10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (fee required) For the fiscal year ended December 31, 2000. OR [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________. Commission File Number 0-11526 FIRST COLONIAL GROUP, INC. ----------------------------------------------------------------- (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. [ X ] The aggregate market value of voting stock held by non-affiliates of the registrant is $26,491,563. (1) The number of shares of the Issuer's common stock, par value $5.00 per share, outstanding as of March 26, 2001 was 1,967,919. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Company's Proxy Statement to be filed in connection with its 2001 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Other documents incorporated by reference are listed in the Exhibit Index. (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the registrant's Common Stock outstanding, reduced by the amount of Common Stock held by executive officers, directors and shareholders owning in excess of 10% of the registrant's Common Stock, multiplied by the last sale price for the registrant's Common Stock on March 26, 2001. Includes an aggregate of 226,149 shares, with an aggregate market value of $3,674,921, held by the Trust Department of Nazareth National Bank & Trust Company in Trust for persons other than executive officers, directors and 10% shareholders of the registrant. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder may be deemed an affiliate of the registrant or that such person is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. PART I Item 1. Business Forward Looking Information The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, statements as to litigation and the amount of reserves, and other statements which are not historical facts or as to the Company's, the Bank's or management's intentions, plans, beliefs, expectations or opinions. Such forward looking statement are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company and the Bank, Federal and state government regulation, competition, and the results of litigation. These and other risks, uncertainties and other factors are discussed elsewhere in this Annual Report on Form 10-K. Investment Considerations In analyzing whether to make or to continue an investment in the Company, investors should consider, among other factors, the following: Economic Conditions and Related Uncertainties. Commercial banking is affected, directly and indirectly, by local, domestic, and international economic and political conditions, and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors beyond the Company's control, may adversely affect the potential profitability of the Company. Any future rises in interest rates, while increasing the income yield on the Company's earning assets, may adversely affect loan demand and the cost of funds and, consequently, the profitability of the Company. Any future decreases in interest rates may adversely affect the Company's profitability because such decreases may reduce the amounts which the Company may earn on its assets. Economic downturns could result in the delinquency of outstanding loans. Management does not expect any one particular factor to affect the Company's results of operations. However, a downtrend in several areas, including real estate, construction and consumer spending, could have an adverse impact on the Company's ability to remain profitable. Effect of Interest Rates on the Bank and the Company. The operations of financial institutions such as the Company are dependent to a large degree on net interest income which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. An institution's net interest income is significantly affected by market rates of interest which in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. At December 31, 2000, total interest earning assets maturing or repricing within one year was less than total interest bearing liabilities maturing or repricing during the same time period by $7,418,000, representing a negative cumulative one year gap of 96%. If interest rates rise, the Company could experience a decrease in net interest income. The Company also has interest rate risk if interest rates decline. This risk is the result of the investment in U. S. Agency securities that have call features. If interest rates decline, $54,420,000 of these securities could be called; thus reducing net interest income. Like all financial institutions, the Company's balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U. S. Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. See "Item 7. Management's Discussion of Financial Condition and Results of Operations", and "Item 7.A. Quantitative and Qualitative Disclosure About Market Risk". Federal and State Government Regulations. The operations of the Company and the Bank are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past, and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on the future business and earnings prospects of the Company. During the past several years, significant legislative attention has been focused on the regulation and deregulation of the financial services industry. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities which compete directly with traditional bank business. Accounting Standards. The operations of the Company and the Bank are affected by accounting standards issued by the Financial Accounting Standards Board ("FASB") which the Company is required to adopt. The adoption of such standards can have the effect of reducing the Company's earnings and capital. Information on current FASB standards that affect the Company can be found in the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Competition. The Company faces strong competition from many other banks, savings institutions and other financial institutions which have branch offices or otherwise operate in the Company's market area, as well as many other companies now offering a range of financial services. Most of these competitors have substantially greater financial resources than the Company including a larger capital base which allows them to attract customers seeking larger loans than the Bank is able to make. In addition, many of the Bank's competitors have higher legal lending limits than does the Bank. Particularly intense competition exists for sources of funds including savings and retail time deposits and for loans, deposits and other services that the Bank offers. As a result of the recent repeal of the Glass-Steagall Act which separated commercial and investment banking industries, all banking organizations, including the Company, are likely to face an increase in competition. See "Supervision and Regulation" - "Recent Regulation". Allowance for Loan Losses. The Company has established an allowance for loan losses which management believes to be adequate to offset potential losses on the Company's existing loans. However, there is no precise method of predicting loan losses. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require the Company to increase its allowance for loan losses through a charge to earnings resulting in reduced profitability. Dividends. While the Board of Directors presently intends to follow a policy of paying cash dividends, the dividend policy will be reviewed periodically in light of future earnings, regulatory restrictions and other considerations. No assurance can be given, therefore, that cash dividends will be paid in the future. See the information contained under the caption in "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". Market for Common Stock. While the Company's common stock is listed on the Nasdaq Stock Market, there is no assurance that an active trading market for the Company's common stock will exist at a particular time. See the information contained under the caption in "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". "Anti-Takeover" and "Anti-Greenmail" Provisions and Management Implications. The Articles of the Company presently contain certain provisions which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction or series of transactions. The overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to discourage, make more costly or more difficult, or prevent a future takeover offer, prevent shareholders from receiving a premium for their securities in a takeover offer, and enhance the possibility that a future bidder for control of the Company will be required to act through arms-length negotiation with the Company's Board of Directors. Copies of the Company's Articles of the Incorporation are on file with the SEC and Pennsylvania Department of State. Stock Not an Insured Deposit. Investments in the shares of the Company's common stock are not deposits insured against loss by the FDIC or any other entity. Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from recovering from the Company based upon material misrepresentations or omissions contained in the Company's disclosure documents to the extent that such documents contained sufficient cautionary statements to apprise investors of the risks of an investment in the Company's securities. The foregoing investment considerations may have the effect of bringing this document, as well as other Company disclosure documents, within the purview of the "Bespeaks Caution Doctrine". General First Colonial Group, Inc. (the "Company) is a Pennsylvania business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). The Company was incorporated on December 30, 1982 for the purpose of acquiring Nazareth National Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on November 25, 1983 when it acquired the Bank. The Bank is a wholly-owned subsidiary of the Company. In July, 1986, the Company established another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a Delaware business corporation formed for the purpose of investing in various types of securities. The Company's principal activities consist of owning and supervising the Bank, which engages in a full service commercial and consumer banking and trust business. The Company, through the Bank, derives substantially all of its income from the furnishing of banking and banking-related services. The Bank has its principal banking office as well as three branch offices in Nazareth, Pennsylvania. It also presently has two branch offices in Bethlehem, Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in Brodheadsville, Pennsylvania, two branches in Stroudsburg, Pennsylvania, one branch in East Stroudsburg, Pennsylvania, one branch in Mount Pocono, Pennsylvania, one branch in Allentown, Pennsylvania, one branch in Trexlertown, Pennsylvania, and one branch in Whitehall, Pennsylvania. The Bank has twenty-seven automated teller machines (ATMs), one at each branch office (except the Mount Pocono branch which has two and the Main Street Nazareth branch which has none), four free-standing drive-up machines at the Northampton Crossings Shopping Center, Easton, Pennsylvania and free-standing machines at its operation center, The First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania, at St. Luke's Hospital, Fountain Hill, Pennsylvania, at C. F. Martin & Company in Nazareth, Pennsylvania, at the Best Western Hotel in Stroudsburg, Pennsylvania, and at the Redner's mini-market on Airport Road in Allentown, Pennsylvania. The Company is a legal entity separate and distinct from the Bank. The rights of the Company, and thus the rights of the Company's creditors and shareholders, to participate in distributions of the assets or earnings of the Bank, are necessarily subject to the prior claims of creditors of the Bank, except to the extent that claims of the Company itself as a creditor may be recognized. Such claims on the Bank by creditors other than the Company include obligations relating to federal funds purchased and certain other borrowings, as well as deposit liabilities. The Company directs the policies and coordinates the financial resources of the Bank. The Company provides and performs various technical, advisory and auditing services for the Bank, coordinates the Bank's general policies and activities, and participates in the Bank's major business decisions. As of December 31, 2000 the Company, on a consolidated basis, had total assets of $442,708,000, total deposits of $353,190,000, and total shareholders' equity of $34,188,000. Nazareth National Bank and Trust Company History and Business The Bank was incorporated under the laws of the United States of America as a national bank in 1897 under its present name. Since that time, the Bank has operated as a banking institution doing business at several locations in Northampton County, Monroe County and Lehigh County, Pennsylvania. The Bank is a member of the Federal Reserve System. As of December 31, 2000, the Bank had total assets of $442,708,000, total deposits of $353,190,000 and total shareholders' equity of $34,188,000. Its deposits are insured by the Bank Insurance Fund ("BIF") maintained by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent permitted by law. The Bank engages in a full service commercial and consumer banking and trust business. The Bank, with its main office at 76 South Main Street, Nazareth, Pennsylvania, also provides services to its customers through its branch network of seventeen full service banks, which includes drive-in facilities at most locations, ATMs at each branch office (except the Main Street Nazareth branch) and bank-by-mail services. Nine of the Bank's full service offices are located in Northampton County, Pennsylvania. Five offices are located in Monroe County, Pennsylvania. Three offices are located in Lehigh County, Pennsylvania. The Bank also has free standing ATMs located in its Operations Center, the First Colonial Building in the Bethlehem Business Park, Hanover Township, Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of Fountain Hill, Pennsylvania, at the C. F. Martin & Company, Nazareth, Pennsylvania, in the Best Western Hotel in Stroudsburg, Pennsylvania, in the Redner's mini-market in Allentown, Pennsylvania, and four free-standing drive-up ATM's at Northampton Crossings Shopping Center, Lower Nazareth Township, Easton, Pennsylvania. The Bank's services include accepting time, demand and savings deposits, including NOW accounts (Flex Checking), regular savings accounts, money market accounts, fixed rate certificates of deposit and club accounts, including the Vacation Club, the College Club(R) and the Christmas Club. The Bank offers Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved line of credit activated by writing checks against a checking account) and the First Colonial Club(R) and Quality Checking(R) (deposit package programs which provide checking accounts with other services including credit card protection, discount travel, shopping services and other related financial services). Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions either directly or through regional industrial development corporations, making construction and mortgage loans, and renting safe deposit facilities. Additional services include making residential mortgage loans (both fixed rate and variable rate), home equity lines of credit, loans to purchase manufactured homes, revolving credit loans with overdraft checking protection, small business loans, student loans, recreational vehicles and new and used car and truck loans. The Bank's business loans include seasonal credit and collateral loans and term loans as well as accounts receivable and inventory financing. Most of the Bank's commercial customers are small to medium size businesses operating in Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in the Nazareth, Allentown, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of Pennsylvania. Trust services provided by the Bank include services as executor and trustee under wills and deeds, as guardian, custodian and as trustee and agent for pension, profit sharing and other employee benefit trusts as well as various investment, pension and estate planning services. Trust services also include service as transfer agent and registrar of stock and bond issues and as escrow agent. In addition, the Bank provides discount brokerage through an outside supplier of this service, and various tax services. The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including Federal, state and local governments). The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits. Competition All phases of the Bank's business are highly competitive. The Bank's market area is the primary trade area of Northampton and Lehigh Counties (known as the Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the Nazareth, Allentown, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to keep pace with its competition and the continuing growth of these areas, the Bank may, in the future, consider establishing additional new branches, although no assurance can be given that any new branches will be opened or if opened, that they will be successful. The Bank competes with local commercial banks as well as other commercial banks with branches in the Bank's market area. The Bank considers its major competition to be Ambassador/Lafayette Bank, headquartered in Easton, Pennsylvania, with branches in Nazareth, Bethlehem and Allentown, Pennsylvania, Vista Bank, headquartered in Phillipsburg, New Jersey with branches in Easton, Pennsylvania, and Bethlehem Pennsylvania; First Union Bank, headquartered in Charlotte, North Carolina, with branch offices in Easton, Bethlehem, Stroudsburg and Allentown, Pennsylvania; Summit Bancorporation, headquartered in Princeton, New Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; and PNC Bank headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth, Brodheadsville, Stroudsburg, Easton and Allentown, Pennsylvania. The Bank, along with other commercial banks, competes with respect to its lending activities, as well as in attracting demand deposits, with savings banks, savings and loan associations, insurance companies, regulated small loan companies, credit unions and the issuers of commercial paper and other securities, such as shares in money market funds. The Bank also competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals in the corporate trust and investment management services. Many of the Bank's competitors have financial resources larger than the Bank's. As a result of the recent repeal of the Glass-Steagall Act which separated the commercial and investment banking industries, all banking organizations are likely to face an increase in competition. See "Supervision and Regulation" - "Recent Regulation". Management believes that the Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. First C. G. Company, Inc. In July 1986, the Company established a wholly-owned subsidiary, First C. G. Company, Inc., a Delaware corporation, for the purpose of investing in various types of securities. As of December 31, 2000, First C. G. Company, Inc. had total assets of $4,455,000, of which $2,962,000 was invested in common stocks and $1,377,000 in loans to the Bank's ESOP and most of the remaining assets were in interest-bearing bank deposits. The total shareholders' equity at December 31, 2000 was $4,343,000. Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. The regulatory framework is intended primarily for the protection of depositors, other customers and the federal deposit insurance funds and not for the protection of shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company and the Bank. The Company The Company is registered as a "bank holding company" under the Bank Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore, subject to supervision and regulation by the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board"). The Company is also regulated by the Pennsylvania Department of Banking. Under the Holding Company Act, the Company is required to secure the prior approval of the Federal Reserve Board before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank or acquire direct or indirect ownership or control of any voting shares of any bank that is not already majority owned by it, if after such acquisition, it would directly or indirectly own or control more than 5% of the voting shares of such bank. See "Interstate Banking". The Company is generally prohibited under the Holding Company Act from engaging in, or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company can reasonably be expected to produce benefits to the public which outweigh possible adverse effects. The Federal Reserve Board has by regulation determined that certain activities including, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non operating basis; and, certain stock brokerage and investment advisory services, are closely related to banking within the meaning of the Holding Company Act. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The Bank currently is rated "satisfactory" under the Community Reinvestment Act. Under the policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is deemed to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee that any "undercapitalized" (as such term is defined in the statute) insured depository institution subsidiary will comply with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards as of the time the institution failed to comply with such capital restoration plan. Under the Holding Company Act, the Company is required to file periodic reports and other information concerning its operations with, and is subject to examination by, the Federal Reserve Board. In addition, under the Banking Code of 1965, the Pennsylvania Department of Banking has the authority to examine the books, records and affairs of any Pennsylvania bank holding company or to require any documentation deemed necessary to ensure compliance with the Banking code. The Company is under the jurisdiction of the Securities and Exchange Commission and various state securities commissions for matters relating to the offering and sale of its securities, and is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. There are various legal restrictions on the extent to which the Company and its non-bank subsidiary can borrow or otherwise obtain credit from its banking subsidiary. In general, these restrictions require that any such extensions of credit must be secured by designated amounts of specified collateral and are limited, as to any one of the Company of such non-bank subsidiary, to ten percent of the lending bank's capital stock and surplus, and as to the Company and its non-bank subsidiary in the aggregate, to 20 percent of such lending bank's capital stock and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Bank The Bank, as a national bank, is subject to The National Bank Act. The Bank is also subject to the supervision of, and is regularly examined by, the Office of the Comptroller of the Currency of the United States (the "OCC") and is required to furnish quarterly reports to the OCC. The approval of the OCC is required for the establishment of additional branch offices by any national bank, subject to applicable state law restrictions. Under current Pennsylvania law, banking institutions located in Pennsylvania, such as the Bank, may establish branches within any county in the Commonwealth, subject to the prior regulatory approval. As a national bank, the Bank is a member of the FDIC and a member of the Federal Reserve System and, therefore, is subject to additional regulation by these agencies. Some of the aspects of the lending and deposit business of the Bank which are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The operations of the Bank are also subject to numerous Federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to interest rates on loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. The Bank is subject to certain limitations on the amount of cash dividends it can pay. See "Note R - Regulatory Matters" in the Notes to Consolidated Financial Statements which appears elsewhere herein. