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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for (fee required) for the fiscal year ended
December 31, 1998.
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number 0-11526
FIRST COLONIAL GROUP, INC.
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(Name of Registrant as Specified in its charter)
Pennsylvania 23-2228154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
76 South Main Street, Nazareth, Pennsylvania 18064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-746-7300
Securities registered pursuant to Section 12
(b) of the Exchange Act:
None
Securities registered pursuant to Section 12
(g) of the Exchange Act:
Common Stock, $5.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $35,476,135. (1)
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 24, 1999 was 1,745,725.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1999 Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.
Other documents incorporated by reference are listed in the Exhibit Index.
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by executive officers, directors and shareholders
owning in excess of 10% of the registrant's Common Stock, multiplied by the last
sale price for the registrant's Common Stock on March 24, 1999. Includes an
aggregate of 146,373 shares, with an aggregate market value of $3,476,359, held
by the Trust Department of Nazareth National Bank & Trust Company in Trust for
persons other than executive officers, directors and 10% shareholders of the
registrant. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
PART I
Item 1. Description of Business
Forward Looking Information
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues and other
statements as to management's beliefs, expectations or opinions. Such forward
looking statement are subject to risks and uncertainties and may be affected by
various factors which may cause actual results to differ materially from those
in the forward looking statements including, without limitation, the effect of
economic conditions and related uncertainties, the effect of interest rates on
the Company and the Bank, Federal and statement government regulation,
competition, and the time, expense and unanticipated problems in addressing the
Year 2000 issue. These and other risks, uncertainties and other factors are
discussed elsewhere in this Annual Report on Form 10-K.
Investment Considerations
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one particular
factor to affect the Company's results of operations. However, a downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.
Effect of Interest Rates on the Bank and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1998 total interest earning assets
maturing or repricing within one year was less than total interest bearing
liabilities maturing or repricing during the same time period by $31,238,000,
representing a negative cumulative one year gap of 82%. If interest rates rise,
the Company could experience a decrease in net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U. S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 7, Management's
Discussion of Financial Condition and Results of Operations".
Federal and State Government Regulations. The operations of the Company and
the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
Accounting Standards. The operations of the Company and the Bank are
affected by accounting standards issued by the Financial Accounting Standards
Board ("FASB") which the Company is required to adopt. The adoption of such
standards can have the effect of reducing the Company's earnings and capital.
Information on current FASB standards that affect the Company can be found in
the Notes to Consolidated Financial Statements contained under the caption,
"Item 8, Financial Statements and Supplementary Data".
Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make. In addition, many of the Bank's competitors have
higher legal lending limits than does the Bank. Particularly intense competition
exists for sources of funds including savings and retail time deposits and for
loans, deposits and other services that the Bank offers.
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses through a charge to earnings resulting in reduced profitability.
Dividends. While the Board of Directors presently intends to follow a
policy of paying cash dividends, the dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends will
be paid in the future. See the information contained under the caption in "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters".
Market for Common Stock. While the Company's common stock is listed on the
Nasdaq Stock Market, there is no assurance that an active trading market for the
Company's common stock will exist at a particular time. See the information
contained under the caption in "Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters".
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Company's Articles of the
Incorporation are on file with the SEC and Pennsylvania Department of State.
Year 2000 Compliance. The Company has adopted a "Year 2000 Policy" and
conducted a comprehensive review of its computer systems and operations to
identify the areas that could be affected by the Year 2000 issue. The issue with
respect to Year 2000 is whether systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause complete
system failures. The Company's estimates of the costs that incurred and costs to
be incurred to prepare for Year 2000 compliance will not exceed $1,100,000;
however, there can be no assurance that the 2000 year problem will not have an
adverse effect on the financial condition and results of operations of the
Company. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" in "Item 7. Management's Discussion of
Financial Condition and Results of Operations".
Stock Not an Insured Deposit. Investments in the shares of the Company's
common stock are not deposits insured against loss by the FDIC or any other
entity.
Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of
Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities
Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal
doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from
recovering from the Company based upon material misrepresentations or omissions
contained in the Company's disclosure documents to the extent that such
documents contained sufficient cautionary statements to apprise investors of the
risks of an investment in the Company's securities. The foregoing investment
considerations may have the effect of bringing this document, as well as other
Company disclosure documents, within the purview of the "Bespeaks Caution
Doctrine".
General
First Colonial Group, Inc. (the "Company) is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). The Company was
incorporated on December 30, 1982 for the purpose of acquiring Nazareth National
Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate
within a bank holding company structure. The Company became an active bank
holding company on November 25, 1983 when it acquired the Bank. The Bank is a
wholly-owned subsidiary of the Company. In July, 1986, the Company established
another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a
Delaware business corporation formed for the purpose of investing in various
types of securities.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and banking-related services. The Bank has its
principal banking office as well as three branch offices in Nazareth,
Pennsylvania. It also presently has two branch offices in Bethlehem,
Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in
Brodheadsville, Pennsylvania, one branch in Stroudsburg, Pennsylvania, one
branch in East Stroudsburg, Pennsylvania and one branch in Allentown,
Pennsylvania. The Bank has nineteen automated teller machines (ATMs), one at
each branch office (except the Main Street Nazareth branch), four free-standing
drive-up machines at the Northampton Crossings Shopping Center, Easton,
Pennsylvania and free-standing machines at its operation center, The First
Colonial Building in the Bethlehem Business Park, Hanover Township,
Pennsylvania, at St. Luke's Hospital, Fountain Hill, Pennsylvania and at a
hardware store in Nazareth, Pennsylvania.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in distributions of the assets or earnings of the
Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations relating to federal funds purchased and certain other borrowings, as
well as deposit liabilities.
The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.
As of December 31, 1998 the Company, on a consolidated basis, had total
assets of $358,496,000, total deposits of $294,549,000, and total shareholders'
equity of $31,717,000.
Nazareth National Bank and Trust Company
History and Business
The Bank was incorporated under the laws of the United States of America as
a national bank in 1897 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Northampton County, Pennsylvania. The Bank is a member of the Federal Reserve
System.
As of December 31, 1998, the Bank had total assets of $354,785,000, total
deposits of $294,818,000 and total shareholders' equity of $27,158,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.
The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at 76 South Main Street,
Nazareth, Pennsylvania, also provides services to its customers through its
branch network of thirteen full service banks, which includes drive-in
facilities at most locations, ATMs at each branch office (except the Main Street
Nazareth branch) and bank-by-mail services. Nine of the Bank's full service
offices are located in Northampton County, Pennsylvania. Three offices are
located in Monroe County, Pennsylvania. One office is located in Lehigh County,
Pennsylvania. The Bank also has free standing ATMs located in its Operations
Center, the First Colonial Building in the Bethlehem Business Park, Hanover
Township, Pennsylvania, in the lobby of St. Luke's Hospital in the Borough of
Fountain Hill, Pennsylvania, in a hardware store in Nazareth, Pennsylvania, and
four free-standing drive-up ATM's at Northampton Crossings Shopping Center,
Lower Nazareth Township, Easton, Pennsylvania.
The Bank's services include accepting time, demand and savings deposits,
including NOW accounts (Flex Checking), regular savings accounts, money market
accounts, fixed rate certificates of deposit and club accounts, including the
Vacation Club, the College Club(R) and the Christmas Club. The Bank offers
Mastercard(R) and VISA(R), as well as a Constant Cash account (a pre-approved
line of credit activated by writing checks against a checking account) and the
First Colonial Club(R) and Quality Checking(R) (deposit package programs which
provide checking accounts with other services including credit card protection,
discount travel, shopping services and other related financial services). Its
services also include making secured and unsecured commercial and consumer
loans, financing commercial transactions either directly or through regional
industrial development corporations, making construction and mortgage loans, and
renting safe deposit facilities. Additional services include making residential
mortgage loans (both fixed rate and variable rate), home equity lines of credit,
loans to purchase manufactured homes, revolving credit loans with overdraft
checking protection, small business loans, student loans, recreational vehicles
and new and used car and truck loans
The Bank's business loans include seasonal credit and collateral loans and
term loans as well as accounts receivable and inventory financing. Most of the
Bank's commercial customers are small to medium size businesses operating in
Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in
the Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas of
Pennsylvania.
