain of $398,000 was recognized on the total loans sold in 1998. At December 31, 1998, $603,000 of residential real estate loans were identified as held-for-sale. Included in other operating expenses in 1998 is an unrealized loss of $1,000 on these loans. During 1997, the Company had a net gain of $178,000 on the sale of $10,754,000 of residential real estate loans. The other operating expenses for 1997 include an unrealized loss of $13,000 on mortgage loans held-for-sale of $759,000 at year-end 1997. The Company intends to continue to originate residential real estate loans in 2000 and to sell some of these loans in the secondary market. The Company services all of the residential mortgage oans sold and plans to continue this practice. Non-Performing Loans The following discussion relates to the Bank's non-performing loans, which consist of loans on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is in doubt. The Company recognizes these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Payments received on non-accrual loans are applied to principal until such time as the principal is paid off. Any additional payments are then recognized as interest income. The table "Non-Accrual Loans" shows the balance and the effect non-accrual loans have had on interest income for each of the periods indicated. Loans on non-accrual status totaled $1,311,000 at December 31, 1999. This balance represents a $66,000 increase in non-accrual loans during 1999 due to the deterioration of certain commercial, residential real estate and consumer loans. Management believes there is sufficient collateral to cover any possible losses on these loans. The Company did not have any significant loans that qualify as "Troubled Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and Creditors for Troubled Debt Restructuring", at December 31, 1999 and 1998. Non-Accrual Loans - ------------------------------------------------------------------------------- (Dollars in Thousands) at December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Non-accrual loans on a cash basis $ 1,311 $ 1,245 $ 813 $ 1,440 $ 2,181 Non-accrual loans as a percentage of total loans .65% .59% .35% .65% 1.13% Interest which would have been recorded at original rate $ 56 $ 144 $ 64 $ 210 $ 214 Interest that was reflected in income 35 23 111 40 44 Net impact on interest income $ 21 $ (121) $ 47 $ (170) $ (170) - -------------------------------------------------------------------------------
Set forth below are the amounts of loans outstanding as of the end of each of the periods indicated that are 90 days and over past due and are on an accrual basis and are not included in the table above. Management continues to accrue interest on these loans since they are secured and in the process of collection and are expected to be eventually paid in full. Accruing Loans Past Due 90 Days or More - -------------------------------------------------------------------------------- (Dollars in Thousands) at December 31, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 1,491 $1,021 $ 802 $ 986 $ 1,115 Accruing loans past due 90 days or more as a percentage of total loans .74% .48% .35% .45% .58% - --------------------------------------------------------------------------------
The Company measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, impairment may be measured based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued in such loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation for credit losses related to loan impairment at December 31, 1999 and 1998 are as follows: - ------------------------------------------------------------ (Dollars in Thousands) at December 31, 1999 1998 - ------------------------------------------------------------ Principal amount of impaired loans $370 $524 Accrued interest --- --- Deferred loan costs --- --- ------- ------- 370 524 Less valuation allowance at December 31, (74) (303) -------- -------- $296 $221 - ------------------------------------------------------------
The activity in the allowance account for credit losses related to impaired loans is as follows: - ----------------------------------------------------------------- (Dollars in Thousands) for the year ended 1999 1998 - ----------------------------------------------------------------- Valuation allowance at January 1, $303 $138 Provision for loan impairment --- 294 Direct charge-offs (161) (129) Recoveries --- --- Transfers to Unallocated Reserve (68) --- ------- ------- Valuation allowance at December 31, $ 74 $303 - -----------------------------------------------------------------
Total cash collected on impaired loans during 1999 was $267,000, of which $232,000 was credited to the principal balance outstanding on such loans, and $35,000 was recognized as interest income. Total cash collected on impaired loans during 1998 was $506,000, of which $483,000 was credited to the principal balance outstanding on such loans and $23,000 was recognized as interest income. Interest that would have been accrued on impaired loans was $56,000 and $144,000 in 1999 and 1998, respectively. The valuation allowance for impaired loans of $74,000 at December 31, 1999 and $303,000 at December 31, 1998 is included in the "Allowance for Possible Loan Losses" which amounts to $2,437,000 and $2,691,000 at December 31, 1999 and 1998, respectively. Shown in the following table is the amount of "Other Real Estate Owned" as of the end of each of the periods indicated recorded as an asset on the Company's books as the result of the foreclosure of certain non-performing real estate loans. OTHER REAL ESTATE OWNED - ----------------------------------------------------------------- (Dollars in Thousands) at December 31, 1999 1998 1997 1996 1995 - ----------------------------------------------------------------- Other Real Estate $ 571 $ 636 $ 284 $ 595 $ 364 Owned - -----------------------------------------------------------------
Allowance and Provision for Possible Loan Losses The allowance for possible loan losses constitutes the amount available to absorb estimated losses within the loan portfolio. As of December 31, 1999, the allowance for possible loan losses was $2,437,000 as compared to the December 31, 1998 amount of $2,691,000 and the December 31, 1997 amount of $2,664,000. The allowance for possible loan losses as a percentage of total loans outstanding as of December 31, 1999 was 1.20%. This compares to 1.27% at the end of 1998 and 1.16% at the end of 1997. The decrease in the allowance for possible loan losses of $254,000 was the result of management's review of loans outstanding (see discussion on "Loan Portfolio") and non-performing loans (the sum of non-accrual loans and accruing loans past due 90 days or more) of $2,802,000 as of December 31, 1999 as compared to $2,266,000 as of December 31, 1998 (see tables on "Non-Accrual Loans" and "Accruing Loans Past Due 90 Days or More"). Net charge-offs as detailed in the table "Allowance for Possible Loan Losses" were $629,000 in 1999 or $206,000 greater than the 1998 amount of $423,000. The 1999 charge-offs were the result of losses on commercial, consumer and residential real estate loans. The net charge-offs in 1998 were primarily the result of losses on commercial, consumer and residential loans. Net loans charged-off in 1997 were $473,000. The ratio of net loan charge-offs to average loans outstanding was .30%, .19% and .21% in 1999, 1998 and 1997, respectively. The provision for loan losses for the year ended December 31, 1999 was $375,000 as compared to $450,000 for the year ended December 31, 1998 and $605,000 for the year ended December 31, 1997. The decrease in 1999 from 1998 was $75,000. In 1998, the decrease in the provision was $155,000 from 1997. The allowance for possible loan losses is established through a provision for possible loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, diversification by industry, and the establishment of lending targets to various segments of the portfolio. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees. Management believes that these procedures provide adequate assurances against the adverse impact from any event or set of conditions, and that the level of the allowance for possible loan losses is sufficient to meet the present and potential risk characteristics of the loan portfolio, including the current level of non-performing and past-due loans. The allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects possible losses resulting from the analysis of individual loans, pools of loans and commitments. The specific allowance allocations for individual loans is based on an analysis of individual loans where the internal credit rating is at or below a predetermined classification. The general allocation for pools of loans and commitments is based on historical loss experience adjusted for current trends in areas such as lending policies, economic conditions, delinquencies and concentrations. The historical loss factor is determined using actual loss experience and the related internal risk rating of loans charged off. The unallocated portion of the allowance is a function of the total allowance and the allocated portion of the allowance. The analysis of the allowance is performed quarterly and historical factors are updated periodically based on actual experience. ALLOWANCE FOR POSSIBLE LOAN LOSSES - ------------------------------------------------------------------------------- (Dollars in Thousands) For the Year Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Allowance for Loan Losses at Beginning of Year $ 2,691 $ 2,664 $ 2,532 $ 2,443 $ 2,187 Loans Charged-Off by Category: Commercial 255 133 249 365 161 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 147 59 20 31 -- Consumer/Installment 330 348 301 271 319 Other -- -- -- -- 1,278 -------- -------- -------- -------- ------- Total Loans Charged-Off 732 540 570 667 1,758 -------- -------- -------- -------- ------- Loans Recovered by Category: Commercial 30 42 19 39 105 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 29 1 1 -- -- Consumer/Installment 44 74 77 47 97 Other -- -- -- -- 14 -------- -------- -------- -------- -------- Total Loans Recovered 103 117 97 86 216 -------- -------- -------- -------- -------- Net Loans Charged-Off 629 423 473 581 1,542 -------- -------- -------- -------- -------- Provision Charged to Expense 375 450 605 670 1,798 -------- -------- -------- -------- -------- Allowance for Loan Losses at End of Period $ 2,437 $ 2,691 $ 2,664 $ 2,532 $ 2,443 ======== ======== ======== ======== ======== Total Loans Average $212,993 $217,191 $228,245 $206,378 $190,874 Year-End $202,258 $212,437 $229,587 $220,117 $193,130 Net Loans Charged Off to: Average Loans .30% .19% .21% .28% .81% Loans at Year-End .31% .20% .21% .26% .80% Allowance for Possible Loan Losses at Year-End 25.81% 15.72% 17.76% 22.95% 63.12% Provision for Possible Loan Losses 167.73% 94.00% 78.18% 86.72% 85.76% Allowance for Possible Loan Losses at Year-End to: Average Loans 1.14% 1.24% 1.17% 1.23% 1.28% Loans at Year-End 1.20% 1.27% 1.16% 1.15% 1.26% - -------------------------------------------------------------------------------
Deposits Deposits are the primary source of the Company's funds. During 1999, deposits increased by $29,931,000 or 10.2% to a total of $324,480,000 at December 31, 1999, from a total of $294,549,000 at December 31, 1998. Average deposits for 1999 were $314,874,000, an increase of $25,566,000 or 8.8% over the average total deposits for 1998 of $289,308,000. Contributing to the increase in average deposits was the strong growth of checking deposits both interest and non-interest bearing as consumers responded to a marketing campaign to attract these types of deposits and continued growth in certificates of deposit and savings accounts. The deposit growth in checking deposits, certificates of deposit and savings accounts was partially offset by a small decline in money market accounts. The continued growth of deposits held by the Company and the banking industry in general could be adversely affected by the flow of funds into credit unions, mutual funds and other investment options. The Bank's time deposits, excluding certificates of deposit under $100,000, increased in 1999 with average balances of $139,076,000, which was $14,253,000 or 11.4% higher than the 1998 average balance of $124,823,000. Non-interest bearing deposits averaged $41,337,000 in 1999 as compared to $35,254,000 in 1998, an increase of $6,083,000 or 17.3%. In addition, there was an increase in average interest-bearing demand deposits of $3,407,000 or 7.0% to $52,395,000 in 1999 from $48,988,000 in 1998, an increase in average savings and club deposits of $2,022,000 or 3.3% from an average balance of $61,177,000 in 1998 to an average balance of $63,199,000 in 1999 and an increase in average certificates of deposit over $100,000 which averaged $5,040,000 in 1999 as compared to $4,700,000 in 1998, an increase of $340,000 or 7.2%. Partially offsetting this growth was a $539,000 or 3.8% decline in average money market deposits. Average money market deposits were $13,827,000 and $14,366,000 in 1999 and 1998, respectively. Short-Term Borrowings The Bank had securities sold under agreements to repurchase totaling $1,730,000 at December 31, 1999 and $5,094,000 at December 31, 1998. At December 31, 1999 and 1998, there were no short-term borrowings in the form of Federal funds purchased, Federal Reserve Bank discount borrowings or Federal Home Loan Bank borrowings. Additional information relating to short-term borrowings can be found in Note F of the "Notes to Consolidated Financial Statements". Liquidity and Capital Resources Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of asset liquidity are money market investments, short-term investment securities, and funds received from the repayment of loans and short-term borrowings. At year-end 1999, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $21,861,000, and securities maturing within one year totaled $2,249,000. At year-end 1998, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $17,560,000, and securities maturing within one year were $4,493,000. The Bank is a member of the Federal Home Loan Bank of Pittsburgh, Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan Bank of Pittsburgh in the amount of $5,548,000 at December 31, 1999, and $3,193,000 at December 31, 1998. These deposits are included in interest-bearing deposits with banks on the Company's financial statements. As a result of this relationship, the Bank places most of its short-term funds at the Federal Home Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000, all of which was available at December 31, 1999. The Bank had four long-term loans from the Federal Home Loan Bank of Pittsburgh totaling $30,000,000 at December 31, 1999 and three long-term loans totaling $20,000,000 at December 31, 1998. The loans outstanding at December 31, 1999 were originated in 1999, 1998 and 1996 with the proceeds used to fund the growth in residential real estate loans and the investment portfolio. The loans are for $8,000,000 originated in August, 1996, and due August, 2000, at a fixed rate of 5.89%, $5,000,000 originated in December, 1996 and due December, 2001, at a variable rate at LIBOR plus 3 basis points (6.26% at December 31, 1999), $7,000,000 originated in October, 1998 and due October, 2008, at a fixed rate of 4.86% until December, 2003, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points and $10,000,000 originated in August, 1999, and due in August, 2004, at a fixed rate of 6.06% until August 21, 2001, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, if the LIBOR rate is 7.5% or higher. If the lender elects to convert a fixed rate loan to a variable rate, the Bank may prepay the loan converted in full at the time of conversion without a penalty. The Bank had an additional loan from the Federal Home Loan Bank at December 31, 1997 in the amount of $5,000,000 that was paid in full in November, 1998. This loan was originated in 1996 and had a fixed interest rate of 5.96% (see Note G of the "Notes to Consolidated Financial Statements"). Cash flows for the year ended December 31, 1999, consisted of cash provided by financing activities of $34,659,000 and cash provided by operating activities of $3,889,000 offset in part by cash used in investing activities of $36,535,000 resulting in a net increase in cash and cash equivalents of $2,013,000. The cash provided by financing activities was comprised of a net increase in certificates of deposit of $27,873,000, a net increase in long-term debt of $10,000,000, a net increase in interest and non-interest bearing demand and savings deposits of $2,058,000, and proceeds from the sale of common stock to the Dividend Reinvestment Plan of $302,000. Partially offsetting these increases were a net decrease in repurchase agreements of $3,364,000, the payment of cash dividends of $1,321,000 and a net increase to the ESOP debt of $885,000. The cash provided by operating activities was comprised principally of the proceeds from mortgage loan sales of $38,068,000, net income of $3,282,000, depreciation and amortization of $1,027,000, an increase in accrued interest payable of $672,000 and the provision for possible loan losses of $375,000, reduced in part by mortgage loans originated for sale of $37,460,000, net investment securities gains of $563,000, a net increase in other assets of $970,000, an increase in accrued interest income of $503,000 and net gains on the sale of mortgage loans of $157,000. The cash used in investing activities was primarily for the purchase of securities available-for-sale in the amount of $72,150,000, the purchase of securities held-to-maturity in the amount of $6,559,000, a net increase in interest-bearing deposits with banks of $2,288,000 and the purchase of premises and equipment in the amount of $1,143,000. These cash uses were partially offset by the proceeds from the sales of securities available-for-sale of $16,858,000, proceeds from the maturities of securities available-for-sale of $15,331,000, proceeds from the maturities of securities held-to-maturity of $3,622,000 and a net decrease in loans of $9,412,000. The Company recognizes the importance of maintaining adequate capital levels to support sound, profitable growth and to encourage depositor and investor confidence. Shareholders' equity at December 31, 1999 was $28,243,000 as compared to $31,717,000 at December 31, 1998, a decrease of $3,474,000 or 11.0%. This decrease was attributable to a decline of $4,848,000 in accumulated other comprehensive income (see Note A.7 of the "Notes to Consolidated Financial Statements"), and a net increase of $885,000 in ESOP debt. These decreases were partially offset by retained earnings and the sale of common shares pursuant to the Dividend Reinvestment Plan. Total shareholders' equity, exclusive of accumulated other comprehensive income was $32,564,000 and $31,190,000 at December 31, 1999 and 1998, respectively. This is an increase of $1,374,000 or 4.4%. The accumulated other comprehensive income is comprised of the unrealized gains or losses on securities available-for-sale. The unrealized losses on securities available-for-sale at December 31, 1999 amounted to $4,322,000 (net of tax effect of $2,226,000). Included in shareholders' equity at December 31, 1998 was $527,000 (net of tax effect of $272,000) of unrealized losses on securities available-for-sale (see discussion on "Securities Available-for-Sale"). The Company paid a 5% stock dividend on its common stock from authorized but unissued shares on June 24, 1999 to all shareholders of record at the close of business on June 4, 1999. On June 25, 1998, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on June 5, 1998. The Company also paid a 5% stock dividend on June 19, 1997 to shareholders of record on May 30, 1997. Fractional shares on the stock dividends were paid in cash. The number of average shares and per share information in this report has been restated to reflect these 5% stock dividends. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In 1999, 15,061 new common shares were purchased pursuant to this Plan at an average price of $20.99 for total proceeds of $316,000. In 1998, 10,910 common shares were purchased pursuant to the Plan at an average price of $29.98 per share. The total proceeds were $327,000. New common shares purchased in 1998 totaled 7,992 at an average price of $29.15 for proceeds of $233,000. The remaining purchase of 2,918 shares were from Treasury shares at an average price of $33.21 for proceeds of $94,000. A Non-Employee Directors Stock Option Plan was adopted by the Company in 1994. This plan provides for the awarding of stock options to the Company's non-employee directors. In 1999, options to purchase 7,654 shares of the Company's common stock at an average price of $21.81 were granted. During 1999, options for 1,276 shares of the Company's common stock issued pursuant to the plan were exercised at an average price of $13.32 per share. No options were issued or exercised under this Plan in 1998. During 1997, options for 957 shares of the Company's common stock were exercised by a non-employee director at a price of $13.32 per share. The Company also has a "Stock Option Plan" that was originally adopted in 1986 and the "1996 Stock Option Plan" that was adopted in 1996 which provide for the granting of options to acquire the Company's common stock for officers and key employees. In 1999, no options were issued under this plan. In 1998, options to purchase 32,524 shares of the Company's common stock at a price of $33.56 per share were granted to certain officers. No options were exercised under this plan in 1999 and 1998. During 1997, options to purchase 20,948 shares of the Company's common stock at a price of $21.31 were issued under this plan. In 1997, options to purchase 6,330 shares of the Company's common stock issued pursuant to the 1986 Plan were exercised at an average price of $14.93 per share. The Company Stock Option Plans are accounted for under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations. This accounting method is permitted under Financial Accounting Standards Board standard SFAS No. 123, "Accounting for Stock-Based Compensation", which allows an entity to use a fair-value based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the Standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. Additional information relating to the Company's Stock Option Plans can be found in Notes A.10 and M of the "Notes to Consolidated Financial Statements". The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Additional information relating to the Company's and Bank's capital requirements and capital ratios can be found in Note R of the "Notes to Consolidated Financial Statements". A group of funeral directors have asserted certain claims against the Bank in connection with certain pre-need funeral trusts which were allegedly directed by funeral directors to be invested in a private placement annuity. The Company has incurred legal expenses in regard to these claims during 1999 and 1998. In 1998, the Company established a reserve of $1.5 million against these possible claims. The reserve balance, as of December 31, 1999 equaled $994,000 with respect to unsettled claims. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. However, there is no assurance that the Bank will be successful. The Company will continue to incur significant legal expenses in regard to these claims and any settlement of this case could exceed the reserve amount and thus have a negative impact on the Company's future earnings and financial condition (see Note N of the "Notes to Consolidated Financial Statements"). Impact of Inflation and Changing Prices The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previously, management is attempting to maintain an essentially balanced position between interest-sensitive assets and liabilities in order to protect against wide interest-rate fluctuations. Year 2000 The Company has adopted a Year 2000 policy to address the "Year 2000" Issue concerning the inability of certain information systems and automated equipment to properly recognize and process dates containing the Year 2000 and beyond. If not corrected, these systems and equipment could produce inaccurate or unpredictable results commencing on January 1, 2000. The Company, similar to most financial services providers, is particularly vulnerable to the potential impact of the Year 2000 Issue due to the nature of financial information. Potential impacts to the Company may arise from software, computer hardware, and other equipment both within the Company's direct control and outside of the Company's ownership, yet with which the Company electronically or operationally interfaces. In order to address the Year 2000 Issue, the Company developed and implemented a five phase compliance plan divided into the following major components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation. The Company completed all phases of the plan prior to year-end 1999. The Company had identified its mission-critical systems as those that affect the Company's ability to process banking transactions and its general accounting systems. Such systems include deposit, loan and trust accounting, check and deposit processing and branch teller equipment. The Company purchases most of its computer software from major outside providers of bank software. A significant component of the Year 2000 plan was to install the Year 2000 compliant software provided by these vendors and also to test these supplied systems. The Company's major software providers have informed the Company that, based on tests they have conducted and continue to conduct, they believe their respective systems to be Year 2000 compliant. In addition, the Company conducted its own tests on these systems provided by vendors. The Company also has some internally generated programmed software. This software was corrected for Year 2000. The Company has reviewed the impact of Year 2000 on other equipment and systems such as heating, air conditioning, telecommunications, electric service, vaults, photocopiers, personal computers, printers and other equipment where necessary. Some of this equipment, such as personal computers, were replaced. Other items such as vaults, heating, air conditioning, photocopiers and printers were tested and found "not date sensitive". The Company's providers of telecommunications and electric service were contacted. These providers indicated they do not expect any interruption of service in the Year 2000. Other important segments of the Year 2000 plan were to identify those suppliers and customers whose possible lack of Year 2000 preparedness might expose the Company to financial loss. Included in this process was communications to all the Company's customers and identification of loan and deposit customers whose failure to address the Year 2000 Issue might impact their banking relationship. As a result of this communication, the Company identified those customers who may be affected by the Year 2000. Risk factors were assigned to these customers. The Company has not experienced any significant loss as a result of these risks. The Company initiated communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company developed contingency plans to address any or all systems that, despite all testing, still did not operate correctly in the Year 2000. The contingency plans provide for manual and personal computer based systems to process checks, deposits and loan transactions. The Company increased its inventories of the various required supplies, such as new account and loan forms, deposit withdrawal forms and other pre-printed forms, available at the Company's Main Office and branch offices. Alternative communications systems were established and alternative power source was installed at the Company's Operations Center. The Company spent $215,000 and $496,000 on Year 2000 compliance matters in 1999 and 1998, respectively. As of December 31, 1999, $1,066,000 has been spent on this project. These expenses are comprised of the replacement of branch teller and new account systems for $645,000, replacement of personal computers for $231,000, the installation of an alternative electrical power source at the Company's Operations Center for $90,000, the replacement of automatic teller machines for $28,000, replacement of mortgage lending software for $19,000 and enhancements to banking systems of $21,000 and trust systems of $12,000. In addition, the Company spent $20,000 on communications to its customers regarding Year 2000 issues. The expenses related to Year 2000 were financed by the general revenues of the Company and are included in the Company's other operating expenses in the Company's financial statement. The Company does not anticipate any additional Year 2000 related expenses. No significant projects have been delayed as a result of the Company's Year 2000 effort. Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams. The Federal banking agencies have highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The Federal banking agencies have conducted Year 2000 compliance examinations. The failure to implement an adequate Year 2000 program can be identified as an unsafe and unsound banking practice. The Company and the Bank are subject to regulation and supervision by the Federal Reserve Bank and the Comptroller of the Currency which regularly conducts reviews of the safety and soundness of the Company's operations, including the Company's progress in becoming Year 2000 compliant. The regulatory agencies have established examination procedures which contain three categories of ratings: "Satisfactory", "Needs Improvement" and "Unsatisfactory". Institutions that receive a Year 2000 rating of Unsatisfactory may be subject to formal enforcement action, supervisory agreements, cease and desist orders, civil money penalties, or the appointment of a conservator. In addition, Federal banking agencies will be taking into account Year 2000 compliance programs when reviewing applications and may deny an application based on Year 2000 related issues. Failure by the Company to adequately prepare for Year 2000 issues could negatively impact the Company's banking operations, including the imposition of restrictions upon its operations by the Comptroller of the Currency. The Company did not experience any material problems related to Year 2000 during the month of January, 2000. The Bank had all of its branch offices open for business on January 1, 2000 with all systems operating normally. The potential full effect, if any, of the Year 2000 issue on the Company, its customers and its business partners, including other banks, the Federal Reserve Bank and other Federal agencies, will not be fully determined until later. If problems related to the Year 2000 arise within the Company or entities with which the Company conducts business, the Company's revenues and financial condition could be adversely impacted. Earnings Per Common Share The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" in 1997. SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods' earnings per share calculations have been restated to reflect the adoption of SFAS No. 128 (see Note A.13 of the "Notes to Consolidated Financial Statements). Accounting for the Impairment of Long-Lived Assets The Company has adopted the Financial Accounting Standards Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain intangibles and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no material effect on the Company's consolidated financial position or results of operations. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company has adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets and extinguishment of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Adoption of this statement had no material impact on the Company's consolidated financial position or results of operations. Reporting Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. The Company's financial statements have been reclassified to reflect the provision of SFAS No. 130 (see Note A.7 of the "Notes to Consolidated Financial Statements"). Disclosures About Segments of an Enterprise and Related Information In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 established standards for the method that public business enterprises report selected information regarding operating segments in financial reports issued to shareholders. The disclosure information required consists of a measure of segment profit and loss, certain revenue and expense items and segment assets based upon specified quantitative thresholds, as it is reported internally to the chief operating decision maker on both an interim and annual basis. The statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Corporation consists of one segment: community banking. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively and retroactive application is not permitted. SFAS No. 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in the value of related hedged assets, liabilities and firm commitments or for forecasted transactions, deferred and recorded as a component of accumulated other comprehensive income (loss) in stockholder' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 on January 1, 2001 and does not believe the effect of adopting SFAS No. 133 will have any material effect on its consolidated financial position or results of operations. Quarterly Financial Data (Unaudited) The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to reflect retroactively the 5% stock dividends of June, 1999, June, 1998 and May, 1997. QUARTERLY FINANCIAL DATA (Unaudited) Dollars in Thousands, except per share data 1999 Dec. 31 Sept. 30 June 30 March 31 Interest income $6,705 $6,934 $6,490 $6,224 Net interest income 3,683 3,980 3,685 3,556 Provision for possible loan losses 125 -- 125 125 Net gain (loss) on sale of securities and mortgages 9 59 358 294 Income before income taxes 845 1,161 1,208 997 Net income $ 687 $ 885 $ 925 $ 785 Basic net income per share $ 0.39 $ 0.48 $ 0.52 $ 0.44 Diluted net income per share $ 0.39 $ 0.49 $ 0.51 $ 0.44
Three Months Ended 1998 Dec. 31 Sept. 30 June 30 March 31 Interest income $6,234 $6,393 $6,355 $6,385 Net interest income 3,504 3,643 3,650 3,699 Provision for possible loan losses 112 113 113 112 Net gain (loss) on sale of securities and mortgages 350 135 495 140 Income before income taxes 630 1,175 1,219 1,039 Net income $ 498 $ 871 $ 895 $ 768 Basic net income per share $ 0.27 $ 0.48 $ 0.50 $ 0.43 Diluted net income per share $ 0.27 $ 0.48 $ 0.49 $ 0.43
