<PAGE> 1
FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________to ______________
Commission file number 0-13312
THE FIRST JERMYN CORP.
(Exact name of small business registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2275242
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
645 Washington Ave; P.O. Box 39; Jermyn, Pennsylvania 18433-0039
(Address of principal executive offices) (Zip-Code)
Registrant's telephone number 717-876-6500
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $1.25 par value
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 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 checkmark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent year. $ 23,858,000
Based on the closing sales price of March 17, 1997, the aggregate market value
of the voting stock held by non-affiliates (which includes all common stock,
$1.25 par value other than shares beneficially owned by directors or officers)
of the registrant was $27,319,778.
The number of shares outstanding of the registrant's common stock, $1.25 par
value was 884,680 at March 15, 1997.
<PAGE> 2
FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the annual report to shareholders for the year ended December
31, 1996 are incorporated by reference into Part I, Part II, Part III, and Part
IV.
(2) Portions of the definitive annual meeting proxy statement to be filed,
pursuant to regulation 14A, within 120 days after December 31, 1996 are
incorporated by reference into Part I and Part III.
Transitional Small Business Disclosure Format. Yes . No X .
--- ---
<PAGE> 3
THE FIRST JERMYN CORP.
FORM 10-KSB
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Description of Business 1-4
ITEM 2. Description of Property 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to a Vote of Security Holders 5
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters 6
ITEM 6. Management's Discussion and Analysis or Plan of Operation 6
ITEM 7. Financial Statements 6
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 6
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16 (a) of the Exchange Act 7
ITEM 10. Executive Compensation 7
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 7
ITEM 12. Certain Relationships and Related Transactions 7
PART IV
ITEM 13. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
</TABLE>
<PAGE> 4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The registrant, The First Jermyn Corp. (Company), is a Pennsylvania
corporation organized on February 13, 1984. The Company is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended. The
Company conducts its principal activities through its bank subsidiary, The First
National Bank of Jermyn (the Bank), located in Lackawanna County, Pennsylvania.
On July 2, 1984, The First Jermyn Corp. Became an active bank holding
company when the Agreement and Plan of Reorganization by and among The First
Jermyn Corp., The First National Bank of Jermyn, and FNBJ National Bank, a
Pennsylvania banking corporation wholly-owned by The First Jermyn Corp., was
consummated. As a result of the consummation, The First National Bank of Jermyn
became a wholly-owned subsidiary of The First Jermyn Corp.
The Company's principal activities consist of owning and supervising
the Bank, which engages in full-service wholesale and retail banking business.
As of December 31, 1996, the Company's subsidiary employed approximately 116
persons on a full-time equivalent basis. Through the Bank, the Company derives
substantially all of its income from the furnishing of banking and banking
related services.
SUBSIDIARIES
The Bank (a Pennsylvania chartered commercial bank) was established in
1902. The operations of the Bank are conducted from four offices located in
Lackawanna County, Pennsylvania. The Bank's main office is located in Jermyn,
Pennsylvania. It has offices operating in the Keyser Oak and Minooka sections of
Scranton, Pennsylvania, Carbondale, Pennsylvania, Daleville, Pennsylvania and an
office in Jessup, Pennsylvania.
Through its branch system, the Bank provides various domestic lending
and depository services to fit both commercial and individual needs. Lending
services include commercial and individual real estate mortgage and construction
loans, secured and unsecured loans and lines of credit. Demand for the Bank's
loan products tends not to be affected by seasonality to a significant degree,
but is significantly impacted by the level and trend of market interest rates.
Deposit services include savings, clubs, money market, NOW, checking and
certificates of deposit accounts. 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 governmental entities. The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
The Company formed a subsidiary, First of Jermyn Realty Company, Inc.,
in May 1990. This subsidiary has been inactive since its inception.
COMPETITION
The Bank experiences stiff competition in all phases of its business
from other bank holding companies and commercial banks, savings and loan
institutions, credit unions, brokerage and insurance companies, and other
financial service providers. The Bank competes for loans and deposits in its
market area (which is concentrated in the primary trade areas of the branch
locations) with both Pennsylvania and out-of-state banks and other financial
service companies which have been given authority to compete within Pennsylvania
boundaries.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provision, it is qualified in its entirety by reference
to the particular statutory and regulatory provision. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company and the Bank.
<PAGE> 5
The Company
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Holding Company Act") and, is,
therefore, subject to supervision and examination by the Federal Reserve Board
under the Holding Company Act. The Company is subject to certain annual
reporting requirements regarding its business operations.
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 periodic reporting
requirements of the Securities and Exchange Commission.
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
Comptroller of the Currency of the United States (the "Comptroller") and is
required to furnish quarterly reports to the Comptroller. The approval of the
Comptroller is required for the establishment of additional branch offices by
any national bank, subject to applicable state law restrictions. Under present
applicable Pennsylvania law, effective March 1990, a federally chartered bank
(such as the Bank) may, with prior approval of the Comptroller, establish
branches generally within any county in the Commonwealth.
The Bank is a member of the FDIC and a member of 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, interest rates as
they relate to lending, and reserve requirements. These agencies are primarily
concerned with the safety and soundness of individual banks, but are also
involved with the general oversight of the activities of a bank directed toward
the determination that the bank is operating competitively and constructively,
in accordance with applicable regulations and statutes.
The operations of the Bank are also subject to numerous federal, state
and local laws and regulations which set forth specific restrictions and
procedure requirements with respect to the extension of credit, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
The Bank is subject to certain restrictions on loans and extensions of
credit to the Company, investment in the stock or securities of the Company, and
acceptance of the stock or securities of the Company as collateral for loans. As
a consequence of the extensive regulation of commercial banking activities in
the United States, the Bank's business is particularly susceptible to being
affected by federal and state legislation and regulation which may have the
effect of increasing the costs of doing business as well as limiting the
business activities of the Bank.
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). This Act substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. Additional discussion of
FDICIA's impact on capital requirements is contained in Management's Discussion
and Analysis, "Capital Adequacy" on page 3 of the Company's Annual Report to
Shareholders which is incorporated by reference.
In addition, FDICIA directs that each federal banking agency prescribe
standards of depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares ( if feasible) and such other standards as the agency
deems appropriate. To date, these regulations have not resulted in any material
cost to the Company or any significant changes to the Company's operations.
FDICIA also contains a variety of other provisions that affected the
operations of the Company, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC. To date, compliance with this regulation has not imposed material
costs on the Company.
<PAGE> 6
Prompt Corrective Action
FDICIA was signed into law on December 19, 1991. Regulations
implementing the prompt corrective action provision of FDICIA became effective
on December 19, 1992. In addition to the prompt corrective action requirements,
FDICIA includes significant changes to the legal and regulatory environment for
insured depository institutions, including reductions in insurance coverage for
certain kinds of deposits, increased supervision by the federal regulatory
agencies, increased reporting requirements for insured institutions, and new
regulations concerning internal controls, accounting, and operations. The prompt
corrective action regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions categorized
as "undercapitalized" or worse are subject to certain restriction, including the
requirement to file a capital plan with its primary federal regulator,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by its
primary federal regulator or by the FDIC, including requirements to raise
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized," it must generally be placed
in receivership or conservatorship within 90 days. To be considered "well
capitalized," an institution must generally have a leverage ratio of at least
5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%. An institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2% or less. The Bank
meets the definition of "well capitalized" at December 31, 1996.
<PAGE> 7
Interstate Banking
The Reglue-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted on September 29, 1994, permits bank
holding companies to acquire banks in any state beginning in 1995. Beginning in
1997, acquired banks in different states may be merged into a single bank, and
thereafter merged banks may establish and acquire additional branches anywhere
the acquiree could have branched. States may opt out of interstate branching
until June 1, 1997, but if so, their domestic institutions will also be
prohibited from branching interstate. States may also enact laws permitting
interstate merger transactions and interstate de novo branching before June 1,
1997. Limited branch purchases are still subject to state laws.
Bank management anticipates that the Interstate Banking Act may
increase competitive pressures in the Bank's market by permitting entry of
additional competitors.