Trust services provided by the Bank include services as executor and
trustee under wills and deeds, as guardian, custodian and as trustee and agent
for pension, profit sharing and other employee benefit trusts as well as various
investment, pension and estate planning services. Trust services also include
service as transfer agent and registrar of stock and bond issues and as escrow
agent. In addition, the Bank provides discount brokerage through an outside
supplier of this service, and various tax services.
The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
Competition
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of Northampton and Lehigh Counties (known as the
Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the
Nazareth, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas. In order to
keep pace with its competition and the continuing growth of these areas, the
Bank may, in the future, consider establishing additional new branches, although
no assurance can be given that any new branches will be opened or if opened,
that they will be successful. The Bank competes with local commercial banks as
well as other commercial banks with branches in the Bank's market area. The Bank
considers its major competition to be Ambassador/Lafayette Bank, headquartered
in Easton, Pennsylvania, with a branch in Nazareth; First Union Bank,
headquartered in Charlotte, North Carolina, with branch offices in Easton and
Bethlehem, Pennsylvania; Summit Bancorporation, headquartered in Princeton, New
Jersey, with branches in Bethlehem, Easton and Allentown, Pennsylvania; and PNC
Bank headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth,
Brodheadsville, Easton and Allentown, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares in money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.
Management believes that the Bank is generally competitive with all
competing financial institutions in its service areas with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
First C. G. Company, Inc.
In July 1986, the Company established a wholly-owned subsidiary, First C.
G. Company, Inc., a Delaware corporation, for the purpose of investing in
various types of securities. As of December 31, 1998, First C. G. Company, Inc.
had total assets of $4,273,000, of which $2,810,000 was invested in common
stocks and $435,000 in a loan to the Bank's ESOP and most of the remaining
assets were in other tax-exempt and taxable securities and interest-bearing bank
deposits. The total shareholders' equity at December 31, 1998 was $3,909,000.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The regulatory framework is intended primarily for the
protection of depositors, other customers and the federal deposit insurance
funds and not for the protection of shareholders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of the Company and the Bank.
The Company
The Company is registered as a "bank holding company" under the Bank
Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore,
subject to supervision and regulation by the Board of Governors of the Federal
Reserve Board (the "Federal Reserve Board"). The Company is also regulated by
the Pennsylvania Department of Banking.
Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank or acquire direct or indirect ownership or control of any voting
shares of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank. See "Interstate Banking".
The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company engaged in non-banking activities unless
the Federal Reserve Board, by order or regulation, has found such activities to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making such determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding company
can reasonably be expected to produce benefits to the public which outweigh
possible adverse effects. The Federal Reserve Board has by regulation determined
that certain activities including, among others, operating a mortgage, finance,
credit card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
nonoperating basis; and, certain stock brokerage and investment advisory
services, are closely related to banking within the meaning of the Holding
Company Act.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank currently is rated "satisfactory" under the Community Reinvestment Act.
Under the policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is deemed to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee
that any "undercapitalized" (as such term is defined in the statute) insured
depository institution subsidiary will comply with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Banking Code
of 1965, the Pennsylvania Department of Banking has the authority to examine the
books, records and affairs of any Pennsylvania bank holding company or to
require any documentation deemed necessary to ensure compliance with the Banking
code.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.
The Bank
The Bank, as a national bank, is subject to The National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by, the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
regulatory approval.
As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.
The Bank is subject to certain limitations on the amount of cash dividends
it can pay. See "Note S - Regulatory Matters" in the Notes to Consolidated
Financial Statements which appears elsewhere herein.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiary.
Substantially all of the deposits of the Bank are insured up to applicable
limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit
insurance assessments to maintain the BIF. The insurance assessments are based
upon a matrix that takes into account a bank's capital level and supervisory
rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it
charged on bank deposits insured by the BIF to the statutory minimum of $2,000
annually for "well-capitalized" banks. On September 30, 1996, the Deposit
Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA
reduced the amount of FDIC insurance premiums for savings association deposits
acquired by banks to the same levels assessed for deposits insured by BIF. DIFA
further provides for assessments to be imposed on all insured depository
institutions with respect to deposits to pay for the cost of Financing
Corporation bonds; however, banks are assessed for this purpose at only this
purpose at only one-fifth the rate of the assessment on savings associations
until December 31, 1999. As a result of these changes, the deposit insurance
assessment for banks and for thrifts has been nearly equalized and will be
identical for comparably rated institutions after January 1, 2000, at which time
banks will share equally in the FICO assessment and the BIF and SAIF funds will
be merged.
Capital Regulation
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial condition and results of
operation. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets
(leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies and other banking organizations are expected to maintain leveral
capital ratios 100 to 200 basis points above the minimum depending on their
financial condition. Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, as of December 31, 1998 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.
Capital Ratios
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 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%
CAPITAL RATIOS
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Purposes Provisions
(Dollars in Thousands)
At December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $31,271 16.03% $15,609 8.00% --- ---
Bank $27,200 13.97% $15,576 8.00% $19,470 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company, (Consolidated) $28,829 14.78% $ 7,804 4.00 --- ---
Bank $24,163 12.41% $ 7,788 4.00% $11,682 6.00%
Tier 1 Capital
(To Average Assets,
Leverage)
Company, (Consolidated) $28,829 8.33% $13,551 4.00% --- ---
Bank $24,163 7.06% $13,416 4.00% $16,770 5.00%
Interstate Banking
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after September 9, 1995. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. Pennsylvania has enacted a law opting in
immediately to interstate merger and interstate branching transactions.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de novo" branches. Pennsylvania has
enacted such a law.
National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market
operations in United States Government securities, setting the discount rate and
changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
Fair Value of Financial Instruments
The Financial Accounting Standards Board ("FASB") issued statement of
financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires all entities to disclose the estimated
fair value of its assets and liabilities considered to be financial instruments.
Financial instruments consist primarily of securities, loans and deposits. The
Company has provided these disclosures as of December 31, 1998 and 1997 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 8, Financial Statements and Supplementary Data".
Accounting for Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1998 and 1997. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements. The classification of securities can be found in Note B of the Notes
to Consolidated Financial Statements contained under the caption, "Item 7,
Financial Statements".
Employees
As of December 31, 1998 the Company had approximately 204 employees, of
whom 44 were part-time. The Company considers its relationship with its
employees to be good.