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Company and the Company's non-bank subsidiary. Substantially all of the deposits of the Bank are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The insurance assessments are based upon a matrix that takes into account a bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits insured by the BIF to the statutory minimum of $2,000 annually for "well-capitalized" banks. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA reduced the amount of FDIC insurance premiums for savings association deposits acquired by banks to the same levels assessed for deposits insured by BIF. DIFA further provides for assessments to be imposed on all insured depository institutions with respect to deposits to pay for the cost of Financing Corporation bonds; however, banks were assessed for this purpose at only one-fifth the rate of the assessment on savings associations until December 31, 1999. As a result of these changes, the deposit insurance assessment for banks and for thrifts has been nearly equalized and have been identical for comparably rated institutions since January 1, 2000, at which time banks shared equally in the FICO assessment and the BIF and SAIF funds were merged. Capital Regulation The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial condition and results of operation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier 1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets (leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking organizations without any supervisory, financial or operational weaknesses or deficiencies and other banking organizations are expected to maintain leveral capital ratios 100 to 200 basis points above the minimum depending on their financial condition. Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying debt instruments, and the allowance for possible loan losses. Management believes, as of December 31, 1999 that the Company and the Bank meet all capital adequacy requirements to which they are subject. The following tables provide a comparison of the Company's and Bank's capital amounts, risk-based capital ratios and leverage ratios for the periods indicated. CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 2000 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $35,733 15.16% $18,862 8.00% --- --- Bank $31,161 13.03% $19,127 8.00% $23,909 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,313 14.13% $ 9,431 4.00% --- --- Bank $28,750 12.02% $ 9,564 4.00% $14,345 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $33,313 8.00% $16,654 4.00% --- --- Bank $28,750 6.95% $16,557 4.00% $20,697 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $34,329 16.67% $16,477 8.00% --- --- Bank $30,831 15.00% $16,446 8.00% $20,557 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,892 15.48% $ 8,239 4.00% --- --- Bank $28,194 13.71% $ 8,223 4.00% $12,334 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $31,892 8.32% $15,324 4.00% --- --- Bank $28,194 7.41% $15,210 4.00% $19,012 5.00%
Interstate Banking On September 29, 1994, the President signed into law the "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act"). Among other things, the Interstate Act permits bank holding companies to acquire banks in any state after September 29, 1995. Beginning June 1, 1997, a bank may merge with a bank in another state so long as both states have not opted out of interstate branching between the date of enactment of the Interstate Act and May 31, 1997. States may enact laws opting out of interstate branching before June 1, 1997, subject to certain conditions. States may also enact laws permitting interstate merger transactions before June 1, 1997 and host states may impose conditions on a branch resulting from an interstate merger transaction that occurs before June 1, 1997, if the conditions do not discriminate against out-of-state banks, are not preempted by Federal law and do not apply or require performance after May 31, 1997. Pennsylvania has enacted a law opting in immediately to interstate merger and interstate branching transactions. Interstate acquisitions and mergers would both be subject, in general, to certain concentration limits and state entry rules relating to the age of the bank. Under the Interstate Act, the Federal Deposit Insurance Act is amended to permit the responsible Federal regulatory agency to approve the acquisition of a branch of an insured bank by an out-of-state bank or bank holding company without the acquisition of the entire bank or the establishment of a "de novo" branch only if the law of the state in which the branch is located permits out-of-state banks to acquire a branch of a bank without acquiring the bank or permits out-of-state banks to establish "de novo" branches. Pennsylvania has enacted such a law. Recent Legislation On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law, repealing the 1933 Glass-Steagall Act's separation of the commercial and investment banking industries. The Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a "Financial Holding Company", a subset of bank holding companies that satisfy the following criteria: (1) all of the depository institution subsidiaries must be well capitalized and well managed; and (2) the holding company must have made an effective election to be a financial holding company to engage in activities that would not have been permissible before the Act. In order for the election to be effective, all of the depository institution subsidiaries must have a CRA rating of "satisfactory" or better at its most recent examination. The Company has not yet elected to be a financial holding company. Financial holding companies may engage in any activity that (i) is financial in nature or incidental to such financial activity or (ii) is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Act specifies certain activities that are financial in nature. These activities include - acting as principal, agent or broker for insurance; - underwriting, dealing in or making a market in securities; and - providing financial and investment advice. The Federal Reserve Board and the Secretary of the Treasury have authority to decide whether other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services and so on. These new financial activities authorized by the Act may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, the Act requires each of the parent bank (and its sister-bank affiliate) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. The Act establishes a system of financial regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and bank's financial subsidiaries, the Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. The Act also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. National Monetary Policy In addition to being affected by general economic conditions, the earnings and growth of the Bank and, therefore, the earnings and growth of the Company, are affected by the policies of regulatory authorities, including the OCC, the Federal Reserve Board and the FDIC. An important function of the Federal Reserve Board is to regulate the money supply, credit conditions and interest rates. Among the instruments used to implement these objectives are open market operations in United States Government securities, setting the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of the Company and the Bank cannot be predicted. Fair Value of Financial Instruments The Financial Accounting Standards Board ("FASB") issued statement of financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments", which requires all entities to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. Financial instruments consist primarily of securities, loans and deposits. The Company has provided these disclosures as of December 31, 2000 and 1999 in Note T of the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Accounting for Investment Securities The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Trading securities are measured at fair value with unrealized holding gains and losses included in income. The Company had no trading securities in 2000 and 1999. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements. The classification of securities can be found in Note B of the Notes to Consolidated Financial Statements contained under the caption, "Item 8. Financial Statements and Supplementary Data". Employees As of December 31, 2000 the Company had approximately 211 employees, of whom 43 were part-time. The Company considers its relationship with its employees to be good. Additional Information The tables listed below, which are set forth on pages 17 through 22 herein, contain unaudited information relevant to the business of the Company and the Bank: Investment Securities Investment Securities Yield by Maturity Loan Portfolio by Type Loan Maturities and Interest Sensitivity Allocation of the Allowance for Possible Loan Losses Percentage of Total Loans in each Category to Total Loans Average Deposit Balances by Major Classification Maturities of Certificates of Deposit of $100,000 or more INVESTMENT SECURITIES Summary of Available-for-Sale and Held-to-Maturity Securities at December 31, (Dollars in Thousands) 2000 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 4,011 $ 4,022 U. S. Government Agency 79,145 79,099 State and Political Subdivisions 28,210 28,253 Mortgage-Backed Securities 44,110 44,129 Equity Securities 8,496 8,526 ------- ------- Total $163,972 $164,029
1999 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 4,001 $ 3,992 U. S. Government Agency 53,112 49,747 State and Political Subdivisions 29,147 27,879 Mortgage-Backed Securities 47,332 46,030 Equity Securities 5,312 4,708 ------- ------- Total $138,904 $132,356
1998 Available-for-Sale Securities Carrying Amount Amortized at Fair Cost Value U. S. Treasury $ 7,026 $ 7,125 U. S. Government Agency 24,482 24,441 State and Political Subdivisions 27,860 28,466 Mortgage-Backed Securities 33,322 33,141 Equity Securities 4,900 5,216 ------- ------- Total $97,590 $98,389
2000 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Government Agencies $ 7,937 $ 7,903 State and Political Subdivisions 8,016 7,991 Mortgage-Backed Securities 4,019 4,012 ------- ------- Total $19,972 $19,906
1999 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Government Agency $ 6,894 $ 6,588 State and Political Subdivisions 7,974 7,583 Mortgage-Backed Securities 5,019 4,952 ------- ------- Total $19,887 $19,123
1998 Held-to-Maturity Securities Carrying Amount Approximate at Amortized Fair Cost Value U. S. Government Agency $ 4,992 $ 5,026 State and Political Subdivisions 6,770 6,943 Mortgage-Backed Securities 5,961 5,951 ------- ------- Total $17,723 $17,920
INVESTMENT SECURITIES YIELD BY MATURITY The maturity distribution and weighted average yield of the investment portfolio of the Company at December 31, 2000 are presented in the following table. Weighted average yields on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a tax rate of 34%. All average yields were calculated on the book value of the related securities. Equity and other securities having no stated maturity have been included in the "After 10 Years" category. Available-for-Sale and Held-to-Maturity Investment Securities Yield by Maturity, at December 31, 2000 AVAILABLE-FOR-SALE AT FAIR VALUE After 1 But After 5 But (Dollars in Thousands) Within One Year Within 5 Years Within 10 Years Amount Yield Amount Yield Amount Yield U. S. Treasury $ 2,000 5.69 % $ 2,023 6.05 % $ -- -- % U. S. Government Agency -- -- 13,053 6.86 36,742 6.80 Mortgage-backed Securities 1 9.00 250 5.93 6,028 6.34 State and Political Subdivisions 145 6.29 1,465 6.98 10,357 7.00 Equity Securities -- -- -- -- -- -- ----- ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 2,146 5.73 % $16,791 6.76 % $53,127 6.79% ===== ==== ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 0.20 3.41 7.79 ==== ==== ====
AVAILABLE-FOR-SALE AT FAIR VALUE (Dollars in Thousands) After 10 Years Total Amount Yield Amount Yield U. S. Treasury $ -- -- % $ 4,023 5.87 % U. S. Government Agency 26,462 7.27 76,257 6.97 Mortgage-backed Securities 40,692 6.83 46,971 6.76 State and Political Subdivisions 16,285 7.30 28,252 7.17 Equity Securities 8,526 6.07 8,526 6.07 ----- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $91,965 6.97 % $164,029 6.87 % ======= ==== ======= ==== Average Of Avail-for-Sale Securities in years 19.58 13.85 ===== =====
HELD-TO-MATURITY AT AMORTIZED COST After 1 But After 5 But (Dollars in Thousands) Within One Year Within 5 Years Within 10 Years Amount Yield Amount Yield Amount Yield U. S. Government Agency $ -- -- % $ -- -- % $ 5,125 7.04 % Mortgage-backed Securities 3 6.50 303 6.57 671 6.63 State and Political Subdivisions 201 7.59 1,938 6.99 1,913 7.00 ------ ---- ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 204 7.57 % $ 2,241 6.94 % $ 7,709 7.00% ===== ==== ======= ==== ======= ==== Average Of Held-to-Maturity Securities in years 0.54 3.60 8.10 ==== ==== ====
HELD-TO-MATURITY AT AMORTIZED COST (Dollars in Thousands) After 10 Years Total Amount Yield Amount Yield U. S. Government Agency $ 2,812 7.61 % $ 7,937 7.24 % Mortgage-backed Securities 3,043 5.93 4,020 6.10 State and Political Subdivisions 3,963 8.77 8,015 7.89 ----- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 9,818 7.56 % $ 19,972 7.27 % ======= ==== ======= ==== Average Of Held-to-Maturity Securities in years 18.54 12.65 ===== =====
LOAN PORTFOLIO BY TYPE The loan portfolio by type is summarized in the following table for the years ended December 31, 2000, 1999, 1998, 1997 and 1996. Loan Portfolio by Type (Dollars in Thousands) For the Year Ended December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- Real Estate - Residential $128,862 $112,870 $119,914 $138,539 $134,013 Real Estate - Construction 5,923 6,737 11,689 12,361 10,923 Real Estate - Commercial 27,206 26,809 29,587 34,579 39,421 Consumer/Installment 53,062 45,886 40,184 35,914 28,870 Commercial (non-Real Estate) and Agricultural 10,214 9,538 10,900 9,086 8,715 State and Political Subdivisions 2,089 1,096 1,178 944 906 Other 19 13 10 20 28 ------------------------------------------------- TOTAL GROSS LOANS 227,375 202,949 213,462 231,443 222,876 Unearned Income (431) (691) (1,025) (1,856) (2,759) ------------------------------------------------- Total Loans 226,944 202,258 212,437 229,587 220,117 Allowance for Possible Loan Losses (2,411) (2,437) (2,691) (2,664) (2,532) ------------------------------------------------- NET LOANS $224,533 $199,821 $209,746 $226,923 $217,585 =================================================
At December 31, 2000 there were no categories of loans exceeding 10% of total loans which are not otherwise disclosed as the categories of loans listed in the above table. LOANS MATURITIES AND INTEREST SENSITIVITY The maturity ranges of items in the loan portfolio (excluding residential mortgages of 1 to 4 family residences and consumer loans) of the Bank and the amount of loans with predetermined interest rates and floating interest rates due after one year, as of December 31, 2000, are summarized in the table set forth below. The determination of maturities included in the table are based upon contract terms. Demand loans that do not have a defined repayment term are reported as maturing within one year. In situations where a rollover is appropriate, the Bank's policy in this regard is to evaluate the credit for collectibility consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customers' use of their lines of credit with the Bank that are at floating interest rates. Management continues to emphasize the granting of floating interest rate loans to better match the interest sensitivity of deposits. Loan Maturity and Interest Sensitivity Due in Due in Due in As of December 31, 2000 One Year One to Over (Dollars in Thousands) or Less Five Years Five Years Total ------------------------------------------------------------------------------- Real Estate - Construction $ 2,033 $1,209 $ 2,681 $ 5,923 Real Estate - Commercial 15,024 9,086 3,096 27,206 Commercial (Non-Real Estate) and Agricultural 6,215 2,445 1,554 10,214 ------ ------ ------- ------- TOTAL $23,272 $12,740 $ 7,331 $43,343 ====== ======= ======= ======= Loan Maturity After 1 Year With: Predetermined Interest Rate $ 5,176 $ 4,028 Floating Interest Rate 7,564 3,303 ------ ------ TOTAL $12,740 $ 7,331 ======= =======
The following table details the Allocation of the Allowance for Possible Loan Losses by the various loan categories. The allocation is not necessarily indicative of the categories in which future loan losses will occur, and the entire allowance is available to absorb losses in any category of loans. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES As of December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- Loan Categories (Dollars in Thousands) Commercial $ 779 $ 901 $1,350 $1,183 $ 663 Real Estate- Construction -- -- 4 6 7 Real Estate - Residential 281 212 128 191 198 Consumer/Installment 964 764 738 785 811 Unallocated 387 560 471 499 853 ------ ------ ------ ------ ------ TOTAL $2,411 $2,437 $2,691 $2,664 $2,532 ====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS As of December 31, 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------- Loan Categories (Dollars in Thousands) Commercial 17.38 % 18.46 % 19.52 % 19.28 % 22.02 % Real Estate - Construction 2.61 3.32 5.48 5.34 4.90 Real Estate - Residential 56.67 55.61 56.18 59.86 60.13 Consumer/Installment 23.34 22.61 18.82 15.52 12.95 ----- ----- ----- ----- ----- TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % ====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31, 2000, 1999 and 1998 are presented in the following table. AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION For the Year Ended December 31, 2000 1999 1998 Average Average Average Balance Rate Balance Rate Balance Rate (Dollars in Thousands) Demand Deposits Non-Interest Bearing $ 43,893 --- % $ 41,337 --- % $ 35,254 --- % Interest Bearing 53,151 1.01 52,395 1.18 48,988 1.15 Money Market Deposits 13,461 2.79 13,827 2.76 14,366 2.81 Savings & Club Accounts 62,834 2.22 63,199 2.06 61,177 2.21 Certificates of Deposit under $100,000 157,164 5.60 139,076 5.26 124,823 5.59 Certificates of Deposit of $100,000 or more 5,886 5.18 5,040 4.01 4,700 3.72 ------ ---- ------ ---- ------ ---- Total Deposits $336,389 $314,874 $289,308 ======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE At December 31, (Dollars in Thousands) 2000 1999 ----------------------------------- Three Months or Less $3,564 $ 252 Over Three, Through Six Months 2,656 471 Over Six, Through Twelve Months 1,577 2,547 Over Twelve Months 429 1,835 ----------------------------------- TOTAL $8,226 $5,105 ===================================
There were no brokered deposits at December 31, 2000 and 1999. Item 2. Description of Property The principal banking office of the Bank and the executive offices of the Bank and the Company are located at 76 South Main Street in the Borough of Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank. In addition, the Bank owns additional properties located at 29 South Broad Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553 Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street, Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania (First Colonial Building, Computer and Operations Center), Rt. 209 Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway (Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing, drive-up ATM location). The Bank also leases facilities for its branch office located at 44 East Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at 101 South Third Street, Easton, Pennsylvania; its branch office located at 1125 N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located at 713 Main Street, Stroudsburg, Pennsylvania; its branch office located in the Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its branch office located within Redner's Supermarket, Airport Road, Allentown, Pennsylvania; and its branch office located within Redner's Supermarket, Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania; its branch office located within Wal-Mart's at 355 Lincoln Avenue, East Stroudsburg, Pennsylvania; its branch office located within Wal-Mart's at 500 Route 940, Mt. Pocono, Pennsylvania; its branch office located within the Giant Supermarket, 2540 McArthur Road, Whitehall, Pennsylvania; and its branch office located within the Giant Supermarket, 6900 Hamilton Boulevard, Trexlertown, Pennsylvania.. Item 3. Legal Proceedings The Company has reserved $2.48 million against asserted claims and claims which have been or may be asserted against the Bank in connection with certain pre-need funeral trust funds. Most of the claims arise from Trusts, in which the Company was allegedly directed by funeral directors to invest in a private placement annuity issued by EA International Trust. The Bank has settled the asserted claims for the amount reserved. From time-to-time, the Company and the Bank are parties to routine litigation incidental to their business. Neither the Company, the Bank nor any of their properties is subject to any other material legal proceedings, nor are any such proceedings known to be contemplated by any governmental authorities. Item 4. Submission of Matters to a Vote of Security Holders ------ --------------------------------------------------- No matter was submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report. Item 4.1: Executive Officers of the Registrant The following table sets forth certain information, as of March 30, 2000, concerning the executive officers of the Company and certain executive officers of the Bank who are not also Directors. Positions Positions Name/Age with the Company with the Bank Reid L. Heeren Treasurer since January, Executive Vice President 59 (a) 1987; Vice President since and Chief Financial April, 1985 Officer since August, 1997 Senior Vice President and Chief Financial Officer since January, 1987; Cashier since November, 1984 Tomas J. Bamberger None Executive Vice President 68 (b) and Senior Loan Officer since September, 1997 Robert M. McGovern None Executive Vice President, 61 (d) Senior Trust Officer since February, 1999 (a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer and Cashier of the Bank from January 1987 to August 1997 and Vice President, Finance of the Bank from November, 1984 to January, 1987. Prior to November, 1984, Mr. Heeren was employed by the American Bank and Trust Company, headquartered in Reading, Pennsylvania, as Vice President for Financial Management (September, 1982 to November, 1984) and was Vice President, Community Banking, Chester County, Pennsylvania (March, 1982 to September, 1982). (b) Mr. Bamberger was previously Executive Vice President and Senior Loan Officer of First Valley Bank/Summit Bank (PA) from February 1984 to September 1997. Prior to that, he was Senior Vice President and Senior Loan Officer of the First National Bank of Allentown from March 1982 to February 1984. Mr. Bamberger started his banking career in October 1967 at Girard Bank in Philadelphia. He was a Vice President and Divisional Manager in commercial lending when he left in February 1982. (c) Mr. McGovern was previously Vice President and Senior Trust Specialist of First Union National Bank from April 1998 to February 1999. Prior to that, Mr. McGovern was Vice President/Trust of CoreStates Bank from 1996 to 1998. From 1985 until 1996, Mr. McGovern was employed by Meridian Bank, most recently as Vice President until it was acquired by CoreStates Bank in 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ------ --------------------------------------------------------------------- First Colonial Group, Inc. common stock trades on the Nasdaq National Market under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group". At the close of business on December 31, 2000, there were 772 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price was $13.50 in December 2000 and $16.55 in December 1999. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of June 2000 and June 1999 (see "Note S - Equity Transactions" in the "Notes to Consolidated Financial Statements" contained in "Item 8. Financial Statements and Supplementary Data"). ------------------------------------------------------------------------------- Cash Dividends High Low Declared ------------------------------------------------------------------------------- 1999 First Quarter $26.30 $20.87 $ 0.1724 Second Quarter 22.86 19.72 0.1724 Third Quarter 23.10 17.62 0.1810 Fourth Quarter 19.05 16.37 0.1810 ------- TOTAL $ 0.7068 ------------------------------------------------------------------------------- 2000 First Quarter $18.69 $14.05 $ 0.1810 Second Quarter 16.33 12.26 0.1810 Third Quarter 17.00 12.00 0.1900 Fourth Quarter 16.50 12.75 0.1900 ------- TOTAL $ 0.7420 -------------------------------------------------------------------------------