Item 7.A Quantitative and Qualitative Disclosure About Market Risks Market Risk As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since most of the Company's interest-bearing assets and liabilities are located at the Bank, the majority of the Company's interest rate risk is at the Bank level. As a result, most interest rate risk management procedures are performed at the Bank level (see discussion on "Interest Rate Sensitivity"). The Company and the Bank operate as a community banking institution primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a result of its location and nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Bank makes real estate loans primarily in the counties adjacent to its operations and thus is subject to risks associated with those local economies. The Bank holds a concentration of residential real estate loans (55.6% of total loans) and commercial loans supported by real estate (13.2% of total loans) in its loan portfolio. In addition, 56.2% of the Bank's consumer, installment loans are for recreational vehicles. These loans represent 12.7% of total loans (see Note P of the "Notes to Consolidated Financial Statements"). These loans are subject to interest and economic risks. The Bank also originates residential real estate loans for sale in the secondary market. Such loans are identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not own any trading assets and does not have any hedging transactions in place such as interest rate swaps (see discussions on "Investment Securities" and "Securities Available-for-Sale"). Interest Rate Sensitivity Interest rate sensitivity is a measure of the extent to which net interest income would change due to changes in the level of interest rates. The objective of interest rate sensitivity management is to reduce a company's vulnerability to future interest rate fluctuations and to enhance consistent growth of net interest income. The Bank's Asset/Liability Management Committee meets semi-monthly to examine, among other subjects, interest rates for various products and interest sensitivity. Rate sensitivity arises from the difference between the volumes of assets which are rate-sensitive as compared to the volumes of liabilities which are rate-sensitive. A comparison of interest-rate-sensitive assets to interest-rate- sensitive liabilities is monitored by the Bank on a regular basis using several time periods. The mismatch of assets and liabilities in a specific time frame is referred to as interest sensitivity gap. Generally, in an environment of rising interest rates, a negative gap (interest sensitive liabilities being greater than interest sensitive assets in a given period of time) will decrease net interest income, and in an environment of falling interest rates, a negative gap will increase net interest income. Assets and liabilities are allocated to a specific time period based on their scheduled repricing date or on an historical basis. At December 31, 1999, assets of $157,197,000 (40% of total assets) were subject to interest rate changes within one year. This compares to assets subject to interest rate changes within one year of $143,809,000 (40% of total assets) at the end of 1998 and $151,613,000 (44% of total assets) at the end of 1997. Liabilities subject to rate change within one year were $163,662,000, $175,047,000 and $166,220,000 in 1999, 1998 and 1997, respectively. A negative one-year gap position of $6,465,000 existed as of December 31, 1999. The gap positions at December 31, 1998 and 1997 were negative $31,238,000 and negative $14,607,000, respectively. The ratio of rate-sensitive assets to rate-sensitive liabilities for the one-year time frame was .96 at the end of 1999, compared to .82 at the end of 1998 and .91 at the end of 1997. The "Interest Sensitivity Analysis" in the following table presents a sensitivity gap analysis of the Company's assets and liabilities at December 31, 1999 for five time-intervals. The Company's negative gap position for the one year time frame decreased in 1999 as a result of a decrease in interest-bearing demand deposits with a maturity of one year or less and a reduction of loan maturities. The change in the deposit mix was due to the sale of longer term certificates of deposit to customers. The change in loan maturities was due in part to the sale of residential mortgage loans. Management intends to continue to purchase adjustable rate securities, make adjustable rate loans, market longer-term certificates of deposit and sell fixed-rate mortgage loans to maintain an acceptable gap position. Interest Sensitivity Analysis 0-90 91-180 181-365 1-5 Over Days Days Days Years 5 years Total Interest-Bearing Deposits with Banks $ 5,589 $ --- $ --- $ --- $ --- $ 5,589 Federal Funds Sold 2,000 --- --- --- --- 2,000 Inv Securities 17,925 11,245 26,255 72,126 24,692 152,243 Loans Held-for-Sale --- --- --- --- --- --- Loans 48,573 9,122 22,216 61,981 57,929 199,821 Other Assets 14,272 --- --- --- 17,964 32,236 ------- -------- -------- ------- -------- -------- TOTAL ASSETS $88,359 $20,367 $ 48,471 $134,107 $100,585 $391,889 ------- -------- -------- ------- -------- -------- Non-Interest-Bearing Deposits (1) $ --- $ --- $ --- $ --- $ 41,813 $ 41,813 Int-Bearing Deposits 99,506 18,747 30,679 72,286 61,449 282,667 Securities Sold Under Agreements to Repurchase 1,730 --- --- --- --- 1,730 Long-Term Debt 5,000 --- 8,000 17,000 --- 30,000 Other --- --- --- --- 7,436 7,436 Capital --- --- --- --- 28,243 28,243 ------- -------- -------- ------- -------- -------- TOTAL LIABILITIES AND CAPITAL $106,236 $18,747 $ 38,679 $89,286 $138,941 $391,889 ------- -------- -------- ------- -------- -------- Net Interest Sensitivity Gap $(17,877)$ 1,620 $ 9,792 $44,821 $(38,356) $ --- Cumulative Int Sensitivity Gap $(17,877)$(16,257)$ (6,465) $38,356 $ --- $ --- Cumulative Gap RSA/RSL 83.2% 87.0% 96.1% 115.2% 100.0%
(1) Historically, non-interest-bearing deposits reflect insignificant change in deposit trends and, therefore, the Company classifies these deposits over five years. While using the interest sensitivity gap analysis is a useful management tool as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest-rate changes that are characteristic of various interest-rate-sensitive assets and liabilities. Consequently, even though the Company currently has a negative gap position because of the unequal sensitivity of these assets and liabilities, management believes that this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the Bank's net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance sheet instruments. The calculated estimates of changes in the market value of portfolio value at December 31, 1999 are as follows: - ------------------------------------------------------------------------------- Dollars in Thousands at December 31, 1999 - ------------------------------------------------------------------------------- Market Value of Percent of Changes in Rate Portfolio Equity Change - --------------------------- ---------------------- ------------------ + 400 basis points 10,122 (58.6)% + 300 basis points 13,469 (44.9) + 200 basis points 16,962 (30.6) + 100 basis points 20,611 (15.6) Flat Rate 24,425 --- - 100 basis points 28,466 16.5 - 200 basis points 32,503 33.1 - 300 basis points 36,202 48.2 - 400 basis points 39,538 61.9 - -------------------------------------------------------------------------------
The assumptions used in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest rate sensitivity of the Company's assets and liabilities as well as the estimated effect of changes in interest rates on the market value of portfolio equity could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors First Colonial Group, Inc. We have audited the accompanying consolidated balance sheets of First Colonial Group, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statement of earnings, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Colonial Group, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /S/ GRANT THORNTON LLP Philadelphia, Pennsylvania January 14, 2000 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------- (Dollars in Thousands) At December 31, 1999 1998 - ------------------------------------------------------------------------------- ASSETS Cash and Due From Banks $ 14,272 $ 12,259 Federal Funds Sold 2,000 2,000 -------- -------- Total Cash and Cash Equivalents 16,272 14,259 Interest-Bearing Deposits With Banks 5,589 3,301 Investments Securities (Fair Value: 1999 - $19,123; 1998 - $17,920) 19,887 17,723 Securities Available-for-Sale at Fair Value 132,356 98,389 Mortgage Loans Held-for-Sale - 603 Total Loans, Net of Unearned Discount 202,258 212,437 Less: Allowance for Possible Loan Losses (2,437) (2,691) -------- -------- Net Loans 199,821 209,746 Premises and Equipment, Net 7,116 6,885 Accrued Interest Income 3,045 2,542 Other Real Estate Owned 571 636 Other Assets 7,232 4,412 -------- -------- TOTAL ASSETS $ 391,889 $ 358,496 ========= ========= LIABILITIES Deposits Non-Interest-Bearing Deposits $ 41,813 $ 38,885 Interest-Bearing Deposits (Includes Certificates of Deposit in Excess of $100: 1999 - $5,105; 1998 - $4,726) 282,667 255,664 -------- -------- Total Deposits 324,480 294,549 Securities Sold Under Agreements to Repurchase 1,730 5,094 Long-Term Debt 30,000 20,000 Accrued Interest Payable 4,208 3,536 Other Liabilities 3,228 3,600 -------- -------- TOTAL LIABILITIES 363,646 326,779 -------- -------- SHAREHOLDERS' EQUITY Preferred Stock, Par Value $5.00 a share Authorized: 500,000 shares, none issued --- --- Common Stock, Par Value $5.00 a share Authorized: 10,000,000 shares Issued: 1,848,437 shares in 1999 and 1,745,725 shares in 1998 9,242 8,729 Additional Paid-In Capital 15,674 13,873 Retained Earnings 8,968 9,023 Employee Stock Ownership Plan Debt (1,320) (435) Accumulated Other Comprehensive Income (Loss) (4,321) 527 -------- ------- TOTAL SHAREHOLDERS' EQUITY 28,243 31,717 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 391,889 $ 358,496 ========= =========
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------- (Dollars in Thousands, except per share data) For the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $17,772 $ 18,885 $19,943 Interest on Investment Securities Taxable 6,829 5,002 4,592 Tax-Exempt 1,509 1,269 837 Interest on Deposits with Banks and Federal Funds Sold 243 211 72 ------- ------- ------- Total Interest Income 26,353 25,367 25,444 ------- ------- ------- INTEREST EXPENSE Interest on Deposits 9,819 9,466 9,312 Interest on Short-Term Borrowings 283 265 372 Interest on Long-Term Debt 1,347 1,140 1,147 ------- ------- ------- Total Interest Expense 11,449 10,871 10,831 ------- ------- ------- NET INTEREST INCOME 14,904 14,496 14,613 Provision for Possible Loan Losses 375 450 605 ------- ------- ------- Net Interest Income After Provision for Possible Loan Losses 14,529 14,046 14,008 ------- ------- ------- OTHER INCOME Trust Revenue 1,246 1,225 1,050 Service Charges on Deposit Accounts 1,682 1,594 1,349 Investment Securities Gains, Net 563 722 601 Gains on Sale of Mortgage Loans 157 398 178 Other Operating Income 707 641 645 ------- ------- ------- Total Other Income 4,355 4,580 3,823 ------- ------- ------- OTHER EXPENSES Salaries and Employee Benefits 6,780 6,385 6,033 Net Occupancy and Equipment Expense 2,171 2,118 2,178 Other Operating Expenses 5,722 6,060 5,041 ------- ------- ------- Total Other Expenses 14,673 14,563 13,252 ------- ------- ------- Income Before Income Taxes 4,211 4,063 4,579 Applicable Income Taxes 929 1,031 1,296 ------- ------- ------- NET INCOME $ 3,282 $ 3,032 $ 3,283 ======= ======= ======= PER SHARE DATA Basic Net Income $ 1.84 $ 1.68 $ 1.83 Diluted Net Income $ 1.83 $ 1.67 $ 1.83 Cash Dividends $ 0.74 $ 0.70 $ 0.64
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------- (Dollars in Thousands) Accumulated Add. Other Common Paid-In Retained Treas. ESOP Comprehensive Stock Capital Earnings Stock Debt Income Total - ------------------------------------------------------------------------------- Balance at Jan 1, 1997 $7,803 $ 9,212 $9,975 $(20) $ (512) $ 347 $26,805 1997 Comprehensive Income Net Income 3,283 3,283 Change in Unrealized Sec Gains, Net 953 953 ------ Total Comprehen- sive Income 4,236 Sale of Common Stock under Dividend Reinv Plan (10,036 shares) 50 204 254 Sale of Common Stock under Stock Option Plan (6,610 shs) 33 74 107 Purchase of Treasury Stock (3,279 shs) (107) (107) Sale of Treasury Stock under Div Reinv Plan (1,361) 33 33 Cash Div Paid (1,139) (1,139) Stock Div Paid of 5% (78,132 shs) 391 1,474 (1,865) --- Cash in Lieu of Fractional Shares (4) (4) ESOP Loan Pymt 122 122 Unall ESOP Shares Committed to Employees (4,415 shs) 50 50 ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1997 8,277 11,014 10,250 (94) (390) 1,300 30,357 1998 Comprehensive Income Net Income 3,032 3,032 Change in Unrealized Sec Gains (Losses), Net (773) (773) -------- Total Comprehen- sive Income 2,259 Sale of Common Stock under Dividend Reinv Plan (7,611 shares) 38 195 233 Sale of Treas Stock under Dividend Reinv Plan (2,779 shares) 94 94 Cash Dividends Paid (1,275) (1,275) Stock Dividend of 5% (82,701 shares) 414 2,564 (2,978) --- Cash in Lieu of Fractional Shares (6) (6) ESOP Loan Pymt 455 455 Loan to ESOP (500) (500) Unall ESOP Shares Committed to Employees (5,353 shares) 100 100 ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1998 8,729 13,873 9,023 --- (435) 527 31,717 1999 Comprehensive Income Net Income 3,282 3,282 Change in Unrealized Gains (Losses), Net (4,848) (4,848) ------ Total Comprehen- sive Income (Loss) (1,566) Sale of Common Stock under Dividend Reinv Plan (14,732 shares) 74 242 316 Sale of Common Stock under Directors Stk Option Plan (496 shares) 2 2 4 Cash Dividends Paid (1,321) (1,321) Stock Dividend of 5% (87,484 shares) 437 1,575 (2,012) --- Cash in Lieu of Fractional Shares (4) (4) ESOP Loan Payment 115 115 Loan to ESOP (1,000) (1,000) Unallocated ESOP Shares Committed to Employees (3,691 shares) (18) (18) ------ ------- ------ --- ----- ---- ------- Balance at Dec 31, 1999 $9,242 $15,674 $8,968 $-- $(1,320) $(4,321) $28,243
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- (Dollars in Thousands) For the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 3,282 $ 3,032 $ 3,283 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Possible Loan Losses 375 450 605 Depreciation and Amortization 1,027 1,004 884 Accretion of Security Discounts (267) (78) (70) Amortization of Security Premiums 251 242 124 Deferred Taxes 90 (395) (277) Amortization of Deferred Fees on Loans 12 (136) (170) (Gain) Loss on Sale of Other Real Estate Owned (39) 4 (54) Investment Securities Gains, Net (563) (722) (601) Gain on Sale of Mortgage Loans (157) (397) (178) Mortgage Loans Originated for Sale (37,460) (42,723) (27,183) Mortgage Loan Sales 38,068 42,879 27,145 Changes in Assets and Liabilities Increase in Accrued Interest Income (503) (310) (212) Increase in Accrued Interest Payable 672 70 261 Increase in Other Assets (970) (740) (545) Increase in Other Liabilities 71 396 625 -------- -------- ------- Net Cash Provided by Operating Activities 3,889 2,576 3,637 -------- -------- ------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 15,331 29,744 13,986 Proceeds from Maturities of Securities Held-to-Maturity 3,622 9,403 8,047 Proceeds from Sales of Securities Available-for-Sale 16,858 11,094 13,279 Proceeds from Sales of Securities Held-to Maturity -- 248 -- Purchase of Securities Available-for-Sale (72,150) (66,712) (40,485) Purchase of Securities Held-to-Maturity (6,559) (9,722) (5,838) Net Increase in Interest-Bearing Deposits With Banks (2,288) (2,906) (110) Net (Increase) Decrease in Loans 9,412 16,614 (10,130) Purchase of Premises and Equipment (1,143) (494) (1,126) Proceeds from Sale of Other Real Estate Owned 382 290 900 -------- -------- ------- Net Cash Used in Investing Activities (36,535) (12,441) (21,477) -------- ------- ------- FINANCING ACTIVITIES Net Increase in Interest and Non-Interest Bearing Demand Deposits and Savings Accounts 2,058 10,669 3,804 Net Increase in Certificates of Deposit 27,873 1,625 10,783 Net Increase in Long-Term Debt 10,000 1,610 -- Net Increase in ESOP Debt (885) (45) -- Net Increase (Decrease) in Repurchase Agreements (3,364) (3,710) 5,009 Proceeds from Issuance of Common Stock 302 333 361 Purchase of Treasury Stock -- -- (107) Proceeds from Sale of Treasury Stock -- 94 33 Cash Dividends Paid (1,321) (1,275) (1,139) Cash in Lieu of Fractional Shares (4) (6) (4) -------- ------- ------- Net Cash Provided by Financing Activities 34,659 9,295 18,740 -------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents 2,013 (570) 900 Cash and Cash Equivalents, January 1, 14,259 14,829 13,929 -------- -------- ------- Cash and Cash Equivalents, December 31, $ 16,272 $ 14,259 $ 14,829