Deposit Insurance Assessments
The Bank's deposit obligations are insured by the "Bank Insurance Fund"
("BIF") administered by the FDIC and the Bank is obligated to pay deposit
insurance premiums semiannually. The FDIC computes the Bank's premium rate based
upon the FDIC's evaluation of the Bank's risk, based principally on the Bank's
capital level and the extent of supervisory risk which bank regulators judge the
Bank to represent.
The Bank's FDIC insurance assessment decreased by $286,000 in 1996
compared to 1995 as a result of a reduction of the Bank's FDIC assessment. The
Bank expects to experience FDIC insurance costs at approximately this reduced
level for the foreseeable future due to the BIF having reached its goal of 1.25%
of insured deposits.
<PAGE> 8
ITEM 2. DESCRIPTION OF PROPERTY
Two of the Bank's offices are leased under a long-term capital lease
agreement which expires (after three annual renewable periods) in the year ended
December 31, 2004. The main office (15,584 square feet) located at 645
Washington Avenue, Jermyn, Pennsylvania, is leased under such agreement. The
office (13,284 square feet) located in the Keyser Oak Plaza, Scranton,
Pennsylvania, is also leased under such agreement. The Bank has the option of
purchasing the leased facilities at the end of the lease term for the fair
market value of the leased property. The Bank also has the option to renew the
lease for four additional terms of five years each at the expiration of the
original lease term. The present value of the minimum lease payments associated
with these properties was $821,000 at December 31, 1996.
One of the Bank's offices is leased under an operating lease which
expires in the year ending December 31, 2000. The office (1,996 square feet) is
located in Daleville.
The Jessup office is owned and not subject to any mortgage debt. The
office contains approximately 7,000 square feet.
The Bank constructed an office (approximately 5,500 square feet
excluding unfinished basement) in the Minooka section of Scranton, Pennsylvania.
This office is not subject to any mortgage debt.
The Bank purchased a building and parking lot in Carbondale,
Pennsylvania. This office serves as a full service community bank with drive up
windows and a drive up automatic teller machine. The office contains 11,090
square feet of space, is owned by the Bank, and is not subject to any mortgage
debt.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are not involved in any pending legal
proceedings other than routine nonmaterial legal proceedings occurring in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information pertaining to The First Jermyn Corp's quarterly common
stock price ranges, dividends declared per share data, any limitations on future
dividend paying abilities, and number of shareholders are found in the Company's
Annual Report to Shareholders and is hereby incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required herein is incorporated by reference from pages
3-16 of the Company's Annual Report.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL ANNUAL REPORT
STATEMENTS AND SUPPLEMENTARY TO SHAREHOLDERS
FINANCIAL DATA PAGE REFERENCE
<S> <C>
Consolidated Balance Sheets,
December 31, 1996 and 1995......................................................................... 18
Consolidated Statements of Income,
Years Ended December 31, 1996, 1995 and 1994....................................................... 19
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1996, 1995 and 1994...................................................... 20
Consolidated Statements of Cash Flows,
Years Ended December 31, 1996,1995 and 1994........................................................ 21
Notes to Consolidated Financial Statements.............................................................. 22-39
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
<PAGE> 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Information concerning directors and executive officers of the
registrant is incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A, within 120 days after
December 31, 1996, for the annual meeting of shareholders.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation information is incorporated by reference from
the Company's definitive proxy statement to be filed, pursuant to Regulation
14A, within 120 days after December 31, 1996, for the annual meeting of
shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the Company's
definitive proxy statement to be filed pursuant to Regulation 14A, within 120
days after December 31, 1996, for the annual meeting of shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
with regard to indebtedness of management is incorporated herein by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A, within 120 days after December 31, 1996, for the annual meeting of
shareholders and Note 4 - Loans of the Notes to Consolidated Financial
Statements of the 1996 Annual Report to Shareholders.
<PAGE> 11
PART IV
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are included in Part II Item 7:
Independent Auditors' Report........................................ 40*
Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1995.......... 18*
Consolidated Statements of Income,
Years Ended December 31, 1996 , 1995 and 1994................. 19*
Consolidated Statement of Changes in Shareholders' Equity,
Years Ended December 31, 1996, 1995 and 1994.................. 20*
Consolidated Statement of Cash Flows,
Years Ended December 31, 1996, 1995 and 1994.................. 21*
Notes to Consolidated Financial Statements....................... 22-39*
Selected Quarterly Financial Data-
Years Ended December 31, 1996, and 1995....................... 17*
</TABLE>
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
<TABLE>
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(2) Exhibits included here in or incorporated by reference herein:
3 (a) Registrant's By-Laws, as amended on June 8,
1987, filed with Form 10-K for the year ended
December 31, 1987 and incorporated herein by
reference
3 (b) Registrant's Articles of Incorporation filed with the Form 10-K for the year ended December 31,
1984 and incorporated herein by reference
3 (c) Amendment No 1 to Form S-4, Registration Statement under The Securities Act of 1933 (File No.
33-22383) dated July 15, 1988 and incorporated herein by reference
3 (d) Articles of Merger and Certificate of Merger of First Jessup, Corp. With and into The First Jermyn
Corp. Filed with Form 10-K for the year ended December 31, 1989 and incorporated herein by
reference
3 (e) Comptroller of the Currency approval of merger of First National Bank of Jessup with and into The
First National Bank of Jessup, filed with Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference
3 (f) Registrant's Articles of Amendment effective December 29, 1989, filed with Form 10-K for the year
ended December 31, 1989, and incorporated herein by reference
3 (g) First of Jermyn Realty Company, Inc. Articles of Incorporation
3 (h) First of Jermyn Realty Company, Inc. By-Laws
10 Lease Agreement, Option Agreement and Memorandum of Lease made the 29th day of August 1974 by and
between Sterling Industrial Corp. and The First National Bank of Jermyn for the Bank's office
buildings located in Jermyn and the Keyser Oak section of Scranton, Pennsylvania, filed with the
Form 10-K for the year ended December 31, 1993 and incorporated by reference
13 Annual Report to Shareholder for the Year Ended December 31, 1996 (included herewith)
</TABLE>
* Refers to page numbers in Annual Report to Shareholders incorporated by
reference
(b) None
<PAGE> 12
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The First Jermyn Corp.
- ------------------------------------------
(Registrant)
<TABLE>
<S> <C> <C>
By /S/ William M. Davis Chairman, President and Director March 26, 1997
--------------------------------------
William M. Davis
(Principal Executive Officer)
By/S/ Martha Myshak Treasurer March 26, 1997
---------------------------------------
Martha Myshak
(Principal Financial Officer)
By/S/ Donald J. Gibbs Vice President, Finance\ March 26, 1997
---------------------------------------- Control Division Manager
Donald J. Gibbs
(Principal Accounting Officer)
Pursuant of the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ Peter A. Sabia Director March 26, 1997
------------------------------------------
Peter A. Sabia
/S/ Kuzma Leschak, Jr. Director March 26, 1997
------------------------------------------
Kuzma Leschak, Jr.