The Company did not sell any of its equity securities during 2000 that were not registered under the Securities Act. Item 6. Selected Financial Data Consolidated Financial Highlights -------------------------------------------------------------------------------- (Dollars in Thousands, Percentage Change except per share data) 2000 1999 1998 2000/99 1999/98 -------------------------------------------------------------------------------- At Year-End Assets $ 443,051 $ 391,889 $ 358,496 13.1 % 9.3 % Deposits 353,190 324,480 294,549 8.8 10.2 Loans 226,944 202,258 212,437 12.2 (4.8) Shareholders' Equity 33,521 28,243 31,717 18.7 (11.0) For the Year Net Interest Income $ 15,340 $ 14,904 $ 14,496 2.9 % 2.8 % Net Income 2,072 3,282 3,032 (36.9) 8.2 Per Share * Basic Net Income $ 1.09 $ 1.75 $ 1.60 (37.8)% 9.4 % Diluted Net Income 1.09 1.74 1.59 (37.5) 9.4 Dividends Paid 0.74 0.70 0.67 5.7 4.5 Book Value 17.08 15.28 18.17 11.8 (15.9) Financial Ratios Return on Average Assets .50% .86% .86% Return on Average Equity 7.04% 10.90% 9.79% Tier I Capital to Average Assets (Leverage) 8.00% 8.32% 8.60%
* Per share data have been restated to reflect the 5% stock dividends of June 2000, June 1999 and June 1998. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review and analysis are intended to assist in understanding and evaluating the major changes in the financial condition and earnings performance of First Colonial Group, Inc. (the "Company") with a primary focus on the analysis of operating results for the years ended December 31, 2000, 1999 and 1998. The Company's consolidated earnings are derived primarily from the operations of Nazareth National Bank and Trust Company (the "Bank") and First C. G. Company, Inc. ("First C. G."). The information below should be read in conjunction with the Company's consolidated financial statements and accompanying notes thereto, and other detailed information appearing elsewhere in this report. Additional financial information can be found in the Company's Form 10-K report, a copy of which may be obtained upon request. During the two most recent fiscal years, there have been no changes in or disagreements with the Company's accountants on accounting and financial disclosure. The information concerning share and per share data included in this discussion has been restated to reflect the 5% stock dividends of June 2000, 1999 and 1998. Forward Looking Statements The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to future loan and deposit volumes, the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, statements as to litigation and the amount of reserves, and other statements which are not historical facts or as to the Company's, the Bank's or management's intentions, plans, beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company and the Bank, Federal and state government regulation, competition, and the results of litigation. These and other risks, uncertainties and other factors are discussed in this Annual Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). Financial Performance Summary In 2000, First Colonial Group recorded net income of $2,072,000. The 2000 net income was $1,210,000 or 36.9% lower than 1999 net income of $3,282,000. The Company's net income in 1998 was $3,032,000. The basic earnings per share were $1.09, $1.75 and $1.60 in 2000, 1999 and 1998, respectively. The diluted earnings per share were $1.09 in 2000, $1.74 in 1999 and $1.59 in 1998. Diluted earnings per share include the effect of common stock equivalents such as options (see Note P of the "Notes to Consolidated Financial Statements"). The Company's return on average assets was .50% in 2000 as compared to .86% in 1999 and .86% in 1998. The return on average equity was 7.04%, 10.90% and 9.79% in 2000, 1999 and 1998, respectively. The principal factor affecting the decline in earnings in 2000 was a $2,272,000 or 15.5% increase in total other expenses. Included in this increase in expenses was an addition of $1,012,000 to the special reserve for Funeral Trust litigation (see discussion on Liquidity and Capital Resources). Also affecting earnings was a decrease of $389,000 or 69.1% in net gains on the sale of securities and a $98,000 or 62.4% decline on the gains on the sale of residential real estate loans. These reductions in income were offset in part by increases of $436,000 or 2.9% in net interest income and $454,000 or 12.5% in other income, exclusive of the net gains on the sales of investment securities and real estate loans held-for-sale. Also impacting earnings in 2000 was a reduction of $659,000 or 71% in Federal income taxes. The change in 1999 earnings was the result of a $408,000 increase in net interest income and an increase of $175,000 in other income, exclusive of net gains on the sale of securities and mortgages, a decrease in the provision for possible loan losses of $75,000 and a reduction in Federal income taxes of $102,000. Offsetting the earnings increases were a decline in net gains on the sale of securities and mortgage loans of $400,000 and higher operating expenses of $110,000. The Company continued to achieve growth in total assets and deposits. Total assets at December 31, 2000 were $443,051,000 as compared to $391,889,000 at year end 1999. This was an increase of $51,162,000 or 13.1%. During 2000, total deposits grew by 8.8% or $28,710,000 to a year-end total of $353,190,000. Total deposits at December 31, 1999 were $324,480,000. Total loans amounted to $226,944,000 and $202,258,000 at December 31, 2000 and 1999, respectively. The loan increase in 2000 was $24,686,000 or 12.2%. ------------------------------------------------------------------------------- SELECTED FINANCIAL DATA (Dollars in Thousands, except per share data) For the Year Ended December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- CONSOLIDATED SUMMARY OF INCOME: Interest Income $ 29,287 $ 26,353 $ 25,367 $ 25,444 $ 23,135 Interest Expense 13,947 11,449 10,871 10,831 9,578 --------- --------- --------- --------- --------- Net Interest Income 15,340 14,904 14,496 14,613 13,557 Provision for Possible Loan Losses 375 375 450 605 670 Gains (Losses) on the Sale of Mortgage Loans 59 157 398 178 (30) Other Income, Excluding Securities and Loan Sale Gains 4,089 3,635 3,460 3,044 2,364 Securities Gains, Net 174 563 722 601 308 Other Expense 16,945 14,673 14,563 13,252 11,571 --------- --------- --------- --------- --------- Income Before Income Taxes 2,342 4,211 4,063 4,579 3,958 Income Taxes 270 929 1,031 1,296 1,136 --------- --------- --------- --------- --------- Net Income $ 2,072 $ 3,282 $ 3,032 $ 3,283 $2,822 --------- --------- --------- --------- --------- Cash Dividends Paid $ 1,406 $ 1,321 $ 1,275 $ 1,139 $ 1,011 Cash Dividends Paid Per Share 0.74 0.70 0.67 0.61 0.55 Dividends Paid to Net Income 67.86% 40.25% 42.05% 34.69% 35.82% PER SHARE DATA: Basic Income $ 1.09 $ 1.75 $ 1.60 $ 1.74 $ 1.52 Diluted Net Income 1.09 1.74 1.59 1.74 1.52 Basic Average Common Shares Outstanding 1,899,702 1,875,320 1,895,304 1,876,078 1,853,222 Dilutive Average Common Shares Outstanding 1,901,823 1,878,777 1,903,543 1,881,667 1,856,356 CONSOLIDATED BALANCE SHEET DATA: Total Assets $443,051 $391,889 $358,496 $346,738 $322,352 Loans (Net of Unearned Discount) 226,944 202,258 212,437 229,587 220,117 Mortgage Loans Held-for-Sale --- --- 603 759 721 Deposits 353,190 324,480 294,549 282,255 267,668 Securities Sold Under Agreements to Repurchase 7,215 1,730 5,094 8,804 3,795 Debt (Short-Term and Long-Term) 39,695 30,000 20,000 18,390 18,512 Shareholders' Equity 33,521 28,243 31,717 30,357 26,805 Book Value Per Share 17.08 15.28 18.17 17.49 16.37 SELECTED CONSOLIDATED RATIOS: Net Income To: Average Total Assets 0.50% 0.86% 0.86% 0.97% 0.92% Average Shareholders' Equity 7.04% 10.90% 9.79% 11.67% 11.16% Tier 1 Capital to Average Assets (Leverage) 8.00% 8.32% 8.60% 8.33% 8.35% -------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) For the Year Ended December 31, 2000 1999 1998 Int Avg Int Avg Int Avg Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/ Bal Exp Rate Bal Exp Rate Bal Exp Rate ASSETS INT-EARNING ASSETS Int-Bearing Balances with Banks $ 2,281 $ 141 6.18% $3,928 $ 196 4.99% $ 3,060 $ 176 5.75% Fed Funds Sold 328 23 7.01 975 47 4.82 641 34 5.30 Inv Sec Taxable 139,283 9,440 6.78 107,054 6,829 6.38 80,939 5,002 6.18 Non-Tax(1) 30,142 2,374 7.88 31,668 2,787 7.22 26,155 1,923 7.35 Loans(1(2) 214,856 18,171 8.46 212,993 17,817 8.36 219,357 18,910 8.62 Allow for Loan Losses (2,474) --- --- (2,669) --- --- (2,710) --- --- -------- ------ -------- ------ -------- ------ Net Loans 212,382 18,171 8.56 210,324 17,817 8.47 216,647 18,910 8.73 -------- ------ -------- ------ -------- ------ Total Int- Earn Assets 384,416 30,149 7.84 353,949 27,176 7.68 327,442 26,045 7.95 Non-Int Earn Assets 31,926 --- --- 29,513 --- --- 25,419 --- --- -------- ------ -------- ------ -------- ------ TOTAL ASSETS, INTEREST INCOME $416,342 30,149 7.24 $383,102 27,176 7.09 $352,861 26,045 7.38 -------- ------ -------- ------ -------- ------ LIABILITIES INTEREST-BEARING LIABILITIES Int-Bearing Deposits Demand Deposits $ 53,151 536 1.01 $ 52,395 619 1.18 $ 48,988 562 1.15 Money Market Deposits 13,461 375 2.79 13,827 382 2.76 14,366 404 2.81 Savings & Club Deposits 62,834 1,392 2.22 63,199 1,304 2.06 61,177 1,350 2.21 CD's over $100,000 5,886 305 5.18 5,040 202 4.01 4,700 175 3.72 All Other Time Dep 157,164 8,806 5.60 139,076 7,312 5.26 124,823 6,975 5.59 -------- ------ -------- ------ -------- ------ Total Int- Bearing Deposits 292,496 11,414 3.90 273,537 9,819 3.59 254,054 9,466 3.73 Securities Sold Under Agreements to Repurchase 7,226 332 4.59 5,994 194 3.24 5,821 210 3.61 Other Short- Term Borrowings 3,994 256 6.41 1,721 89 5.17 974 55 5.65 Long-Term Debt 31,377 1,945 6.20 23,534 1,347 5.72 18,631 1,140 6.12 -------- ------ -------- ------ -------- ------ Total Int- Bearing Liabilities 335,093 13,947 4.16 304,786 11,449 3.76 279,480 10,871 3.89 NON-INTEREST BEARING LIABILITIES Non-Int- Bearing Deposits 43,893 --- --- 41,337 --- --- 35,254 --- --- Other Liab 7,913 --- --- 6,843 --- --- 7,157 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB 386,899 13,947 3.60 352,966 11,449 3.24 321,891 10,871 3.38 SHAREHOLDERS' EQUITY 29,443 --- --- 30,136 --- --- 30,970 --- --- -------- ------ -------- ------ -------- ------ TOTAL LIAB & SHAREHOLDERS' EQUITY, INTEREST EXPENSE $416,342 13,947 3.35 $383,102 11,449 2.99 $352,861 10,871 3.08 -------- ------ -------- ------ -------- ------ NET INTEREST INCOME $ 16,202 $15,727 $15,174 -------- ------- ------- Net Interest Spread (3) 3.68 3.92 4.06 Effect of Int-Free Sources Used to Fund Earnings Assets 0.53 0.52 0.57 NET INTEREST MARGIN (4) 4.21% 4.44% 4.63% ---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable equivalent basis. The taxable equivalent adjustments included above are $862,000, $823,000 and $678,000 for the years 2000, 1999 and 1998, respectively. The effective tax rate used for the taxable equivalent adjustment was 34%. (2) Loan fees of $285,000, $212,000 and $358,000 for th years 2000, 1999 and 1998, respectively, are included in interest income. Average loan balances include non-accruing loans and average loans held-for-sale of $1,237,000, $2,581,000 and $3,736,000 for 2000, 1999 and 1998, respectively. (3) Net interest spread is the arithmetic difference between yield on interest-earning assets and the rate paid on interest-bearing liabilities. (4) Net interest margin is computed by dividing net interest income by average interest-earning assets. Average Balances The "Consolidated Comparative Statement Analysis" table sets forth a comparison of average daily balances, interest income and interest expense on a fully taxable equivalent basis and interest rates calculated for each major category of interest-earning assets and interest-bearing liabilities. For purposes of this analysis, the computations in the "Consolidated Comparative Statement Analysis" were prepared using the Federal statutory rate of 34%; there are no state or local taxes on income applicable to the Company. For further information relating to the effective income tax rate of the Company, see Note J of the "Notes to Consolidated Financial Statements". Interest income on loans included loan fees of $285,000, $212,000 and $358,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Net Interest Income Net interest income is the difference between the interest income on loans, investments and other interest-earning assets, and the interest paid on deposits and other interest-bearing liabilities. Net interest income is the primary source of earnings for the Company. Therefore, changes in this category can be essential to the overall net income of the Company. The net interest income, on a fully taxable equivalent basis, amounted to $16,202,000 for 2000, an increase of $475,000 over $15,727,000 in 1999. As shown in the "Rate/Volume Analysis" table, the increase in net interest income in 2000 was attributable to higher net interest income of $485,000 due to changes in volume and a reduction in net interest income of $10,000 due to changes in rates. The volume-related change resulted primarily from increases in investment securities and average balances for loans (see discussions on "Loan Portfolio" and "Mortgage Loans Held-for-Sale"), partially offset by an increase in time deposits and debt. The rate-related change was primarily the result of the increase of interest paid on time deposits and debt, offset in part by increases in the interest rate earned on investments and loans. Net interest income, on a fully taxable equivalent basis, in 1999 increased $553,000 over the 1998 figure of $15,174,000. This increase was the result of growth in investments, reduced in part by a decrease in loans and an increase in time deposits. Also affecting 1999 was the decrease in interest rates paid on deposits and debt, and an increase in the interest rate earned on investments, offset in part by a decline in the interest rates earned on loans. The net interest margin, a measure of net interest income performance, is determined by dividing net interest income by total interest-earning assets. The net interest margin was 4.21% for 2000, 4.44% for 1999 and 4.63% for 1998. The decrease in 2000 was the result of the 0.4% increase in the average rate paid on interest-bearing liabilities being greater than the 0.16% increase in the average interest rate earned on interest-earning assets. The result was a decline in the interest spread, the difference of interest earned on assets less the interest paid on deposits and debt. The interest spread was 3.68%, 3.92% and 4.06% for 2000, 1999 and 1998, respectively. The impact on earnings by the reduction in the interest spread was diminished in part by the $2,556,000 increase in 2000 of non-interest-bearing deposits. The following table sets forth a "Rate/Volume Analysis", which segregates in detail the major factors that contributed to the changes in net interest income for the years ended December 31, 2000 and 1999, as compared to the respective previous periods, into amounts attributable to both rate and volume variances. In calculating the variances, the changes were first segregated into (1) changes in volume (change in volume times the old rate), (2) changes in rates (change in rate times the old volume) and (3) changes in rate/volume (changes in rate times the change in volume). The changes in rate/volume have been allocated in their entirety to the change in rates. The interest income included in the "Rate/Volume Analysis" table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. Non-accruing loans have been used in the daily average balances to determine changes in interest income due to volume. Loan fees included in the interest income calculation are not material. RATE/VOLUME ANALYSIS (Dollars in Thousands) (Fully Taxable Equivalent) Increase (Decrease) in Year Ended December 31, 2000 to 1999 1999 to 1998 Change Due to: Change Due To: TOTAL RATE VOLUME TOTAL RATE VOLUME ----- --- ----- ----- ----- ----- Interest Income Interest-Bearing Balances With Banks $ (55) $ 27 $ (82) $ 20 $ (30) $ 50 Federal Funds Sold (24) 7 (31) 13 (5) 18 Investment Securities 2,698 680 2,018 2,191 146 2,045 Loans 354 180 174 (1,093) (580) (513) ----- --- ----- ----- ----- ----- Total Interest Income 2,973 894 2,079 1,131 (469) 1,600 ----- --- ----- ----- ----- ----- Interest Expense Demand Deposits, Savings & Clubs (2) (2) - (11) (102) 91 Time Deposits 1,597 610 987 364 (442) 806 Securities Sold Under Agreements to Repurchase 138 98 40 (16) (22) 6 Short-Term Borrowings 167 49 118 34 (8) 42 Long-Term Borrowings 598 149 449 207 (93) 300 ----- --- ----- ----- ----- ----- Total Interest Expense 2,498 904 1,594 578 (667) 1,245 ----- --- ----- ----- ----- ----- Increase in Net Interest Income $ 475 $ (10) $ 485 $ 553 $ 198 $ 355
Market Risk As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since most of the Company's interest-bearing assets and liabilities are located at the Bank, the majority of the Company's interest rate risk is at the Bank level. As a result, most interest rate risk management procedures are performed at the Bank level (see discussion on "Interest Rate Sensitivity"). The Company and the Bank operate as a community banking institution primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a result of its location and nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Bank makes real estate loans primarily in the counties adjacent to its operations and thus is subject to risks associated with those local economies. The Bank holds a concentration of residential real estate loans (56.8% of total loans) and commercial loans supported by real estate (12% of total loans) in its loan portfolio. In addition, 49.3% of the Bank's consumer, installment loans are for recreational vehicles. These loans represent 11.5% of total loans (see Note Q of the "Notes to Consolidated Financial Statements"). These loans are subject to interest and economic risks. The Bank also originates residential real estate loans for sale in the secondary market. Such loans are identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not own any trading assets and does not have any hedging transactions in place such as interest rate swaps (see discussions on "Investment Securities" and "Securities Available-for-Sale"). Interest Rate Sensitivity Interest rate sensitivity is a measure of the extent to which net interest income would change due to changes in the level of interest rates. The objective of interest rate sensitivity management is to reduce a company's vulnerability to future interest rate fluctuations and to enhance consistent growth of net interest income. The Bank's Asset/Liability Management Committee meets semi-monthly to examine, among other subjects, interest rates for various products and interest sensitivity. Rate sensitivity arises from the difference between the volumes of assets which are rate-sensitive as compared to the volumes of liabilities which are rate-sensitive. A comparison of interest-rate-sensitive assets to interest-rate- sensitive liabilities is monitored by the Bank on a regular basis using several time periods. The mismatch of assets and liabilities in a specific time frame is referred to as interest sensitivity gap. Generally, in an environment of rising interest rates, a negative gap (interest sensitive liabilities being greater than interest sensitive assets in a given period of time) will decrease net interest income, and in an environment of falling interest rates, a negative gap will increase net interest income. Assets and liabilities are allocated to a specific time period based on their scheduled repricing date or on an historical basis. At December 31, 2000, assets of $162,221,000 (37% of total assets) were subject to interest rate changes within one year. This compares to assets subject to interest rate changes within one year of $157,197,000 (40% of total assets) at the end of 1999 and $143,809,000 (40% of total assets) at the end of 1998. Liabilities subject to rate change within one year were $169,639,000, $163,662,000 and $175,047,000 in 2000, 1999 and 1998, respectively. A negative one-year gap position of $7,418,000 existed as of December 31, 2000. The gap positions at December 31, 1999 and 1998 were negative $6,465,000 and negative $31,238,000, respectively. The ratio of rate-sensitive assets to rate-sensitive liabilities for the one-year time frame was .96 at the end of 2000, compared to .96 at the end of 1999 and .82 at the end of 1998. The "Interest Sensitivity Analysis" in the following table presents a sensitivity gap analysis of the Company's assets and liabilities at December 31, 2000 for five time-intervals. The Company's negative gap position for the one-year time frame increased in 2000 as a result of an increase in interest-bearing demand deposits and short-term borrowings with a maturity of one year or less and a reduction of loan maturities. The change in the deposit mix was due to the sale of longer-term certificates of deposit to customers. The change in loan maturities was due in part to the sale of residential mortgage loans. Management intends to continue to purchase adjustable rate securities, make adjustable rate loans, market longer-term certificates of deposit and sell fixed-rate mortgage loans to maintain an acceptable gap position. Interest Sensitivity Analysis 0-90 91-180 181-365 1-5 Over Days Days Days Years 5 years Total Interest-Bearing Deposits with Banks $ 95 $ --- $ --- $ --- $ --- $ 95 Inv Securities 43,828 11,114 16,377 60,893 51,789 184,001 Loans 34,036 14,992 24,041 99,630 51,834 224,533 Other Assets 17,738 --- --- --- 16,684 34,422 ------- -------- -------- ------- -------- -------- TOTAL ASSETS $95,697 $26,106 $ 40,418 $160,523 $120,307 $443,051 ------- -------- -------- ------- -------- -------- Non-Interest-Bearing Deposits (1) $ --- $ --- $ --- $ --- $ 48,748 $ 48,748 Int-Bearing Deposits 33,266 50,511 67,952 48,355 104,358 304,442 Securities Sold Under Agreements to Repurchase 7,215 --- --- --- --- 7,215 Short-Term Debt 5,695 --- --- --- --- 5,695 Long-Term Debt 5,000 --- --- 17,000 12,000 34,000 Other --- --- --- --- 9,430 9,430 Capital --- --- --- --- 33,521 33,521 ------- -------- -------- ------- -------- -------- TOTAL LIABILITIES AND CAPITAL $ 51,176 $50,511 $ 67,952 $65,355 $208,057 $443,051 ------- -------- -------- ------- -------- -------- Net Interest Sensitivity Gap $ 44,521 $(24,405)$(27,534) $95,168 $(87,750) $ --- Cumulative Int Sensitivity Gap $ 44,521 $ 20,116 $ (7,418) $87,750 $ --- $ --- Cumulative Gap RSA/RSL 187.0% 119.8% 95.6% 137.3% 100.0%