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts presented in the tables are in thousands, except per share data.) NOTE A - SUMMARY OF ACCOUNTING POLICIES First Colonial Group, Inc. (the "Company") is a one bank holding company of Nazareth National Bank and Trust Company (the "Bank"). The Bank is an independent community bank providing retail and commercial banking services through its thirteen offices in Northampton, Lehigh, and Monroe counties in northeastern Pennsylvania. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and for various types of loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Company and the Bank are subject to regulations of certain state and Federal agencies and, accordingly, they are periodically examined by those regulatory agencies. As a consequence of the extensive regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and Federal legislation and regulation which may have the effect of increasing the cost of doing business. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All significant inter-company balances and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods. Therefore, actual results could differ significantly from those estimates. 2. Investment Securities As required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies debt and marketable equity securities in three categories: trading, available-for-sale and held-to-maturity. Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company does not have any securities classified as trading securities. Available-for-sale securities are measured at fair value, with unrealized gains and losses, net of tax effect, reported in equity. Held-to-maturity securities are carried at amortized cost, and the Company has the positive intent and ability to hold such securities until maturity. The Company's classification of its investment securities into these categories is detailed in "Note B - Investment Securities". Investment securities held-to-maturity are principally debt securities and are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method over the period to maturity. Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. 3. Mortgage Loans Held-for-Sale Mortgage loans held-for-sale are carried at the lower of aggregate cost or fair value. Unrealized losses are included in other operating expenses. Realized gains and losses from mortgage loan sales are included in total other income. Interest and fee income earned during the holding period are included in interest and fees on loans. 4. Loans and Allowance for Possible Loan Losses Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for possible loan losses. Interest income on loans is accrued using various methods which approximate a constant yield. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Upon such discontinuance, all unpaid accrued interest is reversed. The allowance for possible loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. As required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that, as a practical expedient, impairment may be measured based on the observable market price of a loan, or the fair value of the collateral if the loan is collateral dependent. The Company measures impairment based on the fair value of the collateral when it determines that foreclosure is probable (see Note D). 5. Loan Fees and Related Costs Certain origination and commitment fees, and certain direct loan origination costs are deferred and amortized over the contractual life of the related loans. This results in an adjustment of the yield on the related loan. 6. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of buildings and land improvements is computed principally on the straight-line method, and for equipment, principally on an accelerated method, over the estimated useful lives of the assets. 7. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This standard requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains, and losses that bypass the income statement and are reported directly in a separate component of equity. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income are as follows: - ------------------------------------------------------------------------------- For the Year Ended December 31, Before Tax Tax Net of Tax Amount Expense Amount ------------------------------------------- (Credit) 1999 - ----------------------------------- Unrealized Losses on Securities Unrealized Holding Losses Arising During Period $ (7,910) $ (2,690) $ (5,220) Less: Reclassification Adjustment for Gains Realized in Net Income 563 191 372 ------------------------------------------- Other Comprehensive Loss, Net $ (7,347) $ (2,499) $ (4,848) ------------------------------------------- 1998 - ----------------------------------- Unrealized Losses on Securities Unrealized Holding Losses Arising During Period $ (1,894) $ (644) $ (1,250) Less: Reclassification Adjustment for Gains Realized in Net Income 722 245 477 ------------------------------------------- Other Comprehensive Loss, Net $ (1,172) $ (399) $ (773) ------------------------------------------- 1997 - ----------------------------------- Unrealized Gains on Securities Unrealized Holding Gains Arising During Period $ 2,045 $ 695 $ 1,350 Less: Reclassification Adjustment for Gains Realized in Net Income 601 204 397 ------------------------------------------- Other Comprehensive Income, Net $ 1,444 $ 491 $ 953 -------------------------------------------
8. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively and retroactive application is not permitted. SFAS No. 133 will require the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in the value of related hedged assets, liabilities and firm commitments or for forecasted transactions, deferred and recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 on January 1, 2001 and does not believe the effect of adopting SFAS No. 133 will have any material effect on its consolidated financial position or results of operations. 9. Income Taxes The Company, in accordance with SFAS No. 109, "Accounting for Income Taxes", computes the tax expense using the liability method whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are accumulated depreciation, loan origination fees, provision for possible loan losses, unrealized gains and deferred expenses. 10. Stock Option Plans Under Stock Option Plans, options to acquire shares of common stock are granted to certain officers, key employees and directors. The Company Stock Option Plans are accounted for under Accounting Principles Board (APB) Opinion 25 "Accounting for Stock Issued to Employees" and its related interpretations. This accounting method is permitted under SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows an entity to use a fair value-based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the Standard permits entities to continue accounting for employee stock options and similar instruments under APB Opinion No. 25. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied (see Note M). 11. Employee Benefit Plans The Company has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with one year of service as defined by the ESOP. The Company accounts for its ESOP in accordance with Statement of Position (SOP) 93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the Accounting Standards Division of the American Institute of Certified Public Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after December 31, 1992. For issuances of stock to the ESOP after December 15, 1989, but prior to December 31, 1992, the shares allocated method is used to recognize expense in the Company's financial statements. For issuances of stock prior to December 15, 1989, the Company will continue the cash contribution method of recognizing expense to the extent that it exceeds the cumulative expense that would be recognized under the shares allocated method (see Note J). Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that each employee contributes. The Company also has an executive compensation plan which provides additional death, medical and retirement benefits to certain officers (see Note K). The Company has a deferred compensation plan involving the Directors of the Company. This plan provides defined annual payments for 15 years beginning at age 65 or death in exchange for the Directors deferring the payment of a portion of their fees (see Note K). The Company records the cost of post-retirement medical benefits on the accrual basis as employees render service to earn the benefits and records a liability for the unfunded accumulated post-retirement benefit obligation. The transition obligation, representing the unfunded and unrecognized accumulated past-service benefit obligation for all plan participants, will be amortized on a straight-line basis over a 20-year period (see Note L). 12. Trust Assets and Revenue Assets held by the Trust Department of the Bank in fiduciary or agency capacities for its customers are not included in the accompanying consolidated balance sheets since such assets are not assets of the Company. Operating revenue and expenses of the Trust Department are included under their respective captions in the accompanying consolidated statements of income and are recorded on the accrual basis. 13. Per Share Information The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" in 1997. SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods earnings per share calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted earnings per share are calculated as follows. There is no difference between basic and diluted earnings per share for the year ended December 31, 1997. - ------------------------------------------------------------------------------- Income Average Shares Per Share For the Year Ended December 31, (numerator) (denominator) Amount ------------------------------------- 1999 - ------------------------------------------ Net Income $ 3,282 Basic Earnings Per Share Income Available to Common Shareholders $ 3,282 1,786,019 $ 1.84 Effect of Dilutive Securities Stock Options 3,292 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 3,282 1,789,311 $ 1.83 ------------------------------------- 1998 - ------------------------------------------ Net Income $ 3,032 Basic Earnings Per Share Income Available to Common Shareholders $ 3,032 1,805,051 $ 1.68 Effect of Dilutive Securities Stock Options 7,847 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 3,032 1,812,898 $ 1.67 ------------------------------------- 1997 - ------------------------------------------ Net Income $ 3,283 Basic Earnings Per Share Income Available to Common Shareholders $ 3,283 1,786,741 $ 1.83 Effect of Dilutive Securities Stock Options 5,323 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 3,283 1,792,064 $ 1.83 -------------------------------------
Average common shares outstanding in 1999, 1998 and 1997 do not include 56,598, 26,102 and 29,346, respectively, of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6 (see Note A.11). Share and per share information have been restated to reflect the 5% stock dividends of June, 1999, June, 1998 and May, 1997. 14. Statement of Cash Flows The Company considers cash, due from banks and Federal funds sold as cash equivalents for the purposes of the Consolidated Statements of Cash Flows. Cash paid for interest was $10,777,000, $10,801,000 and $10,570,000, for the years ended December 31, 1999, 1998 and 1997, respectively. Cash paid for taxes was $1,060,000 in 1999, $1,458,000 in 1998 and $1,465,000 in 1997. 15. Advertising Costs The Company expenses advertising costs as incurred. 16. Transfer and Servicing of Assets and Extinguishments of Liabilities The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishments of liabilities. This statement is effective for transfers of financial assets, servicing of financial assets, and extinguishments of liabilities occurring after December 31, 1996. There is no material impact on the Company's consolidated financial position or results of operations as a result of the adoption of this statement. 17. Disclosures About Segments of an Enterprise and Related Information In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 established standards for the method that public business enterprises report selected information regarding operating segments in financial reports issued to shareholders. The disclosure information required consists of a measure of segment profit and loss, certain revenue and expense items and segment assets based upon specified quantitative thresholds, as it is reported internally to the chief operating decision maker on both an interim and annual basis. The statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Corporation consists of one segment: community banking. 18. Stock Dividends On June 24, 1999, the Company paid a 5% stock dividend to shareholders of record on June 4, 1999. Fractional shares were paid in cash based on the closing price of $23.312 per share on the record date. Stock dividends of 5% each were also paid in 1997 and 1998. Net income per share and average shares outstanding have been restated to reflect these stock dividends. 19. Reclassifications Certain reclassifications of prior years amounts have been made to conform to the 1999 presentation. NOTE B - INVESTMENT SECURITIES The Company classifies debt and marketable equity securities in three categories: trading, available-for-sale and held-to-maturity as required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company had no trading securities in 1999, 1998 and 1997. Available-for-sale securities are measured at fair value, with unrealized gains and losses reported, net of tax, as a component in equity. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities had unrealized holding losses of $4,322,000 (net of the tax credit of $2,226,000) in 1999 and unrealized holding gains of $527,000 (net of the tax effect of $272,000) in 1998. At December 31, the equity securities in the available-for-sale category include Federal Reserve Bank stock in the amount of $259,000 in 1999 and $256,000 in 1998, and Federal Home Loan Bank stock in the amount of $2,265,000 in 1999 and $1,835,000 in 1998 which are carried at cost. The amortized cost, unrealized gains and losses, and fair value of the Company's available-for-sale and held-to-maturity securities at December 31, 1999 and 1998 are summarized as follows. 1999 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 4,001 $ 4 $ 13 $ 3,992 U. S. Government Agency 53,112 -- 3,365 49,747 State and Political Subdivisions 29,147 16 1,284 27,879 Mortgage-Backed Securities 47,332 36 1,338 46,030 Equity Securities 5,312 68 672 4,708 ------- ------- ------- ------- Total $138,904 $ 2,124 $ 6,672 $132,356
1998 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 7,026 $ 99 $ -- $ 7,125 U. S. Government Agency 24,482 94 135 24,441 State and Political Subdivisions 27,860 721 115 28,466 Mortgage-Backed Securities 33,322 85 266 33,141 Equity Securities 4,900 519 203 5,216 ------- ------- ------- ------- Total $97,590 $ 1,518 $ 719 $98,389
1999 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government Agency $ 6,894 $ -- $ 306 $ 6,588 State and Political Subdivisions 7,974 10 401 7,583 Mortgage-Backed Securities 5,019 13 80 4,952 ------- ------- ------- ------- Total $19,887 $ 23 $ 787 $19,123
1998 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government Agency $ 4,992 $ 35 $ 1 $ 5,026 State and Political Subdivisions 6,770 179 6 6,943 Mortgage-Backed Securities 5,961 39 49 5,951 ------- ------- ------- ------- Total $17,723 $ 253 $ 56 $17,920
The following table lists the maturities of debt securities at December 31, 1999 and 1998, classified as available-for-sale and held-to-maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MATURITIES OF DEBT SECURITIES At December 31, 1999 Available-For-Sale Held-To-Maturity Carrying Fair Carrying Fair Value Value Value Value ----------- --------- --------- -------- Due in one year or less $ 2,001 $ 2,004 $ 245 $ 245 Due after one year through five years 8,509 8,370 1,912 1,902 Due after five years through ten years 36,703 34,809 6,324 6,104 Due after ten years 39,047 36,435 6,387 5,920 ------- ------- ------- ------- 86,260 81,618 14,868 14,171 Mortgage-Backed Securities 47,332 46,030 5,019 4,952 Equity Securities 5,312 4,708 -- -- ------- ------- ------- ------- Total Investments $138,904 $132,356 $19,887 $19,123
At December 31, 1998 Available-For-Sale Held-To-Maturity Carrying Fair Carrying Fair Value Value Value Value ----------- --------- --------- -------- Due in one year or less $ 4,019 $ 4,043 $ 250 $ 251 Due after one year through five years 4,973 5,092 760 777 Due after five years through ten years 19,865 20,094 7,131 7,207 Due after ten years 30,511 30,803 3,621 3,734 ------- ------- ------- ------- 59,368 60,032 11,762 11,969 Mortgage-Backed Securities 33,322 33,141 5,961 5,951 Equity Securities 4,900 5,216 -- -- ------- ------- ------- ------- Total Investments $97,590 $98,389 $17,723 $17,920 ======= ======= ======= ======
Investment securities with a carrying amount of $13,950,000 and $12,262,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits, to qualify for fiduciary powers and for other purposes required or permitted by law. There were no securities held other than U. S. Treasury or U. S. Agencies from a single issuer which represented more than 10% of shareholders' equity. Proceeds from sales of investments in debt and equity securities during 1999, 1998 and 1997 were $16,858,000, $11,342,000 and $13,279,000, respectively. Gross gains of $716,000 and gross losses of $153,000 were realized on those sales in 1999. Gross gains of $740,000 and gross losses of $18,000 were realized on the sales in 1998. In 1997, gross realized gains were $615,000 and gross realized losses were $14,000. NOTE C - LOANS Major classifications of loans at December 31, 1999 and 1998 are as follows. 1999 1998 - ------------------------------------------------------------------------------- Real Estate/Residential $112,870 $ 119,914 Real Estate/Construction 6,737 11,689 Real Estate/Commercial 26,809 29,587 Consumer/Installment 45,886 40,184 Commercial (Non-Real Estate) and Agricultural 9,538 10,900 State and Political Subdivisions 1,096 1,178 Other 13 10 -------- --------- Total Gross Loans 202,949 213,462 Less: Unearned Discount (691) (1,025) -------- --------- Total Loans $202,258 $ 212,437
Included in total gross loans are unamortized loan fees totaling $1,230,416 at December 31, 1999 and $293,000 at December 31, 1998. There were loans totaling $1,311,000 on which the accrual of interest has been discontinued or reduced at December 31, 1999. During 1999, an average of $1,091,000 of loans was on non-accrual status. Non-accrual loans at December 31, 1998 amounted to $1,245,000 and averaged $1,560,000 during 1998. Loans 90 days and over past due and still accruing totaled $1,491,000 at December 31, 1999 and $1,021,000 at December 31, 1998. NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows. - ------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Beginning Balance $ 2,691 $ 2,664 $ 2,532 Additions Provisions for loan losses charged to operating expenses 375 450 605 Recoveries 103 117 97 ------- ------- ------- Total Additions 478 567 702 Deductions Loans charged-off (732) (540) (570) ------- -------- -------- Ending Balance $ 2,437 $ 2,691 $ 2,664