/S/ Robert T. Kelly Director March 26, 1997
- -------------------------------------------
Robert T. Kelly
/S/ David M. Epstein Director March 26, 1997
------------------------------------------
David M. Epstein
/S/ I. Leo Moskovitz Director March 26, 1997
- -------------------------------------------
I. Leo Moskovitz
/S/ Dr. Edmund J. Biancarelli Director March 26, 1997
- -------------------------------------------
Dr. Edmund J. Biancarelli
/S/ Thomas G. Speicher Director March 26, 1997
- -------------------------------------------
Thomas G. Speicher
/S/ Garfield G. Thomas Secretary and Director March 26, 1997
------------------------------------------
Garfield G. Thomas
/S/ William M. Davis Chairman, President and Director March 26, 1997
------------------------------------------
William M. Davis
</TABLE>
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE YEAR 1996 1995 1994
<S> <C> <C> <C>
Total interest income $22,722 $21,492 $18,103
Total interest expense 11,401 10,282 7,197
Net interest income 11,321 11,210 10,906
Provision for loan losses 183 365 454
Non-interest income 1,136 582 577
Non-interest expense 7,462 6,804 6,726
Federal income tax provision 1,308 1,369 1,366
Net income 3,504 3,254 2,937
Cash dividends paid 1,105 1,018 930
AT YEAR END
Assets $321,563 $309,986 $278,015
Loans, gross 197,598 174,470 168,808
Allowance for loan losses 3,111 3,015 2,835
Securities 107,068 114,898 92,464
Deposits 290,115 281,298 250,842
Shareholders' equity 28,674 26,209 23,164
SHARE DATA
Net income $3.96 $3.68 $3.32
Cash dividends 1.25 1.15 1.05
Book value 32.41 29.63 26.18
Number of shares outstanding, net 884,680 884,680 884,680
SELECTED RATIOS
Return on assets (net income divided by average total assets) 1.10% 1.12% 1.10%
Return on equity (net income divided by average equity) 12.71% 13.20% 12.83%
Common stock dividend payout rate (dividends declared divided
by net income) 31.54% 31.28% 31.66%
Equity to assets ratio (average equity divided by average total assets) 8.62% 8.48% 8.56%
Tier I Leverage Ratio 8.85% 8.75% 8.66%
Risk-Based Capital Ratio, Tier I 16.50% 16.13% 16.08%
Risk-Based Capital Ratio, Total 17.76% 17.39% 17.34%
</TABLE>
1
<PAGE> 2
FINANCIAL REVIEW
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE YEAR 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total interest income $ 22,722 $ 21,492 $ 18,103 $ 17,401 $ 18,442
Total interest expense 11,401 10,282 7,197 7,127 8,598
Net interest income 11,321 11,210 10,906 10,274 9,844
Provision for loan losses 183 365 454 1,403 1,483
Non-interest income 1,136 582 577 500 797
Non-interest expense 7,462 6,804 6,726 6,284 5,962
Federal income tax provision 1,308 1,369 1,366 927 895
Net income 3,504 3,254 2,937 2,160 2,301
Cash dividends paid 1,105 1,018 930 885 796
AT YEAR END
Assets $321,563 $309,986 $278,015 $263,427 $242,899
Loans, gross 197,598 174,470 168,808 163,585 175,505
Allowance for loan losses 3,111 3,015 2,835 2,849 2,382
Securities 107,068 114,898 92,464 83,307 47,762
Deposits 290,115 281,298 250,842 239,007 215,454
Shareholders' equity 28,674 26,209 23,164 22,506 21,231
SHARE DATA
Net income $ 3.96 $ 3.68 $ 3.32 $ 2.44 $ 2.60
Cash dividends 1.25 1.15 1.05 1.00 0.90
Book value 32.41 29.63 26.18 25.44 24.00
Number of shares outstanding, net 884,680 884,680 884,680 884,680 884,680
</TABLE>
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
INTRODUCTION AND BUSINESS
The following discussion and analysis presents the significant changes in the
results of operations and financial condition for the periods shown. The
discussion should be read in conjunction with the consolidated financial
statements and notes included elsewhere in this report. Tabular information is
presented in thousands of dollars, except as indicated.
The First Jermyn Corp. (Company) owns all of the outstanding common stock of its
only bank subsidiary, The First National Bank of Jermyn (Bank). The Company
formed a non-bank subsidiary, First of Jermyn Realty Company, Inc. (Realty),
during 1990. Realty has been inactive since inception. The Company is subject to
supervision of the Federal Reserve System. The Bank is chartered as a national
bank and is subject to supervision of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation. The Bank operates offices in Carbondale,
Jermyn and Jessup and two offices in Scranton (Keyser Oak Plaza and Minooka
Section ), Pennsylvania. The Bank opened a sixth office, located in Daleville,
Pennsylvania during 1996. The Bank offers all services normally provided by a
community bank, including deposit, safekeeping and loan functions through its
branch system.
RESULTS OF OPERATIONS
The consolidated net income for 1996 was $3,504,000, an increase of 7.7% from
the prior year. The net income for 1995 ($3,254,000) increased 10.8% from 1994.
The following table (Table 1) presents the amount and percentage of increase
(decrease) for the major components of net income for the years under review
TABLE 1
Increase(Decrease)
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income $1,230 5.7% $3,389 18.7%
Interest expense 1,119 10.9% 3,085 42.9%
---- ----
Net interest income after Net interest income 111 1.0% 304 2.8%
Provision for loan losses (182) (49.9%) (89) (19.6%)
---- ----
Net interest income after provision for loan losses 293 2.7% 393 3.8%
Non-interest income 554 95.2% 5 0.9%
Non-interest expense 658 9.7% 78 1.2%
---- ----
Income before Federal income tax provision 189 4.1% 320 7.4%
Federal income tax provision (61) (4.5%) 3 -
---- ----
Net income $250 7.7% $317 10.8%
==== ====
</TABLE>
NET INTEREST INCOME
Table II illustrates average balances and the average tax-equivalent yield
earned by the Bank on its interest-earning assets and the average interest rate
associated with its interest-bearing liabilities for 1996, 1995, and 1994. Table
II exhibits the volume and yield/rate variances for interest-earning assets and
interest-bearing liabilities.
3
<PAGE> 4
TABLE II
AVERAGE BALANCES AND RATES
<TABLE>
<CAPTION>
1996 1995 1994
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans
Commercial, financial
and agriculture $ 33,715 $ 2,930 8.69% $ 38,124 $ 3,532 9.26% $ 43,625 $ 3,394 7.78%
Real estate - commercial
and residential
mortgage 112,184 9,226 8.22% 105,368 9,087 8.62% 100,341 8,072 8.04%
Installment - net 34,318 2,819 8.21% 25,678 2,158 8.40% 17,415 1,502 8.62%
Fees on loans - 240 - - 164 - - 211 -
-------- ------- --------- ------- -------- -------
Total loans (including fees) 180,217 15,215 8.44% 169,170 14,941 8.83% 161,381 13,179 8.17%
Securities:
Taxable 101,818 6,372 6.26% 94,586 5,979 6.32% 87,270 4,814 5.52%
Tax-exempt 18,269 1,499 8.21% 6,960 568 8.16% 1,635 131 8.01%
-------- ------- --------- ------- -------- -------
Total securities 120,087 7,871 6.55% 101,546 6,547 6.45% 88,905 4,945 5.56%
Federal funds sold 4,737 253 5.34% 5,520 325 5.89% 3,463 146 4.22%
-------- ------- --------- ------- -------- -------
Total interest-earning assets 305,041 23,339 7.65% 276,236 21,813 7.90% 253,749 18,270 7.20%
Non-interest-earning assets 14,858 ------- 14,341 ------- 13,682 -------
-------- -------- --------
TOTAL ASSETS $319,899 $290,577 $267,431
======== ======== ========
Interest bearing liabilities:
Deposits
Savings, Club, NOW, and
money market accounts $ 94,229 $ 2,302 2.44% $ 95,969 $ 2,403 2.50% $107,131 $ 2,711 2.53%
Certificates of deposits 168,005 8,992 5.35% 142,012 7,787 5.48% 110,997 4,383 3.95%
-------- ------- -------- ------- -------- -------
Total deposits 262,234 11,294 4.31% 237,981 10,190 4.28% 218,128 7,094 3.25%
Federal funds purchased 414 22 5.31% 18 1 5.56% 131 6 4.58%
Capitalized lease obligation 853 85 9.96% 920 91 9.89% 981 97 9.89%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 263,501 11,401 4.33% 238,919 10,282 4.30% 219,240 7,197 3.28%
Non-interest bearing liabilities 28,825 27,009 25,296
Shareholders' equity 27,573 24,649 22,895
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $319,899 $290,577 $267,431
======== ======== ========
Net interest income $11,938 $11,531 $11,073
======= ======= =======
Margin analysis:
Interest income/interest -
earning assets 7.65% 7.90% 7.20%
Interest expense/interest -
earning assets 3.74% 3.72% 2.84%
---- ---- ----
Net interest income/interest -
earning assets 3.91% 4.18% 4.36%
==== ==== ====
Tax equivalent adjustments:
