-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUUsVqg7lQucT57FtucAPDfYck+CL9R4sWoa2G3amh1LmIig6Ersv+4ktrUFKHrW gDCvKlZoQUQlPeF0g8djlg== 0000714719-99-000012.txt : 19990816 0000714719-99-000012.hdr.sgml : 19990816 ACCESSION NUMBER: 0000714719-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COLONIAL GROUP INC CENTRAL INDEX KEY: 0000714719 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232228154 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11526 FILM NUMBER: 99687185 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: NAZARETH STATE: PA ZIP: 18064 BUSINESS PHONE: 2157467300 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: NAZARETH STATE: PA ZIP: 18064 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------------------ (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No. 0-11526 ----------------------------------------------------- FIRST COLONIAL GROUP, INC. - ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-2228154 - ----------------------------------- ------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 76 S. MAIN ST., NAZARETH, PA 18064 - ------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____ INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 1,840,274 SHARES OF COMMON STOCK, $5 PAR VALUE, OUTSTANDING ON JUNE 30, 1999. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES INDEX PART 1 - FINANCIAL INFORMATION PAGE NO. ITEM 1 - Financial Statements Consolidated Balance Sheet 2 Consoliated Statement of Income 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 3 - Quantitative and Qualitative Discussion About Market Risk 30 PART 11 - OTHER INFORMATION ITEM 4 - Submission of Matters to a Vote of Security Holders 34 ITEM 5 - Other Information 34 ITEM 6 - Exhibits and Reports on Form 8-K 34 SIGNATURES 35 FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) June 30, Dec. 31 1999 1998 ASSETS Cash and Due From Banks $ 13,412 $ 12,259 Federal Funds Sold 2,000 2,000 --------- --------- Total Cash and Cash Equivalents 15,412 14,259 Interest-Bearing Deposits With Banks 5,054 3,301 Investment Securities Held-to-Maturity 17,118 17,723 (Fair Value: June 30, 1999 $16,794 Dec. 31, 1998 - $17,920) Securities Available-for-Sale at Fair Value 114,939 98,389 Mortgage Loans Held-for-Sale 1,480 603 Total Loans, Net of Unearned Discount 217,989 212,437 LESS: Allowance for Possible Loan Losses (2,658) (2,691) --------- --------- Net Loans 215,331 209,746 Premises and Equipment, Net 6,649 6,885 Accrued Interest Income 2,859 2,542 Other Real Estate Owned 593 636 Other Assets 4,957 4,412 --------- --------- TOTAL ASSETS $ 384,392 $ 358,496 --------- ---------- LIABILITIES Deposits Non-Interest Bearing Deposits $ 41,889 $ 38,885 Interest-Bearing Deposits 279,583 255,664 --------- --------- Total Deposits 321,472 294,549 Securities Sold Under Agreements to Repurchase 9,151 5,094 Long-Term Debt 20,000 20,000 Accrued Interest Payable 3,237 3,536 Other Liabilities 1,543 3,600 --------- --------- TOTAL LIABILITIES 355,403 326,779 SHAREHOLDERS' EQUITY Preferred Stock, Par Value $5.00 a share Authorized - 500,000 shares, none issued Common Stock, Par Value $5.00 a share Authorized - 10,000,000 shares Issued - 1,840,274 shares at June 30, 1999 and 1,745,725 shares at Dec. 31, 1998 9,201 8,729 Additional Paid in Capital 15,573 13,873 Retained Earnings 8,075 9,023 Employee Stock Ownership Plan Debt (1,435) (435) Accumulated Other Comprehensive Income (Loss) (2,425) 527 --------- --------- Total Shareholders' Equity 28,989 31,717 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 384,392 $ 358,496 --------- ---------
See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ---------- -------- -------- -------- INTEREST INCOME: Interest and Fees on Loans $ 4,432 $ 4,747 $ 8,828 $ 9,660 Investment Securities Income Taxable 1,647 1,269 2,988 2,439 Tax-Exempt 392 301 780 560 Interest on Deposits with Banks and Federal Funds Sold 19 38 118 81 ------- ------- ------- ------- Total Interest Income 6,490 6,355 12,714 12,740 ------- ------- ------- ------- INTEREST EXPENSE: Interest on Deposits 2,450 2,352 4,792 4,679 Interest on Short-Term Borrowing 76 73 122 145 Interest on Long-Term Debt 279 280 559 567 ------- ------- ------- ------- Total Interest Expense 2,805 2,705 5,473 5,391 ------- ------- ------- ------- NET INTEREST INCOME: 3,685 3,650 7,241 7,349 Provision for Possible Loan Losses 125 113 250 225 ------- ------- ------- ------- Net Interest Income After Provision For Possible Loan Losses 3,560 3,537 6,991 7,124 ------- ------- ------- ------- OTHER INCOME: Trust Revenue 337 264 603 475 Service Charges on Deposit Accounts 425 411 797 761 Investment Securities Gains, Net 345 363 561 463 Gains on the Sale of Mortgage Loans 13 132 91 172 Other Operating Income 155 156 337 315 ------- ------- ------- ------- Total Other Income 1,275 1,326 2,389 2,186 ------- ------- ------- ------- OTHER EXPENSES: Salaries and Employee Benefits 1,653 1,618 3,293 3,232 Net Occupancy and Equipment Expense 515 530 1,050 1,081 Other Operating Expenses 1,459 1,496 2,832 2,739 ------- ------- ------- ------- Total Other Expenses 3,627 3,644 7,175 7,052 ------- ------- ------- ------- Income Before Income Taxes 1,208 1,219 2,205 2,258 Provision for Income Taxes 283 324 495 595 ------- ------- ------- ------- NET INCOME $ 925 $ 895 $ 1,710 $ 1,663 ======= ======= ======= ======= Per Share Data Basic Net Income $ 0.52 $ 0.50 $ 0.96 $ 0.93 ======= ======= ======= ======= Diluted Net Income $ 0.51 $ 0.49 $ 0.95 $ 0.92 ======= ======= ======= ======= Cash Dividends $ 0.18 $ 0.17 $ 0.36 $ 0.34 ======= ======= ======= =======
See accompanying notes to interim financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Dollars in Thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------ ------ ------ ------ Net Income $ 925 $ 895 $ 1,710 $1,663 Other Comprehensive Income (Loss), Net of Tax Unrealized gains (losses) on securities Unrealized gains (losses) arising in period (2,570) (129) (3,322) (202) Reclassification adjustment; gain included in net income 228 (358) 370 (439) ------ ------ ------ ------ Other Comprehensive Income (Loss) (2,342) (487) (2,952) (641) ------ ------ ------ ------ Comprehensive Income (Loss) $(1,417) $ 408 $(1,242) $1,022 ====== ====== ====== ======
Other comprehensive income is shown net of tax (benefit) for the six months ended June 30, 1999 and June 30, 1998 of $(1,521,000) and $330,000, respectively and the three months ended June 30, 1999 and June 30, 1998 of $(1,206,000) and $251,000, respectively. See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, 1999 June 30, 1998 OPERATING ACTIVITIES (Unaudited) Net Income $1,710 $1,663 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Possible Loan Losses 250 225 Depreciation and Amortization 510 491 Amortization of Security Discounts (96) (39) Amortization of Security Premiums 131 98 Amortization of Deferred Fees on Loans 65 (190) Mortgage Loans Originated for Sale (14,412) (28,418) Mortgage Loan Sales 13,534 27,707 (Gain) on Sale of Mortgage Loans (91) (172) Investment Securities Gains, Net (561) (463) Changes in Assets and Liabilities: Increase in Accrued Interest Income (319) (290) Decrease in Accrued Interest Payable (299) (289) Net Increase in Other Assets (354) (1,033) Net Decrease in Other Liabilities (788) (184) ------- ------- Net Cash Used In Operating Activities (720) (894) ------- ------- INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 8,572 12,139 Proceeds from Maturities of Securities Held-to-Maturity 3,460 5,474 Proceeds from Sales of Securities Available-for-Sale 13,858 4,571 Proceeds from Sales of Securities Held-to-Maturity --- 248 Purchase of Securities Available-for-Sale (43,367) (28,963) Purchase of Securities Held-to-Maturity (2,415) (7,284) Net Increase in Interest Bearing Deposits With Banks (1,753) (4,910) Net Increase (Decrease) in Loans (5,940) 12,711 Purchase of Premises and Equipment, Net (211) (208) Proceeds from Sale of Other Real Estate Owned 176 118 ------- ------- Net Cash Used In Investing Activities (27,620) (9,104) ------- ------- FINANCING ACTIVITIES Net Increase in Interest and Non-Interest Bearing Demand Deposits and Savings Accounts 7,119 6,376 Net Increase in Certificates of Deposits 19,804 2,918 Net Decrease in Long-Term Debt --- (390) Proceeds from Sale of Treasury Stock --- 94 Net Increase in ESOP Debt (1,000) (110) Net (Decrease) Increase in Repurchase Agreements 4,057 (1,648) Proceeds from Issuance of Stock 160 72 Cash Dividends Paid (643) (621) Cash in Lieu of Fractional Shares (4) (6) ------- ------- Net Cash Provided by Financing Activities 29,493 6,685 ------- ------- Increase (Decrease) in Cash and Cash Equivalents 1,153 (3,313) Cash and Cash Equivalents, January 1 14,259 14,829 ------- ------- Cash and Cash Equivalents, June 30, $15,412 $11,516 ======= =======