(1) Historically, non-interest-bearing deposits reflect insignificant change in deposit trends and, therefore, the Company classifies these deposits over five years. While using the interest sensitivity gap analysis is a useful management tool because it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest-rate changes that are characteristic of various interest-rate-sensitive assets and liabilities. Consequently, even though the Company currently has a negative gap position because of the unequal sensitivity of these assets and liabilities, management believes that this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the Bank's net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. The market value of portfolio equity is defined as the present value of the Company's existing assets, liabilities and off-balance sheet instruments. The calculated estimates of changes in the market value of portfolio equity at December 31, 2000 are as follows: ------------------------------------------------------- at December 31, 2000 ------------------------------------------------------- Percent of Change in Market Value Changes in Rate of Portfolio Equity --------------------------- ---------------------- + 400 basis points (17.7)% + 300 basis points (9.5)% + 200 basis points (2.1)% + 100 basis points 3.9 % Flat Rate 0.0 - 100 basis points (8.8)% - 200 basis points (21.6)% - 300 basis points (36.5)% - 400 basis points (54.2)% -------------------------------------------------------
The assumptions used in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates are based on management's consideration of past experience, current position and anticipated future economic conditions. The interest rate sensitivity of the Company's assets and liabilities as well as the estimated effect of changes in interest rates on the market value of portfolio equity could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. Service Charges and Other Income Service charge income on deposit accounts amounted to $2,019,000 in 2000 compared to $1,682,000 in 1999 and $1,594,000 in 1998. In 2000, the service charges on deposit accounts increased by $337,000 or 20% over 1999 and the 1999 increase over 1998 was $88,000 or 5.5%. The increases in 2000 and 1999 were primarily the result of increases in the number of deposit accounts and increases in some deposit-related fees, including charges for the use by non-depositors of the Bank's automated teller machines and the Bank's debit card. In 2000, the Company had a gain on the sale of mortgage loans of $59,000 as compared to a gain of $157,000 in 1999. In 1998, there was a gain on the sale of mortgage loans of $398,000 (see discussion on "Mortgage Loans Held-for-Sale"). Other operating income was $825,000 in 2000, as compared to $707,000 in 1999. This was an increase of $118,000 or 16.7%. Other operating income for 1998 was $641,000. Investment Management and Trust Division Revenue from the Bank's Investment Management and Trust Division operations was $1,245,000 in 2000, as compared to $1,246,000 in 1999. The Investment Management and Trust Division revenue for 1999 increased by 1.7% or $21,000 over the 1998 revenue of $1,225,000. Trust assets are held by the Bank for its customers in a fiduciary or agency capacity, and thus, are not included in the financial statements of the Company. Fees are assessed by the Trust Division to some customers based on the market value of the assets held in the customers' account. As a result, changing market values will impact the revenues earned from Trust operations. Other Expenses Salaries and employee benefits represent a significant portion of non-interest expense. These expenses, amounting to $7,437,000, increased by $657,000 or 9.7% in 2000 compared to $6,780,000 in 1999. These expenses in 1999 amounted to an increase of $395,000 or 6.2% over the $6,385,000 reported in 1998. The increase in 2000 was primarily due to salary increases of approximately 3.5%, the addition of staff related to the new branches opened in Mount Pocono, Whitehall and Trexlertown during the year and a cash bonus paid to non-officer employees, reduced in part by staff reductions during the fourth quarter in Operations and Administration. Salary expense in 1999 increased due to normal salary increases of approximately 3.5%, the addition of staff in the Trust Division, and the opening of the Stroudsburg branch. Occupancy and equipment expenses were $2,392,000 in 2000 which was $221,000 or 10.2% greater than the 1999 amount of $2,171,000. The 1999 amount was $53,000 greater than the 1998 occupancy and equipment expense of $2,118,000. The increase in 2000 was primarily due to the establishment of the new branches in Mount Pocono, Whitehall and Trexlertown and a complete year of occupancy expenses for the Stroudsburg branch opened in 1999. The increase in 1999 was the result of the Stroudsburg branch and new equipment relating to the Y2K issue. Other operating expenses (such as the provision for the special reserve, the write-down of other real estate owned, advertising, publicity, litigation costs, deposit insurance premiums, data processing fees, legal, accounting, supplies, postage and telephone) in 2000 were $7,116,000, compared to $5,722,000 in 1999 and $6,060,000 in 1998. The increase of $1,394,000 or 24.4% in other operating expense during 2000 was primarily due to a provision of $1,012,000 to the special reserve for Funeral Trust litigation, a $184,000 write-down of other real estate owned, the deductible of $100,000 on losses due to theft, and increases in consulting fees of $79,000, supplies of $54,000, legal and litigation expenses of $54,000, data processing fees of $40,000 and Federal Deposit Insurance premiums of $36,000, offset in part by reductions in some other expenses. The decrease in 1999 of $338,000 or 5.6% was the result of the $943,000 decrease to the special reserve for Trust operations offset in part by increases of $251,000 in legal and litigation expenses, $190,000 in data processing fees and $95,000 in consulting fees. The Company's advertising costs are expensed as incurred. Advertising costs were $546,000, $574,000 and $597,000 for the years ended December 31, 2000, 1999 and 1998, respectively (see Notes A.14 and I of the "Notes to Consolidated Financial Statements"). Investment Securities The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company had no trading securities in 2000 and 1999. Available-for-sale securities are stated separately on the financial statements and are discussed in the following section "Securities Available-for-Sale". Held-to-maturity securities are carried at amortized cost and identified as investment securities in the financial statements (see Notes A.2 and B of the "Notes to Consolidated Financial Statements"). Held-to-maturity securities totaled $19,972,000 at December 31, 2000 and $19,887,000 at December 31, 1999. The Company has the intent and ability to hold these securities until maturity. The fair value of these securities was $19,906,000 and $19,123,000 at December 31, 2000 and 1999, respectively. The Company, at December 31, 2000 and 1999, did not hold any securities identified as derivatives in the form of Collateralized Mortgage Obligations (CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment Conduits (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps, futures or options. The Company held adjustable rate mortgage-backed securities issued by U. S. Government Agencies totaling $19,980,000 at December 31, 2000 ($16,937,000 in available-for-sale and $3,043,000 in held-to-maturity) and $19,904,000 at December 31, 1999 ($16,147,000 in available-for-sale and $3,757,000 in held-to-maturity). The interest rates on most of these securities are tied to various indexes, are subject to various caps, and are adjusted annually. The Company also held fixed rate mortgage-backed securities issued by U. S. Government Agencies totaling $28,168,000 at December 31, 2000 ($27,191,000 in available-for-sale and $977,000 in held-to-maturity) and $31,145,000 at December 31, 1999 ($29,882,000 in available-for-sale and $1,263,000 in held-to-maturity). Securities Available-for-Sale The Company had $164,029,000 of securities available-for-sale at December 31, 2000, as compared to $132,356,000 at December 31, 1999. At December 31, 2000, the net unrealized gain on these securities was $37,000, net of the tax effect of $20,000. There was a net unrealized loss of $4,322,000, net of the tax effect of $2,226,000 on the available-for-sale securities at December 31, 1999. The net unrealized gain or loss is included in shareholders' equity (see Notes A.2 and B of the "Notes to Consolidated Financial Statements"). These securities are being held to meet the liquidity needs of the Company and to provide flexibility to support earnings in changing interest rate environments. The tax-free municipal securities in the available-for-sale category will also be used to assist in managing the Company's Federal tax position. While management has the intent and the ability to hold available-for-sale securities on a long-term basis or to maturity, they may sell these securities under certain circumstances. Such occurrences could include, but are not limited to, meeting current liquidity needs, adjusting maturities or repricing periods to reduce interest rate risk, reducing Federal Income Tax liability, improving current or future interest income, adjusting risk-based capital position, changing portfolio concentrations, and providing funds for increased loan demand or deposit withdrawals. Upon the sale of an available-for-sale security, the actual gain or loss is included in income. During 2000, $8,120,000 of securities available-for-sale were sold, resulting in a total net gain of $174,000, which was recorded in income and includes net gains on equity securities sold by First C. G. of $157,000. The securities sold were primarily U. S. Treasury, U. S. Agency and municipal bonds held by the Bank and equity securities held by First C. G. The sales by the Bank were executed to provide liquidity and improve future interest income. The sales of equity securities by First C. G. were made to recognize certain gains, reposition the equity portfolio and provide funds for the loans to the Bank's Employee Stock Ownership Plan (see Note K of the "Notes to Consolidated Financial Statements"). Securities purchased by the Company in 2000 totaled $47,959,000. Included in these purchases were $32,106,000 in U. S. Agency bonds, $8,281,000 in U. S. Agency mortgage-backed bonds, $3,732,000 in municipal securities, $3,011,000 in U. S. Treasury bonds and $829,000 in equity securities. The securities sold in 1999 totaling $16,295,000 were primarily U. S. Treasury, U. S. Agency mortgage-backed bonds held by the Bank and equity securities held by First C. G. The 1999 sales resulted in net gains of $563,000. These gains include net gains of $401,000 on equity securities sold by First C. G. The sales were made to provide liquidity to fund a $1,000,000 loan to the Bank's Employee Stock Ownership Plan, improve future income and invest in a broader list of equity securities. Security purchases in 1999 amounted to $78,709,000 which were primarily U. S. Agency mortgage-backed bonds, U. S. Agency fixed rate bonds, municipal securities and U. S. Treasury bonds. In 1998, a net gain on security transactions of $722,000 was recorded on sales of $11,342,000. Loan Portfolio At December 31, 2000, total loans (net of unearned discounts of $431,000 in 2000 and $691,000 in 1999) of $226,944,000 were $24,686,000, or 12.2% greater than the 1999 amount of $202,258,000. The increase in loans in 2000 was primarily the result of an increase of $15,992,000 or 14.2% in residential real estate loans, an increase of $7,176,000 or 15.6% in consumer loans, an increase of $1,675,000 or 15.7% in commercial and municipal loans, and an increase of $397,000 or 1.5% in commercial real estate loans partially offset by an $814,000 or 12.1% decrease in real estate construction loans. Loans Outstanding at December 31 by Major Category are as follows: -------------------------------------------------------- Dollars in Thousands at Dec. 31, 2000 1999 -------------------------------------------------------- Real Estate Residential $ 128,862 $ 112,870 Real Estate Construction 5,923 6,737 Real Estate Commercial 27,206 26,809 Consumer 53,062 45,886 Municipal 2,089 1,096 Commercial & Other 10,233 9,551 --------- --------- Total 227,375 202,949 Unearned Discount (431) (691) --------- --------- Net $ 226,944 $ 202,258 --------------------------------------------------------
The Company's primary geographic area for its lending activities includes Monroe, Northampton and Lehigh counties, Pennsylvania. Making loans to businesses and individuals entails risks to the Company, including ascertaining cash flows, evaluating the credit history, assets and liabilities of a potential borrower, and determining the value of the various types of collateral pledged as security. Lending involves determining risks, managing those risks and charging an appropriate interest rate to compensate for taking such risks, and to cover the cost of funds (see previous discussion on "Market Risk"). The loan to deposit ratio was 64.3% at December 31, 2000 and 62.3% at December 31, 1999. Additional information concerning loans is shown in Note C of the "Notes to Consolidated Financial Statements". Mortgage Loans Held-for-Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are also accounted for in accordance with Statement of Financial Accounting Standard (SFAS) No. 134, "Accounting for Mortgage Securities Retained After the Securitizations of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". This new statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitizations of a mortgage loan held-for-sale based upon its ability and intent to sell or hold these investments. In 2000, management continued a program to sell some of its newly originated residential real estate loans in the secondary market. The purpose of these sales was to reduce the Company's interest rate risk and to provide funds to support a higher level of loan originations. The sales of residential real estate loans in the secondary market for 2000 amounted to $7,718,000. All of these loans were originated in 2000. A net gain of $59,000 was recorded on the total amount of loans sold. At December 31, 2000, there were no residential real estate loans identified as held-for-sale. In 1999, the Company originated $17,091,000 of residential real estate loans which were sold in the secondary market. In addition, during 1999, $20,977,000 of residential real estate loans originated in prior years were sold. A net gain of $157,000 was recognized on the total loans sold in 1999. At December 31, 1999, there were no residential real estate loans identified as held-for-sale. During 1998, the Company had a net gain of $398,000 on the sale of $42,879,000 of residential real estate loans. The other operating expenses for 1998 include an unrealized loss of $1,000 on mortgage loans held-for-sale of $603,000 at year-end 1998. The Company intends to continue to originate residential real estate loans in 2001 and to sell some of these loans in the secondary market. The Company services all of the residential mortgage loans sold and plans to continue this practice. Non-Performing Loans The following discussion relates to the Bank's non-performing loans, which consist of loans on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is in doubt. The Company recognizes these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Payments received on non-accrual loans are applied to principal until such time as the principal is paid off. Any additional payments are then recognized as interest income. Loans on non-accrual status totaled $1,048,000 at December 31, 2000. This balance represented a $263,000 decrease in non-accrual loans during 2000 due to the collection efforts on certain commercial, residential real estate and consumer loans. Management believes there is sufficient collateral to cover any possible losses on these loans. The Company did not have any significantloans that qualify as "Troubled Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and Creditors for Troubled Debt Restructuring", at December 31, 2000 and 1999. The table "Non-Accrual Loans" shows the balance and the effect non-accrual loans have had on interest income for each of the periods indicated. Non-Accrual Loans ------------------------------------------------------------------------------- (Dollars in Thousands) at December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- Non-accrual loans on a cash basis $ 1,048 $ 1,311 $ 1,245 $ 813 $ 1,440 Non-accrual loans as a percentage of total loans .46% .65% .59% .35% .65% Interest which would have been recorded at original rate $ 38 $ 56 $ 144 $ 64 $ 210 Interest that was reflected in income 42 35 23 111 40 Net impact on interest income $ 4 $ (21) $ (121) $ 47 $ (170) -------------------------------------------------------------------------------
Set forth below are the amounts of loans outstanding as of the end of each of the periods indicated that are 90 days and over past due and are on an accrual basis and are not included in the table above. Management continues to accrue interest on these loans since they are secured and in the process of collection and are expected to be eventually paid in full. Accruing Loans Past Due 90 Days or More -------------------------------------------------------------------------------- (Dollars in Thousands) at December 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 1,469 $1,491 $1,021 $ 802 $ 986 Accruing loans past due 90 days or more as a percentage of total loans .65% .74% .48% .35% .45% --------------------------------------------------------------------------------
The Company measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, impairment may be measured based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued in such loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation for credit losses related to loan impairment at December 31, 2000 and 1999 are as follows: ------------------------------------------------------------ (Dollars in Thousands) at December 31, 2000 1999 ------------------------------------------------------------ Principal amount of impaired loans $339 $370 Accrued interest --- --- Deferred loan costs 1 --- ------- ------- 340 370 Less valuation allowance at December 31, (78) (74) -------- -------- $262 $296 ------------------------------------------------------------
The activity in the allowance account for credit losses related to impaired loans is as follows: ----------------------------------------------------------------- (Dollars in Thousands) for the year 2000 1999 ----------------------------------------------------------------- Valuation allowance at January 1, $ 74 $303 Provision for loan impairment 39 --- Direct charge-offs --- (161) Recoveries --- --- Transfers to Unallocated Reserve (35) (68) ------- ------- Valuation allowance at December 31, $ 78 $ 74 -----------------------------------------------------------------
Total cash collected on impaired loans during 2000 was $201,000, of which $159,000 was credited to the principal balance outstanding on such loans, and $42,000 was recognized as interest income. Total cash collected on impaired loans during 1999 was $267,000, of which $232,000 was credited to the principal balance outstanding on such loans and $35,000 was recognized as interest income. Interest that would have been accrued on impaired loans was $38,000 and $56,000 in 2000 and 1999, respectively. The valuation allowance for impaired loans of $78,000 at December 31, 2000 and $74,000 at December 31, 1999 is included in the "Allowance for Possible Loan Losses" which amounts to $2,411,000 and $2,437,000 at December 31, 2000 and 1999, respectively. Shown in the following table is the amount of "Other Real Estate Owned" as of the end of each of the periods indicated and recorded as an asset on the Company's books as the result of the foreclosure of certain non-performing real estate loans. OTHER REAL ESTATE OWNED ----------------------------------------------------------------- (Dollars in Thousands) at December 31, 2000 1999 1998 1997 1996 ----------------------------------------------------------------- Other Real Estate $ 325 $ 571 $ 636 $ 284 $ 585 Owned -----------------------------------------------------------------