Additional Information
The tables listed below, which are set forth on pages 17 through 23 herein,
contain unaudited information relevant to the business of the Company and the
Bank:
Investment Securities
Investment Securities Yield by Maturity
Loan Portfolio by Type
Loan Maturities and Interest Sensitivity
Allocation of the Allowance for Possible Loan Losses
Percentage of Total Loans in each Category to Total Loans
Average Deposit Balances by Major Classification
Maturities of Certificates of Deposit of $100,000 or more
INVESTMENT SECURITIES
Summary of Available-for-Sale and Held-to-Maturity Securities at December
31,
1998
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 7,026 $ 7,125
U. S. Government Agency 24,482 24,441
State and Political Subdivisions 27,860 28,466
Mortgage-Backed Securities 33,322 33,141
Other Debt Securities --- ---
Equity Securities 4,900 5,216
------- -------
Total $97,590 $98,389
1997
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 9,008 $ 9,066
U. S. Government Agency 14,512 14,556
State and Political Subdivisions 16,865 17,330
Mortgage-Backed Securities 26,791 26,812
Other Debt Securities --- ---
Equity Securities 3,878 5,260
------- -------
Total $71,054 $73,024
1996
Available-for-Sale Securities Carrying Amount
Amortized at Fair
Cost Value
U. S. Treasury $ 7,020 $ 7,054
U. S. Government Agency 14,272 14,161
State and Political Subdivisions 11,808 11,864
Mortgage-Backed Securities 19,131 19,145
Other Debt Securities 796 800
Equity Securities 3,226 3,755
------- -------
Total $56,253 $56,779
1998
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
U. S. Treasury $ --- $ ---
U. S. Government Agency 4,992 5,026
State and Political Subdivisions 6,770 6,943
Mortgage-Backed Securities 5,961 5,951
------- -------
Total $17,723 $17,920
1997
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
U. S. Treasury $ --- $ ---
U. S. Government Agency 6,008 6,051
State and Political Subdivisions 3,169 3,233
Mortgage-Backed Securities 8,579 8,662
------- -------
Total $17,756 $17,946
1996
Held-to-Maturity Securities Carrying Amount at Approximate
Amortized Fair
Cost Value
U. S. Treasury $ 999 $ 1,003
U. S. Government Agency 10,229 10,243
State and Political Subdivisions 3,217 3,261
Mortgage-Backed Securities 6,554 6,617
------- -------
Total $20,999 $21,124
INVESTMENT SECURITIES YIELD BY MATURITY
The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1998 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 34%. All average yields
were calculated on the book value of the related securities. Equity and other
securities having no stated maturity have been included in the "After 10 Years"
category.
Available-for-Sale and Held-to-Maturity Investment Securities Yield
by Maturity, December 31, 1998
AVAILABLE-FOR-SALE
AT FAIR VALUE After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Amount Yield Amount Yield Amount Yield
U. S. Treasury $ 4,043 5.85 % $ 3,082 6.27 % $ -- -- %
U. S. Government Agency -- -- -- -- 12,510 6.55
Mortgage-backed Securities 17 6.76 2,150 5.96 2,162 6.38
State and Political
Subdivisions --- -- 2,010 7.29 7,584 7.12
Equity Securities -- -- -- -- -- --
----- ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 4,060 5.85 % $ 7,242 6.46 % $22,256 6.73%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.59 3.20 9.48
==== ==== ====
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
U. S. Treasury $ -- -- % $ 7,125 6.03 %
U. S. Government Agency 11,931 6.73 24,441 6.64
Mortgage-backed Securities 28,812 6.16 33,141 6.16
State and Political
Subdivisions 18,872 7.50 28,466 7.38
Equity Securities 5,216 3.56 5,216 3.56
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $64,831 6.45 % $98,389 6.49 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 19.21 14.88
===== =====
HELD-TO-MATURITY
AT AMORTIZED COST After 1 But After 5 But
(Dollars in Thousands, Within One Year Within 5 Years Within 10 Years
Unaudited) Amount Yield Amount Yield Amount Yield
U. S. Government Agency $ -- -- % $ -- -- % $ 4,992 7.00 %
Mortgage-backed Securities -- -- 756 6.12 1,137 6.79
State and Political
Subdivisions 250 6.44 760 7.33 2,139 7.00
------ ---- ------- ---- ------- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 250 6.44 % $ 1,516 6.73 % $ 8,268 6.97%
===== ==== ======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 0.05 3.79 8.31
==== ==== ====
AVAILABLE-FOR-SALE
AT FAIR VALUE
(Dollars in Thousands, After 10 Years Total
Unaudited) Amount Yield Amount Yield
U. S. Government Agency $ -- -- % $ 4,992 7.00 %
Mortgage-backed Securities 4,068 6.37 5,961 6.42
State and Political
Subdivisions 3,621 8.64 6,770 7.89
----- ---- ----- ----
TOTAL AVAILABLE-FOR-SALE
SECURITIES $ 7,689 7.44 % $17,723 7.15 %
======= ==== ======= ====
Average Of Avail-for-Sale
Securities in years 21.97 13.75
===== =====
LOAN PORTFOLIO BY TYPE
The loan portfolio by type is summarized in the following table for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
Loan Portfolio by Type
(Dollars in Thousands) For the Year Ended December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Real Estate - Residential $119,914 $138,539 $134,013 $122,293 $117,205
Real Estate - Construction 11,689 12,361 10,923 4,959 2,861
Real Estate - Commercial 29,587 34,579 39,421 35,316 35,673
Consumer/Installment 40,184 35,914 28,870 27,685 24,626
Commercial (non-Real Estate)
and Agricultural 10,900 9,086 8,715 5,403 7,503
State and Political Subdivisions 1,178 944 906 1,290 288
Other 10 20 28 13 18
-------------------------------------------------
TOTAL GROSS LOANS 213,462 231,443 222,876 196,959 188,174
Unearned Income (1,025) (1,856) (2,759) (3,829) (2,959)
-------------------------------------------------
Total Loans 212,437 229,587 220,117 193,130 185,215
Allowance for Possible
Loan Losses (2,691) (2,664) (2,532) (2,443) (2,187)
-------------------------------------------------
NET LOANS $209,746 $226,923 $217,585 $190,687 $183,028
=================================================
At December 31, 1998 there were no categories of loans exceeding 10% of
total loans which are not otherwise disclosed as the categories of loans listed
in the above table.
LOANS MATURITIES AND INTEREST SENSITIVITY
The maturity ranges of items in the loan portfolio (excluding residential
mortgages of 1 to 4 family residences and consumer loans) of the Bank and the
amount of loans with predetermined interest rates and floating interest rates
due after one year, as of December 31, 1998, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.
Loan Maturity and Interest Sensitivity
Due in Due in Due in
As of December 31, 1998 One Year One to Over
(Dollars in Thousands) or Less Five Years Five Years Total
- -------------------------------------------------------------------------------
Real Estate - Construction $ 988 $2,199 $8,502 $11,689
Real Estate - Commercial 1,377 6,850 21,360 29,587
Commercial (Non-Real Estate)
and Agricultural 1,260 4,775 4,865 10,900
------ ------ ------- -------
TOTAL $3,625 $13,824 $34,727 $52,176
====== ======= ======= =======
Loan Maturity After 1 Year With:
Predetermined Interest Rate $2,865 $6,384
Floating Interest Rate 10,959 28,343
------ ------
TOTAL $13,824 $34,727
======= =======
The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
As of December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial $1,350 $1,183 $663 $1,049 $1,142
Real Estate- Construction 4 6 7 3 69
Real Estate - Residential 128 191 198 184 143
Consumer/Installment 738 785 811 534 451
Unallocated 471 499 853 673 382
------ ------ ------ ------ ------
TOTAL $2,691 $2,664 $2,532 $2,443 $2,187
====== ====== ====== ====== ======
PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS
As of December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
Loan Categories (Dollars in Thousands)
Commercial 19.13 % 19.28 % 22.02 % 21.33 % 23.11 %
Real Estate - Construction 5.50 5.34 4.90 2.52 1.52
Real Estate - Residential 56.45 59.86 60.13 62.09 62.28
Consumer/Installment 18.92 15.52 12.95 14.06 13.09
----- ----- ----- ----- -----
TOTAL 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
====== ====== ====== ====== ======
The average balances of deposits for each of the years ended December 31,
1998, 1997 and 1996 are presented in the following table.
AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
For the Year Ended December 31,
1998 1997 1996
Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in Thousands)
Demand Deposits
Non-Interest Bearing $ 35,254 --- % $ 31,074 --- % $ 27,826 --- %
Interest Bearing 48,988 1.15 45,338 1.17 43,206 1.55
Money Market Deposits 14,366 2.81 14,380 2.81 16,297 2.82
Savings & Club Accounts 61,177 2.21 62,746 2.44 62,783 2.49
Certificates of Deposit
under $100,000 124,823 5.59 118,846 5.58 103,221 5.50
Certificates of Deposit
of $100,000 or more 4,700 3.72 5,014 4.19 5,167 4.84
------ ---- ------ ---- ------ ----
Total Deposits $289,308 $277,398 $258,500
======== ======== ========
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
At December 31,
(Dollars in Thousands) 1998 1997
-----------------------------------
Three Months or Less $821 $428
Over Three, Through Six Months 1,380 1,454
Over Six, Through Twelve Months 1,508 977
Over Twelve Months 1,017 1,499
-----------------------------------
TOTAL $4,726 $4,358
===================================
There were no brokered deposits at December 31, 1998 and 1997.
Item 2. Description of Property
The principal banking office of the Bank and the executive offices of the
Bank and the Company are located at 76 South Main Street in the Borough of
Nazareth, Northampton County, Pennsylvania, which building is owned by the Bank.
In addition, the Bank owns additional properties located at 29 South Broad
Street, Nazareth, Pennsylvania (Mortgage and Installment Loan Center); 553
Nazareth Drive, Nazareth, Pennsylvania (Branch Office); 33 S. Broad Street,
Nazareth (Branch Office), 2000 Sullivan Trail, Easton, Pennsylvania (Branch
Office), 3864 Adler Place, Bethlehem Business Park, Bethlehem, Pennsylvania
(First Colonial Building, Computer and Operations Center), Rt. 209
Brodheadsville, Pennsylvania (Branch Office), and 3856 Easton-Nazareth Highway
(Route 248), Lower Nazareth Township, Easton, Pennsylvania (free-standing,
drive-up ATM location).
The Bank also leases facilities for its branch office located at 44 East
Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania; its branch office located at 1125
N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located in the
Hall Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its
branch office located within Redner's Supermarket, Airport Road, Allentown,
Pennsylvania; and its branch office located within Redner's Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania;
and its branch office located within Wal-Mart's at 355 Lincoln Avenue, East
Stroudsburg, Pennsylvania.
Item 3. Legal Proceedings
From time-to-time, the Company and the Bank are partners to routine
litigation incidental to their business.
Neither the Company, the Bank nor any of their properties is subject to any
material legal proceedings, nor are any such proceedings known to be
contemplated by any governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.
Item 4.1: Executive Officers of the Registrant
The following table sets forth certain information, as of March 30, 1999,
concerning the executive officers of the Company and certain executive officers
of the Bank who are not also Directors. All executive officers are elected by
the respective Boards of Directors of the Company and the Bank and hold office
at the discretion of such Boards.
Positions Positions
Name/Age with the Company with the Bank
Reid L. Heeren 57 (a) Treasurer since January, Executive Vice President
1987; Vice President since and Chief Financial
April, 1985 Officer since August, 1997
Senior Vice President and
Chief Financial Officer
since January, 1987;
Cashier since
November, 1984
Tomas J. Bamberger 57 (b) None Executive Vice President
and Senior Loan Officer
since September, 1997
Arthur Williams 53 (c) None Executive Vice President,
Administration since
August, 1997; Senior Vice
President, Administration
since November, 1988.
Robert M. McGovern 60 (d) None Executive Vice President,
Senior Trust Officer
since February, 1999
(a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer
and Cashier of the Bank from January 1987 to August 1997 and Vice
President, Finance of the Bank from November, 1984 to January, 1987. Prior
to November, 1984, Mr. Heeren was employed by the American Bank and Trust
Company, headquartered in Reading, Pennsylvania, as Vice President for
Financial Management (September, 1982 to November, 1984) and was Vice
President, Community Banking, Chester County, Pennsylvania (March, 1982 to
September, 1982).
(b) Mr. Bamberger was previously Executive Vice President and Senior Loan
Officer of First Valley Bank/Summit Bank (PA) from February 1984 to
September 1997. Prior to that, he was Senior Vice President and Senior Loan
Officer of the First National Bank of Allentown from March 1982 to February
1984. Mr. Bamberger started his banking career in October 1967 at Girard
Bank in Philadelphia. He was a Vice President and Divisional Manager in
commercial lending when he left in February 1982.
(c) Mr. Williams was previously Senior Vice President, Administration of the
Bank from November, 1988 to August, 1997 and Vice President of the Bank,
serving as branch administrator with business development and commercial
lending duties, from April 1985 to November, 1988. Prior to April 1985, Mr.
Williams was a Vice President of United Penn Bank, serving as Regional
Administrator of its Northern Region (March 1980 to March 1985).
(d) Mr. McGovern was previously Vice President and Senior Trust Specialist of
First Union National Bank from April 1998 to February 1999. Prior to that,
Vice President/Trust of CoreStates Bank 1996 to 1998 and prior to that Vice
President/Trust of Meridian Bank 1985 to 1996. The Meridian period postions
progressed from Marketing Officer in 1985 to Assistant Vice President to
Vice President in 1996. Note: The changes from Meridian to CoreStates to
First Union were the result of mergers.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
First Colonial Group, Inc. common stock trades on the Nasdaq Stock Market under
the trading symbol FTCG. In newspaper listings, First Colonial Group, Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1998, there were 738 shareholders of record.
The declaration and payment of dividends is at the sole discretion of the Board
of Directors, and their amount depends upon the earnings, financial condition,
and capital needs of the Company and the Bank and certain other factors
including restrictions arising from Federal banking laws and regulations (see
"Note S- Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").
The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $29.125 in December 1998 and
$33.80 in December 1997. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of June 1998 and May 1997 (see "Note T -
Equity Transactions" in the "Notes to Consolidated Financial Statements"
contained in "Item 8, Financial Statements and Supplementary Data").
- -------------------------------------------------------------------------------
1997 Cash Dividends
High Low Declared
- -------------------------------------------------------------------------------
First Quarter $22.45 $20.18 $ 0.1633
Second Quarter 23.33 21.31 0.1633
Third Quarter 32.62 22.38 0.1714
Fourth Quarter 33.81 33.04 0.1714
-------
TOTAL $ 0.6694
- -------------------------------------------------------------------------------
1998
First Quarter $35.24 $32.62 $ 0.1810
Second Quarter 36.50 33.33 0.1810
Third Quarter 36.00 26.75 0.1900
Fourth Quarter 29.75 26.75 0.1900
-------
TOTAL $ 0.7419
- -------------------------------------------------------------------------------
The Company did not sell any of its equity securities during 1998 that were not
registered under the Securities Act.
Item 6. Selected Financial Data
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollars in Thousands, Percentage Change
except per share data) 1998 1997 1996 1998/97 1997/96
- --------------------------------------------------------------------------------
At Year-End
Assets $ 358,496 $ 346,738 $ 322,352 3.4 % 7.6%
Deposits 294,549 282,255 67,668 4.4 5.5
Loans 212,437 229,587 220,117 (7.5) 4.3
Shareholders' Equity 31,717 30,357 26,805 4.5 13.3
For the Year
Net Interest Income $ 14,496 $ 14,613 $ 13,557 (0.8)% 7.8%
Net Income 3,032 3,283 2,822 (7.6) 16.3
Per Share *
Basic Net Income $ 1.76 $ 1.92 $ 1.68 (0.8)% 14.8%
Diluted Net Income 1.75 1.92 1.68 (0.9) 14.8
Dividends Paid 0.74 0.67 0.61 10.4 9.4
Book Value 18.17 17.49 16.37 3.9 6.8
Financial Ratios
Return on average assets .86% .97% .92%
Return on average equity 9.79% 11.67% 11.16%
Average shareholders' equity
to average assets 8.78% 8.30% 8.24%
* Per share data have been restated to reflect the 5% stock dividends of June
1998, May 1997 and May 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following financial review and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of First Colonial Group, Inc. (the "Company") with a
primary focus on the analysis of operating results for the years ended December
31, 1998, 1997 and 1996. The Company's consolidated earnings are derived
primarily from the operations of Nazareth National Bank and Trust Company (the
"Bank") and First C. G. Company, Inc. ("First C. G."). The information below
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes thereto, and other detailed information
appearing elsewhere in this report. Additional financial information can be
found in the Company's Form 10-K report, a copy of which may be obtained upon
request. During the two most recent fiscal years, there have been no changes in
or disagreements with the Company's accountants on accounting and financial
disclosure. The information concerning share and per share data included in this
discussion has been restated to reflect the 5% stock dividends of June 1998, May
1997 and May 1996.