See accompanying notes to interim consolidated financial statements. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - GENERAL The accompanying financial statements, footnotes and discussion should be read in conjunction with the audited financial statements, footnotes, and discussion contained in the Company's Annual Report for the year ended December 31, 1998. The financial information presented herein is unaudited; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the unaudited financial information have been made. The results for the three and six months ended June 30, 1999 are not necessarily indicative of results to be expected for the full year or any other interim period. NOTE B - SUBSIDIARIES First Colonial Group, Inc. (the "Company") is a Pennsylvania business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956. The Company has two wholly-owned subsidiaries, Nazareth National Bank and Trust Company (the "Bank") founded in 1897 and First C. G. Company, Inc. founded in 1986. NOTE C - INVESTMENT CONSIDERATIONS In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain investment considerations more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which can be obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main Street, Nazareth, PA 18064. NOTE D - FORWARD LOOKING STATEMENTS The information contained in this Quarterly Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, the discussion in "Item 3 - - Quantitative and Qualitative Discussion About Market Risk", statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements which are not historical facts or as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in this Quarterly Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). NOTE E - CASH DIVIDENDS On May 21, 1999 the Company paid its 1999 second quarter dividend on its common stock of $.19 per share to shareholders of record on May 7, 1999. NOTE F - STOCK DIVIDEND On June 24, 1999 the Company paid a 5% stock dividend to shareholders of record on June 4, 1999. Fractional shares were paid in cash based on the closing price of $23.312 per share on the record date. Net income per share and average shares outstanding have been restated to reflect the 5% stock dividend. NOTE G - EARNINGS PER SHARE The Company calculates earnings per share as provided by the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS 128)". SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosures of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Basic and diluted earnings per share were calculated as follows. For the Three Months Ended June 30, Average Income Shares Per Share (numerator) (denominator) Amount 1999 Net Income $ 925 Basic Earnings Per Share Income Available to Common Shareholders $ 925 1,779,710 $ 0.52 Effect of Dilutive Securities Stock Options 6,747 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 925 1,786,457 $ 0.51 ------ --------- ------- 1998 Net Income $ 895 Basic Earnings Per Share Income Available to Common Shareholders $ 895 1,801,551 $ 0.50 Effect of Dilutive Securities Stock Options 8,920 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $ 895 1,810,417 $ 0.49 ------ --------- -------
Average common shares outstanding in the three month period ended June 30, 1999 and 1998 did not include 55,844 and 24,250, respectively of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per share information have been restated to reflect the 5% stock dividend of June 1999. For the Six Months Ended June 30, Average Income Shares Per Share (numerator) (denominator) Amount 1999 Net Income $1,710 Basic Earnings Per Share Income Available to Common Shareholders $1,710 1,785,287 $ 0.96 Effect of Dilutive Securities Stock Options 6,876 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $1,710 1,792,163 $ 0.95 ------ --------- ------- 1998 Net Income $1,663 Basic Earnings Per Share Income Available to Common Shareholders $1,663 1,801,323 $ 0.93 Effect of Dilutive Securities Stock Options 8,600 ------ --------- ------- Diluted Earnings Per Share Income Available to Common Shareholders plus Assumed Exercise of Options $1,663 1,809,923 $ 0.92 ------ --------- -------
Average common shares outstanding in the six month period ended June 30, 1999 and 1998 did not include 48,562 and 23,183, respectively of average weighted unallocated shares held by the ESOP. The exclusion of these unallocated shares held by the ESOP is due to the Company's adoption of SOP 93-6. Share and per share information have been restated to reflect the 5% stock dividend of June 1999. NOTE H - ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows: Six Month Period Ended June 30, 1999 1998 Beginning Balance $2,691,000 $2,664,000 Additions Provision for loan losses charged to operating expenses 250,000 225,000 Recoveries of loans 39,000 46,000 ---------- ---------- Total Additions 289,000 271,000 Deductions Loans charged off 322,000 255,000 ---------- ---------- Ending Balance $2,658,000 $2,680,000
NOTE I - IMPAIRED LOANS The Company measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, impairment may be measured based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued on such loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation for credit loses related to loan impairment are as follows: At June 30, 1999 1998 Principal amount of impaired loans $ 419,000 $1,203,000 Deferred loan costs --- 2,000 -------- -------- 419,000 1,205,000 Less valuation allowance 151,000 446,000 -------- -------- $ 268,000 $ 759,000
On January 1, 1995 a valuation for credit losses related to impaired loans was established. The activity in this allowance account for the six months ending June 30, 1999 was as follows: 1999 1998 Valuation allowance at January 1, $303,000 $138,000 Provision for loan impairment 28,000 225,000 Transfer from Unallocated Allowance for Possible Loan Losses (112,000) 117,000 Direct charge-offs (68,000) (34,000) -------- -------- Valuation allowance at June 30, $151,000 $446,000
Total cash collected on impaired loans during the six month period ended June 30, 1999 was $87,000 of which $37,000 was credited to the principal balance outstanding on such loans and $50,000 was recognized as interest income. Interest that would have been accrued on impaired loans during the first six months of 1999 was $27,000. Interest income recognized for the first half of 1998 was $80,000. The valuation allowance for impaired loans of $151,000 at June 30, 1999 is included in the "Allowance for Possible Loan Losses" which amounts to $2,658,000 at June 30, 1999. The provision for loan impairment of $28,000 for the six month period ended June 30, 1999 is included in the "Provision for Possible Loan Losses" as reflected on the "Consolidated Statement of Income" for the same period. NOTE J - REPORTING OF COMPREHENSIVE INCOME On January 1, 1998, the Corporation adopted the Financial Accounting Standards Board issued (SFAS) No. 130, "Reporting Comprehensive Income", which requires presenting a complete set of financial statements to include details of comprehensive income that arises in the reporting period. Comprehensive income consist of net income or loss for the current period and other comprehensive income income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. Other comprehensive income includes, for example, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investment securities. The Corporation has elected to report comprehensive income on a separate scheduled titled "Statement of Comprehensive Income". NOTE K - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 established standards for the method that public business enterprises report selected information regarding operating segments in financial reports issued to shareholders. The disclosure information required consists of a measure of segment profit and loss, certain revenue and expense items and segment assets based upon specified quantitative thresholds, as it is reported internally to the chief operating decision maker on both an interim and annual basis. The statement is effective for fiscal years beginning after December 15, 1997. Management has determined that the Corporation consists of one segment: community banking. NOTE L - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. The Company is currently reviewing the provisions of SFAS No. 133. NOTE M - COMMITMENTS AND CONTINGENCIES The Company has reserved $1.5 million against possible claims which may be asserted against the Bank in connection with certain pre-need funeral trusts which were allegedly directed by funeral directors to be invested in a private placement annuity issued by EA International Trust. In April, 1999, two funeral directors whose funds were invested in this annuity commenced suit against the Bank; if all funeral directors whose funds were invested in this annuity were to pursue claims, the Bank's maximum exposure would be approximately $5.5 million plus interest, costs and attorneys fees. The Bank has been advised that it has significant defenses to these claims and intends to vigorously defend against such claims. The Bank has discontinued its involvement in this annuity and is pursuing indemnification for some or all of these possible losses from its insurance carriers and from EA International Trust. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following financial review and analysis is of the financial condition and earnings performance of the Company and its wholly owned subsidiaries for the three and six month period ended June 30, 1999. The information contained in this Quarterly Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including, without limitation, statements as to the allowance and provision for possible loan losses, future interest rates and their effect on the Company's financial condition or results of operations, the classification of the Company's investment portfolio, the discussion in "Item 3 - - Quantitative and Qualitative Discussion About Market Risk", statements or estimates concerning the effect of the "Year 2000" issues on the Company's systems and software and the Company's plans with regard to "Year 2000" issues and other statements which are not historical facts or as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in this Quarterly Report or in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). In analyzing whether to make, or to continue, an investment in the Company, investors should consider, among other factors, certain investment considerations more particularly described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, a copy of which can be obtained from Reid L. Heeren, Vice President, First Colonial Group, Inc., 76 S. Main Street, Nazareth, PA 18064. Liquidity and Capital Resources Liquidity is a measure of the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. The Company manages its assets and liabilities to maintain liquidity and earnings stability. Among the sources of liquidity are money market investments, securities available-for-sale, funds received from the repayment of loans, short-term borrowings and borrowings from the Federal Home Loan Bank. At June 30, 1999, cash, due from banks, Federal funds sold and interest bearing deposits with banks totaled $20,466,000, and securities maturing within one year totaled $3,352,000. At December 31, 1998, cash, due from banks, Federal funds sold and interest bearing deposits with banks, totaled $17,560,000, and securities maturing within one year were $4,493,000. Securities sold under an agreement to repurchase totaled $9,151,000 at June 30, 1999 and $5,094,000 at December 31, 1998. The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The Bank had interest bearing demand deposits at the Federal Home Loan Bank of Pittsburgh in the amount of $4,350,000 at June 30, 1999 and $3,193,000 at December 31, 1998. These deposits are included in due from banks on the Company's financial statements. As a result of this relationship, the Company places most of its short-term funds at the Federal Home Loan Bank of Pittsburgh. Federal funds sold totaled $2,000,000 at June 30, 1999. At December 31, 1998 there were Federal funds sold totaling $2,000,000. The Federal Home Loan Bank of Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000 at June 30, 1999, subject to certain collateral requirements. The Bank had no short-term (overnight) borrowings against this line at June 30, 1999 or at December 31, 1998. The Bank had additional borrowings from the Federal Home Loan Bank at June 30, 1999 totaling $18,000,000 of which $5,000,000 is due in November 1998, $8,000,000 is due in August 2000 and $5,000,000 is due in December 2001. Cash flows for the six months ended June 30, 1999 consisted of cash used in operating activities of $720,000 and cash used in investing activities of $27,620,000 offset in part by cash provided by financing activities of $29,493,000 resulting in an increase in cash and cash equivalents of $1,153,000. Cash used in operating activities was the result of mortgage loans originated for sale of $14,412,000, a decrease in other liabilities of $788,000, gains on investment securities of $561,000, an increase in accrued interest income of $319,000, a decrease in accrued interest payable of $299,000, and an increase in other assets of $354,000 partially reduced by mortgage loan sales of $13,534,000, net operating income of $1,710,000, depreciation and amortization of $510,000 and a provision for possible loan losses of $250,000. Cash was used in investing activities for the purchase of securities available-for-sale and held-to-maturity of $43,367,000 and $2,415,000, respectively, plus net increase in interest-bearing deposits with banks of $1,753,000, and a net increase in loans of $5,940,000, partially offset by proceeds from maturities of securities available-for-sale and held-to-maturity of $8,572,000 and $3,460,000, respectively, and proceeds from sales of securities available-for-sale of $13,858,000. Cash provided by financing activities consisted principally of increases in interest and non-interest bearing demand deposits and savings accounts of $7,119,000, an increase in certificates of deposit of $19,804,000 and an increase of $4,057,000 in repurchase agreements offset in part by an increase in the ESOP Debt of $1,000,000 and the payment of cash dividends of $643,000. 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 June 30, 1999 was $28,989,000 as compared to $31,717,000 at December 31, 1998, for a decrease of $2,728,000. This decrease was attributable to a decrease of $2,952,000 in the value of securities available-for-sale (see discussion on "Investment Securities"), an increase of $1,000,000 in the debt related to the Employee Stock Ownership Plan, the payment of cash dividends of $643,000 and the payment of $4,000 in cash in lieu of fractional shares from the 5% stock dividend of June 24, 1999 offset in part by net income for the first six months of 1999 of $925,000, and proceeds from the sale of common stock pursuant to the Dividend Reinvestment Plan of $160,000. On June 24, 1999, the Company paid a 5% stock dividend to shareholders of record on June 4, 1999. Fractional shares were paid in cash based on the closing price of $23.312 per share on the record date. The Company maintains a Dividend Reinvestment and Stock Purchase Plan. During the first six months of 1999, 6,569 shares of common stock were purchased from authorized and unissued shares at an average price of $23.70 per share for proceeds of approximately $156,000. The Company has a Non-Employee Director Stock Option Plan that provides for the awarding of stock options to the Company's non-employee directors. During the first six months of 1999, options to purchase 7,650 shares of the Company's common stock at an average price of $21.81 per share were granted to certain non-employee directors. Options for 496 shares of the Company's common stock were exercised at a price of $13.99 per share by a non-employee director during the first half of 1999. 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 debt instruments, and the allowance for possible loan losses. Management believes, that as of June 30, 1999, the Company and the Bank met all capital adequacy requirements to which they were subject. Capital Ratios To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Purposes Provisions (Dollars in Thousands) At June 30, 1999 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,778 16.13% $16,751 8.00% --- --- Bank $30,390 14.47% $16,805 8.00% $21,006 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $31,160 14.88% $ 8,375 4.00 --- --- Bank $27,364 13.03% $ 8,403 4.00% $12,064 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $31,160 8.19% $15,479 4.00% --- --- Bank $27,364 7.24% $15,110 4.00% $18,887 5.00%
To Be Well Capitalized Required Under Prompt For Capital Corrective Actual Adequacy Action (Dollars in Thousands) At December 31, 1998 Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets) Company, (Consolidated) $33,555 16.97% $15,819 8.00% --- --- Bank $29,450 15.02% $15,684 8.00% $19,605 10.00% Tier 1 Capital (To Risk-Weighted Assets) Company, (Consolidated) $30,938 15.64% $ 7,906 4.00% --- --- Bank $26,596 13.57% $ 7,842 4.00% $11,763 6.00% Tier 1 Capital (To Average Assets, Leverage) Company, (Consolidated) $30,938 8.60% $14,114 4.00% --- --- Bank $26,596 7.47% $13,951 4.00% $17,439 5.00%
The Company is not aware of any trends, events or uncertainties that will have a material effect on the Company's liquidity, capital resources or operations, except for higher interest rates which could cause deposit disintermediation and an increase in interest expense and the possibility of inflationary trends, the results of which cannot be determined at this time. The Company is not under any agreement with the regulatory authorities nor is it aware of any current recommendation by regulatory authorities which, if they were implemented, would have a material adverse effect on liquidity, capital resources, or the operations of the Company. Assets and Liabilities Total assets at June 30, 1998 were $384,392,000, representing an increase of 7.2% over total assets of $358,496,000 at December 31, 1998. Deposits increased by $26,923,000 or 9.1% from $294,549,000 on December 31, 1998 to $321,472,000 on June 30, 1999. Contributing to this increase were increases in non-interest bearing checking deposits of $3,004,000, certificates of deposit of $19,804,000, savings and money market deposits of $3,423,000 and interest-bearing checking deposits of $692,000. Loans outstanding at June 30, 1999 were $217,989,000 as compared to $212,437,000 at December 31, 1998. This is an increase of $3,552,000 or 1.7%. The increase in loans was primarily the result of an increase of $11,335,000 or 15.9% in consumer loans. This increase was offset in part by a $1,542,000 or 2.5% decrease in commercial loans and a $4,240,000 or 5.3% decrease in residential real estate loans. During the first half of 1999, $13,534,000 of residential real estate loans were sold. Most of the loans sold were fixed rate with 30 or 15 year maturities. These loans were sold to reduce the Company's interest-rate risk and to provide liquidity for future lending opportunities. Most of the loans sold were originated in 1999. The Bank continues to service all of these loans. There were $1,480,000 of residential real estate loans identified as held-for-sale at June 30, 1999. The loan to deposit ratio was 67.8% at June 30, 1999 and 72.1% at December 31, 1998. Premises and equipment decreased by $236,000 to $6,649,000 at June 30, 1999 from $6,885,000 at December 31, 1998. The Company had long-term debt totaling $20,000,000 at June 30, 1999 and at December 31, 1998 from the Federal Home Loan Bank of Pittsburgh. Of this amount $8,000,000 matures in August 2000, $5,000,000 matures in December 2001, and the remaining $7,000,000 matures in October 2008. The interest rates associated with these loans are 5.89% fixed, 5.41% variable at LIBOR plus 3 basis points, and 4.86% fixed until December 2003, at which time the rate may be converted at the option of the lender to a variable rate of LIBOR plus 15 basis points, respectively. The loans are secured by the Bank's investment and residential real estate loans and securities. These funds were borrowed to improve liquidity and to fund loans. During the first half of 1999, the Company's Employee Stock Ownership Plan (ESOP) borrowed $1,000,000 from the Company's subsidiary, First C. G. Company, payable over twenty years with interest due quarterly and principal annually in October. The interest rate on this loan is at the Bank's prime rate (7.75% at June 30, 1999). The proceeds from this loan were used to purchase 35,500 shares of the Company's common stock. In the second quarter of 1998, the ESOP borrowed $500,000 from First C. G. Company. This loan is due in 2005 with interest due quarterly and principal annually in October. The interest rate on this loan is at the Bank's prime rate (7.75% at June 30, 1999 and December 31, 1998). The balance outstanding on these ESOP loans was $1,435,000 at June 30, 1999 and $435,000 at December 31, 1998. At June 30, 1999 and December 31, 1998 the Bank had no short-term borrowings from the Federal Home Loan Bank of Pittsburgh against a line of credit of $25,000,000. Results of Operations The net income for the three months ended June 30, 1999 was $925,000, a $30,000 or 3.4% increase compared to net income of $895,000 for the same period in 1998. The earnings improvement was attributable to an increase in net interest income of $23,000 or 0.6%, a $17,000 or 