Allowance and Provision for Possible Loan Losses The allowance for possible loan losses constitutes the amount available to absorb estimated losses within the loan portfolio. As of December 31, 2000, the allowance for possible loan losses was $2,411,000 as compared to the December 31, 1999 amount of $2,437,000 and the December 31, 1998 amount of $2,691,000. The allowance for possible loan losses as a percentage of total loans outstanding as of December 31, 2000 was 1.06%. This compares to 1.20% at the end of 1999 and 1.27% at the end of 1998. The decrease in the allowance for possible loan losses of $26,000 was the result of management's review of loans outstanding (see discussion on "Loan Portfolio") and non-performing loans (the sum of non-accrual loans and accruing loans past due 90 days or more) of $2,517,000 as of December 31, 2000 as compared to $2,802,000 as of December 31, 1999 (see tables on "Non-Accrual Loans" and "Accruing Loans Past Due 90 Days or More"). Net charge-offs as detailed in the table "Allowance for Possible Loan Losses" were $401,000 in 2000 or $228,000 less than the 1999 amount of $629,000. The 2000 charge-offs were the result of losses on commercial, consumer and residential real estate loans. The net charge-offs in 1999 were primarily the result of losses on commercial, consumer and residential loans. Net loans charged-off in 1998 were $423,000. The ratio of net loan charge-offs to average loans outstanding was .19%, .30% and .19% in 2000, 1999 and 1998, respectively. The provision for loan losses was $375,000 for the years ended December 31, 2000 and December 31, 1999 and $450,000 for the year ended December 31, 1998. In 1999, the decrease in the provision was $75,000 from 1998. The allowance for possible loan losses is established through a provision for possible loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, diversification by industry, and the establishment of lending targets to various segments of the portfolio. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees. Management believes that these procedures provide adequate assurances against the adverse impact from any event or set of conditions, and that the level of the allowance for possible loan losses is sufficient to meet the present and potential risk characteristics of the loan portfolio, including the current level of non-performing and past-due loans. The allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects possible losses resulting from the analysis of individual loans, pools of loans and commitments. The specific allowance allocations for individual loans is based on an analysis of individual loans where the internal credit rating is at or below a predetermined classification. The general allocation for pools of loans and commitments is based on historical loss experience adjusted for current trends in areas such as lending policies, economic conditions, delinquencies and concentrations. The historical loss factor is determined using actual loss experience and the related internal risk rating of loans charged off. The unallocated portion of the allowance is a function of the total allowance and the allocated portion of the allowance. The analysis of the allowance is performed quarterly and historical factors are updated periodically based on actual experience. ALLOWANCE FOR POSSIBLE LOAN LOSSES ------------------------------------------------------------------------------- (Dollars in Thousands) For the Year Ended December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- Allowance for Loan Losses at Beginning of Year $ 2,437 $ 2,691 $ 2,664 $ 2,532 $ 2,443 Loans Charged-Off by Category: Commercial 17 255 133 249 365 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 219 147 59 20 31 Consumer/Installment 325 330 348 301 271 Other -- -- -- -- -- -------- -------- -------- -------- ------- Total Loans Charged-Off 561 732 540 570 667 -------- -------- -------- -------- ------- Loans Recovered by Category: Commercial 5 30 42 19 39 Real Estate - Construction -- -- -- -- -- Real Estate - Residential 100 29 1 1 -- Consumer/Installment 55 44 74 77 47 Other -- -- -- -- -- -------- -------- -------- -------- -------- Total Loans Recovered 160 103 117 97 86 -------- -------- -------- -------- -------- Net Loans Charged-Off 401 629 423 473 581 -------- -------- -------- -------- -------- Provision Charged to Expense 375 375 450 605 670 -------- -------- -------- -------- -------- Allowance for Loan Losses at End of Period $ 2,411 $ 2,437 $ 2,691 $ 2,664 $ 2,532 ======== ======== ======== ======== ======== Total Loans Average $214,856 $212,993 $217,191 $228,245 $206,378 Year-End $226,944 $202,258 $212,437 $229,587 $220,117 Net Loans Charged Off to: Average Loans .19% .30% .19% .21% .28% Loans at Year-End .18% .31% .20% .21% .26% Allowance for Possible Loan Losses at Year-End 16.63% 25.81% 15.72% 17.76% 22.95% Provision for Possible Loan Losses 106.93% 167.73% 94.00% 78.18% 86.72% Allowance for Possible Loan Losses at Year-End to: Average Loans 1.12% 1.14% 1.24% 1.17% 1.23% Loans at Year-End 1.06% 1.20% 1.27% 1.16% 1.15% -------------------------------------------------------------------------------
Deposits Deposits are the primary source of the Company's funds. During 2000, deposits increased by $28,710,000 or 8.8% to a total of $353,190,000 at December 31, 2000, from a total of $324,480,000 at December 31, 1999. Average deposits for 2000 were $336,389,000, an increase of $21,515,000 or 6.8% over the average total deposits for 1999 of $314,874,000. Contributing to the increase in average deposits was the acquisition of approximately $10,000,000 in deposits as the result of the purchase of the Whitehall and Trexlertown branches from another financial institution. There was no premium paid for the acquisition of these deposits. Also contributing to the growth in deposits were increases in certificates of deposit and checking products in response to marketing campaigns to attract these types of deposits. The deposit growth in checking deposits and certificates of deposits was partially offset by a small decline in savings accounts and money market accounts. The continued growth of deposits held by the Company and the banking industry in general could be adversely affected by the flow of funds into other banks, credit unions, mutual funds and other investment options. The Bank's time deposits, excluding certificates of deposit over $100,000, increased in 2000 with average balances of $157,164,000, which was $18,088,000 or 13.0% higher than the 1999 average balance of $139,076,000. Non-interest bearing deposits averaged $43,893,000 in 2000 as compared to $41,337,000 in 1999, an increase of $2,556,000 or 6.2%. In addition, there was an increase in average interest-bearing demand deposits of $756,000 or 1.4% to $53,151,000 in 2000 from $52,395,000 in 1999, and an increase in average certificates of deposit over $100,000 which averaged $5,886,000 in 2000 as compared to $5,040,000 in 1999, an increase of $846,000 or 16.8%. Partially offsetting this growth was a $366,000 or 2.6% decline in average money market deposits and a decline of $365,000 or 0.6% in savings and club deposits. Average money market deposits were $13,461,000 and $13,827,000 in 2000 and 1999, respectively. Average savings and club deposits were $62,834,000 in 2000 as compared to $63,199,000 in 1999. Short-Term Borrowings The Bank had securities sold under agreements to repurchase totaling $7,215,000 at December 31, 2000 and $1,730,000 at December 31, 1999. The Bank's short-term (overnight) borrowing at December 31, 2000 from the Federal Home Loan Bank amounted to $5,695,000 against a line of credit of $25,000,000. There were no short-term borrowings from the Federal Home Loan Bank outstanding at December 31, 1999. At December 31, 2000 and 1999, there were no short-term borrowings in the form of Federal funds purchased, or Federal Reserve Bank discount borrowings. Additional information relating to short-term borrowings can be found in Note G of the "Notes to Consolidated Financial Statements". Liquidity and Capital Resources Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of asset liquidity are money market investments, short-term investment securities, and funds received from the repayment of loans and short-term borrowings. At year-end 2000, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $17,833,000, and securities maturing within one year totaled $2,345,000. At year-end 1999, cash, due from banks, Federal funds sold and interest-bearing deposits with banks totaled $21,861,000, and securities maturing within one year were $2,249,000. The Bank is a member of the Federal Home Loan Bank of Pittsburgh, Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan Bank of Pittsburgh in the amount of $94,000 at December 31, 2000, and $5,548,000 at December 31, 1999. These deposits are included in interest-bearing deposits with banks on the Company's financial statements. As a result of this relationship, the Bank places most of its short-term funds at the Federal Home Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000, of which $19,305,000 was available at December 31, 2000. The Bank had four long-term loans from the Federal Home Loan Bank of Pittsburgh totaling $34,000,000 at December 31, 2000 and four long-term loans totaling $30,000,000 at December 31, 1999. The loans outstanding at December 31, 2000 were originated in 2000, 1999, 1998 and 1996 with the proceeds used to fund the growth in residential real estate loans and the investment portfolio. The loans are for $5,000,000 originated in December, 1996 and due December, 2001, at a variable rate at LIBOR plus 3 basis points (6.895% at December 31, 2000), $7,000,000 originated in October, 1998 and due October, 2008, at a fixed rate of 4.86% until October, 2003, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, $10,000,000 originated in August, 1999, and due in August, 2004, at a fixed rate of 6.06% until August 2001, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, in the LIBOR rate is is 7.5% or higher and $12,000,000 originated in August 2000, and due in August 2010, at a fixed rate of 6.23% until August 2000, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, if the LIBOR rate is 8.0% or higher. If the lender elects to convert a fixed rate loan to a variable rate, the Bank may prepay the loan converted in full at the time of conversion without a penalty. The Bank had an additional loan from the Federal Home Loan Bank at December 31, 1999 in the amount of $8,000,000 that was paid in full in August 2000. This loan was originated in 1996 and had a fixed interest rate of 5.89% (see Note H of the "Notes to Consolidated Financial Statements"). Cash flows for the year ended December 31, 2000, consisted of cash provided by financing activities of $42,738,000 and cash provided by operating activities of $4,053,000 offset in part by cash used in investing activities of $45,325,000 resulting in a net increase in cash and cash equivalents of $1,466,000. The cash provided by financing activities was comprised of a net increase in certificates of deposit of $16,636,000, a net increase in interest and non-interest bearing demand and savings deposits of $12,074,000, a net increase in repurchase agreements of $5,485,000, an increase in short-term (overnight) debt of $5,695,000, a net increase in long-term debt of $4,000,000 and proceeds from the sale of common stock of $313,000. Partially offsetting these increases were the payment of cash dividends of $1,406,000 and a net increase to the ESOP debt of $57,000. The cash provided by operating activities was comprised principally of the proceeds from mortgage loan sales of $7,718,000, net income of $2,072,000, an increase in other liabilities of $1,181,000 which includes a $1,012,000 increase in the special reserve for Funeral Trust litigation, depreciation and amortization of $1,120,000, an increase in accrued interest payable of $794,000 and the provision for possible loan losses of $375,000, reduced in part by mortgage loans originated for sale of $7,718,000, an increase in accrued interest income of $781,000, net investment securities gains of $174,000, an increase of $389,000 in deferred taxes, a net increase in other assets of $439,000 and net gains on the sale of mortgage loans of $59,000. The cash used in investing activities was primarily for the purchase of securities available-for-sale in the amount of $45,625,000, the purchase of securities held-to-maturity in the amount of $2,334,000, a net increase in loans of $25,949,000 and the purchase of premises and equipment in the amount of $703,000. These cash uses were partially offset by the proceeds from the maturities of securities available-for-sale of $13,747,000, proceeds from the sales of securities available-for-sale of $8,294,000, proceeds from the maturities of securities held-to-maturity of $1,128,000 and a net decrease in interest-bearing deposits with banks of $5,494,000. The Company recognizes the importance of maintaining adequate capital levels to support sound, profitable growth and to encourage depositor and investor confidence. Shareholders' equity at December 31, 2000 was $33,521,000 as compared to $28,243,000 at December 31, 1999, an increase of $5,278,000 or 18.7%. This increase was attributable to an increase of $4,358,000 in accumulated other comprehensive income (see Note A.6 of the "Notes to Consolidated Financial Statements"), and increases of $1,283,000 in paid in capital and $572,000 in common stock. The increases in paid in capital and common stock was the result of the sale of common shares pursuant to the Dividend Reinvestment Plan and the 5% stock dividend. These increases were partially offset by an $878,000 reduction in retained earnings as a result of the payment of cash dividends and the 5% stock dividend. Total shareholders' equity, exclusive of accumulated other comprehensive income was $33,484,000 and $32,564,000 at December 31, 2000 and 1999, respectively. This was an increase of $920,000 or 2.8%. The accumulated other comprehensive income was comprised of the unrealized gains or losses on securities available-for-sale. The unrealized gain on securities available-for-sale at December 31, 2000 amounted to $37,000 (net of tax effect of $20,000). Included in shareholders' equity at December 31, 1999 was $4,321,000 (net of tax effect of $2,226,000) of unrealized losses on securities available-for-sale (see discussion on "Securities Available-for-Sale"). The Company paid a 5% stock dividend on its common stock from authorized but unissued shares on June 22, 2000 to all shareholders of record at the close of business on June 2, 2000. On June 24, 1999, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on June 4, 1999. The Company also paid a 5% stock dividend on June 25, 1998 to shareholders of record on June 5, 1998. Fractional shares on the stock dividends were paid in cash. The number of average shares and per share information in this report has been restated to reflect these 5% stock dividends. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In 2000, 21,646 new common shares were purchased pursuant to this Plan at an average price of $14.44 for total proceeds of $313,000. In 1999, 15,814 new common shares were purchased pursuant to the Plan at an average price of $19.98 per share. The total proceeds were $316,000. A Non-Employee Directors Stock Option Plan was adopted by the Company in 1994. This plan provides for the awarding of stock options to the Company's or the awarding of stock options to the Company's non-employee directors. In 2000, options to purchase 2,680 shares of the Company's common stock at an average price of $16.43 were granted to certain non-employee directors. During 2000, options for 1,340 shares of the Company's common stock issued pursuant to the plan were exercised at an average price of $12.69 per share. During 1999, options for 8,037 shares of the Company's common stock were granted to non-employee directors at a price of $20.77 per share. A non-employee director exercised options for 1,340 shares of the Company's common stock at a price of $12.69 per share in 1999. The Company also has a Stock Option Plan that was adopted in 1986 and the 1996 Stock Option Plan that was adopted in 1996 which provide for the granting of options to acquire the Company's common stock for officers and key employees. No new options may be issued under the 1986 Stock Option Plan. In 2000 and 1999 no options were issued under the 1996 Stock Option Plan. No options were exercised under these plans in 2000 and 1999. On January 19, 2001, options to purchase 39,500 shares of the Company's common stock at a price of $17.41 were issued to certain officers under the 1996 Stock Option Plan. The Company's stock option plans are accounted for under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations. This accounting method is permitted under Financial Accounting Standards Board standard SFAS No. 123, "Accounting for Stock-Based Compensation", which allows an entity to use a fair-value based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the Standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. Additional information relating to the Company's Stock Option Plans can be found in Notes A.9 and N of the "Notes to Consolidated Financial Statements". The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory a nd possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Additional information relating to the Company's and Bank's capital requirements and capital ratios can be found in Note R of the "Notes to Consolidated Financial Statements". The Company, in March 2001, settled claims by a group of funeral directors, against the Bank in connection with certain pre-need funeral trusts which were allegedly directed by funeral directors to be invested in a private placement annuity. In 1998, the Company established a reserve of $1.5 million against these possible claims. The Company added an additional $960,000 to this reserve as of December 31, 2000. The reserve balance, as of December 31, 2000 equaled $2.48 million. The Company expects the reserve to be sufficient to cover the settlement. The Company has incurred legal expenses in regard to these claims during 2000, 1999 and 1998. The Company will continue to incur significant legal expenses in regard to these claims during 2001, primarily in the first quarter (see Note O of the "Notes to Consolidated Financial Statements"). Impact of Inflation and Changing Prices The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates (see discussion on "Market Risk" and "Interest Rate Sensitivity"). Earnings Per Common Share The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" in 1997. SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior periods' earnings per share calculations have been restated to reflect the adoption of SFAS No. 128 (see Note A.12 and P of the "Notes to Consolidated Financial Statements"). Revenue Recognition in Financial Statements In December, 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 31, 1999. The Company is required to adopt SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to have a material impact on the consolidated financial statements. Accounting for the Impairment of Long-Lived Assets The Company has adopted the Financial Accounting Standards Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain intangibles and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no material effect on the Company's consolidated financial position or results of operations. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In September 2000, the Financial Accounting Standards Board has adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS 125. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements. Reporting Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. The Company's financial statements have been reclassified to reflect the provision of SFAS No. 130 (see Note A.6 of the "Notes to Consolidated Financial Statements"). Disclosures About Segments of an Enterprise and Related Information The Statement of Financial Accounting Standards Board (SFAS) No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and hold assets, and about major customers, regardless of whether that information is used in making operating decisions. The Company has one reportable segment, "Community Banking". All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133, an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, and changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective July 1, 2000. No adjustment was required as a result of the change in accounting principle. Statement of Financial Accounting Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On the balance sheet, receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998. Item 7.A Quantitative and Qualitative Disclosure About Market Risks Contained in Item 7 "Management's Discussion and Analysis of Financial Condition And Results of Operation". Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors First Colonial Group, Inc. We have audited the accompanying consolidated balance sheets of First Colonial Group, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Colonial Group, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Philadelphia, Pennsylvania March 8, 2001 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------- (Dollars in Thousands) At December 31, 2000 1999 ------------------------------------------------------------------------------- ASSETS Cash and Due From Banks $ 17,738 $ 14,272 Federal Funds Sold --- 2,000 -------- -------- Total Cash and Cash Equivalents 17,738 16,272 Interest-Bearing Deposits With Banks 95 5,589 Investments Securities Held-to-Maturity (Fair Value: 2000 - $19,906; 1999 - $19,123) 19,972 19,887 Investment Securities Available-for-Sale 164,029 132,356 Total Loans 226,944 202,258 Less: Allowance for Possible Loan Losses (2,411) (2,437) -------- -------- Net Loans 224,533 199,821 Premises and Equipment, Net 6,832 7,116 Accrued Interest Income 3,826 3,045 Other Real Estate Owned 325 571 Other Assets 5,701 7,232 -------- -------- TOTAL ASSETS $ 443,051 $ 391,889 ========= ========= LIABILITIES Deposits Non-Interest-Bearing Deposits $ 48,748 $ 41,813 Interest-Bearing Deposits (Includes Certificates of Deposit in Excess of $100: 2000 - $8,008; 1999 - $5,105) 304,442 282,667 -------- -------- Total Deposits 353,190 324,480 Securities Sold Under Agreements to Repurchase 7,215 1,730 Short-Term Debt 5,695 --- Long-Term Debt 34,000 30,000 Accrued Interest Payable 5,002 4,208 Other Liabilities 4,428 3,228 -------- -------- TOTAL LIABILITIES 409,530 363,646 -------- -------- SHAREHOLDERS' EQUITY Preferred Stock, Par Value $5.00 a share Authorized: 500,000 shares, none issued --- --- Common Stock, Par Value $5.00 a share Authorized: 10,000,000 shares Issued: 1,962,699 shares in 2000 and 1,848,437 shares in 1999 9,814 9,242 Additional Paid-In Capital 16,957 15,674 Retained Earnings 8,090 8,968 Employee Stock Ownership Plan Debt (1,377) (1,320) Accumulated Other Comprehensive Income (Loss) 37 (4,321) -------- ------- TOTAL SHAREHOLDERS' EQUITY 33,521 28,243 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 443,051 $ 391,889 ========= =========