Loans $ 107 $ 128 $ 121
Securities 510 193 46
------- ------- -------
Total $ 617 $ 321 $ 167
======= ======= =======
</TABLE>
1. Installment loans are stated net of unearned income.
2. Average loan balances include non-accrual loans.
3. Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34% for each of the three years.
4. Average balances represent average daily balances.
5. Yields on securities available for sale were computed using historical
amortized cost.
4
<PAGE> 5
TABLE III
VOLUME AND YIELD/RATE VARIANCES
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
--------------------- ---------------------
Yield/ Yield/
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 950 $(676) $ 274 $ 655 $1,107 $1,762
Securities:
Taxable 453 (60) 393 425 740 1,165
Tax-exempt 928 3 931 435 2 437
Federal funds sold (44) (28) (72) 107 72 179
------ ----- ------ ------ ------ ------
Total interest-earning assets 2,287 (761) 1,526 1,622 1,921 3,543
------ ----- ------ ------ ------ ------
Interest expense:
Savings, Club, NOW, and
money market accounts (43) (58) (101) (280) (28) (308)
Certificates of deposit 1,395 (190) 1,205 1,424 1,980 3,404
Federal funds purchased 21 - 21 (6) 1 (5)
Capitalized lease obligation (7) 1 (6) (6) - (6)
------ ----- ------ ------ ------ ------
Total interest-bearing liabilities 1,366 (247) 1,119 1,132 1,953 3,085
------ ----- ------ ------ ------ ------
Net interest income $ 921 $(514) $ 407 $ 490 $ (32) $ 458
====== ===== ====== ====== ====== ======
</TABLE>
1. The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of change in each.
2. Balances of non-accrual loans and related income recognized have been
included for computation purposes.
3. Tax-exempt income has been converted to a tax-equivalent basis using an
incremental rate of 34% in each of the three years.
The increase in 1996 taxable equivalent net interest income was driven by an
$11.0 million increase in the average balance of total loans and an $18.5
million increase in the average balance of total securities, primarily
tax-exempt securities. This was partially offset by an increase in the average
balance of total interest-bearing liabilities of $24.6 million, primarily
certificates of deposit and by the negative impact of yield/rate movements.
As shown in Table II and III, 1996 taxable-equivalent net interest income
increased $407,000 (3.5%) over 1995. Interest income increased $1,526,000 and
interest expense increased $1,118,000. The 1996 net interest margin was 3.91%
(twenty seven basis points below 1995). The decline in the net interest margin
was a result of competitive pressures causing yields/rates to decrease for total
interest-earning assets and to increase for total interest-bearing liabilities.
Net interest income as a percentage of interest income also fell in 1995
compared to 1994 due to increased competition in the local retail banking
market. The 1996 versus 1995 increase in average interest-bearing deposits
($24,253,000) was invested in loans and securities.
The increase in 1995 tax equivalent net interest income was primarily due to the
growth in the loans and securities portfolios. Also contributing to the increase
in net interest income in 1995 were $320,000 of recoveries on non-accrual loans
of which one loan accounted for $172,000.
5
<PAGE> 6
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance is an amount that management believes will be
adequate to absorb known and inherent losses in the existing loan portfolio. See
Note 1 to the consolidated financial statements with regard to the Bank's policy
for its provision and allowance for loan losses.
The allowance for loan losses was $3,111,000 at December 31, 1996 as compared to
$3,015,000 at December 31, 1995, an increase of 3.2%. The allowance was 1.58% of
total loans (net of unearned discount and fees) at December 31, 1996 and 1.74%
at December 31, 1995. There is no foreign loan exposure in the Bank's loan
portfolio. The provision for loan losses was $183,000 and $365,000 in 1996 and
1995 respectively. The decreases in the 1996 and 1995 provisions reflect a five
year record low in the amount of net charge-offs and a five year high in the
allowance for loan losses at end of period.
A significant portion of the Bank's loans are collateralized by residential and
commercial real estate located in Northeastern Pennsylvania with a primary
concentration in Lackawanna County. The Bank's primary concentration of credit
risk is related to the real estate market in the aforementioned area. The
ultimate collectibility of most of the Bank's loan portfolio is greatly affected
by the economic conditions within Northeastern Pennsylvania. Management is not
aware of any other significant concentrations of credit risk within its loan
portfolio.
Table IV illustrates the changes in allowance for loan losses for the previous
five years including charge-offs, recoveries and percent of net charge-offs to
average loans outstanding during each period. Table V illustrates the allocation
of the allowance for loans for each period. These allocations are no more than
estimates and are subject to revision as conditions change.
6
<PAGE> 7
TABLE IV
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans, net of unearned discount $180,217 $169,170 $161,381 $168,721 $175,198
======== ======== ======== ======== ========
Allowance for loan losses at beginning of period $ 3,015 $ 2,835 $ 2,849 $ 2,382 $ 2,002
-------- -------- -------- -------- --------
Charge-offs:
Domestic:
Commercial, financial and agricultural 4 53 249 931 915
Real estate commercial and residential
mortgage 130 193 293 22 170
Installment 36 28 25 60 98
-------- -------- -------- -------- --------
Total 170 274 567 1,013 1,183
-------- -------- -------- -------- --------
Recoveries:
Domestic:
Commercial, financial and agricultural 78 76 93 51 38
Real estate- commercial and residential
mortgage - - - - -
Installment 5 13 6 26 42
-------- -------- -------- -------- --------
Total 83 89 99 77 80
-------- -------- -------- -------- --------
Net charge-offs 87 185 468 936 1,103
Additions charged to operations 183 365 454 1,403 1,483
-------- -------- -------- -------- --------
Allowance for loan losses at end of period $ 3,111 $ 3,015 $ 2,835 $ 2,849 $ 2,382
======== ======== ======== ======== ========
Percentage of net charge-offs during the period
to average loans outstanding during the period 0.05% 0.11% 0.29% 0.55% 0.63%
Percentage of allowance for loan losses to total loans -
net of unearned discount and fees, period end 1.58% 1.74% 1.69% 1.75% 1.37%
======== ======== ======== ======== ========
</TABLE>
TABLE V
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
% Of % Of % Of % Of % Of
Loans Loans Loans Loans Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agriculture $ 257 17% $ 680 18% $ 718 22% $1,242 28% $1,116 28%
Real estate - commercial
and residential 1,272 63% 977 66% 1,037 65% 1,368 63% 543 61%
mortgage
Installment 57 20% 86 16% 59 13% 54 9% 16 11%
Unallocated 1,525 - 1,272 - 1,021 - 185 - 707 -
----- ----- ----- --- ---
Total $3,111 100% $3,015 100% $2,835 100% $2,849 100% $2,382 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
7
<PAGE> 8
Allocations for commercial, financial and agricultural loans are determined by
reviewing significant or unusual loans. Allocated provisions for real estate and
consumer loans are based on historical losses, delinquency trends and current
economic conditions. The unallocated portion is established by management to
absorb inherent losses in the portfolio. The increase in the unallocated
allowance at December 31, 1996 is due to the decrease in net charge-offs. The
increase in the unallocated allowance at December 31, 1995 and 1994 are due to
the decreases in non-accrual loans.