0.4% decrease in total other expenses, a $41,000 or 12.7% decrease in Federal income taxes partially offset by an increase in the provision for possible loan losses of $12,000 or 10.6%, a decrease in total other income, exclusive of net securities gains of $33,000 or 3.4% and an $18,000 decrease in net securities gains. Net income for the six months ended June 30, 1999 was $1,710,000 compared to $1,663,000 for the same period in 1998. The earnings improvement was primarily attributable to increases in total other income, higher gains on the sale of securities and a reduction in Federal income taxes. During the first half of 1999, total other income, exclusive of net securities gains, increased by $105,000 or 5.8% as compared to June 30, 1998. Also affecting earnings was a $98,000 or 21.2% increase in net securities gains and a $100,000 or 16.8% decline in Federal income taxes. These were offset in part by a decrease in net interest income of $108,000 or 1.5% and an increase in the provision for possible loan losses of $25,000 or 11.1% and total other expenses of $123,000 or 1.7%. Basic earnings per share for the three months ended June 30, 1999 were $0.52 as compared to $0.50 for the corresponding period in 1998. Average shares outstanding during this three month period were 1,779,710 in 1999 and 1,801,551 in 1998. Basic earnings per share for the six months ended June 30, 1999 and 1998 were $0.96 and $0.95, respectively. Average shares outstanding during this six month period were 1,785,287 in 1999 and 1,801,323 in 1998. Diluted earnings per share for the three month period ended June 30, 1999 were $0.51 compared to $0.49 for the same period in 1998. Diluted earnings per share for the six month period ended June 30 were $0.95 and $0.92 in 1999 and 1998, respectively. Per share earnings and average shares outstanding have been restated to reflect the 5% stock dividend paid on June 24, 1999. (see Note F Net Interest Income The "Rate/Volume Analysis" table segregates, in detail, the major factors that contributed to the changes in net interest income, for the quarter and six months ended March 31, 1999 as compared to the same period in 1998, into amounts attributable to both rate and volume variances. In calculating the variances, the changes were first segregated into (1) changes in volume (change in volume times the old rate), (2) changes in rate (changes in rate times the old volume) and (3) changes in rate/volume (changes in rate times the change in volume). The changes in rate/volume have been allocated in their entirety to the change in rates. The interest income included in the "Rate/Volume Analysis" table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. Non accruing loans have been used in the daily average balances to determine changes in interest income due to volume. Loan fees included in the interest income calculation are not material. Net interest income amounted to $3,685,000 for the three months ended June 30, 1999 as compared to $3,650,000 for the three months ended March 31, 1998, an increase of $35,000 or 1.0%. This increase is the result of lower loan volumes combined with a smaller decline in interest expense. The fully taxable-equivalent net interest income was $7,661,000 for the first six months of 1999, compared to $7,649,000 for the same period in 1998, a .16% or $12,000 increase as shown in the following "Rate/Volume Analysis" table. This increase in taxable-equivalent net interest income was primarily due to a $171,000 increase related to volume partially offset by a $159,000 decrease related to interest rates. For the six months period ended June 30, 1999, net interest income was $7,241,000 compared to $7,349,000 for the same period in 1998, a decrease of $108,000 or 1.5%. Total taxable-equivalent interest income grew $93,000 primarily the result of the higher volumes in the investment security earning asset category. Taxable-equivalent income from investment securities for the second quarter increased $882,000 or 8.7% over the second half of 1998. This was comprised of a $911,000 increase due to volume partially offset by a $29,000 decrease due to rates as a result of declining yields. The increase in interest earned on investment securities was partially reduced by a $855,000 reduction in taxable equivalent interest earned on loans in the first half of 1999 as compared to 1998. This decrease was attributed to a $412,000 reduction due to a lower volume of loans and $443,000 due to a reduction in interest rates on loans. Average year-to-date earning assets increased to $345,119,000 at June 30, 1999 from $323,648,000 at June 30, 1998, a 6.6% increase. Total interest expense grew $81,000 during the first six months of 1999, compared to the same period in 1998. This growth was principally the result of higher volumes, primarily due to an increase in time deposits. Interest expense attributed to time deposits increased $113,000 during the first six months of 1999, compared to the first six months of 1998. The increase in time deposits was used to finance the earning asset growth. Partially offsetting this growth in interest expense were lower interest rates paid on savings accounts and securities sold under agreements to repurchase as a result of repricing due to market conditions (see Item 3. - Quantitative and Qualitative Discussion About Market Risk). The following table sets forth a "Rate/Volume Analysis" which segregates in detail the major factors that contributed to the changes in net interest income for the six months ended June 30, 1999. The interest income included in the table has been adjusted to a fully taxable equivalent amount using the Federal statutory tax rate of 34%. RATE/VOLUME ANALYSIS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, 1999 Over / (Under) June 30, 1998 CHANGE DUE TO: TOTAL RATE VOLUME (Fully Taxable Equivalent) INTEREST INCOME Interest-Bearing Balances With Banks $ 44 $ (35) $ 79 Federal Funds Sold (7) (3) (4) Investment Securities 882 (29) 911 Loans Held for Sale 29 20 9 Loans (855) (443) (412) ------- ------- ------- Total Interest Income 93 (491) 584 ------- ------- ------- INTEREST EXPENSE Demand Deposits, Savings & Clubs (1) (35) 34 Time Deposits 113 (206) 319 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (25) (22) (3) Short-Term Borrowings 2 (6) 8 Long-Term Borrowings (8) (63) 55 ------- ------- ------- Total Interest Expense 81 (332) 413 ------- ------- ------- Net Increase (Decrease) in Interest Income $ 12 $ (159) $ 171
Other Income and Other Expenses Other income for the three months ended June 30, 1999 including service charges, trust fees, gains on the sale of mortgage loans and other miscellaneous income, but exclusive of securities gains or losses, was $930,000 as compared to $963,000 for the same period in 1998. This was a decrease of $33,000 due to a $119,000 decline in the gains on the sale of mortgage loans, offset in part by increases in service charges and Trust Department revenues. There were $13,000 in gains on the sale of mortgage loans for the three month period ended June 30, 1999 and of $132,000 for the same period in 1998. In the three month period ended June 30, 1999, service charges were $425,000, a $14,000 increase over the 1998 amount of $411,000. The revenues from the Trust Department operations were $337,000 for the three months ended June 30, 1999 as compared to $264,000 for the three months ended June 30, 1998, an increase of $73,000 or 27.7%. Other miscellaneous income for the three months ended June 30, 1999 was $155,000, as compared to $156,000 for the same period in 1998. Other income for the six months ended June 30, 1999 including service charges, trust revenues, gains on the sale of mortgage loans and other miscellaneous income, but exclusive of securities gains or losses, was $1,828,000 as compared to $1,723,000 for the same period in 1998. This was an increase of $105,000 or 6.1%. In the six month period ended June 30, 1999 service charges were $797,000, a $36,000 or 4.7% increase over the 1998 amount of $761,000. The increase in service charge income is the result of an increase in deposit accounts. The revenues from the Investment Management and Trust Division operations were $603,000 for the six months ended June 30, 1999 as compared to $475,000 for the six months ended June 30, 1998, an increase of $128,000 or 26.9%. During the six months ended June 30, 1999, sales of mortgage loans resulted in a gain of $91,000 as compared to $172,000 for the same period in 1998, a decrease of $81,000. The gain in 1999 was the result of the sale of $13,534,000 of residential real estate loans in the first half (see discussion on Assets and Liabilities). Other operating income for the six months ended June 30, 1999 was $337,000 as compared to $315,000 for the same period in 1998, an increase of $22,000 or 7.1%. Total other expenses for the three month period ended June 30, 1999 decreased by $17,000 or 0.5% to $3,627,000 over total other expenses for the same period in 1998 of $3,644,000. Included in the total other expenses for the three month period ended June 30, 1999 is a $35,000 or 2.2% increase in salary and benefit expenses to a total of $1,653,000 as compared to $1,618,000 in 1998. These increases were primarily due to general salary increases of approximately 3%. Occupancy and equipment expenses were $515,000 for the three months ended June 30, 1999 and $530,000 for the three months ended June 30, 1998, a decrease of $15,000 or 2.8%. Other operating expenses for the three month period ended June 30, 1999 were $1,459,000, a decrease of $37,000 or 2.5% from the $1,496,000 in other expenses for the same period in 1998. Total other expenses for the six months ended June 30, 1999 increased by $123,000 or 1.7%, to $7,175,000 from $7,052,000 for the same period in 1998. Salaries and employee benefits were $3,293,000 for the six months ended June 30, 1999 as compared to $3,232,000 for the six months ended June 30, 1998 representing an increase of $61,000 or 1.9%. These increases were primarily due to general salary increases of approximately 3%. Occupancy and equipment expenses were $1,050,000 for the six