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------- (Dollars in Thousands, except per share data) For the Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $18,116 $ 17,772 $18,885 Interest on Investment Securities Taxable 9,440 6,829 5,002 Tax-Exempt 1,567 1,509 1,269 Interest on Deposits with Banks and Federal Funds Sold 164 243 211 ------- ------- ------- Total Interest Income 29,287 26,353 25,367 ------- ------- ------- INTEREST EXPENSE Interest on Deposits 11,414 9,819 9,466 Interest on Short-Term Borrowings 588 283 265 Interest on Long-Term Debt 1,945 1,347 1,140 ------- ------- ------- Total Interest Expense 13,947 11,449 10,871 ------- ------- ------- NET INTEREST INCOME 15,340 14,904 14,496 Provision for Possible Loan Losses 375 375 450 ------- ------- ------- Net Interest Income After Provision for Possible Loan Losses 14,965 14,529 14,046 ------- ------- ------- OTHER INCOME Trust Revenue 1,245 1,246 1,225 Service Charges on Deposit Accounts 2,019 1,682 1,594 Investment Securities Gains, Net 174 563 722 Gains on Sale of Mortgage Loans 59 157 398 Other Operating Income 825 707 641 ------- ------- ------- Total Other Income 4,322 4,355 4,580 ------- ------- ------- OTHER EXPENSES Salaries and Employee Benefits 7,437 6,780 6,385 Net Occupancy and Equipment Expense 2,392 2,171 2,118 Other Operating Expenses 7,116 5,722 6,060 ------- ------- ------- Total Other Expenses 16,945 14,673 14,563 ------- ------- ------- Income Before Income Taxes 2,342 4,211 4,063 Income Taxes 270 929 1,031 ------- ------- ------- NET INCOME $ 2,072 $ 3,282 $ 3,032 ======= ======= ======= PER SHARE DATA Net Income - Basic $ 1.09 $ 1.75 $ 1.60 Net Income - Diluted $ 1.09 $ 1.74 $ 1.59 Cash Dividends $ 0.74 $ 0.70 $ 0.67
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------- (Dollars in Thousands) Accumulated Add. Other Common Paid-In Retained Treas. ESOP Comprehensive Stock Capital Earnings Stock Debt Income Total ------------------------------------------------------------------------------- Balance at Jan 1, 1998 $8,277 $11,014 $10,250 $(94) $ (390) $ 1,300 $30,357 1998 Comprehensive Income Net Income 3,032 3,032 Change in Unrealized Sec Gains, (Losses), Net (773) (773) ------ Total Comprehen- sive Income 2,259 Sale of Common Stock under Dividend Reinv Plan (7,611 shares) 38 195 233 Sale of Treas Stock under Div Reinv Plan (2,779 shs) 94 94 Cash Div Paid (1,275) (1,275) Stock Div of 5% (82,701 shs) 414 2,564 (2,978) --- Cash Pd in Lieu of Fractional Shares (6) (6) ESOP Loan Pymt 455 455 Loan to ESOP (500) (500) Unall ESOP Shares Committed to Employees (5,353 shs) 100 100 ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1998 8,729 13,873 9,023 -- (435) 527 31,717 1999 Comprehensive Income Net Income 3,282 3,282 Change in Unrealized Sec Gains (Losses), Net (4,848) (4,848) -------- Total Comprehen- sive Income (Loss) (1,566) Sale of Common Stock under Dividend Reinv Plan (14,732 shares) 74 242 316 Sale of Common Stock under Directors Stock Option Plan (496) shares) 2 2 4 Cash Dividends Paid (1,321) (1,321) Stock Dividend of 5% (87,484 shares) 437 1,575 (2,012) --- Cash Pd in Lieu of Fractional Shares (4) (4) ESOP Loan Pymt 115 115 Loan to ESOP (1,000) (1,000) Unall ESOP Shares Committed to Employees (3,691 shares) (18) (18) ------- ------- ------- ----- ------ ------ ------- Balance at Dec 31, 1999 9,242 15,674 8,968 --- (1,320) (4,321) 28,243 2000 Comprehensive Income Net Income 2,072 2,072 Change in Unrealized Gains (Losses), Net 4,358 4,358 ------ Total Comprehen- sive Income 6,430 Sale of Common Stock under Dividend Reinv Plan (21,177 shares) 106 207 313 Sale of Common Stock under Directors Stk Option Plan (332 shares) 2 2 Cash Dividends Paid (1,406) (1,406) Stock Dividend of 5% (92,752 shares) 464 1,078 (1,542) --- Cash Pd in Lieu of Fractional Shares (2) (2) ESOP Loan Payment 115 115 Loan to ESOP (172) (172) Unallocated ESOP Shares Committed to Employees (6,334 shares) (2) (2) ------ ------- ------ --- ----- ---- ------- Balance at Dec 31, 2000 $9,814 $16,957 $8,090 $-- $(1,377) $ 37 $33,521
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------- (Dollars in Thousands) For the Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 2,072 $ 3,282 $ 3,032 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Possible Loan Losses 375 375 450 Depreciation and Amortization 1,120 1,027 1,004 Accretion of Security Discounts (430) (267) (78) Amortization of Security Premiums 239 251 242 Deferred Taxes (389) 90 (395) Amortization of Deferred Fees on Loans 479 12 (136) (Gain) Loss on Sale of Other Real Estate Owned (119) (39) 4 Loss from Writedown of Other Real Estate Owned 184 -- -- Investment Securities Gains, Net (174) (563) (722) Gain on Sale of Mortgage Loans (59) (157) (398) Mortgage Loans Originated for Sale (7,718) (37,460) (42,723) Mortgage Loan Sales 7,718 38,068 42,879 Changes in Assets and Liabilities Increase in Accrued Interest Income (781) (503) (310) Increase in Accrued Interest Payable 794 672 70 Increase in Other Assets (439) (970) (740) Increase in Other Liabilities 1,181 71 397 -------- -------- ------- Net Cash Provided by Operating Activities 4,053 3,889 2,576 -------- -------- ------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 13,747 15,331 29,744 Proceeds from Maturities of Securities Held-to-Maturity 1,128 3,622 9,403 Proceeds from Sales of Securities Available-for-Sale 8,294 16,858 11,094 Proceeds from Sales of Securities Held-to Maturity -- --- 248 Purchase of Securities Available-for-Sale (45,625) (72,150) (66,712) Purchase of Securities Held-to-Maturity (2,334) (6,559) (9,722) Net Decrease (Increase) in Interest-Bearing Deposits With Banks 5,494 (2,288) (2,906) Net (Increase) Decrease in Loans (25,949) 9,412 16,614 Purchase of Premises and Equipment (703) (1,143) (494) Proceeds from Sale of Other Real Estate Owned 623 382 290 -------- -------- ------- Net Cash Used in Investing Activities (45,325) (36,535) (12,441) -------- ------- ------- FINANCING ACTIVITIES Net Increase in Interest and Non-Interest Bearing Demand Deposits and Savings Accounts 12,074 2,058 10,669 Net Increase in Certificates of Deposit 16,636 27,873 1,625 Net Increase in Long-Term Debt 4,000 10,000 1,610 Net Increase in ESOP Debt (57) (885) (45) Net Increase (Decrease) in Repurchase Agreements 5,485 (3,364) (3,710) Increase in Short-Term Debt 5,695 -- -- Proceeds from Issuance of Common Stock 313 302 333 Proceeds from Sale of Treasury Stock -- -- 94 Cash Dividends Paid (1,406) (1,321) (1,275) Cash in Lieu of Fractional Shares (2) (4) (6) -------- ------- ------- Net Cash Provided by Financing Activities 42,738 34,659 9,295 -------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents 1,466 2,013 (570) Cash and Cash Equivalents, January 1, 16,272 14,259 14,829 -------- -------- ------- Cash and Cash Equivalents, December 31, $ 17,738 $ 16,272 $ 14,259
See accompanying notes to consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts presented in the tables are in thousands, except per share data.) NOTE A - SUMMARY OF ACCOUNTING POLICIES First Colonial Group, Inc. (the "Company") is a one bank holding company of Nazareth National Bank and Trust Company (the "Bank"). The Bank is an independent community bank providing retail and commercial banking services through its seventeen offices in Northampton, Lehigh, and Monroe counties in northeastern Pennsylvania. The Bank competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and for various types of loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Company and the Bank are subject to regulations of certain state and Federal agencies and, accordingly, they are periodically examined by those regulatory agencies. As a consequence of the extensive regulation of commercial banking activities, the Bank's business is particularly susceptible to being affected by state and Federal legislation and regulation which may have the effect of increasing the cost of doing business. 1. Basis of Financial Statement Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and First C. G. Company, Inc. All significant inter-company balances and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods. Therefore, actual results could differ significantly from those estimates. The principal estimate that is particularly susceptible to significant change in the near term relates to the allowance for loan losses. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. The Company has one reportable segment, "Community Banking". All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. In December, 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 31, 1999. The Company is required to adopt SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to have a material impact on the consolidated financial statements. 2. Investment Securities As required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company classifies debt and marketable equity securities in three categories: trading, available-for-sale and held-to-maturity. Trading securities are measured at fair value, with unrealized holding gains and losses included in income. The Company does not have any securities classified as trading securities. Available-for-sale securities are measured at fair value, with unrealized gains and losses, net of tax effect, reported in equity. Investment securities held-to-maturity are principally debt securities and are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using the interest method over the period to maturity. The Company has the positive intent and ability to hold such securities until maturity. The Company's classification of its investment securities into these categories is detailed in "Note B - Investment Securities". Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. 3. Mortgage Loans Held-for-Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on the sales of loans are also accounted for in accordance with SFAS No. 134, "Accounting for Mortgage Securities Retained after the Securitizations of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". This new statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitizations of a mortgage loan held-for-sale based upon its ability and intent to sell or hold these investments. 4. Loans and Allowance for Possible Loan Losses Loans receivable that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for possible loan losses. Interest income on loans is accrued using various methods which approximate a constant yield. Certain origination and commitment fees, and certain direct loan origination costs are deferred and amortized over the contractual life of the related loans. This results in an adjustment of the yield on the related loan. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Upon such discontinuance, all unpaid accrued interest is reversed. The allowance for possible loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. As required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that, as a practical expedient, impairment may be measured based on the observable market price of a loan, or the fair value of the collateral if the loan is collateral dependent. The Company measures impairment based on the fair value of the collateral when it determines that foreclosure is probable (see Note D). 5. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of buildings and land improvements is computed principally on the straight-line method, and for equipment, principally on an accelerated method, over the estimated useful lives of the assets. 6. Comprehensive Income On January 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This standard requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains, and losses that bypass the income statement and are reported directly in a separate component of equity. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income are as follows: ------------------------------------------------------------------------------- For the Year Ended December 31, Before Tax Tax Net of Tax Amount Expense Amount ------------------------------------------- (Credit) 2000 ----------------------------------- Unrealized Gains on Securities: Unrealized Holding Gains Arising During Period $ 6,778 $ (2,305) $ 4,473 Less: Reclassification Adjustment for Gains Realized in Net Income (174) 59 (115) ------------------------------------------- Other Comprehensive Income, Net $ 6,604 $ (2,246) $ 4,358 ------------------------------------------- 1999 ----------------------------------- Unrealized Losses on Securities: Unrealized Holding Losses Arising During Period $ (7,910) $ (2,690) $ (5,220) Less: Reclassification Adjustment for Gains Realized in Net Income 563 191 372 ------------------------------------------- Other Comprehensive Loss, Net $ (7,347) $ (2,499) $ (4,848) ------------------------------------------- 1998 ----------------------------------- Unrealized Losses on Securities: Unrealized Holding Losses Arising During Period $ (1,894) $ (644) $ (1,250) Less: Reclassification Adjustment for Gains Realized in Net Income 722 245 477 ------------------------------------------- Other Comprehensive Loss, Net $ (1,172) $ (399) $ (773) -------------------------------------------
7. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized for forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective January 1, 2001. No adjustment was required as a result of the change in accounting principle. Statement of Financial Accounting Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998. 8. Income Taxes Under the liability method called for in SFAS No. 109, "Accounting for Income Taxes", whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. 9. Stock Option Plans Under Stock Option Plans, options to acquire shares of common stock are granted to certain officers, key employees and directors. The Company's Stock Option Plans are accounted for under SFAS No. 123, "Accounting for Stock-Based Compensation". This standard contains a fair value-based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the Standard permits entities to continue accounting for employee stock options and similar instruments under APB Opinion No. 25. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. 10. Employee Benefit Plans The Company has established an Employee Stock Ownership Plan (ESOP) covering eligible employees with one year of service as defined by the ESOP. The Company accounts for its ESOP in accordance with Statement of Position (SOP) 93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the Accounting Standards Division of the American Institute of Certified Public Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after December 31, 1992. For issuances of stock to the ESOP after December 15, 1989, but prior to December 31, 1992, the shares allocated method is used to recognize expense in the Company's financial statements. For issuances of stock prior to December 15, 1989, the Company will continue the cash contribution method of recognizing expense to the extent that it exceeds the cumulative expense that would be recognized under the shares allocated method. Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. The Company contributes $.50 for each $1.00 up to the first 5% that each employee contributes. The Company also has an executive compensation plan which provides additional death, medical and retirement benefits to certain officers. The Company has a deferred compensation plan involving the Directors of the Company. This plan provides defined annual payments for 15 years beginning at age 65 or death in exchange for the Directors deferring the payment of a portion of their fees. The Company records the cost of post-retirement medical benefits on the accrual basis as employees render service to earn the benefits and records a liability for the unfunded accumulated post-retirement benefit obligation. The transition obligation, representing the unfunded and unrecognized accumulated past-service benefit obligation for all plan participants, will be amortized on a straight-line basis over a 20-year period. 11. Trust Assets and Revenue Assets held by the Trust Department of the Bank in fiduciary or agency capacities for its customers are not included in the accompanying consolidated balance sheets since such assets are not assets of the Company. Operating revenue and expenses of the Trust Department are included under their respective captions in the accompanying consolidated statements of income and are recorded on the accrual basis. 12. Per Share Information The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Share and per share amounts have been retroactively restated to reflect the three 5% stock dividends in June 2000, 1999 and 1998. 13. Statement of Cash Flows The Company considers cash, due from banks and Federal funds sold as cash equivalents for the purposes of the Consolidated Statements of Cash Flows. Cash paid for interest was $13,153,000, $10,777,000 and $10,801,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Cash paid for taxes was $500,000 in 2000, $1,060,000 in 1999 and $1,458,000 in 1998. 14. Advertising Costs The Company expenses advertising costs as incurred. 15. Transfer and Servicing of Assets and Extinguishments of Liabilities In September, 2000, the Financial Accounting Standards Board has adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS 125. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements. 16. Reclassifications Certain reclassifications of prior years amounts have been made to conform to the 2000 presentation. NOTE B - INVESTMENT SECURITIES The amortized cost, unrealized gains and losses, and fair value of the Company's available-for-sale and held-to-maturity securities at December 31, 2000 and 1999 are summarized as follows. 2000 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 4,011 $ 13 $ (2) $ 4,022 U. S. Government Agency 79,145 672 (718) 79,099 State and Political Subdivisions 28,210 233 (190) 28,253 Mortgage-Backed Securities 44,110 309 (290) 44,129 Equity Securities 8,496 417 (387) 8,526 ------- ------- ------- ------- Total $163,972 $ 1,644 $(1,587) $164,029
1999 Available-for-Sale Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Treasury $ 4,001 $ 4 $ (13) $ 3,992 U. S. Government Agency 53,112 -- (3,365) 49,747 State and Political Subdivisions 29,147 16 (1,284) 27,879 Mortgage-Backed Securities 47,332 36 (1,338) 46,030 Equity Securities 5,312 68 (672) 4,708 ------- ------- ------- ------- Total $138,904 $ 124 $(6,672) $132,356
2000 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government Agency $ 7,937 $ 15 $ (49) $ 7,903 State and Political Subdivisions 8,016 45 (70) 7,991 Mortgage-Backed Securities 4,019 23 (30) 4,012 ------- ------- ------- ------- Total $19,972 $ 83 $ (149) $19,906
1999 Held-to-Maturity Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U. S. Government Agency $ 6,894 $ -- $ (306) $ 6,588 State and Political Subdivisions 7,974 10 (401) 7,583 Mortgage-Backed Securities 5,019 13 (80) 4,952 ------- ------- ------- ------- Total $19,887 $ 23 $ (787) $19,123
At December 31, the equity securities in the available-for-sale category include Federal Reserve Bank stock in the amount of $258,000 in 2000 and $259,000 in 1999, and Federal Home Loan Bank stock in the amount of $2,306,000 in 2000 and $2,265,000 in 1999 which are carried at cost. The following table lists the maturities of debt securities at December 31, 2000, classified as available-for-sale and held-to-maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MATURITIES OF DEBT SECURITIES At December 31, 2000 Available-For-Sale Held-To-Maturity Carrying Fair Carrying Fair Value Value Value Value ----------- --------- --------- -------- Due in one year or less $ 2,146 $ 2,145 $ 200 $ 202 Due after one year through five years 16,330 16,541 1,939 1,942 Due after five years through ten years 50,029 49,941 7,040 7,056 Due after ten years 42,861 42,747 6,774 6,694 ------- ------- ------- ------- 111,366 111,374 15,953 15,894 Mortgage-Backed Securities 44,110 44,129 4,019 4,012 Equity Securities 8,496 8,526 -- -- ------- ------- ------- ------- Total Investments $163,972 $164,029 $19,972 $19,906
Investment securities with a carrying amount of $7,651,000 and $13,950,000 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits, to qualify for fiduciary powers and for other purposes required or permitted by law. There were no securities held other than U. S. Treasury or U. S. Agencies from a single issuer which represented more than 10% of shareholders' equity. Proceeds from sales of investments in debt and equity securities during 2000, 1999 and 1998 were $8,294,000, $16,858,000 and $11,342,000, respectively. Gross gains of $252,000 and gross losses of $78,000 were realized on those sales in 2000. Gross gains of $716,000 and gross losses of $153,000 were realized on the sales in 1999. In 1998, gross realized gains were $740,000 and gross realized losses were $18,000. NOTE C - LOANS Major classifications of loans at December 31, 2000 and 1999 are as follows. 2000 1999 Real Estate/Residential $128,862 $ 112,870 Real Estate/Construction 5,923 6,737 Real Estate/Commercial 27,206 26,809 Consumer/Installment 53,062 45,886 Commercial (Non-Real Estate) and Agricultural 10,214 9,538 State and Political Subdivisions 2,089 1,096 Other 19 13 -------- --------- Total Gross Loans 227,375 202,949 Less: Unearned Discount (431) (691) -------- --------- Total Loans $226,944 $ 202,258
The Company makes loans to its directors and executive officers. These loans were made in the ordinary course of business at substantially the same terms and conditions as those with other borrowers. An analysis of the 2000 activity of these loans follows. Balance, January 1, 2000 $ 1,040 New loans 116 Repayments 425 ------- Balance, December 31, 2000 $ 731
NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows. ------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Beginning Balance $ 2,437 $ 2,691 $ 2,664 Provisions charged to charged to operating expenses 375 375 450 Recoveries 160 103 117 Loans charged-off (561) (732) (540) ------- ------- ------- Ending Balance $ 2,411 $ 2,437 $ 2,691
There were loans totaling $1,048,000 on which the accrual of interest has been discontinued or reduced at December 31, 2000. During 2000, an average of $1,147,000 of loans was on non-accrual status. Non-accrual loans at December 31, 1999 amounted to $1,311,000 and averaged $1,091,000 during 1999. Loans 90 days and over past due and still accruing totaled $1,469,000 at December 31, 2000 and $1,491,000 at December 31, 1999. The recorded investment in impaired loans was $339,000, $370,000 and $524,000 at December 31, 2000, 1999 and 1998, respectively. The valuation allowance for credit losses related to impaired loans is a part of the allowance for possible loan losses. The total valuation allowance was $78,000, $74,000 and $303,000 at December 31, 2000, 1999 and 1998, respectively. The average recorded investment in impaired loans during the years ended December 31, 2000, 1999 and 1998 was approximately $317,000, $469,000 and $897,000, respectively. All impaired loans were on a non-accrual status. Income on impaired loans is recognized by the Company on a cash basis. The Company recognized interest income of approximately $42,000, $35,000 and $23,000 on impaired loans in 2000, 1999 and 1998, respectively. NOTE E - PREMISES AND EQUIPMENT Major classifications of these assets at December 31, 2000 and 1999 are summarized as follows. ------------------------------------------------------------------------------- Estimated Useful Lives 2000 1999 ------------------------------------------------------------------------------- Land --- $ 939 $ 939 Premises 10-20 years 7,556 7,370 Equipment 3-10 years 6,900 6,408 ------ ----- 15,395 14,717 Accumulated depreciation and amortization (8,563) (7,601) ------ ------- Total Premises and Equipment $ 6,832 $ 7,116