The recorded investment in impaired loans as defined by SFAS No. 114 was $370,000, $524,000 and $523,000 at December 31, 1999, 1998 and 1997, respectively. The valuation allowance for credit losses related to impaired loans is a part of the allowance for possible loan losses. The total valuation allowance was $74,000, $303,000 and $138,000 at December 31, 1999, 1998 and 1997, respectively. The average recorded investment in impaired loans during the year ended December 31, 1999, 1998 and 1997 was approximately $469,000, $897,000 and $612,000, respectively. All impaired loans were on a non-accrual status. Income on impaired loans is recognized by the Company on a cash basis. The Company recognized interest income of approximately $35,000, $23,000 and $111,000 on impaired loans in 1999, 1998 and 1997, respectively. NOTE E - PREMISES AND EQUIPMENT Major classifications of these assets at December 31, 1999 and 1998 are summarized as follows. - ------------------------------------------------------------------------------- Estimated Useful Lives 1999 1998 - ------------------------------------------------------------------------------- Land --- $ 939 $ 939 Premises 10-20 years 7,370 6,963 Equipment 3-10 years 6,408 5,768 ------ ----- 14,717 13,670 Accumulated depreciation and amortization (7,601) (6,785) ------ ------- Total Premises and Equipment $ 7,116 $ 6,885
Depreciation and amortization expense amounted to $912,000, $908,000 and $857,000 in 1999, 1998 and 1997, respectively. NOTE F - SHORT-TERM BORROWINGS - ------------------------------------------------------------------------------- FEDERAL HOME LOAN BANK BORROWINGS Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Balance outstanding at December 31, $ -- $ -- $ -- Maximum amount outstanding at any month-end during the year $12,425 $ 1,422 $ 6,890 Average amount outstanding $ 1,721 $ 974 $ 1,217 Average interest rate during the year 5.19% 5.65% 5.85%
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000, all of which was available at December 31, 1999. There were no short-term borrowings in the form of Federal Reserve Discount borrowings and Federal Funds purchased at December 31, 1999, 1998 and 1997. - -------------------------------------------------------------------------------- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Balance outstanding at December 31, $ 1,730 $ 5,094 $ 8,804 Maximum amount outstanding at any month-end during the year $ 8,682 $ 8,166 $14,290 Average amount outstanding $ 5,994 $ 5,821 $ 6,459 Average interest rate during the year 3.24% 3.61% 3.72%
NOTE G - LONG-TERM DEBT The Company had long-term borrowings from the Federal Home Loan Bank of Pittsburgh totaling $30,000,000 at December 31, 1999 and $20,000,000 at December 31, 1998. These loans will mature in eight months to eight years. The weighted average interest rate on these loans was 5.78% and 5.41% at December 31, 1999 and 1998, respectively. The Company also has an obligation as a party to the Employee Stock Ownership Plan debt, which is discussed in Note J. The principal payments due on the Company's debt at December 31, 1999 are as follows. - -------------------------------------------------------------------------------- ESOP Debt FHLB Debt Total Debt - -------------------------------------------------------------------------------- 2000 $ 115 $ 8,000 $ 8,115 2001 115 5,000 5,115 2002 115 - 115 2003 115 - 115 2004 115 10,000 10,115 2005 and beyond 745 7,000 7,745 ----- -------- -------- Total $1,320 $ 30,000 $ 31,320 - --------------------------------------------------------------------------------
NOTE H- OTHER OPERATING EXPENSES The following items which are greater than 1% of the aggregate of "Total Interest Income" and "Total Other Income" are included in "Other Operating Expenses" for the respective years indicated. - ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Advertising $ 574 $ 597 $ 524 Consulting Fees $ 511 $ 416 $ 430 Data Processing Services $ 773 $ 583 $ 607 Litigation Costs and Legal Fees $ 669 $ 418 $ 237 Loan Collection $ 298 $ 346 $ 240 Printing, Stationery and Supplies $ 318 $ 328 $ 363 Provisions for Trust Reserve $ 57 $ 1,000 $ 500 - -------------------------------------------------------------------------------
NOTE I- INCOME TAXES The Company uses the liability method of accounting for income taxes. Applicable income tax expense (benefit) in the consolidated statements of income is as follows. - ------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Federal Current $ 840 $ 1,426 $ 1,573 Deferred (benefit) 89 (395) (277) ----- ------- ------- Total $ 929 $ 1,031 $ 1,296 - -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed statutory Federal rate is as follows. - ------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Federal tax expense at statutory rate $ 1,432 $ 1,385 $ 1,557 Increase (decrease) in taxes resulting from: Tax-exempt investment securities income (569) (363) (261) Tax-exempt interest on loans (29) (23) (16) Other, net 95 32 16 ------- ------- ------- Applicable Income Taxes $ 929 $ 1,031 $ 1,296
Deferred tax assets and liabilities consist of the following. - ------------------------------------------------------------------------ At December 31, 1999 1998 - ------------------------------------------------------------------------ Deferred Tax Assets: Unrealized Securities Losses $ 2,226 $ -- Loan Loss Reserve 523 648 Deferred Compensation 429 432 Post-Retirement Benefits 71 64 Deferred Loan Fees 34 50 Depreciation 64 47 Miscellaneous Reserves 531 537 Other 86 49 ------- ------- ------- ------- Total $ 3,964 $ 1,827 ------- ------- Deferred Tax Liability: Unrealized Securities Gains $ -- $ 272 Other -- -- ------- ------- ------- ------- Total $ -- $ 272 ------- ------- Net $ 3,964 $ 1,555 - ------------------------------------------------------------------------
Based on management's evaluation of the likelihood of realization, no valuation allowance has been provided. NOTE J - EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of eligible employees. In 1999, the ESOP borrowed $1,000,000 from the Company's subsidiary, First C. G., payable over twenty years. The interest on this loan is at the Bank's prime rate (an interest rate of 8.50% at December 31, 1999). The balance on this loan was $950,000 at December 31, 1999. The proceeds from this loan were used to purchase shares from the market. In 1998, the ESOP borrowed $500,000 from the Company's subsidiary, First C. G., payable over six years. The interest rate on this loan is at the Bank's prime rate (an interest rate of 8.50% at December 31, 1999 and 7.75% at December 31, 1998). The balance outstanding on this loan was $370,000 at December 31, 1999 and $435,000 at December 31, 1998. The proceeds from this loan were used to purchase shares from retiring employees and to pay off the balance on the 1993 loan of $358,000. In 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The interest rate on this loan was that bank's prime rate plus 1.25% (an interest rate of 9.75% at December 31, 1997). The balance outstanding on this loan was $390,000 at December 31, 1997. During 1997, the ESOP made the final principal payments on two additional loans. These obligations have been recorded as a liability on the books of the Company and are collateralized by stock of the Bank. Interest expense represents the actual interest paid by the ESOP. The interest incurred on ESOP debt was $85,000, $40,000 and $41,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Compensation expense related to the ESOP amounted to $210,000, $310,000 and $275,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As provided by SOP 93-6 (see Note A.10), the ESOP compensation expense includes a $20,000 credit in 1999 and an expense of $100,000 in 1998 and $50,000 in 1997, which is the fair market value of the shares related to the loans that were allocated to the employees during these years. The number of shares released was 3,783 in 1999, 5,621 in 1998 and 4,867 in 1997. Dividends on unallocated shares used for debt service were $45,000, $19,000 and $23,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The total shares held by the ESOP were 277,778 and 236,135 at December 31, 1999 and 1998, respectively. ESOP shares have been restated to reflect the 5% stock dividends of June, 1999, June, 1998 and May, 1997. NOTE K - OTHER BENEFIT PLANS Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. A participating employee may contribute a maximum of 12% of his or her compensation. The Company will contribute $.50 for each $1.00 up to the first 5% that each employee contributes. Company payments are charged to current operating expenses. These contributions were $86,000, $75,000 and $84,000 in 1999, 1998 and 1997, respectively. The Company also has an executive compensation plan (the "Officers' Supplemental Retirement Plan") which provides additional death, medical and retirement benefits to certain officers. The Company has a deferred compensation plan (the "Deferred Directors' Plan") involving Directors of the Company. The plan requires defined annual payments for 15 years beginning at age 65 or death. The annual benefit is based upon the amount deferred plus interest. The Company has recorded the deferred compensation liabilities using the present value method. The following table sets forth the funded status of the Officers' Supplemental Retirement Plan and the Deferred Directors' Plan and the amounts recognized in the Company's balance sheets at December 31, 1999 and 1998. Officers' Deferred Supplemental Directors' Retirement Plan Plan At December 31, 1999 1998 1999 1998 Accumulated benefit obligation, all of which is vested $ 170 $ 146 $ 468 $ 491 Projected benefit obligation for service rendered to date $(227) $(200) $(468) $(491) Plan assets at fair value -- -- -- -- ----- ----- ----- ----- Projected benefit obligation in excess of plan assets (227) (200) (468) (491) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (260) (247) 37 38 Prior service cost not yet recognized in net periodic pension cost -- -- -- -- Unrecognized net assets at December 31, being recognized over 15 years (4) (4) -- -- Adjustment to recognize additional minimum liability -- -- (37) (38) ----- ----- ----- ----- Accrued Pension Cost $(491) $(451) $(468) $(491)
The weighted average assumed discount rates used in determining the actuarial present value of the projected benefit obligation were 6.75% in 1999 and 6.50% in 1998 and 7.0% in 1997 for the Officers' Supplemental Retirement Plan. The weighted average assumed discount rate used in determining the actuarial present value of the projected benefit obligation for the Deferred Directors' Plan was 7.0% in 1999, 7.0% in 1998 and 7.5% in 1997. The weighted average expected long-term rate of return on assets was 8.0% for 1999, 1998 and 1997 for the Officers' Supplemental Retirement Plan and 9.0% in each of those years for the Deferred Directors' Plan. The weighted average rate of increase in future compensation levels used in determining the actuarial present value for the Officers' Supplemental Retirement Plan was 6.0% in 1999, 1998 and 1997. - -------------------------------------------------------------------------------- OFFICERS' SUPPLEMENTAL RETIREMENT PLAN at December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 43 $ 37 $ 10 Interest cost on projected benefit obligation 18 15 11 Net amortization and deferral (21) (15) (19) ---- ---- --- Net Periodic Pension Cost $ 40 $ 37 $ 2
DEFERRED DIRECTORS' PLAN at December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost - benefits earned during the period $ - $ - $ -- Interest cost on projected benefit obligation 32 34 36 Net amortization and deferral -- -- -- ---- ---- --- Net Periodic Pension Cost $ 32 $ 34 $ 36 - --------------------------------------------------------------------------------
NOTE L - POST-RETIREMENT BENEFIT The Company sponsors a post-retirement plan that covers a certain number of retired employees and a limited group of current employees. This plan provides medical insurance benefits to a group of previously qualified retirees and spouses and to current full-time employees who were 60 years of age or older on January 1, 1992 and who have retired from the Company after attaining age 65 and are fully vested in the ESOP at the time of retirement. This plan is currently unfunded. As permitted by SFAS No. 106, the Company elected to delay the recognition of the transition obligation by aggregating $308,000, which arose from adopting SFAS No. 106, and amortize this amount on a straight-line basis over 20 years. This election is recorded in the financial statements as a component of net periodic post-retirement benefit cost. The Company has determined the actuarially computed expense associated with this benefit for 1999, 1998 and 1997. The components of the net periodic post-retirement benefit cost for the years ended December 31 were as follows. - ------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Service cost - benefits earned during the period $ - $ - $ - Interest cost on accumulated benefit obligation 11 11 14 Amortization of transition obligation 7 6 8 ----- ----- ----- Net periodic post- retirement benefit cost $ 18 $ 17 $ 22 - -------------------------------------------------------------------------------
The assumptions used to develop the net periodic post-retirement benefit cost and the accrued post-retirement benefit cost were as follows. - ------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------- Discount Rate 6.75% 6.50% 7.00% Medical care cost trend rate 8.50% 8.50% 10.00% - -------------------------------------------------------------------------------
The medical care cost trend rate used in the actuarial computation ultimately is reduced to 8.0% in the year 2001 and 6.0% in 2005 and subsequent years. This was accomplished using 0.5% decrements through the year 2005 and later. The table of actuarially computed plan assets and benefit obligations for the Company is presented below. - ---------------------------------------------------------------- at December 31, 1999 1998 - ---------------------------------------------------------------- Accumulated post-retirement benefit obligation: Retirees $ 173 $ 164 Active, eligible employees - - Active, not-yet-eligible employees - - ------ ------ Accumulated post-retirement benefit obligation 173 164 Plan assets at fair value - - Accumulated benefit obligation in excess of plan assets 173 164 Unrecognized transition obligation (201) (216) Unrecognized net gain 94 117 ------ ------ Accrued post-retirement benefit cost $ 66 $ 65 - ----------------------------------------------------------------
At December 31, 1999, $207,000 of the accrued post-retirement benefit cost is included in "Total Other Liabilities". The effect of a one percentage point increase in each future year's assumed medical care cost trend rate, holding all other assumptions constant, would have been to increase the net periodic post-retirement benefit cost by $12,000 and the accrued post-retirement benefit cost by $1,000. Health care benefits are provided to certain retired employees. The cost of providing these benefits was approximately $16,000, $20,000 and $22,000 in 1999, 1998 and 1997, respectively. The cost is accrued over the service periods of employees expected to receive benefits. Past-service costs are being amortized principally over 30 years. NOTE M - STOCK OPTIONS The Company adopted a Stock Option Plan in 1996 that was similar to the Stock Option Plan established in 1986. Under the Stock Option Plans, options to acquire shares of common stock may be granted to the officers and key employees. The Stock Option Plans provide for the granting of options at the fair market value of the Company's common stock at the time the options are granted. Each option granted under the Stock Option Plans may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from date of grant. In 1999, no options were awarded under this plan. In 1998, options to purchase 32,524 shares of the Company's common stock at a price of $33.56 per share were awarded. The aggregate number of shares which may be issued under these plans are 317,196 shares of common stock. In 1994, a Non-Employee Directors Stock Option Plan was adopted. This Plan provides for the awarding of stock options to the Company's Directors. Pursuant to this Plan, on May 1, 1994, each non-employee director of the Company was automatically granted an option to purchase 1,275 shares of the Company's common stock at the fair market value of the Company's common stock of $13.32 per share. In addition, on May 1, 1999, the fifth anniversary of the initial option grant, persons who continue to be non-officer directors were each granted additional options to purchase 1,275 shares of the Company's common stock at a price of $21.81. The Plan additionally provides that any non-employee director who is first elected or appointed as a director of the Company or any subsidiary after May 1, 1994, shall, as of that date of such election or appointment, automatically be granted an option to purchase 1,275 shares of the Company's common stock. Such persons who continue to be non-officer directors shall also be granted additional options to purchase 1,275 shares of the Company's common stock on the fifth anniversary of the date they were first elected or appointed to the Board of Directors. The aggregate number of shares which may be issued under the Non-Employee Directors Stock Option Plan is 25,524 shares of common stock. Had compensation cost for the Plans been determined based on the fair value of the options at the grant dates consistent with the method required by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. - ------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Net Income As reported $ 3,282 $ 3,032 $ 3,283 Pro forma $ 3,194 $ 3,015 $ 3,265 Basic earnings per share As reported $ 1.84 $ 1.68 $ 1.83 Pro forma $ 1.79 $ 1.67 $ 1.82 Diluted earnings per share As reported $ 1.83 $ 1.67 $ 1.83 Pro forma $ 1.78 $ 1.66 $ 1.82