months ended June 30, 1999 and $1,081,000 for the six months ended June 30, 1998, a decrease of $31,000 or 2.9%. Other operating expenses for the six months ended June 30, 1999 were $2,832,000 in relation to $2,739,000 for the six months ended June 30, 1998, an increase of $93,000 or 3.4%. Investment Securities The Company classifies its debt and marketable securities into three categories: trading, available-for-sale, and held-to-maturity as provided by the Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company had no trading securities at June 30, 1999 and December 31, 1998. Available-for-sale securities are carried at fair value with the net unrealized gains or losses reported in equity. The Company had $114,939,000 in available-for-sale securities at June 30, 1999 with a net unrealized loss of $2,425,000. At December 31, 1998 available-for-sale securities amounted to $98,389,000 with a net unrealized gain of $527,000. During the six month period ended June 30, 1999, $13,297,000 of securities available-for-sale were sold for a net gain of $561,000 as compared to $4,571,000 of securities available-for-sale were sold for a net gain of $463,000 for the same time period in 1998. Held-to-maturity securities totaling $17,118,000 at June 30, 1999 are carried at cost. At December 31, 1998, the held-to-maturity securities totaled $17,723,000. The Company has the intent and ability to hold the held-to-maturity securities until maturity. The Company, at June 30, 1999, did not hold any securities identified as derivatives. Allowance and Provision for Possible Loan Losses The provision is based on management's analysis of the adequacy of the allowance for loan losses. In its evaluation, management considers past loan experience, overall characteristics of the loan portfolio, current economic conditions and other relevant facators. At present, management currently believes that the allowance is adequate to absorb known and inherent losses in the loan portfolio. Ultimately, however, the adequacy of the allowance is largely dependent upon economic conditions which are beyond the scope of management's control. For the first six months of 1999, the provision for loan losses was $250,000 compared to $225,000 for the same period in 1998. Net charge offs were $283,000 for the six months ended June 30, 1999 compared with $209,000 for the six months ended June 30, 1998. The ratio of the allowance for loan losses to total loans at June 30, 1999 was 1.22% compared to 1.27% at December 31, 1998 and 1.24% at June 30, 1998. This was primarily the result of an increase in total loans to $217,989,000 at June 30, 1999 over $216,957,000 at December 31, 1998. The allowance for possible loan losses at June 30, 1999 totaled $2,658,000, a decrease of $33,000 or 1.2% from the December 31, 1998 amount of $2,691,000 and $22,000 or 0.8% over the June 30, 1998 balance of $2,680,000. As provided by SFAS No. 114, as amended by SFAS No. 118, $151,000 of the Allowance for Possible Loan Losses is allocated to impaired loans at June 30, 1999 (See Note I "Impaired Loans"). Transactions in the allowance for loan losses are as follows: ALLOWANCE FOR LOAN LOSSES 1999 1998 Balance, January 1, $ 2,691,000 $ 2,664,000 Provision charged to Operating Expenses 250,000 225,000 Loans Charged Off 322,000 255,000 Recoveries 39,000 46,000 ----------- ---------- Balance June 30, $ 2,658,000 $ 2,680,000
The following table sets forth an allocation of the allowance for loan losses by loan category: At June 30, 1999 Commercial $ 952,000 Residential Real Estate 174,000 Consumer 733,000 Unallocated 799,000 ---------- Total $2,658,000
Non-Performing Loans The following discussion relates to the Bank's non-performing loans which consist of those on a non-accrual basis and accruing loans which are past due ninety days or more. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection effort, that the borrower's financial condition is such that the collection of interest is doubtful. The Company views these loans as non-accrual, but considers the principal to be substantially collectible because the loans are protected by adequate collateral or other resources. Interest on these loans is recognized only when received. The following table shows the balance of non-performing loans for each of the periods indicated. Non performing assets (non accruing loans and loans past due over 90 days) were 1.16% of total loans at June 30, 1999 compared to 1.3% at June 30, 1998. The decrease in this ratio is the result of a $302,000 or 10.6% decrease in non performing loans to $2,532,000 over the one year period ending June 30, 1998. The ratio of the allowance for loan losses to non performing assets was 104.97% at June 30, 1999 compared to 94.6% at June 30, 1998. Non accruing loans at June 30, 1999 of $941,000 decreased from June 30, 1998 level of $1,816,000. This $875,000 decrease was primarily the result of the charge off of a commercial loan. At the present time, management is of the opinion that these loans present a minimal amount of exposure to the Bank. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and expected to be restored to a current status in the near future. As of June 30, 1999, loans past due 90 days or more and still accruing interest were $1,591,000 compared to $1,018,000 at June 30, 1998. The $573,000 increase in loans past due 90 days from June 30, 1998 to June 30, 1998 was the result of increases in mortgage and commercial loans past due 90 days or more. NON-PERFORMING LOANS June 30, December 31, June 30, 1999 1998 1998 Non-accrual loans on a cash basis $ 941,000 $1,245,000 $1,816,000 Non-accrual loans as a percentage of total loans 0.43% 0.59% 0.89% Accruing loans past due 90 days or more $1,591,000 $1,021,000 $1,018,000 Accruing loans past due 90 days or more as a percentage of total loans 0.73% 0.48% 0.47% Other Real Estate Owned from Foreclosed Property $ 593,000 $ 636,000 $ 238,000 Allowance for loan losses to nonperforming loans 104.97% 118.80% 94.57% Nonperforming assets to total loans 1.16% 1.07% 1.31% Allowance for loan losses to total loans 1.22% 1.27% 1.24%
There are no significant loans classified for regulatory purposes that have not been included in the above table of non-performing loans. The Company has no significant loans that qualify as "Troubled Debt Restructuring" as defined by the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 15 "Accounting for Debtors and Creditors for Troubled Debt Restructuring" at June 30, 1999. Year 2000 The Company has adopted a Year 2000 policy to address the "Year 2000" issue concerning the inability of certain information systems and automated equipment to properly recognize and process dates containing the Year 2000 and beyond. If not corrected, these systems and equipment could produce inaccurate or unpredictable results commencing on January 1, 2000. The Company, similar to most financial services providers, is particularly vulnerable to the potential impact of the Year 2000 issue due to the nature of financial information. Potential impacts to the Company may arise from software, computer hardware, and other equipment both within the Company's direct control and outside of the Company's ownership, yet with which the Company electronically or operationally interfaces. In order to address the Year 2000 issue, the Company has developed and implemented a five phase compliance plan divided into the following major components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation. The Company completed all five phases of the plan for all of its mission-critical systems. The Company has identified its mission-critical systems as those that affect the Company's ability to process banking transactions and its general accounting systems. Such systems include deposit, loan and trust accounting, check and deposit processing and branch teller equipment. The Company purchases most of its computer software from major outside providers of bank software. A significant component of the Year 2000 plan was to install the Year 2000 compliant software provided by these vendors and also to test these supplied system. The Company's major software providers have informed the Company that, based on tests they have conducted, they believe their respective systems to be Year 2000 compliant. In addition, the Company has conducted its own tests on these systems provided by vendors. The Company completed testing and implementation of all mission-critical system in June, 1999. The Company has reviewed the impact of Year 2000 on other equipment and systems such as heating, air conditioning, telecommunications, electric service, vaults, photocopiers, personal computers, printers and other equipment where necessary. Some of this equipment, such as personal computers, has been replaced. Other items such as vaults, heating, air conditioning, photocopiers and printers have been tested and found "not date sensitive". The Company's providers of telecommunications and electric service have been contacted. These providers have indicated they do not expect any interruption of service in the Year 2000. Other important segments of the Year 2000 plan are to identify those suppliers and customers whose possible lack of Year 2000 preparedness might expose the Company to financial loss. Included in this process was communications to all the Company's customers and identification of loan and deposit customers whose failure to address the Year 2000 Issue might impact their banking relationship. As a result of this communication, the Company has identified those customers who may be affected by the Year 2000. Risk factors have been assigned to these customers. The Company does not anticipate any significant loss as a result of these risks. The Company has initiated communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company has also assessed the amount of currency the Bank will require at year-end as a result of expected increased customer demand. The Company has made arrangements with the Federal Reserve Bank to obtain any additional currency required. The Company has developed contingency plans to address any or all systems that, despite