Depreciation and amortization expense amounted to $987,000, $912,000 and $908,000 in 2000, 1999 and 1998, respectively. NOTE F - DEPOSIT MATURITIES At December 31, 2000, the schedule of maturities of certificates of deposit is as follows: 2001 $ 137,452 2002 23,769 2003 8,852 2004 1,915 2005 1,008 Thereafter 224 --------- $ 173,220
NOTE G - SHORT-TERM BORROWINGS Short-term debt consists of the following Federal Home Loan Bank advances: ------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Balance outstanding at December 31, $ 5,695 $ -- $ -- Maximum amount outstanding at any month-end during the year $11,255 $12,425 $ 1,422 Average amount outstanding $ 3,994 $ 1,721 $ 974 Average interest rate during the year 6.41% 5.17% 5.65%
The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000, of which $19,305,000 was available at December 31, 2000. There were no short-term borrowings in the form of Federal Reserve Discount borrowings and Federal Funds purchased at December 31, 2000, 1999 and 1998. Securities sold under agreements to repurchase consist of the following: -------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 -------------------------------------------------------------------------------- Balance outstanding at December 31, $ 7,215 $ 1,730 $ 5,094 Maximum amount outstanding at any month-end during the year $12,950 $ 8,682 $ 8,166 Average amount outstanding $ 7,226 $ 5,994 $ 5,821 Average interest rate during the year 4.59% 3.24% 3.61%
NOTE H - LONG-TERM DEBT The Company had long-term borrowings from the Federal Home Loan Bank of Pittsburgh totaling $34,000,000 at December 31, 2000 and $30,000,000 at December 31, 1999. These loans will mature in one to ten eight years. The weighted average interest rate on these loans was 6.0% and 5.78% at December 31, 2000 and 1999, respectively. The Company also has an obligation as a party to the Employee Stock Ownership Plan debt, which is discussed in Note K. The principal payments due on the Company's debt at December 31, 2000 are as follows. -------------------------------------------------------------------------------- ESOP Debt FHLB Debt Total Debt -------------------------------------------------------------------------------- 2001 $ 142 $ 5,000 $ 5,142 2002 142 - 142 2003 142 - 142 2004 142 10,000 10,142 2005 142 - 142 2006 and beyond 627 19,000 19,627 ----- -------- -------- Total $1,337 $ 34,000 $ 35,337 --------------------------------------------------------------------------------
NOTE I- OTHER OPERATING EXPENSES Other operating expenses consists of the following: ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- Advertising $ 546 $ 574 $ 597 Consulting Fees $ 588 $ 511 $ 416 Data Processing Services $ 813 $ 773 $ 583 Litigation Costs and Legal Fees $ 723 $ 669 $ 418 Loan Collection $ 240 $ 298 $ 346 Printing, Stationery and Supplies $ 320 $ 318 $ 328 Provisions for Trust Reserve $1,012 $ 57 $1,000 All Other $2,874 $2,522 $2,372 ------ ------ ------ Total Other Operating Expenses $7,116 $5,722 $6,060 -------------------------------------------------------------------------------
NOTE J- INCOME TAXES Income tax expense (benefit) is as follows. ------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Federal Current $ 659 $ 840 $ 1,426 Deferred (benefit) (389) 89 (395) ----- ------- ------- Total $ 270 $ 929 $ 1,031 -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed statutory Federal rate is as follows. ------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Federal tax expense at statutory rate $ 796 $ 1,432 $ 1,385 Increase (decrease) in taxes resulting from: Tax-exempt investment securities income (582) (569) (363) Tax-exempt interest on loans (37) (29) (23) Other, net 93 95 32 ------- ------- ------- Applicable Income Taxes $ 270 $ 929 $ 1,031
Deferred tax assets and liabilities consist of the following. ------------------------------------------------------------------------ At December 31, 2000 1999 ------------------------------------------------------------------------ Deferred Tax Assets: Unrealized Securities Losses $ -- $ 2,226 Loan Loss Reserve 514 523 Deferred Compensation 428 429 Post-Retirement Benefits 75 71 Depreciation 74 64 Miscellaneous Reserves 931 531 Other 152 120 ------- ------- Total $ 2,174 $ 3,964 ------- ------- Deferred Tax Liability: Unrealized Securities Gains $ 20 $ -- ------- ------- Total $ 20 $ -- ------- ------- Net $ 2,154 $ 3,964 ------------------------------------------------------------------------
NOTE K - EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains an Employee Stock Ownership Plan (ESOP) for the benefit of eligible employees. In October 2000, the ESOP borrowed $71,875 from the Company's subsidiary, First C. G., payable over ten years. The proceeds from this loan were used to purchase shares from the market. In December 2000, the ESOP borrowed an additional $100,000 from the Company's subsidiary, First C. G., payable over five years. The proceeds from this loan were used to purchase the shares from the account of a former employee pursuant to the provisions of the Plan. The interest on these loans is at the Bank's prime rate (an interest rate of 9.50% at December 31, 2000). The balance on these loans was $71,875 and $100,000, respectively at December 31, 2000. In 1999, the ESOP borrowed $1,000,000 from the Company's subsidiary, First C. G., payable over six years. The interest rate on this loan is at the Bank's prime rate (an interest rate of 9.50% at December 31, 2000 and 8.50% at December 31, 1999). The balance outstanding on this loan was $900,000 at December 31, 2000 and $950,000 at December 31, 1999. The proceeds from this loan were used to purchase shares from the market. In 1998, the ESOP borrowed $500,000 from the Company's subsidiary, First C. G. The interest rate on this loan is at the bank's prime rate (an interest rate of 9.50% at December 31, 2000 and 8.50% at December 31, 1999). The balance outstanding on this loan was $305,000 at December 31, 2000 and $370,000 at December 31, 1999. These obligations have been recorded as a liability on the books of the Company and are collateralized by stock of the Bank. Interest expense represents the actual interest paid by the ESOP. The interest incurred on ESOP debt was $121,000, $85,000 and $40,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Compensation expense related to the ESOP amounted to $238,000, $210,000 and $310,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As provided by SOP 93-6, the ESOP compensation expense includes a $2,000 credit in 2000 and a $20,000 credit in 1999 and an expense of $100,000 in 1998, which is the fair market value of the shares related to the loans that were allocated to the employees during these years. The number of shares released was 6,334 in 2000, 3,972 in 1999 and 5,902 in 1998. Dividends on unallocated shares used for debt service were $41,000, $45,000 and $19,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The total shares held by the ESOP were 297,166 and 291,667 at December 31, 2000 and 1999, respectively. ESOP shares have been restated to reflect the three 5% stock dividends of June, 2000, 1999 and 1998. NOTE L - OTHER BENEFIT PLANS Employees who qualify may elect to participate in a deferred salary savings 401(k) plan. A participating employee may contribute a maximum of 12% of his or her compensation. The Company will contribute $.50 for each $1.00 up to the first 5% that each employee contributes. Company payments are charged to current operating expenses. These contributions were $91,000, $86,000 and $75,000 in 2000, 1999 and 1998, respectively. The Company also has an executive compensation plan (the "Officers' Supplemental Retirement Plan") which provides additional death, medical and retirement benefits to certain officers. The Company has a deferred compensation plan (the "Deferred Directors' Plan") involving Directors of the Company. The plan requires defined annual payments for five to fifteen years beginning at age 65 or death. The annual benefit is based upon the amount deferred plus interest. The Company has recorded the deferred compensation liabilities using the present value method. The following table sets forth the changes in benefit obligations and plan assets of the Officers' Supplemental Retirement Plan and the Deferred Directors' Plan. Actuarial present value of benefit obligations is as follows. Officers' Deferred Supplemental Directors' Retirement Plan Plan At December 31, 2000 1999 2000 1999 Benefit obligation at beginning of year $ 227 $ 200 $ 468 $ 491 Service cost 46 43 - - Interest cost 27 18 30 32 Actual (gain) loss 88 (34) (2) (2) Benefits paid - - (53) (53) ----- ----- ----- ----- Benefits obligation at end of year 388 227 443 468 Change in plan assets: Fair value of plan assets at beginning of year - - - - Actual return on plan assets - - - - Employer contribution - - 53 53 Benefits paid - - (53) (53) ----- ----- ----- ----- Fair value of plan assets at end of year - - - - Funded status (388) (227) (443) (468) Unrecognized net transition asset (3) (4) - - Unrecognized net actuarial (gain) loss (161) (260) 35 37 Unrecognized prior service cost - - - - Adjustment to recognize additional minimum liability -- -- (35) (37) ----- ----- ----- ----- Accrued benefit cost $(552) $(491) $(443) $(468)
The weighted average assumed discount rates used in determining the actuarial present value of the projected benefit obligation were 7.0% in 2000 and 6.75% in 1999 and 6.50% in 1998 for the Officers' Supplemental Retirement Plan, and 7.0% in 2000, 1999 and 1998 for the Deferred Directors' Plan. The weighted average expected long-term rate of return on assets was 8.0% for 2000, 1999 and 1998 for the Officers' Supplemental Retirement Plan and 9.0% in each of those years for the Deferred Directors' Plan. The weighted average rate of increase in future compensation levels used in determining the actuarial present value for the Officers' Supplemental Retirement Plan was 6.0% in 2000, 1999 and 1998. Components of the net periodic benefit costs is as follows for both plans. -------------------------------------------------------------------------------- OFFICERS' SUPPLEMENTAL RETIREMENT PLAN at December 31, 2000 1999 1998 -------------------------------------------------------------------------------- Service cost $ 46 $ 43 $ 37 Interest cost 27 18 15 Net amortization and deferral of prior service costs (12) (21) (15) ---- ---- --- Net Periodic Benefit Cost $ 61 $ 40 $37
DEFERRED DIRECTORS' PLAN at December 31, 2000 1999 1998 -------------------------------------------------------------------------------- Service cost $ - $ - $ -- Interest cost 30 32 34 Net amortization and deferral of prior service costs -- -- -- ---- ---- --- Net Periodic Benefit Cost $ 30 $ 32 $ 34 --------------------------------------------------------------------------------
NOTE M - POST-RETIREMENT BENEFIT The Company sponsors a post-retirement plan that covers a certain number of retired employees and a limited group of current employees. This plan provides medical insurance benefits to a group of previously qualified retirees and spouses and to current full-time employees who were 60 years of age or older on January 1, 1992 and who have retired from the Company after attaining age 65 and are fully vested in the ESOP at the time of retirement. This plan is currently unfunded. As permitted by SFAS No. 106, the Company elected to delay the recognition of the transition obligation by aggregating $308,000, which arose from adopting SFAS No. 106, and amortize this amount on a straight-line basis over 20 years. This election is recorded in the financial statements as a component of net periodic post-retirement benefit cost. The components of the net periodic post-retirement benefit cost are as follows. ------------------------------------------------------------------------------- POST-RETIREMENT PLAN Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Interest cost $ 9 $ 11 $ 11 Amortization of transition obligation 3 7 6 ----- ----- ----- Net Periodic Benefit Cost $ 12 $ 18 $ 17 -------------------------------------------------------------------------------
The assumptions used to develop the net periodic post-retirement benefit cost are as follows. ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- Discount Rate 7.00% 6.75% 6.50% Medical care cost trend rate 8.50% 8.50% 8.50% -------------------------------------------------------------------------------
The medical care cost trend rate used in the actuarial computation ultimately is reduced to 8.0% in the year 2001 and 6.0% in 2005 and subsequent years. This was accomplished using 0.5% decrements through the year 2005 and later. The table of actuarially computed plan assets and benefit obligations for the Company is presented below. POST-RETIREMENT PLAN 2000 1999 Change in benefit obligation: Benefit obligation at beginning of year $ 174 $ 164 Service cost - - Interest cost 8 11 Actual gain - - Change due to change in experience (40) 13 Change due to change in assumption - 2 Benefits paid (14) (16) ----- ----- Benefits obligation at end of year 128 174 ----- ----- Change in plan assets: Fair value of plan assets at beginning of year - - Actual return on plan assets - - Employer contribution - - Benefits paid - - ----- ----- Fair value of plan assets at end of year - - Funded status (128) (174) Unrecognized net transition obligation 185 201 Unrecognized net gain (122) (93) ----- ----- Accrued benefit cost $ (65) $ (66)
The effect of a one percentage point increase in each future year's assumed medical care cost trend rate, holding all other assumptions constant, would have been to increase the net periodic post-retirement benefit cost by $9,000 and the accrued post-retirement benefit cost by $1,000. Health care benefits are provided to certain retired employees. The cost of providing these benefits was approximately $13,000, $16,000 and $20,000 in 2000, 1999 and 1998, respectively. The cost is accrued over the service periods of employees expected to receive benefits. NOTE N - STOCK OPTIONS The Company adopted a Stock Option Plan in 1996 that was similar to the Stock Option Plan established in 1986. Under the Stock Option Plans, options to acquire shares of common stock may be granted to the officers and key employees. The Stock Option Plans provide for the granting of options at the fair market value of the Company's common stock at the time the options are granted. Each option granted under the Stock Option Plans may be exercised within a period of ten years from the date of grant. However, no option may be exercised within one year from date of grant. In 2000 and 1999, no options were awarded under this plan. On January 19, 2001 options to purchase 39,500 shares of the Company's common stock at a price of $17.41 per share were issued to certain officers under this plan. The aggregate number of shares which may be issued under these plans are 330,055 shares of common stock. The Non-Employee Directors Stock Option Plan provides for the awarding of stock options to the Company's Directors. Pursuant to this Plan, on May 1, 1994, each non-employee director of the Company was automatically granted an option to purchase 1,340 shares of the Company's common stock at the fair market value of the Company's common stock of $12.69 per share. In addition, on May 1, 1999, the fifth anniversary of the initial option grant, persons who continue to be non-officer directors were each granted additional options to purchase 1,340 shares of the Company's common stock at a price of $20.08. The Plan additionally provides that any non-employee director who is first elected or appointed as a director of the Company or any subsidiary after May 1, 1994, shall, as of that date of such election or appointment, automatically be granted an option to purchase 1,340 shares of the Company's common stock. Such persons who continue to be non-officer directors shall also be granted additional options to purchase 1,340 shares of the Company's common stock on the fifth anniversary of the date they were first elected or appointed to the Board of Directors. In 2000, options to purchase 2,680 shares of the Company's common stock at a price of $16.43 per share were granted to certain non-employee directors pursuant to the provisions of this plan. Options to purchase 8,037 shares at a price of $20.77 were granted 1999 to non-employee directors. The aggregate number of shares which may be issued under the Non-Employee Directors Stock Option Plan is 26,800 shares of common stock. Had compensation cost for the Plans been determined based on the fair value of the options at the grant dates consistent with the method required by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. ------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- Net Income As reported $ 2,072 $ 3,282 $ 3,032 Pro forma $ 1,937 $ 3,194 $ 3,015 Basic earnings per share As reported $ 1.09 $ 1.75 $ 1.60 Pro forma $ 1.01 $ 1.70 $ 1.59 Diluted earnings per share As reported $ 1.09 $ 1.74 $ 1.59 Pro forma $ 1.01 $ 1.69 $ 1.58
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options- pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield of 2.8% for all years; expected volatility of 27.0%, 39.0% and 39.0%; risk-free interest rates of 6.07%, 6.3% and 5.7%; and expected lives of 10 years. A summary of the status of the Company's Employee Stock Option Plans as of December 31, 2000, 1999 and 1998, and changes during the years ending on those dates is presented below. EMPLOYEE STOCK OPTION PLAN Year Ended December 31, 2000 Weighted Average Excercise Shares Price Outstanding at beginning of year 61,746 $ 25.57 Granted --- --- Expired --- --- ------ -------- Outstanding at end of year 61,746 $ 25.57 Options exercisable at year-end 40,042 $ 23.71 Weighted average fair value of options granted during the year $ ---
Year Ended December 31, 1999 Weighted Average Excercise Shares Price Outstanding at beginning of year 62,903 $ 25.69 Granted --- --- Expired (1,157) 31.96 ------ -------- Outstanding at end of year 61,746 $ 25.57 Options exercisable at year-end 26,439 $ 21.88 Weighted average fair value of options granted during the year $ ---
Year Ended December 31, 1998 Weighted Average Excercise Shares Price Outstanding at beginning of year 29,332 $ 18.50 Granted 34,150 31.96 Expired (579) 31.96 ------ -------- Outstanding at end of year 62,903 $ 25.69 Options exercisable at year-end 12,837 $ 16.20 Weighted average fair value of options granted during the year $ 31.96
The following table summarizes information concerning employee stock options outstanding at December 31, 2000: ------------------------------------------------------------- Options outstanding ------------------------------------------------------------- Weighted Average Weighted Remaining Average Range of Number Contractual Exercise Exercise Price Outstanding Life (years) Price -------------- ----------- ----------- --------- $ 13.12 7,338 3.98 $ 13.12 $ 20.30 21,995 6.44 $ 20.30 $ 31.96 32,413 7.02 $ 31.96 ------ 61,746
------------------------------------------------- Options Exercisable -------------------------------------------------- Weighted Average Number Exercise Exercisable Price ----------- -------- 7,338 $ 13.12 16,497 $ 20.30 16,207 $ 31.96 ------ 40,042
A summary of the status of the Company's Non-Employee Directors Stock Option Plan as of December 31, 2000 and 1999, and changes during the years ending on those dates are presented below. NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Year Ended December 31, 2000 Weighted Average Excercise Shares Price Outstanding at beginning of year 17,413 $ 16.56 Granted 2,680 16.43 Exercised (1,340) 12.69 Expired (1,340) 20.08 ------ -------- Outstanding at end of year 17,413 $ 16.56 Options exercisable at year-end 9,714 $ 14.36 Weighted average fair value of options granted during the year $ 16.43
Year Ended December 31, 1999 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,716 $ 12.91 Granted 8,037 20.77 Exercised (1,340) 12.69 Expired --- --- ------ -------- Outstanding at end of year 17,413 $ 16.56 Options exercisable at year-end 9,045 $ 12.87 Weighted average fair value of options granted during the year $ 20.77
Year Ended December 31, 1998 Weighted Average Excercise Shares Price Outstanding at beginning of year 10,716 $ 12.91 Granted --- --- Exercised --- --- Expired --- --- ------ -------- Outstanding at end of year 10,716 $ 12.91 Options exercisable at year-end 9,380 $ 12.80 Weighted average fair value of options granted during the year $ ---
The following table summarizes information concerning non-employee director options outstanding at December 31, 2000. ------------------------------------------------------------------ Options outstanding ------------------------------------------------------------------ Weighted Average Weighted Remaining Average Range of Number Contractual Exercise Exercise Price Outstanding Life (years) Price -------------- ----------- ----------- --------- $12.34 - $16.43 10,717 5.34 $ 13.85 $20.08 - $22.14 6,696 8.38 $ 20.90 ----- 17,413
------------------------------------------------- Options Exercisable -------------------------------------------------- Weighted Average Number Exercise Exercisable Price ----------- -------- 8,040 $ 12.99 1,674 $ 20.90 ------ 9,714
NOTE O - COMMITMENTS AND CONTINGENCIES The Company has non-cancelable operating lease agreements in excess of one year with respect to various buildings and equipment. The minimum annual rental commitments at December 31, 2000 are payable as follows. -------------------------------------------- Operating Leases -------------------------------------------- 2001 $ 546 2002 529 2003 516 2004 527 2005 476 2006 and beyond 1,258 ------- Total $ 3,852 --------------------------------------------
The total rental expense was $479,000, $397,000 and $378,000 in 2000, 1999 and 1998, respectively. The Company has reserved $2.48 million against asserted claims and claims which have been or may be asserted against the Bank in connection with certain pre-need funeral trust funds. Most of the claims arise from Trusts, in which the Company was allegedly directed by funeral directors to invest in a private placement annuity issued by EA International Trust. The Bank has settled the asserted claims for the amount reserved. NOTE P - EARNINGS PER SHARE ------------------------------------------------------------------------------- Income Average Shares Per Share For the Year Ended December 31, (numerator) (denominator) Amount ------------------------------------- 2000 ------------------------------------------ Net Income $ 2,072 Basic Earnings Per Share Income Available to Common Shareholders $ 2,072 1,899,702 $ 1.09 Effect of Dilutive Securities Stock Options 2,121 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 2,072 1,901,823 $ 1.09 ------------------------------------- 1999 ------------------------------------------ Net Income $ 3,282 Basic Earnings Per Share Income Available to Common Shareholders $ 3,282 1,875,320 $ 1.75 Effect of Dilutive Securities Stock Options 3,457 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 3,282 1,878,777 $ 1.74 ------------------------------------- 1998 ------------------------------------------ Net Income $ 3,032 Basic Earnings Per Share Income Available to Common Shareholders $ 3,032 1,895,304 $ 1.60 Effect of Dilutive Securities Stock Options 8,239 ------------------------------------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 3,032 1,903,543 $ 1.59 -------------------------------------