Forward Looking Statements
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements or estimates
concerning the effect of the "Year 2000" issues on the Company's systems and
software and the Company's plans with regard to "Year 2000" issues and other
statements as to management's beliefs, expectations or opinions. Such forward
looking statements are subject to risks and uncertainties and may be affected by
various factors which may cause actual results to differ materially from those
in the forward looking statements including, without limitation, the effect of
economic conditions and related uncertainties, the effect of interest rates on
the Company and the Bank, Federal and state government regulation, competition,
and the time, expense and unanticipated problems in addressing the Year 2000
issue. These and other risks, uncertainties and other factors are discussed in
this Annual Report or in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
Financial Performance Summary
In 1998, First Colonial Group recorded net income of $3,032,000. The 1998
net income is $251,000 or 7.6% lower than 1997 net income of $3,283,000. The
decrease was primarily the result of a provision expense of $1,000,000 to the
special reserve for possible losses resulting from specific pre-need funeral
trusts which the Bank had been directed to invest in a private placement
annuity. The Company's net income in 1998, exclusive of this special reserve,
would have been $3,692,000, an increase of 12.5% or $409,000 over net income in
1997. Net income in 1996 was $2,822,000.
The basic earnings per share were $1.76, $1.92 and $1.68 in 1998, 1997 and
1996, respectively. The diluted earnings per share were $1.75 in 1998, $1.92 in
1997 and $1.68 in 1996. Diluted earnings per share include the effect of common
stock equivalents such as options (see Note A.12 of the "Notes to Consolidated
Financial Statements"). The basic and diluted earnings per share, exclusive of
the special reserve in 1998, would have been $2.14.
The Company's return on average assets was .86% in 1998 as compared to .97%
in 1997 and .92% in 1996. The return on average equity was 9.79%, 11.67% and
11.16% in 1998, 1997 and 1996, respectively
The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 1998 were $358,496,000 as compared to $346,738,000 at
year end 1997. This is an increase of $11,758,000 or 3.4%. During 1998 total
deposits grew by 4.4% or $12,294,000 to a year-end total of $294,549,000. Total
deposits at December 31, 1997 were $282,255,000. Total loans amounted to
$212,437,000 and $229,587,000 at December 31, 1998 and 1997, respectively. The
loan decrease in 1998 was $17,150,000 or 7.5%. This decrease is attributed to
the sale of $42,880,000 of residential real estate loans during 1998.
The principal factors affecting earnings in 1998 were a $757,000 or 19.8%
increase in other income, including service charges, trust revenues and higher
net gains on the sales of securities and mortgages of $341,000, a decrease in
the provision for possible loan losses of $155,000 and a reduction in Federal
income taxes of $265,000. These earnings improvement factors were offset by a
decline in net interest income of $117,000 and higher operating expenses of
$1,311,000, including the provision for the special reserve of $1,000,000.
The 1997 earnings increase was the result of a $1,056,000 increase in net
interest income, an increase in other income of $1,181,000 and a $65,000
reduction in the provision for possible loan losses. Partially offsetting the
earnings increases were higher operating expenses of $1,681,000 and an increase
in Federal income taxes of $160,000.
- -------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in Thousands,
except per share data)
For the Year Ended
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF INCOME:
Interest Income $ 25,367 $ 25,444 $ 23,135 $ 21,896 $ 18,986
Interest Expense 10,871 10,831 9,578 9,252 7,152
--------- --------- --------- --------- ---------
Net Interest Income 14,496 14,613 13,557 12,644 11,834
Provision for Possible
Loan Losses 450 605 670 1,798 420
Gains (Losses) on the
Sale of Mortgage Loans 398 178 (30) 22 37
Other Income, Excluding
Securities and Loan
Sale Gains 3,460 3,044 2,364 2,230 1,896
Securities Gains, Net 722 601 308 22 97
Other Expense 14,563 13,252 11,571 11,204 10,084
--------- --------- --------- --------- ---------
Income Before Income Taxes
and Cumulative Effect of
Accounting Method Change 4,063 4,579 3,958 1,916 3,360
Applicable Income Taxes 1,031 1,296 1,136 515 1,018
--------- --------- --------- --------- ---------
Net Income $ 3,032 $ 3,283 $ 2,822 $ 1,401 $2,342
--------- --------- --------- --------- ---------
Cash Dividends Paid $ 1,275 $ 1,139 $ 1,011 $ 972 $ 936
Cash Dividends Paid Per Share 0.74 0.67 0.61 0.59 0.57
Dividends Paid to Net Income 42.05% 34.69% 35.82% 69.38% 39.97%
PER SHARE DATA:
Basic Income $ 1.76 $ 1.92 $ 1.68 $ 0.85 $ 1.44
Diluted Net Income 1.75 1.92 1.68 0.85 1.44
Basic Average Common
Shares Outstanding 1,719,096 1,701,658 1,680,927 1,658,399 1,633,462
Dilutive Average Common
Shares Outstanding 1,726,569 1,706,729 1,683,770 1,658,792 1,633,462
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $358,496 $346,738 $322,352 $298,514 $284,553
Loans (Net of
Unearned Discount) 212,437 229,587 220,117 193,130 185,215
Mortgage Loans
Held-for-Sale 603 759 721 1,006 69
Deposits 294,549 282,255 267,668 254,102 247,532
Securities Sold Under
Agreements to Repurchase 5,094 8,804 3,795 6,096 9,027
Debt (Short-Term
and Long-Term) 20,000 18,390 18,512 7,643 1,612
Shareholders' Equity 31,717 30,357 26,805 24,767 22,400
Book Value Per Share 18.17 17.49 16.37 16.04 14.66
SELECTED CONSOLIDATED RATIOS:
Net Income To:
Average Total Assets 0.86% 0.97% 0.92% 0.48% 0.85%
Average Shareholders' Equity 9.79% 11.67% 11.16% 5.98% 10.51%
Average Shareholders'
Equity to Average Assets 8.78% 8.30% 8.24% 8.00% 8.10%
- -------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
1998 1997 1996
Int Avg Int Avg Int Avg
Avg Inc/ Yield/ Avg Inc/ Yield/ Avg Inc/ Yield/
Bal Exp Rate Bal Exp Rate Bal Exp Rate
ASSETS
INT-EARNING
ASSETS
Int-Bearing
Balances
with Banks $ 3,060 $ 176 5.75% $1,252 $ 71 5.67% $ 1,313 $ 78 5.96%
Fed Funds
Sold 641 34 5.30 18 1 5.56 16 2 5.43
Inv Sec
Taxable 80,939 5,002 6.18 69,876 4,592 6.57 67,241 4,386 6.42
Non-Tax(1) 26,155 1,923 7.35 16,653 1,268 7.62 12,318 935 7.59
Loans(1(2) 219,357 18,910 8.62 229,205 19,972 8.71 206,378 18,083 8.76
Allow for
Loan Losses (2,710) --- --- (2,614) --- --- (2,500) --- ---
-------- ------ -------- ------ -------- ------
Net Loans 216,647 18,910 8.73 226,591 19,972 8.81 203,878 18,083 8.87
-------- ------ -------- ------ -------- ------
Total Int-
Earn
Assets 327,442 26,045 7.95 314,390 25,904 8.24 284,766 23,484 8.25
Non-Int
Earn Assets 25,419 --- --- 24,391 --- --- 22,305 --- ---
-------- ------ -------- ------ -------- ------
TOTAL ASSETS,
INTEREST
INCOME $352,861 26,045 7.38 $338,781 25,904 7.65 $307,071 23,484 7.65
-------- ------ -------- ------ -------- ------
LIABILITIES
INTEREST-BEARING
LIABILITIES
Int-Bearing
Deposits
Demand
Deposits $ 48,988 562 1.15 $ 45,338 532 1.17 $ 43,206 670 1.55
Money
Market
Deposits 14,366 404 2.81 14,380 404 2.81 16,297 460 2.82
Savings &
Club
Deposits 61,177 1,350 2.21 62,746 1,530 2.44 62,783 1,566 2.49