all testing, still do not operate correctly in the Year 2000. The contingency plans provide for manual and personal computer based systems to process checks, deposits and loan transactions. The Company will increase its inventories of the various required supplies, such as new account and loan forms, deposit withdrawal forms and other pre-printed forms, available at the Company's Main Office and branch offices. Alternative communications systems have been established and alternative power sources are being investigated. These plans have been finalized and tested during the first half of 1999 except the plans with respect to the alternative power source. The Company has purchased an electric generator for its Operations Center, which will be installed in October. At this time, the Company cannot estimate the cost, if any, that might be required to implement such contingency plans. During the second quarter of 1999, the Company spent $68,000 on Year 2000 compliance matters. During the first half of 1999, the Company spent $98,000 on Year 2000. As of June 30, 1999, $949,000 has been spent on this project. These expenses are comprised of the replacement of branch teller and new account systems for $645,000, replacement of personal computers for $231,000, replacement of mortgage lending software for $19,000, replacement of ATMs for $28,000, customer communication $5,000, and enhancements to banking and trust systems of $20,000. Additional expenses expected in 1999 include $80,000 for an alternative electric power system, $25,000 for branch new account systems, $15,000 for check processing software and $50,000 for other banking systems. The expenses related to Year 2000 are financed by the general revenues of the Company and are included in the Company's other operating expenses in the Company's financial statement. The Company anticipates that its total Year 2000 project cost will not exceed $1,250,000. This estimated project cost is based upon currently available information. The aforementioned Year 2000 project cost estimate also may change as the Company progresses in its Year 2000 program and obtains additional information and conducts further testing. At this time, no significant projects have been delayed as a result of the Company's Year 2000 effort. Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams. The Federal banking agencies have highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The Federal banking agencies have been conducting Year 2000 compliance examinations. The failure to implement an adequate Year 2000 program can be identified as an unsafe and unsound banking practice. The Company and the Bank are subject to regulation and supervision by the Federal Reserve Bank and the Comptroller of the Currency which regularly conducts reviews of the safety and soundness of the Company's operations, including the Company's progress in becoming Year 2000 compliant. The regulatory agencies have established examination procedures which contain three categories of ratings: "Satisfactory", "Needs Improvement" and "Unsatisfactory". Institutions that receive a Year 2000 rating of Unsatisfactory may be subject to formal enforcement action, supervisory agreements, cease and desist orders, civil money penalties, or the appointment of a conservator. In addition, Federal banking agencies will be taking into account Year 2000 compliance programs when reviewing applications and may deny an application based on Year 2000 related issues. Failure by the Company to adequately prepare for Year 2000 issues could negatively impact the Company's banking operations, including the imposition of restrictions upon its operations by the Comptroller of the Currency. Despite the Company's activities in regards to the Year 2000 Issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Company's business, financial condition, results of operations, and business prospects. There is also no guarantee that the hardware, software and systems of third parties such as utility companies, other banks, computer services and supply companies, the Federal Reserve Bank, other Federal agencies and other vendors who provide services and supplies to the Company will be free of unfavorable Year 2000 issues. The failure of such third parties could have a material adverse impact upon the Company. ITEM 3. Quantitative and Qualitative Discussion About Market Risk As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest will ultimately impact both the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since most of the Company's interest-bearing assets and liabilities are located at the Bank, the majority of the Company's interest rate risk is at the Bank level. As a result, most interest rate risk management procedures are performed at the Bank level (see discussion on "Interest Rate Sensitivity"). The Company and the Bank operate as a community banking institution primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a result of its location and nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Bank makes real estate loans primarily in the counties adjacent to its operations and thus is subject to risks associated with those local economies. The Bank holds a concentration of residential real estate loans (34.8% of total loans) and commercial loans supported by real estate (21.3% of total loans) in its loan portfolio. These loans are subject to interest and economic risks. The Bank also originates residential real estate loans for sale in the secondary market. Such loans are identified as "Mortgage Loans Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate risk (see discussion on "Assets and Liabilities"). The Company does not own any trading assets and does not have any hedging transactions in place such as interest rate swaps. FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS (Dollars in Thousands) (Unaudited) Six Months Ended, June 30, 1999 1998 Int Avg Int Avg Avg Inc/ Yield/ Avg Inc/ Yield/ Bal Exp Rate Bal Exp Rate ASSETS: INTEREST-EARNING ASSETS Int-Bearing Deposits with Banks $ 4,185 $ 100 4.78% $ 1,733 $ 56 6.46% Federal Funds Sold 785 18 4.59 917 25 5.46 Investment Securities Taxable 95,769 2,988 6.24 78,048 2,439 6.26 Non-Taxable (1) 33,049 1,182 7.15 22,824 849 7.44 Net Loans Held for Sale 2,455 53 4.32 1,801 24 2.66 Loans (1) (2) 211,599 8,792 8.31 221,038 9,647 8.72 Reserve for Loan Losses 2,723 -- -- (2,713) -- -- --------- ----- -------- ----- Net Loans 208,876 8,792 8.42 218,325 9,647 8.84 --------- ----- -------- ----- Total Interest-Earning Assets 345,119 13,133 7.61 323,648 13,040 8.06 Non-Interest Earning Assets 27,366 -- -- 24,645 -- -- --------- ----- -------- ----- TOTAL ASSETS, INT INCOME $ 372,485 13,133 7.05 $348,293 13,040 7.48 --------- ----- -------- ----- LIABILITIES INTEREST-BEARING LIABILITIES Interest-Bearing Deposits Demand Deposits $ 50,576 271 1.07 $ 48,165 277 1.16 Money Market Deposits 13,785 188 2.73 14,274 200 2.80 Savings & Club Deposits 63,160 690 2.19 61,435 673 2.20 CD's over $100,000 4,631 91 3.93 4,795 91 3.80 All Other Time Deposits 134,744 3,551 5.27 123,308 3,438 5.58 --------- ----- -------- ----- Total Int-Bearing Deposits 266,896 4,791 3.59 251,977 4,679 3.72 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 5,903 88 2.98 6,048 113 3.74 Short-Term Borrowings 1,398 34 4.86 1,132 32 5.66 Long-Term Borrowings 20,000 559 5.59 18,227 567 6.22 --------- ----- -------- ----- Total Int-Bearing Liabilities 294,197 5,472 3.72 277,384 5,391 3.88 NON-INTEREST-BEARING LIABILITIES Non-Interest-Bearing Deposits 40,213 -- -- 33,130 -- -- Other Liabilities 7,196 -- -- 7,179 -- -- --------- ----- -------- ----- TOTAL LIABILITIES 341,606 5,472 3.20 317,693 5,391 3.40 SHAREHOLDERS' EQUITY 30,879 -- -- 30,600 -- -- --------- ----- -------- ----- TOTAL LIABILITIES AND EQUITY $ 372,485 5,472 2.94 $348,293 5,391 3.10 NET INTEREST INCOME $7,661 $7,649 ----- ----- Net Interest Spread 4.11 4.18 Effect of Interest-Free Sources Used to Fund Earnings Assets 0.33 0.54 Net Interest Margin 4.44% 4.72% ---- ----
The net interest margin of 4.44% for the six month period ended June 30, 1999, decreased from the 4.72% net interest margin for the first six months of 1998. The yield on interest earning assets was 7.61% during the first six months of 1999 as compared to 8.06% in 1998. The average interest rate paid on interest bearing deposits and other borrowings was 3.72% for the first six months of 1999 as compared to 3.88% in 1998. Interest rate sensitivity is a measure of the extent to which net interest income would change due to changes in the level of interest rates. The objective of interest rate sensitivity management is to reduce a company's vulnerability to future interest rate fluctuations and to enhance consistent growth of net interest income Rate sensitivity arises from the difference between the volumes of assets which are rate-sensitive as compared to the volumes of liabilities which are rate-sensitive. The mismatch of assets and liabilities in a specific time frame is referred to as interest sensitivity gap. Generally, in an environment of rising interest rates, a negative gap will decrease net interest income, and in an environment of falling interest rates, a negative gap will increase net interest income. Assets and liabilities are allocated to a specific time period based on their scheduled repricing date or on an historical basis. At June 30, 1999, assets of $161,016,000 (41.8% of total assets) were subject to interest rate changes within one year. Liabilities subject to rate change within one year were $175,277,000. A negative one-year gap position of $14,261,000 existed as of June 30, 1999. The ratio of rate-sensitive assets to rate-sensitive liabilities for the one-year time frame was 91.9%. The "Interest Sensitivity Analysis" in the following table presents a sensitivity gap analysis of the Company's assets and liabilities at June 30, 1999. Interest Sensitivity Analysis (Dollars in Thousands) as of June 30, 1999 0-90 91-180 181-365 1-5 Over Days Days Days Years 5 years Total Interest-Bearing Deposits with Banks $ 5,054 $ --- $ --- $ --- $ --- $ 5,054 Federal Funds Sold 2,000 --- --- --- --- 2,000 Inv Securities 15,608 16,387 20,055 67,553 12,454 132,057 Loans Held-for-Sale 1,480 --- --- --- --- 1,480 Loans 48,421 13,939 24,660 78,211 50,100 215,331 Other Assets 13,412 --- --- --- 15,058 28,470 ------- -------- -------- ------- -------- -------- TOTAL ASSETS $85,975 $30,326 $ 44,715 $145,764 $ 77,612 $384,392 ------- -------- -------- ------- -------- -------- Non-Interest-Bearing Deposits (1) $ --- $ --- $ --- $ --- $ 41,889 $ 41,889 Int-Bearing Deposits 80,889 21,275 50,962 61,709 64,748 279,583 Securities Sold Under Agreements to Repurchase 9,151 --- --- --- --- 9,151 Long-Term Debt 13,000 --- --- 7,000 --- 20,000 Other --- --- --- --- 4,780 4,780 Capital --- --- --- --- 28,989 28,989 ------- -------- -------- ------- -------- -------- TOTAL LIABILITIES AND CAPITAL $103,040 $21,275 $ 50,962 $68,709 $140,406 $384,392 ------- -------- -------- ------- -------- -------- Net Interest Sensitivity Gap $(17,065) $ 9,051 $ (6,247) $77,055 $(62,794) $ --- Cumulative Int Sensitivity Gap $(17,065) $(8,014)$(14,261) $62,794 $ --- $ --- Cumulative Gap RSA/RSL 83.44% 93.55% 91.86% 125.74% 100.0%