Average common shares outstanding in 2000, 1999 and 1998 do not include 55,174, 59,428 and 27,407, respectively, of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per share information have been retroactively restated to reflect the three 5% stock dividends of June, 2000, 1999 and 1998. NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The contract or notional amounts as of December 31, 2000 and 1999 are as follows. Financial instruments whose contract amounts represent credit risk: 2000 1999 Commitments to extend credit $ 31,773 $ 36,119 Standby letters of credit $ 2,222 $ 2,164
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support contracts entered into by customers. Most guarantees extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, collateral held by the Bank for financial instruments varies, but may include personal or commercial real estate, accounts receivable, inventory, equipment, certificates of deposit or marketable securities. The extent of collateral held for any one financial instrument ranges up to 100%. The average collateral held on financial instruments was 67.0% as of December 31, 2000. The Bank grants commercial, real estate and installment loans to customers primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of Northampton, Monroe and Lehigh Counties. At December 31, 2000, the Bank had residential real estate loans outstanding totaling $128,862,000, which was 56.8% of total loans. The Bank also had real estate related commercial loans outstanding at December 31, 2000 totaling $27,206,000, which was 12.0% of total loans. Loans to various borrowers for land development totaling $2,153,000 are included in the Bank's total real estate commercial loans. These loans represented 7.9% of the total real estate related commercial loans. Loans to individuals for recreational vehicles totaled $26,165,000 at December 31, 2000. This was 11.5% of total loans and 49.3% of the Bank's consumer and installment loans which totaled $53,062,000 at December 31, 2000. NOTE R - REGULATORY MATTERS The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 2000, that the Bank could declare, without the approval of the Comptroller of the Currency, amounted to approximately $2,092,000. Restrictions on cash and due from bank accounts are placed upon the banking subsidiary by the Federal Reserve Bank. Certain amounts of reserve balances are required to be on hand or on deposit at the Federal Reserve Bank based upon deposit levels and other factors. The average and year-end amount of the reserve balance for 2000 was approximately $6,706,000 and $7,421,000, respectively. For 1999, the average reserve balance was $6,150,000 and the year-end amount was $6,558,000. The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of risk-adjusted assets and of Tier 1 capital of at least 4% of average assets (leverage ratio). Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Tier 2 capital may be comprised of limited life preferred stock, qualifying subordinated debt instruments, and the allowance for possible loan losses. Management believes that, as of December 31, 2000, the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 15, 2000, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The following table provides a comparison of the Company's and Bank's capital amounts, risk-based capital ratios and leverage ratios for the periods indicated CAPITAL RATIOS To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 2000 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $35,733 15.16% $18,862 8.00% --- --- Bank $31,161 13.03% $19,127 8.00% $23,909 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,313 14.13% $ 9,431 4.00% --- --- Bank $28,750 12.02% $ 9,564 4.00% $14,345 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $33,313 8.00% $16,654 4.00% --- --- Bank $28,750 6.95% $16,557 4.00% $20,697 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At December 31, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $34,329 16.67% $16,477 8.00% --- --- Bank $30,831 15.00% $16,446 8.00% $20,557 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,892 15.48% $ 8,239 4.00% --- --- Bank $28,194 13.71% $ 8,223 4.00% $12,334 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $31,892 8.32% $15,324 4.00% --- --- Bank $28,194 7.41% $15,210 4.00% $19,012 5.00%
NOTE S - EQUITY TRANSACTIONS The Company paid a 5% stock dividend on its common stock from authorized but unissued shares on June 22, 2000 to all shareholders of record at the close of business on June 2, 2000. On June 24, 1999, the Company paid a 5% stock dividend on its common stock from authorized but unissued shares to all shareholders of record at the close of business on June 4, 1999. The Company also paid a 5% stock dividend on June 25, 1998 to shareholders of record on June 5, 1998. Fractional shares on these stock dividends were paid in cash. The number of shares and earnings per share as stated in the following discussion of the shares issued under the Dividend Reinvestment and Stock Purchase Plan have been restated to reflect these 5% stock dividends. A Dividend Reinvestment and Stock Purchase Plan was established in 1988. The Plan provides the holders of common stock with a method to invest their cash dividends and voluntary cash payments of not less than $100 or more than $1,000 per quarter in additional shares of the Company's common stock. Under this plan, shares are sold, in general, at a discounted price of 5% below the average of the high bid and asked price for the Company's common stock on the trading day immediately preceding the investment date. In 2000, 21,646 common new shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $14.44 per share for total proceeds of $313,000. In 1999, 15,814 common shares were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at an average cost of $19.98 for proceeds of $316,000. NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the estimated fair value of their assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments (other than available-for-sale) to maturity and to not engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data which management considered the best available, as generally provided in the Company's FRY-9C Regulatory Reports, and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies and resulting fair values, and recorded carrying amounts at December 31, 2000 and 1999 were as follows. Fair value of loans and deposits with floating interest rates is generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices. 2000 1999 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Cash and cash equivalents $ 17,738 $ 17,738 $ 16,272 $ 16,272 Investment securities 183,935 184,001 151,479 152,243
Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities. Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand). 2000 1999 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Assets: Interest-bearing deposits with banks $ 95 $ 95 $ 5,589 $ 5,589 Liabilities: Deposits with stated maturities 173,828 173,220 154,771 156,584 Deposits with no stated maturities 139,252 179,971 167,691 167,896 Securities sold under agreements to repurchase 7,215 7,215 1,730 1,730 Short-term debt 5,695 5,695 -- -- Long-term debt 34,068 34,000 29,519 30,000
The fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the approximate current market rates adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors. 2000 1999 Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount Total loans $233,994 $226,944 $199,738 $202,258
There is no material difference between the carrying amount and the estimated fair value of off-balance-sheet items totaling $33,995,000 at December 31, 2000 and $38,283,000 at December 31, 1999 which were primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS No. 107 NOTE U - QUARTERLY FINANCIAL DATA (Unaudited) The following represents summarized quarterly financial data of the Company, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. Net income per share of common stock has been restated to reflect retroactively the 5% stock dividends of June, 2000, June, 1999 and June, 1998. QUARTERLY FINANCIAL DATA (Unaudited) (Dollars in Thousands) except per share data Three Months Ended 2000 Dec. 31 Sept. 30 June 30 March 31 Interest income $7,791 $7,471 $7,169 $6,856 Net interest income 3,946 3,851 3,837 3,706 Provision for possible loan losses 125 125 125 -- Net gain on sale of securities and mortgages 20 56 110 47 Income (loss) before income taxes (150) 724 744 1,024 Net income $ 54 $ 603 $ 619 $ 796 Basic net income per share $ 0.03 $ 0.32 $ 0.32 $ 0.42 Diluted net income per share $ 0.03 $ 0.32 $ 0.32 $ 0.42
1999 Dec. 31 Sept. 30 June 30 March 31 Interest income $6,705 $6,934 $6,490 $6,224 Net interest income 3,683 3,980 3,685 3,556 Provision for possible loan losses 125 -- 125 125 Net gain on sale of securities and mortgages 9 59 358 294 Income before income taxes 845 1,161 1,208 997 Net income $ 687 $ 885 $ 925 $ 785 Basic net income per share $ 0.37 $ 0.47 $ 0.50 $ 0.42 Diluted net income per share $ 0.37 $ 0.47 $ 0.49 $ 0.42
NOTE V - FIRST COLONIAL GROUP, INC. (PARENT COMPANY ONLY) ----------------------------------------------------------------------- CONDENSED BALANCE SHEETS December 31, 2000 1999 ----------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 31 $ 14 Interest-Bearing Deposits with Banks 609 369 Loan to Banking Subsidiary 1,000 1,000 Investment in Banking Subsidiary 28,937 24,544 Investment in Other Subsidiary 4,343 3,680 Other Assets 20 35 --------- --------- TOTAL ASSETS $ 33,521 $ 29,642 LIABILITIES Long-Term Debt $ 1,377 $ 1,320 Other Liabilities 42 79 -------- --------- TOTAL LIABILITIES 1,419 1,399 SHAREHOLDERS' EQUITY 33,521 28,243 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,940 $ 29,642
------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME For the Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- INCOME Dividends from Subsidiaries $ 1,405 $1,321 $ 688 Interest on Loan to Subsidiary 97 85 89 Interest on Deposits with Banks 13 6 5 ------- ------ ------ TOTAL INCOME 1,515 1,412 782 ------- ------ ------ EXPENSES Interest on Long-Term Debt 121 105 39 Other Expenses 39 81 94 ------- ----- ------ TOTAL EXPENSES 160 186 133 ------- ----- ------ Income Before Taxes and Equity in Undistributed Net Earnings of Subsidiaries 1,355 1,226 649 Federal Income Tax (Credit) (17) (32) (12) ------- ----- ------ Income Before Equity in Undistributed Net Earnings of Subsidiaries 1,372 1,258 661 Equity in Undistributed Net Earnings of Subsidiaries 700 2,024 2,371 ------- ------- ------- NET INCOME $ 2,072 $ 3,282 $ 3,032 -------------------------------------------------------------------------------
------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS For the Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 2,072 $ 3,282 $ 3,032 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Distribution in Excess of Undistributed Net Earnings of Subsidiaries (687) (2,005) (2,467) Changes in Assets and Liabilities: (Increase) Decrease in Interest-Bearing Deposits with Banks (240) (239) 774 (Increase) Decrease in Other Assets 15 (22) (1) Increase (Decrease) in Other Liabilities (47) 1 28 ------- ------- ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,113 1,017 1,366 ------- ------- ------ INVESTING ACTIVITIES Capital Contribution to Bank Subsidiary - - (500) -------- ------- ------ NET CASH PROVIDED BY INVESTING ACTIVITIES - - (500) -------- ------- ------ FINANCING ACTIVITIES Increase in Long-Term Debt 57 885 45 Increase in ESOP Debt (57) (885) (45) Proceeds from the Sale of Treasury Stock - - 94 Proceeds from Issuance of Common Stock 312 302 333 Cash Dividends Paid (1,406) (1,321) (1,275) Cash in Lieu of Fractional Shares (2) (4) (6) -------- ------ ------- NET CASH USED IN FINANCING ACTIVITIES (1,096) (1,023) (854) -------- ------ ------- Increase (Decrease) in Cash and Cash Equivalent 17 (6) 12 Cash and Cash Equivalent, January 1, 14 20 8 -------- ------ ------- Cash and Cash Equivalent, December 31, $ 31 $ 14 $ 20 -------------------------------------------------------------------------------
INVESTOR INFORMATION First Colonial Group, Inc. 76 South Main Street Nazareth, PA 18064 ANNUAL SHAREHOLDERS' MEETING The annual shareholders' meeting will be held on Thursday, May 17, 2001 at 9 a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem, Pennsylvania 18017. REGISTRAR AND TRANSFER AGENT The registrar and transfer agent is Nazareth National Bank and Trust Company. Shareholders seeking assistance with stock registration, lost stock certificates or dividend information should contact Maria A. Keller at the following address or by telephone at (610) 746-7317. Nazareth National Bank Trust Department 76 South Main Street Nazareth, PA 18064 STOCK INFORMATION First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group". At the close of business on December 31, 2000, there were 772 shareholders of record. The declaration and payment of dividends is at the sole discretion of the Board of Directors, and their amount depends upon the earnings, financial condition, and capital needs of the Company and the Bank and certain other factors including restrictions arising from Federal banking laws and regulations (see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial Statements") and a certain loan agreement (see "Note H- Long-Term Debt" in the "Notes to Consolidated Financial Statements"). The following table sets forth for the periods indicated high and low sale prices reported for the Company's common stock and the respective dividends declared per common share. The last sale price in December, 2000 was $13.50 and in December, 1999 was $16.55. Stock prices and dividends per share have been restated to reflect the 5% stock dividends of June 2000 and June 1999. 1999 First Quarter $26.30 $20.87 $ 0.1724 Second Quarter 22.86 19.72 0.1724 Third Quarter 23.10 17.62 0.1810 Fourth Quarter 19.05 16.37 0.1810 -------- TOTAL $ 0.7068
2000 First Quarter $18.69 $14.05 $ 0.1810 Second Quarter 16.33 12.26 0.1810 Third Quarter 17.00 12.00 0.1900 Fourth Quarter 16.50 12.75 0.1900 -------- TOTAL $ 0.7420
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shareholders may participate in the Dividend Reinvestment and Stock Purchase Plan. The plan provides that additional shares of common stock may be purchased with reinvested cash dividends and with voluntary cash payments at a 5% discount from market. A description of the plan and additional information may be obtained by writing to: Nazareth National Bank Trust Department 76 South Main Street Nazareth, PA 18064 INVESTMENT CONSIDERATIONS In analyzing whether to make or to continue an investment in the Company, investors should consider, among other factors, the information contained in this Annual Report and certain investment considerations and other information described in the Company's Form 10-K for the year ended December 31, 2000. FORM 10-K Shareholders, analysts and others seeking a copy of Form 10-K without charge (except for exhibits) or additional financial information about First Colonial Group, Inc. should send a written request to: Reid L. Heeren, Vice President First Colonial Group, Inc. 76 South Main Street Nazareth, PA 18064 MARKET MAKERS The following investment brokerage houses currently make a market in First Colonial Group, Inc. common stock: F. J. Morrissey & Co., Inc.; Monroe Securities, Inc.; Ryan, Beck & Co.; and Spear Leeds & Kellogg Capital Markets. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information contained under the captions "Election Of Directors" and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in the Company's 2000 Proxy Statement and "Executive Officers of the Registrant" in Item 4.1 of this Form 10-K is incorporated herein by reference therefrom. Item 11. Executive Compensation The information contained under the caption "Executive Compensation" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the caption "Voting Securities and Principal Holders Thereof" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. Item 13. Certain Relationships and Related Transactions The information contained under the caption "Certain Relationships and Related Transactions" in the Company's 2000 Proxy Statement is incorporated herein by reference therefrom. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents Filed as Part of this Report: 1. Financial Statements: The Consolidated Financial Statements of the Company and the Report of Independent Certified Public Accountants thereon, as listed below, have been filed under "Item 8, Financial Statements and Supplementary Data". Report of Independent Certified Public Accountants Consolidated Balance Sheets for the Years Ended 12/31/00 and 12/31/99 Consolidated Statements of Income and Comprehensive Income for the Years Ended 12/31/00, 12/31/99 and 12/31/98 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended 12/31/00, 12/31/99 and 12/31/98 Consolidated Statements of Cash Flows for the Years Ended 12/31/00, 12/31/99 and 12/31/98 Notes to Consolidated Financial Statements 2. Exhibits: Number Title Page No. ------ ----- -------- 3.1 (7) Restated Articles of Incorporation of the Company, as amended. 3.2 (7) Bylaws of the Company, as amended. 4.1 (1) Specimen Common Stock Certificate of the Company. * 10.1 (1) Deferred Compensation Plan for Directors. 10.2 Intentionally omitted. * 10.3 (1) Form of Executive Benefit Program Agreement. * 10.4 (6) Employee Stock Ownership Plan. 10.5 (1) Loan Agreement (including Exhibits thereto), dated October 5, 1984, by and between the Company and Commonwealth Bank and Trust Company, N.A. * 10.6 (3) First Colonial Group, Inc. Stock Option Plan. 10.7 Intentionally Omitted * 10.8 (8) Restated Optional Deferred Salary Plan (401(k)). * 10.9 (10) 1994 Stock Option Plan for Non-Employee Directors, as amended *10.10 Severance Agreement dated January 1, 2001 by and between the Bank and S. Eric Beattie *10.11 Severance Agreement dated January 1, 2001 by and between the Bank and Reid L. Heeren *10.12 (9) Severance agreement dated July 19, 1994 by and between the Bank and Arthur Williams *10.12.1 (12) Amendment No. 1 to Severance Agreement by and between the Board and Arthur Williams Number Title Page No. ------ ----- -------- *10.14 (10) Amendment No. 1 dated September 27, 1994 to the Bank's Employee Stock Ownership Plan *10.15 (10) Amendment No. 1 dated September 22, 1994 to the Optional Deferred Salary Plan (401K) *10.16 (11) Amendment Number 1 to the 1994 Stock Option Plan for Non-Employee Directors *10.17 (11) 1996 Employee Stock Option Plan *10.18 Severance Agreement dated January 1, 2001 by and between the Board and Tomas J. Bamberger 10.19 (14) Loan Agreement dated April 22, 1998 by and between First C. G. Company and the Employee Stock Ownership Plan 10.20 Severance Agreement dated January 1, 2001 by and between the Board and Robert McGovern 10.21 (16) Loan Agreement dated February 8, 1999 by and between First C. G. Company and the Employee Stock Ownership Plan 10.22 Loan Agreement dated October 19, 2000 by and between First C. G. Company and the Employee Stock Ownership Plan 10.23 Loan Agreement dated December 22, 2000 by and between First C. G. Company and the Employee Stock Ownership Plan 21.1 (3) Subsidiaries of the Company. 23.1 Consent of Accountants. 27.1 Financial Data Schedule ----------------------- * Represents a Management Contract or Compensatory Plan, Contract or Arrangement. (1) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-4908), as filed on April 16, 1986. (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-20319), as filed on February 25, 1988. (3) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1986. (4) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1988. (5) Incorporated by reference from the Company's Current Report on Form 8-K dated June 20, 1989 (File No. 0-11526). (6) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1991. (7) Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-64816), as filed on June 22, 1993. (8) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1993. (9) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB (File No. 0-11526) for the quarter ended June 30, 1994. (10) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1994. (11) Incorporated by reference from the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1995. (12) Incorporated by reference by the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1996. (13) Incorporated by reference by the Company's Annual Report on Form 10-KSB (File No. 0-11526) for the fiscal year ended December 31, 1997. (14) Incorporated by reference by the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1998. (15) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (File No. 0-11526) for the quarter ended June 30, 1999. (16) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-11526) for the fiscal year ended December 31, 1999. (b) Reports on Form 8-K No reports on Form 8-K were filed in the fourth quarter of the year ended December 31, 2000. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COLONIAL GROUP, INC. Dated: March 30, 2001 By: /s/ S. Eric Beattie ------------------------------------ S. ERIC BEATTIE, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Richard Stevens, III ----------------------------------------------------------- RICHARD STEVENS, III Chairman of the Board and Director March 30, 2001 By: /s/ S. Eric Beattie ----------------------------------------------------------- S. ERIC BEATTIE President, Chief Executive Officer and Director (Principal Executive Officer) March 30, 2001 By: /s/ Reid L. Heeren ----------------------------------------------------------- REID L. HEEREN Executive Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 30, 2001 By: /s/ Robert J. Bergren ----------------------------------------------------------- ROBERT J. BERGREN Director March 30, 2001 By: /s/ Christian F. Martin, IV ----------------------------------------------------------- CHRISTIAN F. MARTIN, IV Director March 30, 2001 By: /s/ Gordon B. Mowrer ----------------------------------------------------------- GORDON B. MOWRER Director March 30, 2001 By: /s/ Daniel B. Mulholland ----------------------------------------------------------- DANIEL B. MULHOLLAND Director March 30, 2001 By: /s/ Charles J. Peischl ----------------------------------------------------------- CHARLES J. PEISCHL, ESQUIRE Director March 30, 2001 By: /s/ John H. Ruhle, Jr. ----------------------------------------------------------- JOHN H. RUHLE, JR. Director March 30, 2001 By: /s/ Maria Zumas Thulin ----------------------------------------------------------- MARIA Z. THULIN Director March 30, 2001