CD's over
$100,000 4,700 175 3.72 5,014 210 4.19 5,167 250 4.84
All Other
Time Dep 124,823 6,975 5.59 118,846 6,636 5.58 103,221 5,675 5.50
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Deposits 254,054 9,466 3.73 246,324 9,312 3.78 230,674 8,622 3.74
Securities
Sold Under
Agreements
to Repurchase 5,821 210 3.61 6,459 240 3.72 4,680 149 3.18
Other Short-
Term
Borrowings 974 55 5.65 2,325 132 5.68 3,560 198 5.56
Long-Term
Debt 18,631 1,140 6.12 18,422 1,147 6.23 9,319 609 6.54
-------- ------ -------- ------ -------- ------
Total Int-
Bearing
Liabilities 279,480 10,871 3.89 273,530 10,831 3.96 248,233 9,578 3.86
NON-INTEREST
BEARING
LIABILITIES
Non-Int-
Bearing
Deposits 35,254 --- --- 31,074 --- --- 27,826 --- ---
Other Liab 7,157 --- --- 6,054 --- --- 5,724 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB 321,891 10,871 3.38 310,658 10,831 3.49 281,783 9,578 3.40
SHAREHOLDERS'
EQUITY 30,970 --- --- 28,123 --- --- 25,288 --- ---
-------- ------ -------- ------ -------- ------
TOTAL LIAB &
SHAREHOLDERS'
EQUITY,
INTEREST
EXPENSE $352,861 10,871 3.08 $338,781 10,831 3.20 $307,071 9,578 3.12
NET INTEREST
INCOME $ 15,174 $15,073 $13,906
-------- ------- -------
Net Interest
Spread (3) 4.06 4.28 4.39
Effect of
Int-Free
Sources
Used to
Fund Earnings
Assets 0.57 0.51 0.49
NET INTEREST
MARGIN (4) 4.63% 4.79% 4.88%
---- ---- ----
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis. The taxable equivalent adjustments included above are
$678,000, $460,000 and $349,000 for the years 1998, 1997and 1996, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.
(2) Loan fees of $358,000, $377,000 and $303,000 for the years 1998, 1997 and
1996, respectively, are included in interest income. Average loan balances
include non-accruing loans and average loans held-for-sale of $3,726,000,
$1,781,000 and $2,212,000 for 1998, 1997 and 1996, respectively.
(3) Net interest spread is the arithmetic difference between yield on
interest-earning assets and the rate paid on interest-bearing liabilities.
(4) Net interest margin is computed by dividing net interest income by averaging
interest-earning assets.
Average Balances
The "Consolidated Comparative Statement Analysis" table sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
are no state or local taxes on income applicable to the Company. For further
information relating to the effective income tax rate of the Company, see Note J
of the "Notes to Consolidated Financial Statements". Interest income on loans
includes loan fees of $358,000, $377,000 and $303,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Net Interest Income
Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets, and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. Therefore, changes in this category can be
essential to the overall net income of the Company. The net interest income, on
a fully taxable equivalent basis, amounted to $15,174,000 for 1998, an increase
of $101,000 over $15,073,000 in 1997. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 1998 was attributable to higher
net interest income from changes in volume of $348,000 reduced in part by a
reduction in rates of $247,000. The volume-related change resulted primarily
from increases in investment securities partially offset by decreased average
balances for loans (see discussions on "Loan Portfolio" and "Mortgage Loans
Held-for-Sale") and an increase in time deposits. The rate-related change was
primarily the result of the decrease of interest earned on loans and investments
being greater than the decrease on interest paid on deposits and debt.
Net interest income, on a fully taxable equivalent basis, in 1997 increased
$1,167,000 over the 1996 figure of $13,906,000. This increase was the result of
growth in loans, investments, deposits and long-term debt. Also affecting 1997
was the increase in interest rates earned on deposits exceeding the interest
rates paid on interest-bearing liabilities.
The net interest margin, a measure of net interest income performance, is
determined by dividing net interest income by total interest-earning assets. The
net interest margin was 4.63% for 1998, 4.79% for 1997 and 4.88% for 1996. The
decrease in 1998 was the result of a decrease in the average rate earned on
loans and investments being greater than the decrease in the average interest
rate paid on interest-bearing deposits and debt. The result was a decline in the
interest spread, the difference of interest earned on assets less the interest
paid on deposits and debt. The interest spread was 4.06%, 4.28% and 4.39% for
1998, 1997 and 1996, respectively. The impact on earnings by the reduction in
the interest spread was diminished in part by the $4,180,000 increase in 1998 of
non-interest-bearing deposits.
The following table sets forth a "Rate/Volume Analysis", which segregates
in detail the major factors that contributed to the changes in net interest
income for the years ended December 31, 1998 and 1997, as compared to the
respective previous periods, into amounts attributable to both rate and volume
variances. In calculating the variances, the changes were first segregated into
(1) changes in volume (change in volume times the old rate), (2) changes in
rates (change in rate times the old volume) and (3) changes in rate/volume
(changes in rate times the change in volume). The changes in rate/volume have
been allocated in their entirety to the change in rates. The interest income
included in the "Rate/Volume Analysis" table has been adjusted to a fully
taxable equivalent amount using the Federal statutory tax rate of 34%.
Non-accruing loans have been used in the daily average balances to determine
changes in interest income due to volume. Loan fees included in the interest
income calculation are not material.
RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)
Increase (Decrease) in Year Ended December 31,
1998 to 1997 1997 to 1996
Change Due to: Change Due To:
TOTAL RATE VOLUME TOTAL RATE VOLUME
----- --- ----- ----- ----- -----
Interest Income
Interest-Bearing Balances
With Banks $ 105 $ 2 $ 103 $ (7) $ (3) $ (4)
Federal Funds Sold 33 (2) 35 (1) (1) ---
Investment Securities 1,065 (328) 1,393 539 73 466
Loans (1,062) (146) (916) 1,889 (140) 2,029
----- --- ----- ----- ----- -----
Total Interest Income 141 (474) 615 2,420 (71) 2,491
----- --- ----- ----- ----- -----
Interest Expense
Demand Deposits,
Savings & Clubs (150) (192) 42 (231) (235) 4
Time Deposits 304 (9) 313 921 75 846
Securities Sold Under
Agreements to Repurchase (30) (6) (24) 91 34 57
Short-Term Borrowings (77) --- (77) (66) 3 (69)
Long-Term Borrowings (7) (20) 13 538 (57) 595
----- --- ----- ----- ----- -----
Total Interest Expense 40 (227) 267 1,253 180 1,433
----- --- ----- ----- ----- -----
Increase in Net
Interest Income $ 101 $(247) $ 348 $1,167 $ 109 $1,058
Service Charges and Other Income
Service charge income on deposit accounts amounted to $1,594,000 in 1998
compared to $1,349,000 in 1997 and $1,083,000 in 1996. In 1998, the service
charges on deposit accounts increased by $245,000 or 18.2% over 1997 and the
1997 increase over 1996 was $266,000 or 24.5%. The increases in 1998 and 1997
were primarily the result of increases in the number of deposit accounts and
increases in some deposit-related fees, including the Bank's debit card.