(1) Historically, non-interest-bearing deposits reflect insignificant changes in deposit trends and, therefore, the Company classifies these deposits over five years. PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders On May 13, 1999, the Company held its annual meeting of shareholders. At the annual meeting, the shareholders elected Robert J. Bergren and Richard Stevens, III as Class 3 Directors of the Company to serve for a term of four years and until their successors are duly elected and qualified. The following is a tabulation of the vote for these directors. Votes Withheld For Authority --------------- -------------- Robert J. Bergren 1,371,136 27,473 Richard Stevens, III 1,371,261 27,348 The other directors whose terms of office as a director continued after the meeting are S. Eric Beattie, Gordon B. Mowrer, Daniel B. Mulholland, Robert C. Nagel, Charles J. Peischl, and Maria Z. Thulin. ITEM 5. Other Information Pursuant to the provision of the Company's By-Laws, the Board of Directors authorized an increase in the size of the Board of Directors of both the Company and the Bank to ten members on June 17, 1999. The Board of Directors appointed Mr. Christian F. Martin, IV, Chairman and Chief Executive Officer of The Martin Guitar Company and Mr. John H. Ruhle, Jr., President and Chairman of Reeb Millwork Corporation as directors of both the Company and the Bank. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.20 Severance Agreement dated March 1, 1999 by and between the Board and Robert McGovern 27.1 Financial Data Schedule (b) Reports on Form 8K No reports on Form 8K were filed for the quarter during which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST COLONIAL GROUP, INC. DATE: August 13, 1999 BY: /S/ S. ERIC BEATTIE -------------------------- -------------------- S. ERIC BEATTIE PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE: August 13, 1999 BY: /S/ REID L. HEEREN ------------------------- ------------------- REID L. HEEREN VICE PRESIDENT (PRINCIPAL FINANCIAL OFFICER) EX-10 2 SEVERANCE AGREEMENT SEVERANCE AGREEMENT Agreement made this 1st day of March 1999, by and between Nazareth National Bank and Trust Company, a banking association organized under the laws of the United States ("Bank") and Robert M. McGovern, Jr., an individual ("Employee"). BACKGROUND Employee is currently employed by the Bank in the position of Executive Vice President and Senior Trust Officer. In consideration of Employee's past, present and future services to the Bank, the Bank desires to provide for the payment of certain compensation and other benefits to Employee upon the occurrence of certain events, all as more fully set forth below. In consideration of the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Term. This Agreement shall continue for a period beginning on the day hereof and ending on the earliest of the following dates (the "Term"): (a) the date Employee dies or becomes permanently disabled (i.e., upon his failure to render services of the character which he had previously rendered to the Bank, because of his physical or mental illness or other incapacity beyond his control for a continuous period of six months or for shorter periods aggregating six months in any twelve month period); (b) termination of Employee's employment with the Bank for cause (as hereinafter defined); (c) mutual agreement of the Bank and Employee; (d) subject to Section 2 hereof, termination by Employee of Employee's employment with the Bank by resignation or otherwise; or (e) December 31, 2000. In the event the Employee's employment with the Bank is terminated during the Term other than as set forth in Section 2 hereof, the Employee shall have no rights or benefits under this Agreement, but shall be entitled to any other rights or benefits to which he or she might otherwise be entitled to. For purposes of this Agreement, the term "cause" shall mean (i) conviction of Employee for any felony, fraud or embezzlement or (ii) Employee failing or refusing to comply with the written policies or directives of the Bank's Board of Directors or the Employee being guilty of misconduct in connection with the performance of his duties for the Bank and the Employee fails to cure such noncompliance or misconduct within twenty days after receiving written notice from the Bank's Board of Directors specifying such non-compliance or misconduct. 2. Termination. If during the Term hereof, the Employee's employment with the Bank is terminated as set forth below, the Bank will pay to Employee the amount set forth in Section 3 hereof and Employee shall be entitled to the benefits set forth in Section 4 hereof: (a) the Bank terminates Employee's employment with the Bank without cause; or (b) the Employee terminates Employee's employment with the Bank due to the fact that the nature and scope of Employee's duties and authority or his responsibilities with the Bank or the surviving or acquiring person are materially reduced to a level below that which he enjoys on the date hereof, his then current base annual salary is materially reduced to a level below that which he enjoys on the date hereof, the fringe benefits which the Bank provides Employee on the date hereof are materially reduced, Employee's position or title with the Bank or the surviving or acquiring person is materially reduced from his current position or title with the Bank, or without Employee's consent, Employee's principal place of employment with the Bank is changed to a location greater than eighty miles from his current principal place of employment with the Bank, provided, however, that for any termination by Employee under this clause (b) the Employee shall have first given Bank ten (10) days written notice of his intention to termination his employment pursuant to this clause (ii), specifying the reason(s) for such termination, and provided further, that the Bank shall not have cured or remedied the reason(s) specified in such notice prior to the expiration of ten (10) days after receipt of such written notice. 3. Termination Payments to Employee. Commencing not later than 30 days after the date Employee's employment with the Bank is terminated pursuant to Section 2 hereof (the "Termination Date") and subject to Employee's compliance with Section 8 hereof, the Bank shall pay compensation to Employee for a one year period following the Termination Date (the "Compensation Period") at a per annum rate equal to 100% of Employee's "base annual salary" on the Termination Date. For purposes of this Agreement, the term "base annual salary" shall mean the Employee's annual compensation rate on the Termination Date exclusive of cash bonuses and payments under the Bank's Annual Incentive Bonus Plan. The Bank agrees that it will make the payments due under this Section 3 on the first day of each month following the Termination Date in an amount equal to 1/12 of 100% of Employee's base annual salary on the Termination Date. Such payments to Employee shall be reduced each month by the sum of the following: (a) by the amount of any pension or annuity benefits Employee receives under any Defined Benefit Pension Plan maintained by the Bank as the same shall be amended from time to time, computed as if Employee had retired at age 65 (regardless of when he actually retired) and had elected the single life annuity benefit (regardless of the benefit he actually elected), and (b) in the event Employee commences employment within the Compensation Period, by the amount of base annual salary to which he is then entitled by virtue of his new employment. The intent of this paragraph is that the sum of payments made under this Section 3 in any year, when added to payments received under the Bank's Defined Benefit Pension Plan and base annual salary received by virtue of other employment, will not exceed the Employee's base annual salary on the Termination Date. The Employee covenants and agrees that upon the termination of the Employee's employment with the Bank, the Employee shall use his best efforts to secure new employment. 