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options- pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 2.8%, 2.8% and 2.1%; expected volatility of 39.0%, 39.0% and 39.0%; risk-free interest rates of 6.3%, 5.7% and 6.7%; and expected lives of 10 years. A summary of the status of the Company's Employee Stock Option Plans as of December 31, 1999, 1998 and 1997, and changes during the years ending on those dates is presented below. The number of shares and price per share have been restated to reflect the 5% stock dividends of June, 1999, June, 1998 and May, 1997. - ------------------------------------------------------------------------------- EMPLOYEE STOCK OPTION PLAN Year Ended December 31, 1999 Weighted Average Excercise Shares Price Outstanding at beginning of year 59,908 $ 26.97 Granted --- --- Exercised --- --- Expired 1,102 33.56 ------ -------- Outstanding at end of year 58,806 $ 26.85 Options exercisable at year-end 32,898 Weighted average fair value of options granted during the year N/A
Year Ended December 31, 1998 Weighted Average Excercise Shares Price Outstanding at beginning of year 27,935 $ 19.43 Granted 32,524 33.56 Exercised --- --- Expired 551 33.56 ------ -------- Outstanding at end of year 59,908 $ 26.97 Options exercisable at year-end 12,223 Weighted average fair value of options granted during the year $ 33.56
Year Ended December 31, 1997 Weighted Average Excercise Shares Price Outstanding at beginning of year 13,317 $ 14.30 Granted 20,948 21.31 Exercised 6,330 14.93 Expired --- --- ------ -------- Outstanding at end of year 27,935 $ 19.43 Options exercisable at year-end 5,240 Weighted average fair value of options granted during the year $ 21.31
The following information applies to options outstanding at December 31, 1999. - ------------------------------------------------------------------------------- EMPLOYEE STOCK OPTION PLAN - ------------------------------------------------------------------------------- Number outstanding 58,806 Range of exercise prices $13.78 to $33.56 Weighted-average exercise price $26.85 Weighted-average remaining contractual life 7.46 years - -------------------------------------------------------------------------------
A summary of the status of the Company's Non-Employee Directors Stock Option Plan as of December 31, 1999 and 1998, and changes during the years ending on those dates are presented below. The number of shares and price per share have been restated to reflect the 5% stock dividends of June, 1999, June, 1998 and May, 1997. NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Year Ended December 31, 1999 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,206 $ 13.56 Granted 7,654 21.81 Exercised 1,276 13.32 Expired --- --- ----- -------- Outstanding at end of year 16,584 $ 17.39 Options exercisable at year-end 8,611 Weighted average fair value of options granted during the year $ 21.81
Year Ended December 31, 1998 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,206 $ 13.56 Granted --- --- Exercised --- --- Expired --- --- ----- -------- Outstanding at end of year 10,206 $ 13.56 Options exercisable at year-end 8,929 Weighted average fair value of options granted during the year N/A
Year Ended December 31, 1997 Weighted Average Excercise Shares Price Outstanding at beginning of year 11,481 $ 13.53 Granted --- --- Exercised 957 13.32 Expired 318 13.32 ----- -------- Outstanding at end of year 10,206 $ 13.56 Options exercisable at year-end 6,378 Weighted average fair value of options granted during the year N/A
The following information applies to options outstanding at December 31, 1999. - ------------------------------------------------------------------------------- NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN - ------------------------------------------------------------------------------- Number outstanding 16,584 Range of exercise prices $12.96 to $23.25 Weighted-average exercise price $17.39 Weighted-average remaining contractual life 6.98 years - -------------------------------------------------------------------------------
NOTE N - COMMITMENTS AND CONTINGENCIES The Company has non-cancellable operating lease agreements in excess of one year with respect to various buildings and equipment. The minimum annual rental commitments at December 31, 1999 are payable as follows. - -------------------------------------------- Operating Leases - -------------------------------------------- 2000 $ 428 2001 441 2002 526 2003 412 2004 422 2005 and beyond 1,258 ------- Total $ 3,487 - --------------------------------------------
The total rental expense was $397,000, $378,000 and $421,000 in 1999, 1998 and 1997, respectively. The Company has reserved $994,000 against unsettled claims which have been or may be asserted against the Bank in connection with certain pre-need funeral trust funds which were allegedly directed by funeral directors to be invested in a private placement annuity issued by EA International Trust. As of December 31, 1999, nine funeral directors whose funds were invested in this annuity have commenced suit against the Bank; if all funeral directors whose funds were invested in this annuity were to pursue claims, the Bank's maximum exposure for unsettled claims would be approximately $4.1 million principal loss plus punitive damages, interest, costs and attorney fees. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. The Bank has discontinued its involvement in this annuity and is pursuing indemnification for some or all of these possible losses from its insurance carriers and from EA International Trust. NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The contract or notional amounts as of December 31, 1999 are as follows. Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 36,119 Standby letters of credit $ 2,164 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support contracts entered into by customers. Most guarantees extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, collateral held by the Bank for financial instruments varies, but may include personal or commercial real estate, accounts receivable, inventory, equipment, certificates of deposit or marketable securities. The extent of collateral held for any one financial instrument ranges up to 100%. The average collateral held on financial instruments was 79.9% as of December 31, 1999. NOTE P - CONCENTRATIONS OF CREDIT RISK The Bank grants commercial, real estate and installment loans to customers primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of Northampton, Monroe and Lehigh Counties. At December 31, 1999, the Bank had residential real estate loans outstanding totaling $112,870,000, which is 55.6% of total loans. The Bank also had real estate related commercial loans outstanding at December 31, 1999 totaling $26,809,000, which is 13.2% of total loans. Loans to various borrowers for land development totaling $7,053,000 are included in the Bank's total real estate commercial loans. These loans represent 26.3% of the total real estate related commercial loans. Loans to individuals for recreational vehicles totaled $25,817,000 at December 31, 1999. This is 12.7% of total loans and 56.2% of the Bank's consumer and installment loans which totaled $45,886,000 at December 31, 1999 NOTE Q - RELATED PARTY TRANSACTIONS The amount of loans by the Company to its directors and executive officers was approximately $1,040,000 and $1,298,000 at December 31, 1999 and 1998, respectively. These loans were made in the ordinary course of business at substantially the same terms and conditions as those with other borrowers. An analysis of the 1999 activity of these loans follows. - ------------------------------------------------------- Balance, January 1, 1999 $ 1,298 New loans 131 Repayments 389 -------------- Balance, December 31, 1999 $ 1,040 - ------------------------------------------------------- NOTE R - REGULATORY MATTERS The Bank, as a National Bank, i s subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 1999, that the Bank could declare, without the approval of the Comptroller of the Currency, amounted to approximately $3,494,000. The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital of at least 4% of average assets (leverage ratio). Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying subordinated debt instruments, and the allowance for possible loan losses. Management believes that, as of December 31, 1999, the Company and the Bank met all capital adequacy requirements to which they were subject. The following table provides a comparison of the Company's and Bank's capital amounts, risk-based capital ratios and leverage ratios for the periods indicated CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $34,329 16.67% $16,477 8.00% --- --- Bank $30,831 15.00% $16,446 8.00% $20,557 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,892 15.48% $ 8,239 4.00% --- --- Bank $28,194 13.71% $ 8,223 4.00% $12,334 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $31,892 8.11% $15,726 4.00% --- --- Bank $28,194 7.20% $15,655 4.00% $19,568 5.00%
CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- --- Bank $29,450 15.02% $15,684 8.00% $19,605 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- --- Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- --- Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
The Company is not aware of any known trends, events or uncertainties that will have a material effect on the Company's liquidity, capital resources or operations. The Company is not under any agreement with the regulatory authorities nor is it aware of any current recommendation by regulatory authorities which, if they were implemented, would have a material effect on liquidity, capital, resources, or the operations of the Company. Restrictions on cash and due from bank accounts are placed upon the banking subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are required to be on hand or on deposit at the Federal Reserve Bank based upon deposit levels and other factors. The average and year-end amount of the reserve balance for 1999 was approximately $6,150,000 and $6,558,000, respectively. For 1998, the average reserve balance was $5,152,000 and the year-end amount was $5,675,000. NOTE S - EQUITY TRANSACTIONS The Company paid a 5% stock dividend on its common stock from authorized but unissued shares on June 24, 1999 to all shareholders of record at the close of business on June 4, 1999. On June 25, 1998, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on June 5, 1998. The Company also paid a 5% stock dividend on June 19, 1997 to shareholders of record on May 30, 1997. Fractional shares on these stock dividends were paid in cash. The number of shares and earnings per share as stated in the following discussion of the shares issued under the Dividend Reinvestment and Stock Purchase Plan have been restated to reflect these 5% stock dividends. A Dividend Reinvestment and Stock Purchase Plan was established in 1988. The Plan provides the holders of common stock with a method to invest their cash dividends and voluntary cash payments of not less than $100 or more than $1,000 per quarter in additional shares of the Company's common stock. Under this plan, shares are sold, in general, at a discounted price of 5% below the average of the high bid and asked price for the Company's common stock on the trading day immediately preceding the investment date. In 1999, 15,061 common new shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $20.99 per share for total proceeds of $316,000. In 1998, 10,910 common shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $29.98 for proceeds of $327,000. NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments (other than available-for-sale) to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data which management considered the best available, as generally provided in the Company's FRY-9C Regulatory Reports, and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies and resulting fair values, and recorded carrying amounts at December 31, 1999 and 1998 were as follows. Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices. 1999 1998 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Cash and cash equivalents $ 16,272 $ 16,272 $ 14,259 $ 14,259 Investment securities 19,123 19,887 17,920 17,723 Securities available-for-sale 132,356 132,356 98,389 98,389 Mortgage loans held-for-sale --- --- 603 603
Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities. 1999 1998 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Assets: Interest-bearing deposits with banks $ 5,589 $ 5,589 $ 3,301 $ 3,301 Liabilities: Deposits with stated maturities 154,771 156,584 136,024 128,711 Securities sold under agreements to repurchase 1,730 1,730 5,094 5,094 Long-term debt 29,519 30,000 20,419 20,000
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand). 1999 1998 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Deposits with no stated maturities $ 167,691 $ 167,896 $ 173,301 $165,838
The fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the approximate current market rates adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors. 1999 1998 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Total loans $199,738 $202,258 $238,031 $212,437
There is no material difference between the carrying amount and the estimated fair value of off-balance-sheet items totaling $38,283,000 at December 31, 1999 and $22,502,000 at December 31, 1998 which are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS No. 107 NOTE U - FIRST COLONIAL GROUP, INC. (PARENT COMPANY ONLY) - ----------------------------------------------------------------------- CONDENSED BALANCE SHEETS December 31, 1999 1998 - ----------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 14 $ 20 Interest-Bearing Deposits with Banks 369 130 Loan to Banking Subsidiary 1,000 1,000 Investment in Banking Subsidiary 24,544 27,158 Investment in Other Subsidiary 3,680 3,909 Other Assets 35 13 --------- --------- TOTAL ASSETS $ 29,642 $ 32,230 LIABILITIES Long-Term Debt $ 1,320 $ 435 Other Liabilities 79 78 -------- --------- TOTAL LIABILITIES 1,399 513 SHAREHOLDERS' EQUITY 28,243 31,717 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,642 $ 32,230
- ------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME For the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- INCOME Dividends from Subsidiaries $ 1,321 $ 688 $ 1,139 Interest on Loan to Subsidiary 85 89 89 Interest on Deposits with Banks 6 5 21 ------- ------ ------ TOTAL INCOME 1,412 782 1,249 ------- ------ ------ EXPENSES Interest on Long-Term Debt 105 39 41 Other Expenses 81 94 99 ------- ----- ------ TOTAL EXPENSES 186 133 140 ------- ----- ------ Income Before Taxes and Equity in Undistributed Net Earnings of Subsidiaries 1,226 649 1,109 Federal Income Tax (Credit) (32) (12) (10) ------- ----- ------ Income Before Equity in Undistributed Net Earnings of Subsidiaries 1,258 661 1,119 Equity in Undistributed Net Earnings of Subsidiaries 2,024 2,371 2,164 ------- ------- ------- NET INCOME $ 3,282 $ 3,032 $ 3,283 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS For the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 3,282 $ 3,032 $ 3,283 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Distribution in Excess of Undistributed Net Earnings of Subsidiaries (2,006) (2,467) (2,164) Changes in Assets and Liabilities: (Increase) Decrease in Interest-Bearing Deposits with Banks (239) 774 (248) (Increase) Decrease in Other Assets (22) (1) - Increase (Decrease) in Other Liabilities 1 28 (23) ------- ------- ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,016 1,366 848 ------- ------- ------ INVESTING ACTIVITIES Capital Contribution to Bank Subsidiary - (500) - -------- ------- ------ NET CASH PROVIDED BY INVESTING ACTIVITIES - (500) - -------- ------- ------ FINANCING ACTIVITIES Increase in Long-Term Debt 885 45 - Increase in ESOP Debt (885) (45) - Purchase of Treasury Stock - - (107) Proceeds from the Sale of Treasury Stock - 94 33 Proceeds from Issuance of Common Stock 303 333 361 Cash Dividends Paid (1,321) (1,275) (1,139) Cash in Lieu of Fractional Shares (4) (6) (4) -------- ------ ------- NET CASH USED IN FINANCING ACTIVITIES (1,022) (854) (856) -------- ------ ------- Increase (Decrease) in Cash and Cash Equivalent (6) 12 (8) Cash and Cash Equivalent, January 1, 20 8 16 -------- ------ ------- Cash and Cash Equivalent, December 31, $ 14 $ 20 $ 8 - -------------------------------------------------------------------------------
INVESTOR INFORMATION First Colonial Group, Inc. 76 South Main Street Nazareth, PA 18064 ANNUAL SHAREHOLDERS' MEETING The annual shareholders' meeting will be held on Thursday, May 11, 1999 at 9 a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem, Pennsylvania 18017. REGISTRAR AND TRANSFER AGENT The registrar and transfer agent is Nazareth National Bank and Trust Company. Shareholders seeking assistance with stock registration, lost stock certificates or dividend information should contact Maria A. Keller at the following address or by telephone at (610) 746-7317. Nazareth National Bank Trust Department 76 South Main Street Nazareth, PA 18064 STOCK INFORMATION First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group". At the close of business on December 31, 1999, there were 726 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note G - Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price in December, 1999 was $17.375 and in December, 1998 was $27.738. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of June, 1999 and June, 1998 (see "Note S - Equity Transactions" in the "Notes to Consolidated Financial Statements"). 1998 First Quarter $33.56 $31.07 $ 0.1724 Second Quarter 34.76 31.74 0.1724 Third Quarter 34.29 25.48 0.1810 Fourth Quarter 28.33 25.48 0.1810 -------- TOTAL $ 0.7068