NON-INTEREST INCOME
Non-interest income generally consists of service charges on deposits, fees for
customer services, fees from the Small Business Administration, gains on sales
of loans, and other non-recurring types of transactions.
Non-interest income increased in 1996 primarily as a result of a $600,000
one-time gain on a legal settlement which occurred in the first quarter of 1996.
There were no comparable items in 1995 or 1994. There were no sales of loans in
1996 and 1994. Included in 1994 is the receipt of $93,000 of the Bank's capital
shares tax refund.
NON-INTEREST EXPENSE
The following table (Table Vl) summarizes major components of non-interest
expense for the periods shown.
<TABLE>
<CAPTION>
1996 1995 1994
Percent To Total Percent To Total Percent To Total
Interest Earning Interest Earning Interest Earning
---------------- ---------------- ----------------
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $3,589 1.19% $3,315 1.16% $3,077 1.21%
Occupancy costs 575 0.19% 469 0.16% 452 0.18%
Furniture and equipment expense 556 0.18% 521 0.18% 484 0.20%
Data processing services and
programs and supplies 404 0.13% 424 0.15% 418 0.16%
FDIC insurance 2 0.00% 288 0.10% 532 0.21%
Fidelity loss 320 0.11% - - - -
Other expense 2,016 0.67% 1,787 0.62% 1,763 0.69%
----- ---- ----- ---- ----- ----
Total $7,462 2.47% $6,804 2.37% $6,726 2.65%
====== ==== ====== ==== ====== ====
</TABLE>
Salaries and benefits have increased throughout the periods presented due to
increased headcount, salary adjustments, and increases in related benefits.
Total full-time equivalent employees numbered 116 at December 31, 1996, 110 at
December 31, 1995 and 106 at December 31, 1994. The increases in full-time
equivalent employees at December 31, 1996 and 1995 are due primarily to the
additions of the Daleville office and Carbondale office, respectively.
8
<PAGE> 9
Occupancy costs increased in 1996 primarily as a result of the increased costs
associated with a full year of occupancy of the Carbondale office. The Bank's
FDIC insurance assessment decreased in 1996 as a result of a reduction of the
Bank's FDIC insurance assessment. The Bank expects to experience reduced FDIC
insurance costs for the foreseeable future due to the Bank Insurance Fund (which
provides coverage for the Bank) having reached its goal of 1.25% of insured
deposits. FDIC insurance decreased in 1995 as a result of a refund of premiums
when the Bank Insurance Fund initially reached its capitalization goal. Other
expense increased in 1996 due to additional advertising, and legal and
collection costs as well as costs associated with real estate owned. Other
expense increased in 1995 due to additional advertising, business development,
miscellaneous and office expenses which were partially offset by a decrease in
legal and collection costs as well as costs associated with real estate owned.
During the first quarter of 1997, the Company discovered certain irregularities
allegedly involving an employee. Management has accrued its full estimate of the
fidelity loss as of December 31, 1996 in non-interest expense. Management
believes that this loss will be recoverable (less a $50,000 deductible) under
the Company's Fidelity Bond Insurance Policy. Such recovery, if any, will be
recognized in the Company's financial statements when received.
FEDERAL INCOME TAX PROVISION
Fluctuations in the 1996 and 1995 Federal income tax provisions result from the
changes in taxable income and significant increases in tax-free income on
securities and loans. The provision for income taxes includes federal, state and
local income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
The deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the periods in which those temporary
differences are expected to be recovered or settled.
SECURITIES
On January 1, 1994, the Bank adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115). Upon implementation of SFAS No. 115, the Bank's strategy was to
classify all securities as available for sale in order to provide maximum
liquidity and flexibility. During the first six months of 1994, the Bank
monitored closely its liquidity position and asset/liability gap position using
new modeling techniques. Based on these analyses, the Bank redefined its
determination of liquidity needs and identified approximately $45,000,000 of
securities (consisting of all municipal bonds, U.S. Treasury securities with
maturities generally greater than two years, and various other securities with
maturities generally greater than two years) which the Bank believes it has the
ability and intent to hold to maturity. As a result, on June 30, 1994, the Bank
transferred these securities to the investment securities held to maturity
portfolio at fair value in accordance with Paragraph 15 of SFAS No. 115. The
remaining unrealized loss of $349,000, net of tax, continues to be reported as a
component of shareholders' equity and is being amortized over the remaining
lives of the individual securities as an adjustment to yield. In addition, none
of the securities reclassified to the investment securities held to maturity
portfolio at June 30, 1994 were subsequently transferred to securities available
for sale in connection with the FASB's issuance of its Special Report in
November 1995.
9
<PAGE> 10
The following table (Table VII) shows maturity data and related weighted-average
yields as of December 31, 1996 and carrying values as of December 31, 1996,
1995, and 1994. Yields on available for sale securities are computed using
historical amortized cost.
TABLE VLL
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
December 31, 1996
After ten
One year After one After five years/no
or less through five years through ten years maturity Total
------- ------------------ ----------------- -------- -----
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasuries
Market value $ 23,085 $ 1,000 $ -- $ -- $24,085
Yield (2) 5.79% 5.72% -- 5.79%
Other Securities
Market value -- -- -- 150 150
Yield (2) -- -- -- 6.02% 6.02%
---------- ---------- ---------- ---------- -------
Total Market Value $ 23,085 $ 1,000 $ -- $ 150 $24,235
========== ========== ========== ========== =======
Weighted average yield 5.79% 5.72% -- 6.02% 5.79%
========== ========== ========== ========== =======
Investment securities held to maturity
U.S. Treasuries
Carrying value $ 11,997 $ 27,357 $ -- $ -- $39,354
Yield 6.55% 6.05% -- -- 6.20%
States and municipal securities
Carrying value -- 478 2,942 14,853 18,273
Yield (1) -- 7.63% 8.00% 8.26% 8.20%
Other securities
Carrying value 200 -- -- -- 200
Yield 9.65% -- -- -- 9.65%
---------- ---------- ---------- ---------- -------
Total carrying value $ 12,197 $ 27,835 $ 2,942 $ 14,853 $57,827
========== ========== ========== ========== =======
Weighted average yield 6.60% 6.08% 8.00% 8.26% 6.85%
========== ========== ========== ========== =======
</TABLE>
10
<PAGE> 11
TABLE VII (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1996
One year After one After five After ten
or less through five years through ten years years Total
------- ------------------ ----------------- ----- -----
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities available for sale
Mortgage-backed securities
Market value $ 147 $ 372 $ -- $ 9,869 $ 10,388
Yield (2) 6.75% 6.38% -- 6.02% 6.04%
Collateralized mortgage obligations
of U.S. government agencies
Market value -- -- 1,809 12,809 14,618
Yield (2) -- -- 5.94% 5.95% 5.95%
---------- ---------- ---------- ---------- ----------
Total market value $ 147 $ 372 $ 1,809 $ 22,678 $ 25,006
========== ========== ========== ========== ==========
Weighted average yield 6.75% 6.38% 5.94% 5.98% 5.99%
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and other U.S. government agencies $24,085 $13,225 $15,821
Other 150 150 150
------- ------- -------
Total $24,235 $13,375 $15,971
======= ======= =======
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasuries and other U.S government agencies $39,354 $56,599 58,832
States and municipal 18,273 18,266 2,837
Other 200 452 557
------- ------- -------
Total $57,287 $75,317 $62,226
======= ======= =======
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities $10,388 $12,304 $6,324
Collateralized mortgage obligations of U.S. government agencies 14,618 13,902 7,938
Other - - 5
------- ------- -------
Total $25,006 $26,206 $14,267
======= ======= =======
</TABLE>
(1) Yields are presented on a taxable equivalent basis utilizing an effective
tax rule of 34% for all maturities.