In 1998, the Company had a gain on the sale of mortgage loans of $398,000
as compared to a gain of $178,000 in 1997. In 1996, there was a loss of $30,000
(see discussion on "Mortgage Loans Held-for-Sale").
Other operating income was $641,000 in 1998, as compared to $645,000 in
1997. Other operating income for 1996 was $585,000.
Investment Management and Trust Division
Revenue from the Bank's Investment Management and Trust Division operations
was $1,225,000 in 1998, representing an increase of $175,000 or 16.7% over
revenue of $1,050,000 in 1997. The Investment Management and Trust Division
revenue for 1997 increased by 50.9% or $354,000 over the 1996 revenue of
$696,000. Trust assets are held by the Bank for its customers in a fiduciary or
agency capacity, and thus, are not included in the financial statements of the
Company. The increase in 1998 and 1997 Trust revenue was the result of the
addition of new accounts and increased market values.
Other Expenses
Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $6,385,000, increased by
$352,000 or 5.8% in 1998 compared to $6,033,000 in 1997. These expenses in 1997
amounted to an increase of $418,000 or 7.4% over the $5,615,000 reported in
1996. The increase in 1998 was primarily due to salary increases of
approximately 4% and the addition of staff in the Lending Division. Salary
expense in 1997 increased due to normal salary increases of approximately 4% and
the addition of the East Stroudsburg branch opened in January, 1997.
Occupancy and equipment expenses were $2,118,000 in 1998, which was $60,000
less than the 1997 amount of $2,178,000. The 1997 amount was $6,000 less than
the 1996 occupancy and equipment expense of $2,184,000. The decreases in 1998
and 1997 were achieved through the continued implementation of expense control
measures which offset the added expenses of a new teller system and Trust system
in 1998, and the new East Stroudsburg branch and the installation of check image
equipment added in 1997.
Other operating expenses (such as the provision for the special reserve,
advertising, publicity, litigation costs, deposit insurance premiums, data
processing fees, legal, accounting, supplies, postage and telephone) in 1998
were $6,060,000, compared to $5,041,000 in 1997 and $3,772,000 in 1996. The
increase of $1,019,000 or 20.2% in other operating expense during 1998 was
primarily due to the povision of $1,000,000 to the special reserve for Trust
operations and higher legal and loan collection costs. The increase in 1997 of
$1,269,000 or 33.6% was the result of higher legal and professional fees and
advertising expenses as a result of increased marketing programs. The Company's
advertising costs are expensed as incurred. Advertising costs were $597,000,
$524,000 and $299,000 for the years ended December 31, 1998, 1997 and 1996,
respectively (see Notes A.14 and I of the "Notes to Consolidated Financial
Statements").
Investment Securities
The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 1998 and 1997. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements (see Notes A.2 and B of the "Notes to Consolidated Financial
Statements").
Held-to-maturity securities totaled $17,723,000 at December 31, 1998 and
$17,756,000 at December 31, 1997. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$17,920,000 and $17,946,000 at December 31, 1998 and 1997, respectively.
The Company, at December 31, 1998 and 1997, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
Conducts (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps,
futures or options. The Company held adjustable rate mortgage-backed securities
issued by U. S. Government Agencies totaling $20,029,000 at December 31, 1998
($15,961,000 in available-for-sale and $4,068,000 in held-to-maturity) and
$27,426,000 at December 31, 1997 ($21,723,000 in available-for-sale and
$5,703,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and adjust annually.
The Company also held fixed rate mortgage-backed securities issued by U. S.
Government Agencies totaling $19,253,000 at December 31, 1998 ($17,360,000 in
available-for-sale and $1,893,000 in held-to-maturity) and $7,943,000 at
December 31, 1997 ($5,067,000 in available-for-sale and $2,876,000 in
held-to-maturity).
Securities Available-for-Sale
The Company had $98,389,000 of securities available-for-sale at December
31, 1998, as compared to $73,024,000 at December 31, 1997. At December 31, 1998,
the net unrealized gain on these securities was $527,000, net of the tax effect
of $272,000. There was a net unrealized gain of $1,300,000, net of the tax
effect of $670,000 on the available-for-sale securities at December 31, 1997.
The net unrealized gain or loss is included in shareholders' equity (see Notes
A.2 and B of the "Notes to Consolidated Financial Statements").
These securities are being held to meet the liquidity needs of the Company
and to provide flexibility to support earnings in changing interest rate
environments. The tax-free municipal securities in the available-for-sale
category will also be used to assist in managing the Company's Federal Tax
position. While management has the intent and the ability to hold
available-for-sale securities on a long-term basis or to maturity, they may sell
these securities under certain circumstances. Such occurrences could include,
but are not limited to, meeting current liquidity needs, adjusting maturities or
repricing periods to reduce interest rate risk, reducing Federal Income Tax
liability, improving current or future interest income, adjusting risk-based
capital position, changing portfolio concentrations, and providing funds for
increased loan demand or deposit withdrawals. Upon the sale of an
available-for-sale security, the actual gain or loss is included in income.
During 1998, $11,342,000 of securities available-for-sale were sold,
resulting in a total net gain of $722,000, which was recorded in income and
includes net gains on equity securities sold by First C. G. of $694,000. The
securities sold were primarily U. S. Treasury, U. S. Agency and mortgage-backed
bonds held by the Bank and equity securities held by First C. G. The sales by
the Bank were executed to provide liquidity and improve future interest income.
The sales of equity securities by First C. G. were made to recognize certain
gains and reposition the equity portfolio. Securities purchased by the Company
in 1998 totaled $76,280,000. Included in these purchases were $35,447,000 in U.
S. Agency fixed rate bonds, $21,856,000 in U. S. Agency mortgage-backed bonds,
$14,219,000 in municipal securities, $2,127,000 in public housing bonds,
$1,031,000 in U. S. Treasury bonds, and $1,600,000 in equity securities. The
securities sold in 1997 totaling $13,279,000 were primarily U. S. Treasury, U.
S. Agency, mortgage-backed and municipal bonds held by the Bank and equity
securities held by First C. G. The 1997 sales resulted in net gains of $601,000.
These gains include net gains of $560,000 on equity securities held by First C.
G. The sales were made to provide liquidity, improve future income and diversify
the equity portfolio. Security purchases in 1997 amounted to $46,283,000 which
were primarily U. S. Agency mortgage-backed bonds, U. S. Agency fixed rate
bonds, municipal securities and U. S. Treasury bonds. In 1996, a net gain on
security transactions of $308,000 was recorded on sales of $19,842,000.