4. Other Benefits. In addition to the compensation set forth in Section 3 hereof, Employee shall be entitled to the following benefits from the Bank: (a) for a period of one year following the Termination Date, reimbursement for all reasonable expenses incurred by Employee in connection with the search for new employment, including, without limitation, those of a placement agency or service; provided, however, in no event shall the Bank be obligated to reimburse Employee hereunder in excess of 1/3 of his base annual salary on the Termination Date. (b) for a period of one year following the Termination Date, reimbursement for all reasonable relocation expenses incurred by Employee in connection with securing new employment; provided, however, in no event shall the Bank be obligated to reimburse Employee hereunder in excess of 1/3 of his base annual salary on the Termination Date. (c) for a period of one year following the Termination Date, Employee shall be entitled to participate in the following programs of the Bank: (i) All medical, hospitalization and life insurance benefits shall be continued for the Compensation Period except that should subsequent employment be accepted during the Compensation Period, continuation of any medical, hospitalization and life insurance benefits will be offset by coverages provided through the Employee's subsequent employer. (ii) If permitted under the terms thereof, Employee will remain a participant under the Bank's Defined Benefit Pension Plan, however, benefits will be actuarially reduced based upon the number of years remaining until Employee's normal retirement date had he remained an employee of the Bank. 5. Withholding. The Bank may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 6. Source of Payment. All payments provided under this Agreement shall be paid in cash from the general funds of the Bank. No special or separate fund shall be required to be established by the Bank and the Employee shall have no right, title or interest whatsoever in or to any investment which the Bank may make to aid the Bank in meeting its obligations hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Bank and Employee or any other person. 7. (a) Nonassignability. Neither this Agreement nor any right or interest hereunder shall be assignable by Employee or his legal representatives without the Bank's prior written consent. (b) Attachment. Except as required by law, the right to receive payments under this Agreement shall not be subject of anticipation, sale, encumbrance, charge, levy, or similar process or assignment by operation of law. 8. Confidentiality and Non-Competition. All payments to Employee under this Agreement shall be subject to Employee's compliance with the provisions of this Section 8. If Employee fails to comply with such provisions, his right to any future payments under this Agreement shall terminate and the Bank's obligations under this Agreement to make such payments and provide such benefits shall cease. (a) Employee covenants and agrees that he will not, during the term of his employment and at any time thereafter, except with the express prior written consent of the Bank or pursuant to the lawful order of any judicial or administrative agency of government, directly or indirectly, disclose, communicate or divulge to any person, or use for the benefit of any person, any knowledge or information with respect to the conduct or details of the Bank's business which he, acting reasonably, believes or should believe to be of a confidential nature and the disclosure of which not to be in the Bank's interest. (b) Employee covenants and agrees that he will not, during the term of his employment and for a period of one year thereafter, except with the express prior written consent of the Bank, directly or indirectly, whether as employee, employer, owner, partner, consultant, agent, director, officer, shareholder or in any other capacity, engage in or assist any person to engage in any act or action which he, acting reasonably, believes or should believe would be harmful or inimical to the interests of the Bank. (c) Employee covenants and agrees that he will not, during the term of his employment and for a period of one year thereafter, except with the express prior written consent of the Bank, in any capacity (including, but not limited to, owner, partner, shareholder, consultant, agent, employee, employer, officer, director or otherwise), directly or indirectly, for his own account or for the benefit of any person, engage or participate in or otherwise be connected with any commercial bank which has its principal office in either Northampton or Lehigh Counties, Pennsylvania or Warren County, New Jersey except that the foregoing shall not prohibit Employee from owning as a shareholder less than 1% of the outstanding stock of an issuer whose stock is publicly traded. (d) The parties agree that any breach by Employee of any of the covenants or agreements contained in this Section 8 will result in irreparable injury to the Bank for which money damages could not adequately compensate the Bank and therefore, in the event of any such breach, the Bank shall be entitled (in addition to any other rights and remedies which it may have at law or in equity) to have an injunction issued by any competent court enjoining and restraining Employee and/or any other person involved therein from continuing such breach. The existence of any claim or cause of action which Employee may have against the Bank or any other person (other than a claim for the Bank's breach of this Agreement for failure to make payments hereunder) shall not constitute a defense or bar to the enforcement of such covenants. In the event of an alleged breach by Employee of any of the covenants or agreements contained in this Section 8, the Bank shall continue any and all of the payments due Employee under this Agreement until such time as a court shall enter a final and unappealable order finding such a breach; provided, however, that the foregoing shall not preclude a court from ordering Employee to repay such payments made to him for the period after the breach is determined to have occurred or from ordering that payments hereunder be permanently terminated in the event of a material and willful breach. (e) If any portion of the covenants or agreements contained in this Section 8, or the application thereof, is construed to be invalid or unenforceable, the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions to the fullest extent possible. If any covenant or agreement in this Section 8 is held unenforceable because of the area covered, the duration thereof, or the scope thereof, then the court making such determination shall have the power to reduce the area and/or duration and/or limit the scope thereof, and the covenant or agreement shall then be enforceable in its reduced form. (f) For purposes of this Section 8, the term "the Bank" shall include the Bank, any successor to the Bank under Section 9 hereof, and all present and future direct and indirect subsidiaries and affiliates of the Bank. 9. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which may acquire, directly or indirectly, by merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Bank, and shall otherwise inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. Nothing in the Agreement shall preclude the Bank from consolidating or merging into or with or transferring all or substantially all of its assets to another person. In that event, such other person shall assume this Agreement and all obligations of the Bank hereunder. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Bank" as used herein, shall mean such other person and this Agreement shall continue in full force and effect. 10. Waivers Not to be Continued. Any waiver by a party of any breach of this Agreement by another party shall not be construed as a continuing waiver or as a consent to any subsequent breach by the other party. 11. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other address as either party may designate by like notice: If to Employee, to: Mr. Robert M. McGovern, Jr. 2804 Liberty Street Allentown, Pennsylvania 18104 If to the Bank, to: Nazareth National Bank and Trust Company 76 South Main Street Nazareth, Pennsylvania 18064 Attn: Board of Directors and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice. 12. Applicable Law~ Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the Commonwealth of Pennsylvania with respect to contracts executed in and to be wholly performed therein. Bank and Employee consent to the exclusive jurisdiction of the Court of Common Pleas, Northampton County, Commonwealth of Pennsylvania and the United States District Court for the Eastern District of Pennsylvania in any and all actions arising hereunder and irrevocably consent to service of process as set forth in Section 11 hereof. 13. General Provisions. (a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior agreements between the parties. No amendment, waiver or termination of any of the provisions hereof shall be effective unless in writing and signed by the party against whom it is sought to be enforced. Any written amendment, waiver or termination hereof executed by the Bank and Employee shall be binding upon them and upon all other persons, without the necessity of securing the consent of any other person, and no person shall be deemed to be a third party beneficiary under this Agreement. (b) This Agreement shall not limit or infringe upon the right of the Bank to terminate the employment of Employee at any time for any reason, nor upon the right of Employee to terminate his employment with the Bank. (c) The term "person" as used in this Agreement means a natural person, joint venture, corporation, sole proprietorship, trust, estate, partnership, cooperative, association, non-profit organization or any other legally cognizable entity. (d) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same Agreement. (e) No failure on the part of any party hereto to exercise and no delay in exercising any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other rights, power or remedy. (f) The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof. (g) Nothing contained herein shall be construed to require the Bank to violate applicable law, including, but not limited to, applicable banking laws and regulations, and all obligations of the Bank under this Agreement shall be deemed to be qualified accordingly. ATTEST: NAZARETH NATIONAL BANK AND TRUST COMPANY By: /S/ Michelle L. Frable BY: /S/ S. Eric Beattie Michelle L. Frable, Secretary S. Eric Beattie, President Witness: /S/ Susan M. Kresge /S/ Robert M. McGovern, Jr. ROBERT M. McGOVERN, JR.(SEAL) EX-27 3 FDS --
9 0000714719 First Colonial Group 1,000 6-Mos Dec-31-1999 Jun-30-1999 13,412 5,054 2,000 0 114,939 17,118 16,974 217,989 2,658 384,392 321,472 9,151 4,780 20,000 0 0 9,201 19,788 384,392 8,828 3,768 118 12,714 4,792 5,473 7,241 250 561 7,175 2,205 1,710 0 0 1,710 0.96 0.95 4.44 941 1,591 0 0 2,691 322 39 2,658 1,859 0 799
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