(2) Yields on securities available for sale are computed using historical
amortized costs.
11
<PAGE> 12
LOANS
Net loans grew $23,268,000 to $196,610,000 at December 31, 1996. Increases of
$9,291,000 $2,363,000, $11,154,000 and $320,000 occurred in commercial and
residential mortgage, commercial, installment and real estate construction loan
portfolios, respectively. The increase in loan portfolios was primarily due to
aggressive pricing strategies employed by the Bank in conjunction with the
Bank's larger advertising budget which has been successful in attracting a
variety of new loans.
Net loans grew $5,830,000 to $173,342,000 at December 31, 1995. Increase of
$5,886,000 and $7,227,000 occurred in commercial and residential mortgage and
installment loan portfolios, respectively. Declines in commercial loans of
$6,475,000 and real estate construction loans of $976,000 partially offset these
increases.
The following table (Table VIII) shows consolidated loans at December 31, 1996,
1995, 1994, 1993, and 1992 (including non-accrual loans) and summarizes the
maturity data for loans - gross (net of non-accrual loans) as of December 31,
1996.
TABLE VIII
LOANS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate - commercial and
residential mortgage $122,625 $113,334 $107,448 $100,827 $107,658
Commercial, financial and agricultural 33,042 30,679 37,154 46,178 49,402
Installment 39,789 28,635 21,408 15,136 18,445
Real estate - construction 2,142 1,822 2,798 1,444 -
-------- -------- -------- -------- --------
Total loans - gross $197,598 $174,470 $168,808 $163,585 $175,505
======== ======== ======== ======== ========
Less unearned discount and fees (988) (1,128) (1,296) (1,226) (1,116)
Total gross loans, net of unearned
discount and fees $196,610 $173,342 $167,512 $162,359 $174,389
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
After One
Year but
Within Within Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $ 34,392 $ 2,073 $ 83,944 $120,409
Commercial, financial and agricultural 20,915 4,827 6,436 32,178
Installment 1,989 29,842 7,958 39,789
Real estate - construction 2,142 -- -- 2,142
-------- -------- -------- --------
Total loans - gross (net of non-accrual) $ 59,438 $ 36,742 $ 98,338 $194,518
======== ======== ======== ========
Fixed rate $ 1,933 $ 31,408 $ 98,338 $131,679
Variable rate 57,505 5,334 -- 62,839
-------- -------- -------- --------
Total loans - gross (net of non-accrual) $ 59,438 $ 36,742 $ 98,338 $194,518
======== ======== ======== ========
</TABLE>
Management is not aware of any trends or uncertainties within its loan portfolio
which it reasonably expects will materially impact future operating results on
capital resources nor is management aware of any information which would cause
it to have serious doubts as to the ability of its performing borrowers to
comply with current loan repayment terms.
12
<PAGE> 13
Table IX summarizes the Bank's non-performing assets at December 31, 1996, 1995,
1994, 1993 and 1992.
TABLE IX
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $3,080 $1,978 $3,043 $5,595 $2,281
Loans past due 90 days or more and still accruing 468 511 185 448 1,567
------ ------ ------ ------ ------
Total non-performing loans 3,548 2,489 3,228 6,043 3,848
Real estate owned other than bank premises 199 296 574 516 976
------ ------ ------ ------ ------
Total $3,747 $2,785 $3,802 $6,559 $4,824
====== ====== ====== ====== ======
</TABLE>
(1) See Note 4 to the consolidated financial statements concerning interest
income on non-accruing loans and Note 1 to the consolidated financial statements
- - Loans caption - concerning the Bank's policy with regard to accrual of
interest.
An analysis of non-accrual loans as of December 31, 1996, 1995, 1994, 1993, 1992
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $2,216 $1,397 $1,939 $3,075 $1,141
Commercial 864 581 1,104 2,520 1,140
------ ------ ------ ------ ------
Total $3,080 $1,978 $3,043 $5,595 $2,281
====== ====== ====== ====== ======
</TABLE>
DEPOSITS
Table X summarizes the average deposits and rates paid on deposit categories of
average total deposits for the last three years.
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Deposits Rates Deposits Rates Deposits Rates
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Domestic:
NOW accounts $17,955 2.13% $17,739 2.47% $17,754 2.49%
Savings deposits 56,180 2.51% 56,373 2.51% 61,892 2.54%
Other time deposits 2,006 3.48% 1,829 2.99% 1,579 2.97%
Money market accounts 18,088 2.44% 20,028 2.49% 25,905 2.51%
Certificates of deposit 168,005 5.35% 142,012 5.48% 110,997 3.95%
Total interest bearing $262,234 4.31% $237,981 4.28% $218,127 3.25%
-------- -------- --------
Non-interest bearing demand 27,064 25,503 24,115
------ ------ ------
Total $289,298 $263,484 $242,242
======== ======== ========
</TABLE>
The Bank has been successful at increasing the level of certificates of deposit
through offering competitive rates at its offices.
13
<PAGE> 14
Table XI summarizes the maturity distribution of time deposits greater than
$100,000 at December 31, 1996 and 1995 (including open time deposits and savings
accounts).
TABLE XI
MATURITY DISTRIBUTION OF TIME DEPOSITS GREATER THAN $100,000
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Domestic:
Certificates of deposit:
Three months or less $11,475 $16,569
Over three months through six months 7,700 5,949
Over six months through twelve months 3,509 2,903
Over twelve months 3,417 1,372
------- -------
Total certificates of deposit $26,101 $26,793
Open-account time deposits and savings accounts 4,946 4,582
------- -------
Total $31,047 $31,375
======= =======
</TABLE>
CAPITAL ADEQUACY
A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
consists of shareholders' equity, which provides a basis for future growth and
expansion and also provides a buffer against unexpected losses. Shareholders'
equity increased $2,465,000 to $28,674,000 at December 31, 1996. It is
management's intention to continue paying a reasonable return on shareholders'
investment while retaining adequate earnings to allow for continued growth.
However, the Company's ability to pay dividends to shareholders is dependent on
its ability to receive dividend payments from the Bank (see note 13 to the
consolidated financial statements).
The Federal Reserve Board measures capital adequacy for bank holding companies
by using a risk-based capital framework and by monitoring compliance with
minimum leverage ratio guidelines. The minimum ratio of total risk-based capital
to risk-adjusted assets is 8% at December 31, 1996, of which 4% must be Tier 1
capital. The Company's total risk-based capital was 17.76% at December 31, 1996
and 17.39% at December 31,1995. The Company's Tier 1 risk-based capital ratio
was 16.50% at December 31, 1996 and 16.13% at December 31, 1995.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. All other bank
holding companies are required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points. The Federal Reserve
Board has not advised the Company of any specific minimum leverage ratio
applicable to it. The Company's leverage ratio was 8.85% at December 31, 1996
and 8.75% at December 31, 1995.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as
other requirements, establishes five capital tiers: "well capitalized,"
"adequately capitalized," "under-capitalized," "significantly
under-capitalized," and "critically under-capitalized." FDICIA imposes
significant restrictions on the operations of a bank which is not at least
adequately capitalized. A depository institution's capital tier will depend upon
where its capital levels are in relation to various other capital measures which
include a risk-based capital measure, a leverage ratio capital measure and other
factors. Under regulation adopted, for an institution to be well capitalized it
must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, and a Tier 1 leverage ratio of at least 5%, and
not be subject to any specific capital order or directive.