1999 First Quarter $27.62 $21.91 $ 0.1810 Second Quarter 24.00 20.71 0.1810 Third Quarter 24.25 18.50 0.1900 Fourth Quarter 20.00 17.19 0.1900 -------- TOTAL $ 0.7420
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shareholders may participate in the Dividend Reinvestment and Stock Purchase Plan. The plan provides that additional shares of common stock may be purchased with reinvested cash dividends and with voluntary cash payments at a 5% discount from market. A description of the plan and additional information may be obtained by writing to: Nazareth National Bank Trust Department 76 South Main Street Nazareth, PA 18064 INVESTMENT CONSIDERATIONS In analyzing whether to make or to continue an investment in the Company, investors should consider, among other factors, the information contained in this Annual Report and certain investment considerations and other information described in the Company's Form 10-K for the year ended December 31, 1999. FORM 10-K Shareholders, analysts and others seeking a copy of Form 10-K without charge (except for exhibits) or additional financial information about First Colonial Group, Inc. should send a written request to: Reid L. Heeren, Vice President First Colonial Group, Inc. 76 South Main Street Nazareth, PA 18064 MARKET MAKERS The following investment brokerage houses currently make a market in First Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Instinet Corporation; Ryan, Beck & Co.; Spear Leeds & Kellogg Capital Markets; and Tucker Anthony, Inc. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information contained under the captions "Election Of Directors" and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in the Company's 2000 Proxy Statement and "Executive Officers of the Registrant" in Item 4.1 of this Form 10-K is incorporated herein by reference therefrom. Item 11. Executive Compensation The information contained under the caption "Executive Compensation" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the caption "Voting Securities and Principal Holders Thereof" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. Item 13. Certain Relationships and Related Transactions The information contained under the caption "Certain Relationships and Related Transactions" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents Filed as Part of this Report: 1. Financial Statements: The Consolidated Financial Statements of the Company and the Report of Independent Certified Public Accountants thereon, as listed below, have been filed under "Item 8, Financial Statements and Supplementary Data". Report of Independent Certified Public Accountants Consolidated Balance Sheets for the Years Ended 12/31/99 and 12/31/98 Consolidated Statements of Income and Comprehensive Income for the Years Ended 12/31/99, 12/31/98 and 12/31/97 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended 12/31/99, 12/31/98 and 12/31/97 Consolidated Statements of Cash Flows for the Years Ended 12/31/99, 12/31/98 and 12/31/97 Notes to Consolidated Financial Statements 2. Exhibits: Number Title Page No. 3.1 (7) Restated Articles of Incorporation of the Company, as amended. 3.2 (7) Bylaws of the Company, as amended. 4.1 (1) Specimen Common Stock Certificate of the Company. * 10.1 (1) Deferred Compensation Plan for Directors. 10.2 Intentionally omitted. * 10.3 (1) Form of Executive Benefit Program Agreement. * 10.4 (6) Employee Stock Ownership Plan. 10.5 (1) Loan Agreement (including Exhibits thereto), dated October 5, 1994, by and between the Company and Commonwealth Bank and Trust Company, N.A. * 10.6 (3) First Colonial Group, Inc. Stock Option Plan. 10.7 Intentionally Omitted * 10.8 (8) Restated Optional Deferred Salary Plan (401(k)). * 10.9 (10) 1994 Stock Option Plan for Non-Employee Directors, as amended *10.10 (9) Severance Agreement dated July 19, 1994 by and between the Bank and S. Eric Beattie *10.10.1 (12) Amendment No. 1 to Severance Agreement by and between the Board and S. Eric Beattie *10.11 (9) Severance Agreement dated July 19, 1994 by and between the Bank and Reid L. Heeren Number Title Page No. ------ ----- -------- *10.11.1 (12) Amendment No. 1 to Severance Agreement by and between the Board and Reid L. Heeren *10.12 (9) Severance agreement dated July 19, 1994 by and between the Bank and Arthur Williams *10.12.1 (12) Amendment No. 1 to Severance Agreement by and between the Board and Arthur Williams *10.13 (9) Severance dated July 19, 1994 by and between the Bank and Gerald E. Kemmerer *10.14 (10) Amendment No. 1 dated September 27, 1994 to the Bank's Employee Stock Ownership Plan *10.15 (10) Amendment No. 1 dated September 22, 1994 to the Optional Deferred Salary Plan (401K) *10.16 (11) Amendment Number 1 to the 1994 Stock Option Plan for Non-Employee Directors *10.17 (11) 1996 Employee Stock Option Plan *10.18 (13) Severance Agreement dated September 22, 1997 by and between the Board and Tomas J. Bamberger 10.19 (14) Loan Agreement dated April 22, 1998 by and between First C. G. Company and the Employee Stock Ownership Plan *10.20 (15) Severance Agreement dated March 1, 1999 by and between the Board and Robert McGovern 10.21 Loan Agreement dated February 8, 1999 by and between First C. G. Company and the Employee Stock Ownership Plan 21.1 (3) Subsidiaries of the Company. 23.1 Consent of Accountants. 27.1 Financial Data Schedule - ----------------------- * Represents a Management Contract or Compensatory Plan, Contract or Arrangement. (1) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-4908), as filed on April 16, 1986. (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-20319), as filed on February 25, 1988. (3) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1986. (4) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1988. (5) Incorporated by reference from the Company's Current Report on Form 8-K dated June 20, 1989 (File No. 0-11526). (6) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1991. (7) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-64816), as filed on June 22, 1993. (8) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1993. (9) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB (File No. 0-11526) for the quarter ended June 30, 1994. (10) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1994. (11) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1995. (12) Incorporated by reference by the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1996. (13) Incorporated by reference by the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1997. (14) Incorporated by reference by the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1998. (15) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (File No. 0-11526) for the quarter ended June 30, 1999. (b) Reports on Form 8-K No reports on Form 8-K were filed in the fourth quarter of the year ended December 31, 1999. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COLONIAL GROUP, INC. Dated: March 31, 2000 By: /s/ S. Eric Beattie -------------------- S. ERIC BEATTIE, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Richard Stevens, III ---------------------------- RICHARD STEVENS, III Chairman of the Board and Director March 31, 2000 By: /s/ S. Eric Beattie ---------------------------- S. ERIC BEATTIE President, Chief Executive Officer and Director (Principal Executive Officer) March 31, 2000 By: /s/ Reid L. Heeren ---------------------------- REID L. HEEREN Executive Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 31, 2000 By: /s/ Robert J. Bergren ---------------------------- ROBERT J. BERGREN Director March 31, 2000 By: /s/ Christian F. Martin, IV ---------------------------- CHRISTIAN F. MARTIN, IV Director March 31, 2000 By: /s/ Gordon B. Mowrer ---------------------------- GORDON B. MOWRER Director March 31, 2000 By: /s/ Daniel B. Mulholland ---------------------------- DANIEL B. MULHOLLAND Director March 31, 2000 By: /s/ Charles J. Peischl ----------------------------- CHARLES J. PEISCHL, ESQUIRE Director March 31, 2000 By: /s/ John H. Ruhle, Jr. ----------------------------- JOHN H. RUHLE, JR. Director March 31, 2000 By: /s/ Maria Zumas Thulin ----------------------------- MARIA Z. THULIN Director March 31, 2000 EX-10.21 2 LOAN AGREEMENTS ESOP LOAN AGREEMENT THIS LOAN AGREEMENT, dated February 8, 1999 by and between Nazareth National Bank and Trust Company Employee Stock Ownership Plan Trust, a trust formed under the laws of the Commonwealth of Pennsylvania pursuant to a Trust Agreement dated June 28, 1994 (the "Borrower"), Nazareth National Bank and Trust Company in its capacity as trustee for Borrower ("Trustee") and First C. G. Company, Inc., a Delaware Corporation (the "Lender"). BACKGROUND The Borrower has requested the Lender to lend to it moneys in an amount not to exceed One Million and 00/100 Dollars ($1,000,000) (the "Loan"). The purpose of the loan is to refinance the purchase of 35,500 shares of Common Stock of First Colonial Group, Inc. from the market. The Lender is willing to make the Loan to the Borrower pursuant to the terms of a note of even date herewith (the "ESOT Term Note"). NOW, THEREFORE, in consideration of the promises herein contained, and each intending to be legally bound hereby, the parties agree as follows: Section I. The Loan 1.01 General Terms. Subject to the terms hereof, the Lender will lend One Million and 00/100 Dollars ($1,000,000) to the Borrower at Closing which will be repayable in twenty (20) equal annual installments of $50,000 each due each October 1, commencing October 1, 1999, with a final installment of the entire unpaid principal balance due October 1, 2018 and quarterly interest payments of all outstanding accrued and unpaid interest due on each April 1, July 1, October 1 and January 1, commencing April 1, 1999, and a final interest payment of all outstanding accrued and unpaid interest due on October 1, 2018. 1.02 Disbursement of the Loans. The Lender will wire transfer the proceeds of the Loan to Borrower. 1.03 Interest Rate and Payments of Interest. (A) Interest on the principal balance of the Loan, from time to time outstanding, will be payable at the rate of the Nazareth National Bank and Trust Company's (or its successor, the "Bank") Prime Rate and shall be paid as provided herein. (B) Changes in the Prime Rate shall be effective at the beginning of business on the same day on which the Bank effects a change in its Prime Rate. Interest shall be calculated by the Lender on the basis of a 365 day year and the actual number of days elapsed. (C) For purposes of this Agreement, "Prime Rate" and "Bank's Prime Rate" shall mean the commercial lending rate of interest per annum as fixed from time to time by the management of the Bank at its main office and designated as "Prime Rate". The determination and publication of "Prime Rate" by the Bank shall not in any way preclude or limit the Bank from lending to certain borrowers from time to time at a rate of interest less than "Prime Rate." (D) If, at any time, the interest rate shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by any applicable laws, then, for such time as the interest rate would be deemed excessive, its application shall be suspended and there shall be charged instead the maximum rate of interest permissible under such laws. (E) If an event of default, as set forth in Section VI of this Agreement, should occur, the interest rate hereunder shall increase thereafter to the rate of three percent (3%) per annum over the Bank's Prime Rate and shall be paid as provided herein. 1.04 Payment to the Lender. All sums payable to the Lender hereunder shall be paid directly to the Lender in immediately available funds. The Lender shall send the Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Lender to the contrary within sixty (60) days of its receipt of any statement which it deems to be incorrect. Section II. Conditions Precedent 2.01 The obligation of the Lender to make the Loan hereunder is subject to the following conditions precedent: (A) Delivery of the ESOT Term Note executed by the Trustee of the Borrower; (B) Delivery of a certified (as of the date of Closing) copy of resolutions of the Borrower's Trustee authorizing the execution, delivery and performance of this Agreement and the ESOT Term Note; (C) A copy (certified by the Trustee) of the trust agreement for the ESOT; and (D) A certificate (dated the date of the request for the advance under the Loan) of the secretary of the Trustee as to the incumbency and signatures of the officers of the Trustee signing the ESOT Term Note. Section III. Collateral 3.01 First Colonial Group, Inc. has executed a Pledge Agreement this date and delivered 134,946 shares of the common stock of Nazareth Nation Bank and Trust Company (the "Stock") to the Lender together with stock powers executed in blank, as security for the performance of the obligations of the Trustee of the ESOT under a certain note from the Trustee to the Lender. The Pledge Agreement and the Stock held pursuant thereto shall be collateral for Trustee's obligations hereunder. Section IV. Subordination and Set Off 4.01 Lender hereby waives its right to set off obligations due from the Lender to the Borrower and agrees that, in the event of an event of default hereunder or otherwise, it will not set off any amounts due from it to the Borrower. Section V. Warranties and Covenants 5.01 Within ninety (90) days after the close of each fiscal year, Borrower shall provide annual financial statements all in reasonable detail, including all supporting schedules and comments; the statements to be audited by an independent certified public accountant selected by the Borrower and acceptable to the Lender, and certified by such accountants to have been prepared in accordance with generally accepted accounting principles consistently applied by the Borrower, except for any inconsistencies explained in such certificate. The Lender shall have the right, from time to time, to discuss the Borrower's affairs directly with the Borrower's independent certified public accountants after notice to the Borrower and opportunity of the Borrower to be present at an such discussions. 5.02 Within forty-five (45) days after the end of the first three financial quarters of any fiscal year in which the Loan is outstanding, the Borrower shall provide financial statements for the preceding quarter prepared by the Trustee or Trustee's designee, all in reasonable detail and certified by the Trustee as having been prepared in accordance with generally accepted accounting principals consistently applied. 5.03 The Borrower represents that it is not in default with respect to any of its existing indebtedness, and the making and performance of this Agreement, and the Note executed in connection herewith, will not, immediately or with the passage of time, the giving of notice, or both, constitute default under any notes or agreements with third parties. 5.04 The Borrower will notify the Lender immediately of the occurrence of any event of default or of any fact, condition or event that only with the giving of notice or the passage of time or both, could become an event of default, or of the failure of the Borrower to observe any of its undertakings hereunder. 5.05 The Borrower will not furnish to the Lender any certificate or other document that will contain any untrue statement of material fact or that will omit to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. Section VI. Acts of Default 6.01 The occurrence of any one or more of the following events shall constitute an event of default: (A) The Borrower shall fail to pay any amounts to be paid hereunder, or under the ESOT Term Note when and as due, and such failure shall continue uncured for ten (10) days after notice from the Lender to the Borrower; (B) The Borrower shall fail to observe or perform any other obligation to be observed or performed by it herein or in any of the notes or agreements secured hereby and such failure shall continue for thirty (30) days after notice of such failure to the Borrower by the Lender; (C) Any financial statement, representation, warranty or certificate made or furnished by the Borrower to the Lender or the Lender's agent or representatives in connection with this Agreement, or as inducement to the Lender to enter into this Agreement, or in any separate statement or document to be delivered hereunder to the Lender, shall be materially false, incorrect, or incomplete when made; (D) The Borrower shall admit its inability to pay its debts as they mature, or shall make an assignment for the benefit of its or any of its creditors; (E) Proceedings in bankruptcy, or for reorganization of the Borrower, or for the readjustment of any of its debts, under the Bankruptcy Act of 1978, as amended, or any part thereof, or under any other laws, whether State or Federal, for the relief of borrowers, now or hereafter existing, shall be commenced by the Borrower, or shall be commenced against the Borrower and shall not be discharged within thirty (30) days of commencement, or stayed pending legal action to have such proceeding dismissed; or (F) A receiver shall be appointed for the Borrower or for any substantial part of its assets, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Borrower, and such receiver shall not be discharged within ninety (90) days of his appointment, or such proceedings shall not be discharged within ninety (90) days of their commencement. 