Loan Portfolio
At December 31, 1998, total loans (net of unearned discounts of $1,025,000
in 1998 and $1,856,000 in 1997) of $212,437,000 were $17,150,000, or 7.5% less
than the 1997 amount of $229,587,000. The decline in loans in 1998 was primarily
the result of a decrease of $18,625,000 or 13.4% in residential real estate
loans, a decrease of $4,992,000 or 14.4% in commercial real estate loans and a
decrease of $672,000 or 5.4% in real estate construction loans partially offset
by a $4,270,000 or 11.9% increase in consumer loans and a $2,038,000 or 20.3%
increase in commercial and municipal loans. Loans Outstanding at December 31 by
Major Category are as follows:
- -------------------------------------------------------------------
Dollars in Thousands at 1998 1997
December 31,
- -------------------------------------------------------------------
Real Estate Residential $119,914 $138,539
Real Estate Construction 11,689 12,361
Real Estate Commercial 29,587 34,579
Consumer 40,184 35,914
Municipal 1,178 944
Commercial & Other 10,910 9,106
--------- --------
Total 213,462 231,443
Unearned Discount 1,025 1,856
----------------- ------------------
Net $212,437 $229,587
- -------------------------------------------------------------------
The decline in residential real estate loans was the result of management's
decision to sell $21,564,000 of these loans originated in the prior year to
reduce the Bank's interest rate risk and concentration in these types of loans
(see discussion on " Mortgage Loans Held-for-Sale").
The Company's primary geographic area for its lending activities includes
Monroe, Northampton and Lehigh counties, Pennsylvania.
Making loans to businesses and individuals entails risks to the Company,
including ascertaining cash flows, evaluating the credit history, assets and
liabilities of a potential borrower, and determining the value of the various
types of collateral pledged as security. Lending involves determining risks,
managing those risks and charging an appropriate interest rate to compensate for
taking such risks, and to cover the cost of funds (see previous discussion on
"Market Risk").
The loan to deposit ratio was 72.1% at December 31, 1998 and 81.3% at
December 31, 1997. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".
Mortgage Loans Held-for-Sale
In 1998, management continued a program of selling most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's interest rate risk and to provide funds to
support a higher level of loan originations.
The sales of residential real estate loans in the secondary market for 1998
amounted to $42,880,000. The amount of these loans originated in 1998 was
$21,316,000, with the remaining $21,564,000 being originated in prior years of
which $759,000 was identified as held-for-sale at December 31, 1997. The sale of
prior years loans in excess of those identified as held-for-sale was done to
restructure the loan portfolio, reducing interest rate risk and the level of
concentration in residential real estate loans. A net gain of $398,000 was
recorded on these sales. In addition, $603,000 of residential real estate loans
was identified as held-for-sale at December 31, 1998. All of these loans were
originated during 1998. An unrealized loss of $1,000 on these loans is included
in other operating expenses for 1998.
In 1997, the Company originated $10,754,000 of residential real estate
loans which were sold in the secondary market. In addition, during 1997,
$16,391,000 of these loans that were originated in prior years were sold. A net
gain of $178,000 was recognized on these sales in 1997. At December 31, 1997,
At December 31, 1997, $759,000 of residential real estate loans were identified
as held-for-sale. Included in other operating expenses in 1997 is an unrealized
loss of $13,000 on these loans. During 1996, the Company had net losses of
$30,000 on the sale of $19,509,000 of residential real estate loans. The other
operating expenses for 1996 include an unrealized loss of $10,000 on mortgage
loans held-for-sale of $721,000 at year-end 1996.
The Company intends to continue to originate residential real estate loans
in 1999 and to sell most of the fixed-rate loans in the secondary market. The
Company services all of its sold residential mortgage loans and plans to
continue this practice.
Non-Performing Loans
The following discussion relates to the Bank's non-performing loans which
consist of those on a non-accrual basis and accruing loans which are past due
ninety days or more.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. The Company views these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Interest on these loans is recognized
only when received. The table "Non-Accrual Loans" shows the balance and the
effect on interest income of non-accrual loans for each of the periods
indicated. There were $1,245,000 of loans on a non-accrual status at December
31, 1998. The increase in non-accrual loans during 1998 of $432,000 resulted
from the deterioration of certain residential real estate and consumer loans.
Management believes there is sufficient collateral to cover any possible losses
on these loans.
The Company does not have any significant loans that qualify as "Troubled
Debt Restructuring" as defined by SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructuring", at December 31, 1998 and 1997.
Non-Accrual Loans
- -------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Non-accrual loans on
a cash basis $ 1,245 $ 813 $ 1,440 $ 2,181 $ 1,724
Non-accrual loans
as a percentage
of total loans .59% .35% .65% 1.13% .93%
Interest which would
have been recorded
at original rate $ 144 $ 64 $ 210 $ 214 $ 168
Interest that was
reflected in income 23 111 40 44 --
Net impact on
interest income $ (121) $ 47 $ (170) $ (170) $ (168)
- -------------------------------------------------------------------------------
Set forth below are the amounts of loans outstanding as of the end of each
of the periods indicated that are 90 days and over past due and are on an
accrual basis and are not included in the table above. Management continues to
accrue interest on these loans since they are secured and in the process of
collection and are expected to be eventually paid in full.
Accruing Loans Past Due 90 Days or More
- --------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Accruing loans past due
90 days or more $ 1,021 $ 802 $ 986 $ 1,115 $ 1,069
Accruing loans past due
90 days or more
as a percentage
of total loans .48% .35% .45% .58% .58%
- --------------------------------------------------------------------------------
The Company measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, impairment may be measured based on a
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.
The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued in such loans and
no income is recognized until all recorded amounts of interest and principal are
recovered in full.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment at December 31, 1998 and 1997 are as
follows:
- ------------------------------------------------------------
(Dollars in Thousands)
at December 31, 1998 1997
- ------------------------------------------------------------
Principal amount of impaired loans $524 $523
Accrued interest --- ---
Deferred loan costs --- 1
------- -------
524 524
Less valuation allowance
at December 31, (303) (138)
-------- --------
$221 $386
- ------------------------------------------------------------
The activity in the allowance account for credit losses related to impaired
loans is as follows:
- -----------------------------------------------------------------
(Dollars in Thousands)
for the year ended 1998 1997
- -----------------------------------------------------------------
Valuation allowance at January 1, $138 $128
Provision for loan impairment 294 158
Direct charge-offs (129) (148)
Recoveries --- ---
------- -------
Valuation allowance at December 31, $303 $138
- -----------------------------------------------------------------
Total cash collected on impaired loans during 1998 was $506,000, of which
$483,000 was credited to the principal balance outstanding on such loans, and
$23,000 was recognized as interest income.
Total cash collected on impaired loans during 1997 was $768,000, of which
$657,000 was credited to the principal balance outstanding on such loans and
$111,000 was recognized as interest income. Interest that would have been
accrued on impaired loans was $144,000 and $64,000 in 1998 and 1997,
respectively. The valuation allowance for impaired loans of $303,000 at December
31, 1998 and $138,000 at December 31, 1997 is included in the "Allowance for
Possible Loan Losses" which amounts to $2,691,000 and $2,664,000 at December 31,
1998 and 1997, respectively.
Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated recorded as an asset on the
Company's books as the result of the foreclosure of certain non-performing real
estate loans.
OTHER REAL ESTATE OWNED
- -----------------------------------------------------------------
(Dollars in
Thousands)
at December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------
Other Real Estate $ 636 $ 284 $ 595 $ 364 $ 373
Owned
- -----------------------------------------------------------------
Allowance and Provision
for Possible Loan Losses
The allowance for possible loan losses constitutes the amount available to
absorb estimated losses within the loan portfolio. As of December 31, 1998, the
allowance for possible loan losses was $2,691,000 as compared to the December
31, 1997 amount of $2,664,000 and the December 31, 1996 amount of $2,532,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 1998 was 1.27%. This compares to 1.16% at the end
of 1997 and 1.15% at the end of 1996. The increase in the allowance for possible
loan losses of $27,000 was the result of management's review of loans
outstanding (see discussion on "Loan Portfolio") and non-performing loans (the
sum of non-accrual loans and accruing loans past due 90 days or more) of
$2,266,000 as of December 31, 1998 as compared to $1,615,000 as of December 31,
1997 (see tables on "Non-Accrual