14
<PAGE> 15
At December 31, 1996, the Bank is classified as well-capitalized with total
risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios of
17.76%, 16.50%, and 8.85% respectively.
The following table (Table XII) summarizes the Bank's sensitivity to interest
rate fluctuations at December 31, 1996 for certain interest sensitivity periods.
TABLE XII
<TABLE>
<CAPTION>
Over three Over six After one year
Zero to months to months to but within After five
three months six months one year five years years Total
------------ ---------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 22,316 $ 13,999 $ 21,916 $ 46,060 $ 2,627 $ 106,918
Loans (net of unearned
discount and deferred
fees) 65,007 9,226 11,512 63,163 47,702 196,610
Federal funds sold 1,900 -- -- -- -- 1,900
--------- --------- --------- --------- --------- ---------
Total $ 89,223 $ 23,225 $ 33,428 $ 109,223 $ 50,329 $ 305,428
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Interest-bearing DDA $ 17,555 $ -- $ -- $ -- $ -- $ 17,555
Money market accounts 16,264 -- -- -- -- 16,264
Savings (1) 11,269 -- -- -- 45,075 56,344
Time 43,762 40,478 37,858 21,316 -- 143,414
Time >100M 11,475 7,700 3,509 3,417 -- 26,101
Capitalized lease obligation 26 26 52 408 309 821
--------- --------- --------- --------- --------- ---------
Total $ 100,351 $ 48,204 $ 41,419 $ 25,141 $ 45,384 $ 260,499
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $ (11,128) $ (24,979) $ (7,991) $ 84,082 $ 4,945 $ 44,929
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap $ (11,128) $ (36,107) $ (44,098) $ 39,984 $ 44,929 $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity ratio (2) (3.5%) (11.2%) (13.7%) 12.4% 14.0% --
========= ========= ========= ========= ========= =========
</TABLE>
(1) The amount shown as repricing within 0 to 3 months is that portion which,
based upon average balances, is considered sensitive to changes in interest
rates. The Bank's historical experience has been that total savings account
balances exhibit minimal movement with changes in interest rates.
Accordingly, a large percentage of the Bank's savings account balances are
not as rate sensitive and are classified in the "After five years" category.
(2) Represents the cumulative interest rate sensitivity gap as a percentage of
total assets
15
<PAGE> 16
As shown above, the Bank has a negative gap (interest-sensitive assets are less
than interest-sensitive liabilities) within the next year, which generally
indicates that an increase in rates may lead to a decrease in net interest
income and a decrease in rates may lead to an increase in net interest income.
Although the Bank is substantially liability sensitive within the next year,
management believes that customer behavior patterns and product pricing allow
the Bank to reduce interest rate risk to acceptable levels.
ACCOUNTING DEVELOPMENTS
In June 1996, the FASB issued SFAS No. 125, Accounting For Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125).
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred, and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. The
Bank will adopt SFAS 125 prospectively, effective January 1, 1997, the required
date of adoption except for those types of transactions for which the provisions
of SFAS 125 have been delayed by the issuance of SFAS 127, Deferral of Certain
Provisions of SFAS 125. The adoption of SFAS 125 did not have a material impact
on the operation, financial condition, or shareholders' equity of the Bank. The
Bank has not yet determined the effect that the adoption of those provisions
deferred by SFAS 127 would have on its operations, financial condition and
shareholders' equity, but believes present accounting practices fairly depict
the financial transactions and obligations of the Bank.
LIQUIDITY
Liquidity involves the Company's ability to raise funds to support asset growth,
meet deposit withdrawal and other borrowing needs, maintain reserve requirements
and otherwise operate the Company on an ongoing basis. To adjust for the effects
of a changing interest rate environment and deposit structure, the Company's
management monitors its liquidity requirements through its asset/liability
management program. This program, along with other management analysis, enables
the bank to meet its cash flow requirements and adapt to the changing needs of
individual customers and the requirements of regulatory agencies.
Among the sources of asset liquidity are cash and due from banks, Federal Funds
sold, securities available for sale, mortgage loans available for sale, and
funds received from the repayment of loans and the maturing of investments. The
total carrying value of cash and due from banks, Federal Funds sold, securities
available for sale, mortgage-backed securities available for sale, and
investment securities with maturities of less than one year was $71,441,000 at
December 31, 1996. In addition to these sources of liquidity and loan
repayments, the Company has the ability to secure borrowings collateralized by
the securities portfolio. Through the use of these and other sources, management
believes the Company has adequate liquidity in both the short-term and the
long-term to carry out the Company's growth and profitability strategies. The
Company's ability to pay dividends depends primarily on the ability of the Bank
to pay dividends to the Company. Note 13 of the consolidated financial
statements provides information as to the limitations on dividend and other
funds transfers from the Company's subsidiary. Such limitations are not expected
to adversely impact the ability of the Company to meet its future dividend and
other cash obligations.
16
<PAGE> 17
QUARTERLY FINANCIAL DATA
A comparison of quarterly financial information for 1996 and 1995 is provided in
the following table.
<TABLE>
<CAPTION>
1996
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
QUARTER ENDED
Interest income $5,648 $5,716 $5,693 $5,665
Interest expense 2,919 2,809 2,809 2,864
Net interest income 2,729 2,907 2,884 2,801
Provision for loan losses 46 46 45 46
Net income 537 874 875 1,218
Earnings per share $0.60 $0.99 $ 0.99 $ 1.38
<CAPTION>
1995
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
QUARTER ENDED
Interest income $5,708 $5,442 $5,307 $5,035
Interest expense 2,788 2,730 2,572 2,192
Net interest income 2,920 2,712 2,735 2,843
Provision for loan losses 92 92 91 90
Net income 935 794 706 819
Earnings per share $ 1.05 $ 0.90 $ 0.80 $ 0.93
</TABLE>
FOURTH QUARTER RESULTS - 1996 VERSUS 1995
Net income for the fourth quarter of 1996 decreased $398,000 ($.45 per share)
from the fourth quarter of 1995. The primary reasons for the decrease in net
income were the decrease in net interest income due to increased competition in
the local retail banking market and the increase in other expense due to a
fidelity loss.