6.02 Acceleration. Upon the occurrence of an event of default, at the option of the Lender, but only upon notice to the Borrower, all amounts due hereunder shall immediately become due and payable without further action of any kind. Section VII. Miscellaneous 7.01 Construction. The provisions of this Agreement shall be in addition to those of any pledge, note, assignment or other evidence of liability held by the Lender, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Lender from enforcing any or all of any other notes, pledges or security agreements it may have in accordance with their respective terms. 7.02 Further Assurance. From time to time, the Borrower will execute and deliver to the Lender such additional documents and will provide such additional information as the Lender may reasonably require to carry out the terms of this Agreement and to be informed of the Borrower's status and affairs. 7.03 Expenses of the Lender. The Borrower will, on demand, reimburse the Lender for all expenses, including the reasonable fees and expenses of legal counsel for the Lender, incurred by the Lender in connection with the preparation, administration, amendment, modification or enforcement of this Agreement and the collection or attempted collection of the notes. 7.04 Applicable Law. Except to the extent preempted by applicable Federal law, the substantive laws of the Commonwealth of Pennsylvania relating to contracts executed and to be performed therein shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 7.05 Notices. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: (A) If to the Borrower: Nazareth National Bank and Trust Company as Trustee 76 South Main Street Nazareth, PA 18064 Attn: S. Eric Beattie, President With copy to: Frederick D. Lipman, Esquire Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, PA 19103 (B) If to the Lender: First C. G. Company, Inc. 103 Springer Building 3411 Silverside Road Wilmington, DE 19810 Attn: Reid L. Heeren, President 7.06 Binding Effect, Assignment and Entire Agreement. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Lender. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 7.07 Severability. If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect with the invalid provision, and, to this end, the provisions hereof are severable. 7.08 Waivers. The Lender may at any time, and from time to time, waive any one or more of the conditions or provisions contained herein; however, no waiver shall be effective unless in writing. Section VIII. Miscellaneous 8.01 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. Section IX. Seal 9.01 This document is intended to take effect as an instrument under seal. FIRST C. G. COMPANY, INC. By: /S/ Reid L. Heeren (Seal) President NAZARETH NATIONAL BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN TRUST By: /S/ Barbara A. Seifert (Seal) Vice President of Trustee NAZARETH NATIONAL BANK AND TRUST COMPANY By: /S/ S. Eric Beattie (Seal) President PLEDGE AGREEMENT TO: First C. G. Company, Inc. (the "Pledgee") February 8, 1999 103 Springer Building 3411 Silverside Road Wilmington, DE 19810 Attn: Reid L. Heeren, President In order to induce the Pledgee to make loans or otherwise to give, grant or extend credit at any time(s) to the Nazareth National Bank and Trust Company Employee Stock Ownership Plan Trust (the "ESOT") or the trustee or trustees for the ESOT (individually and collectively "Trustee") for the benefit of the ESOT, First Colonial Group, Inc. (the "Pledgor") hereby agrees and consents: BACKGROUND The Pledgee is lending the ESOT One Million and 00/100 Dollars ($1,000,000) pursuant to the ESOT Loan Agreement of even herewith between the ESOT and the Pledgee (the "ESOT Loan Agreement") and pursuant to an ESOT Term Note (as defined in the ESOT Loan Agreement). NOW, THEREFORE, in consideration of the promises herein contained, and each intending to be legally bound hereby, and incorporating the foregoing Background herein, the parties agree as follows: 1. That, as security for any and all indebtedness and/or other liabilities of the ESOT to the Pledgee, now existing or to arise pursuant to the ESOT Loan Agreement and the ESOT Term Note between the ESOT and the Pledgee (hereinafter referred to as the "Obligations"), the Pledgee shall have and is hereby given a lien upon and security interest in the following property, which is owned by the Pledgor and is in due form for transfer and all of which has been or is herewith deposited with the Pledgee: 134,946 shares of common stock of the Nazareth National Bank and Trust Company hereby warranted by the Pledgor to be duly authorized, validly issued, fully paid and non-assessable, free and clear of any liens, encumbrances, security interests, claims and demands of any person whatsoever and which the Pledgor has power to pledge and the Pledgee shall be under no duty with respect to all or any of the aforesaid property except to account therefor in due course pursuant to the terms and conditions hereof. 2. The Pledgor grants to the Pledgee the unlimited and unconditional right to vote all stock pledged hereunder only after default has occurred. 3. The Pledgee assumes no Responsibility for the custody and preservation of stock in its possession other than the use of reasonable care which the parties by agreement determine as follows: the Pledgor will give the Pledgee at least ten (10) days prior written notice of any act or acts to be done or notice or notices to be served which are necessary to preserve rights under the stock, necessary to collect money thereunder, or any act which is necessary, advisable or desirable to preserve any interest against third parties, exercise rights or options which the Pledgor may have in stock or to preserve its value or to take any other act or action, similar or dissimilar; and, unless so notified, the Pledgee or any holder will not be responsible for any loss or impairment of such interest, rights, options or benefits in connection therewith. Neither the Pledgee nor any holder will be required to see to the collection of any sums which may become due with respect to said stock nor to give notice to the Pledgor or any one else in respect thereto. The Pledgee shall have no obligation to give notice to the Pledgor or any other person or to consult with it, him or them regarding any rights or options which the Pledgor may at any time have to vote, tender, sell, convert or otherwise deal with such securities or to purchase, obtain or receive any securities or other property by virtue of ownership of said stock. The Pledgee is also granted a security interest in all additional securities issued by the issuer of the securities pledged hereunder, if any, including but not limited to, all stock dividends, stock splits, stock received in exchange for the stock pledged herein, whether by merger, consolidation, liquidation, reorganization or otherwise and all other securities of every kind and character whatsoever, whether similar or dissimilar to that pledged hereunder, now or hereafter issued by the issuer thereof to the Pledgor. 4. That, in event of the happening of any one or more of the following, to wit: (a) the non-payment to the Pledgee when due of all or any part of the Obligations which shall continue uncured for ten (10) days after notice from the Pledgee to the Pledgor and the ESOT; (b) failure in business dissolution or termination of existence of the Pledgor or the ESOT; (c) any petition in bankruptcy being filed by or against the Pledgor, or any proceedings in bankruptcy, or under any Acts of Congress relating to the relief of debtors, being commenced for the relief or readjustment of any indebtedness of the Pledgor or the ESOT, either through reorganization, composition, extension or otherwise and such petition or commencement shall not be discharged within ninety (90) days of filing or commencement, or stayed pending proceedings for dismissal; (d) a receiver of any property of the Pledgor or the ESOT which may be in or come into your possession or control, or that of any third party as agent or pledgeholder for Pledgor or the ESOT, being attached or distrained, or becoming subject to any mandatory order of court or other legal process, which writ of attachment, distraint, order or process shall not be discharged within ninety (90) days of its issuance or entry, then, or at any time after the happening of any such event and expiration of the periods for cure. The Pledgee is authorized and empowered, acting in its discretion and either before or after the maturity of all or any part, of the property upon which you then have a lien hereunder, at public or private sale, upon ten (10) days prior written notice to the Pledgor which is agreed to be reasonable notice. 5. That no delay on the part of the Pledgee in exercising any power of sale, lien, option or other right hereunder, and no notice or demand which may be given to or made upon the Pledgor by the Pledgee with respect to any power of sale, lien, option or other right hereunder, shall constitute a waiver thereof, or limit or impair the right of the Pledgee to take any other right hereunder, without notice or demand, or prejudice the rights of the Pledgee as against the Pledgor in any respect. 6. That the Pledgee may, at its option and without any obligation to do so, transfer to or register all or any part of said stock into its name or its nominee's all or any part of property upon which you may have a lien hereunder at any time, only after default on all or an part of the Obligations, with written notice to the Pledgor. 7. That the Pledgee may release or surrender at any time(s) all or any of the property upon which it has a lien at any time, together with any substitution(s) therefor and/or any addition(s) thereto and/or any proceeds thereof without in any way affecting the liability of the Pledgor or the ESOT hereunder or otherwise. 8. That it will not vote its stock of the Nazareth National Bank and Trust Company in favor of, or consent to, or otherwise approve the issuance of any additional shares of the common stock of Nazareth National Bank and Trust Company, unless such shares are pledged to the Pledgee. 9. That this is a continuing agreement and shall remain in full force and effect and be binding upon the Pledgor and the legal representatives successors or assigns of the Pledgor until payment in full of all sums due to become due to the Pledgee. 10. That all remedies of the Pledgee shall be cumulative not alternative. 11. Except to the extent preempted by applicable Federal law, this agreement shall be deemed to be made under and shall be governed by the laws of the Commonwealth of Pennsylvania in all respects, including matters of construction, validity and performance and none of its terms or provisions may be waived, altered, modified or amended, except as the Pledgee may consent thereto in writing duly signed by the Pledgee. 12. This is the entire agreement between the Pledgor and the Pledgee. FIRST C. G. COMPANY, INC. By: /S/ Reid L. Heeren President FIRST COLONIAL GROUP, INC. By: /S/ S. Eric Beattie President ESOT TERM NOTE DATE: February 8, 1999 $1,000,000 Nazareth National Bank and Trust Company, Employee Stock Ownership Plan Trust, a trust formed under the laws of the Commonwealth of Pennsylvania (the "ESOT") pursuant to a trust agreement dated June 28, 1994 (the "Agreement"), by the trustee(s) under the Agreement (individually and collectively the "Trustee") for value received, hereby promises to pay to the order of First C. G. Company. Inc., a Delaware corporation (the "Lender"), the principal sum of One Million and 00/100 Dollars ($1,000,000) in twenty (20) equal annual installments of principal in the amount of $50,000 each due each October 1, commencing October 1, 1999, with a final installment of the entire unpaid principal balance due October 1, 2018, and quarterly interest payments of all outstanding accrued and unpaid interest thereon due each April 1, July 1, October 1 and January 1, commencing October 1, 1999. The ESOT shall pay interest at the Nazareth National Bank and Trust Company's (or its successor, the "Bank") prime rate plus on the unpaid principal balance due hereunder, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The interest shall be calculated on the basis of a 365 day year and the actual number of days elapsed. The Bank's prime rate shall be that rate of interest which the management of the Bank establishes as its "prime rate" from time to time. The determination and publication of "prime rate" by the Bank shall not in any way preclude or limit the Bank from lending to certain borrowers from time to time at a rate of interest less than the Bank's announced "prime rate." Changes, from time to time, in the Bank's prime rate shall be effective at the beginning of business on the same day on which the Bank effects a change in its prime rate. If an event of default, as set forth in this Note, should occur, the interest rate hereunder shall increase to rate of three percent (3%) per annum over prime rate. Interest, at the rate provided for herein, shall continue to accrue at such rate and continue to be paid even after default, maturity, acceleration, recovery of judgment, bankruptcy, insolvency proceedings of any kind or the happening of any event or occurrence similar or dissimilar. The Trustee may prepay the balance due hereunder in whole at any time, or in part from time to time, without penalty or premium. The ESOT, and any and all endorsers hereby: 1. Waive presentment, demand, protest and notice of protest or dishonor; 2. Consent to any extension, renewal, compromise, forbearance, acceleration or release of any party; 3. Agree that any provisions may be modified between the holder hereof and any party; 4. Consent to the exchange, release or surrender of any collateral to any party or to any guarantor, for the waiver, release or subordination of any security interest, in whole or in part; and 5. Waive all other notices in connection with the delivery, acceptance. performance, default or enforcement of payment of this Note. The occurrence of any of the following events or conditions shall constitute an event of default hereunder: 1. The ESOT shall fail to pay when due any amounts due hereunder of principal or interest and such failure shall continue for a period often (10) days: 2. The ESOT shall fail to observe or perform any other obligation to be observed or performed by it hereunder or under any other agreements pledges, or instruments relating hereto, and such failure shall continue uncured for thirty (30) days after notice of such failure from the Lender to the Trustee; 3. Any financial statement, representation, warranty or certificate made or furnished by the Trustee to the Lender or to the Lender's agent or representative in connection with this Note or any agreements or instruments entered into in connection herewith, or as an inducement to the Lender to make any loans shall be materially false, incorrect or incomplete when made; 4. The institution of any proceedings by or against the ESOT under any bankruptcy or insolvency statute or an assignment for the benefit of creditors or the appointment of a receiver, conservator, liquidator or other judicial representative by or for the ESOT, whether similar or dissimilar, for the ESOT's assets, which if commenced by the ESOT shall not be discharged within ninety (90) days of their commencement; or 5. The Trustee shall admit its inability to pay the ESOT's debts as they become due. Upon the occurrence of an Event of Default, at the option of the Lender, but only upon notice to the Trustee, all amounts due hereunder shall become immediately due and payable, and the Lender shall thereupon have all rights and remedies provided hereunder and under any other agreements between the Lender and the ESOT or otherwise available at law or in equity. A waiver by the Lender of any event of default hereunder shall not constitute a waiver of any subsequent event of default. The Lender waives its right to set off obligations due from it to the ESOT and agrees that, in event of default or otherwise, it will not set off any amounts due from it to the ESOT. The Trustee shall be liable hereunder only in its capacity as Trustee under the agreement of trust for the ESOT and recourse for the obligations due hereunder shall be limited to the assets of the ESOT. Except to the extent preempted by applicable Federal law, this Note shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts made and to be performed in Pennsylvania, but all rights of the Lender hereunder shall inure to the benefit of its successors and assigns and all obligations of the ESOT shall bind its successors and assigns. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not effect the validity, legality or enforceability of the remainder of the provisions hereof. NAZARETH NATIONAL BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN TRUST By: /S/ Barbara A. Seifert (SEAL) Vice President of Trustee EX-23 3 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 14, 2000 accompanying the consolidated financial statements included in the 1999 Annual Report to Shareholders which is incorporated by reference in the Annual Report of First Colonial Group, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statementsof 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 17, 1994). /S/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 27, 2000 EX-27 4 FINANCIAL DATE SCHEDULE
9 0000714719 FIRST COLONIAL GROUP 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 14,272 5,589 2,000 0 132,356 19,887 19,123 202,258 2,437 391,889 324,480 1,730 7,436 30,000 0 0 9,242 19,001 391,889 17,772 8,338 243 26,353 9,819 11,449 14,904 375 563 14,673 4,211 3,282 0 0 3,282 1.84 1.83 4.44 1,311 1,491 0 0 2,691 732 103 2,437 1,877 0 560
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