MARKET FOR THE FIRST JERMYN CORP. COMMON STOCK
The stock of The First Jermyn Corp. is not listed or traded on a recognized
securities exchange and is inactively traded. Range of sale prices is gained
when available from purchaser or seller at time of transfer for sales of 100
shares or more. Quarterly highs and lows are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Quarter
First $38.50 $34.00 $33.50 $31.63 $30.00 $28.50
Second $42.25 $38.75 $33.75 $32.00 $31.00 $31.00
Third $43.00 $41.00 $34.50 $32.25 $32.00 $32.00
Fourth $44.25 $43.00 $36.00 $33.50 $32.00 $31.00
</TABLE>
17
<PAGE> 18
Consolidated Balance Sheets
(In Thousands of Dollars, Except Per Share Information)
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
ASSETS:
Cash and due from banks $ 8,103 $ 12,341
Federal funds sold 1,900 1,860
Securities available for sale 24,235 13,375
Mortgage-backed securities available for sale 25,006 26,206
Investment securities total market value - (1996 - $58,849, 1995 - $77,394) 57,827 75,317
Loans, gross 197,598 174,470
Less:
Unearned discount and origination fees (988) (1,128)
Allowance for loan losses (3,111) (3,015)
--------- ---------
Loans, net 193,499 170,327
Accrued interest receivable 2,470 2,551
Bank premises, leasehold improvements
and furniture and equipment - net 5,067 5,190
Real estate owned other than bank premises 199 296
Other assets 3,257 2,523
--------- ---------
Total assets $ 321,563 $ 309,986
========= =========
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 30,437 $ 29,071
Interest-bearing 259,678 252,227
Total deposits 290,115 281,298
Capitalized lease obligation 821 891
Accrued interest payable 1,250 1,106
Other liabilities 703 482
--------- ---------
Total liabilities 292,889 283,777
========= =========
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value, authorized,
2,500,000 shares; outstanding, 899,885 shares 1,125 1,125
Surplus 3,876 3,876
Retained earnings 24,343 21,944
Unrealized losses on securities available for sale, net of tax (474) (540)
Less: Treasury stock - at cost (15,205 shares) (196) (196)
--------- ---------
Total shareholders' equity 28,674 26,209
--------- ---------
Total liabilities and shareholders' equity $ 321,563 $ 309,986
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Information)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 15,108 $ 14,813 $ 13,058
Interest and dividends on securities:
U.S. Treasury 4,648 4,710 4,133
U.S. government agencies 6 5 6
Mortgage-backed securities 1,687 1,209 623
State and political subdivisions 989 375 86
Other taxable debt 22 46 42
Taxable equity 9 9 9
Interest on Federal funds sold 253 325 146
-------- -------- --------
Total interest income 22,722 21,492 18,103
-------- -------- --------
Interest expense:
Deposits 11,294 10,190 7,094
Federal funds purchased 22 1 6
Capitalized lease obligation 85 91 97
-------- -------- --------
Total interest expense 11,401 10,282 7,197
-------- -------- --------
Net interest income 11,321 11,210 10,906
Provision for loan losses 183 365 454
-------- -------- --------
Net interest income after provision for loan losses 11,138 10,845 10,452
Non-interest income:
Service charges and fees 523 539 484
Gain on sale of loans - net - 10 -
Litigation recovery 600 - -
Other 13 33 93
-------- -------- --------
Total non-interest income 1,136 582 577
-------- -------- --------
Non-interest expense:
Salaries and benefits 3,589 3,315 3,077
Net occupancy and furniture/equipment expenses 1,131 990 936
Data processing services 404 424 418
FDIC insurance 2 288 532
Fidelity loss 320 - -
Other expense 2,016 1,787 1,763
-------- -------- --------
Total non-interest expense 7,462 6,804 6,726
-------- -------- --------
Income before Federal income tax provision 4,812 4,623 4,303
Federal income tax provision 1,308 1,369 1,366
-------- -------- --------
Net income $ 3,504 $ 3,254 $ 2,937
======== ======== ========
Per share information:
Net income $ 3.96 $ 3.68 $ 3.32
======== ======== ========
Weighted average shares outstanding 884,680 884,680 884,680
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands of Dollars, Except Per Share and Par Value Amounts)
<TABLE>
<CAPTION>
Net Unrealized
Common Gains (Losses)
Stock On Securities
Par Value Retained Available Treasury
$1.25 Surplus Earnings For Sale Stock Total
--------- ------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $1,125 3,876 17,701 - (196) 22,506
Net income - - 2,937 - - 2,937
Cash dividends ($1.05 per share) - - (930) - - (930)
Effect of initial adoption of SFAS No. 115, net of tax - - - 1,185 - 1,185
Net unrealized losses on
securities available for sale, net of tax - - - (2,534) - (2,534)
------- ----- ------- ------- ----- -------
Balance, December 31, 1994 $1,125 3,876 19,708 (1,349) (196) 23,164
Net income - - 3,254 - - 3,254
Cash dividends ($1.15 per share) - - (1,018) - - (1,018)
Net unrealized gains on
securities available for sale, net of tax - - - 809 - 809
------- ----- ------- ------- ----- -------
Balance, December 31, 1995 $1,125 3,876 21,944 (540) (196) 26,209
Net income - - 3,504 - - 3,504
Cash dividends ($1.25 per share) - - (1,105) - - (1,105)
Net unrealized gains on
securities available for sale, net of tax - - - 66 - 66
------- ----- ------- ------- ----- -------
Balance, December 31, 1996 $1,125 3,876 24,343 (474) (196) 28,674
------- ----- ------- ------- ----- -------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,504 $ 3,254 $ 2,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 183 365 454
Depreciation and amortization of investment
securities, bank premises, leasehold improvements
and furniture and equipment 485 461 441
Deferred income tax benefit (15) (11) (40)
Gain on sales of loans - net -- (10) --
Loss on disposition of real estate 139 21 41
Increase in interest receivable and other assets (672) (141) (651)
Increase in interest payable and other liabilities 365 433 253
Other -- -- 40
-------- -------- --------
Net cash provided by operating activities 3,989 4,372 3,475
-------- -------- --------
INVESTING ACTIVITIES:
Maturities of securities available for sale 4,994 13,241 13,237
Maturities of mortgage backed securities available for sale 3,193 510 --
Maturities of investment securities 17,699 3,633 --
Purchases of securities available for sale (16,000) (10,443) (9,175)
Purchases of mortgage backed securities available for sale (1,956) (11,944) (3,952)
Purchases of investment securities -- (16,622) (10,616)
Net increase in loans (23,445) (6,315) (6,350)
Purchases of bank premises, leasehold improvements
and furniture and equipment - net (362) (932) (231)
Sales of assets acquired through foreclosure, net 48 567 589
-------- -------- --------
Net cash used in investing activities (15,829) (28,305) (16,498)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase in non-interest-bearing demand deposits
and interest-bearing deposits 8,817 30,456 11,835
Proceeds from Federal funds purchased -- -- 1,900
Repayment of Federal funds purchased -- (1,900) --
Principal payments on capitalized lease obligation (70) (63) (58)
Dividends paid (1,105) (1,018) (930)
-------- -------- --------
Net cash provided by financing activities 7,642 27,475 12,747
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (4,198) $ 3,542 $ (276)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 14,201 $ 10,659 $ 10,935
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,003 $ 14,201 $ 10,659
-------- -------- --------
CASH PAID DURING THE YEAR:
Interest $ 11,257 $ 9,908 $ 6,999
-------- -------- --------
Federal income taxes $ 1,390 $ 1,372 $ 1,425
-------- -------- --------
NON CASH TRANSACTIONS
Change in unrealized (gains) losses on securities available for sale, net of tax $ (66) $ (809) $ 1,349
======== ======== --------
Transfers of loans to real estate owned other than bank premises $ 90 $ 310 $ 688
======== ======== --------
Transfer of securities from available for sale to investment securities $ -- $ -- $ 45,000
======== ======== --------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The First Jermyn Corp. is a bank holding company whose principal
subsidiary is The First National Bank of Jermyn (Bank) which
operates 6 offices in Lackawanna County, PA. The Bank provides a
range of banking services typically associated with a community
bank, the most important of which are the taking of deposits and
granting of loans to both individuals and corporations within its
market area. The Bank faces competition in its market from other
depository institutions, some of which are substantially larger than
the Bank and from other financial services companies, including
mutual funds, mortgage companies, finance companies, and others.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements of The First
Jermyn Corp. and subsidiaries (Company) include the accounts of The
First Jermyn Corp., The First National Bank of Jermyn and First of
Jermyn Realty Company, Inc. (inactive since inception). All
significant intercompany balances and transactions have been
eliminated in consolidation. Prior period amounts are reclassified
when necessary to conform with the current year's presentation.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for possible loan losses and the valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for possible
loan losses and real estate owned, management obtains independent
appraisals for significant properties to the extent considered
practical.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash, due from banks and federal funds sold. Generally,
federal funds are sold for periods ranging up to thirty days.
SECURITIES
Securities include investment and mortgage-backed securities,
corporate bonds and certain equity securities.
Investments in equity securities that have a readily determinable
fair value and investments in debt securities are classified into
categories and accounted for as follows:
- Debt securities that the Company positively
intends to hold to maturity are classified as
"held-to-maturity" and are reported at amortized
cost.
- Debt and equity securities purchased with the
intention of selling them in the near future are
classified as "trading securities" and are
reported at fair value, with unrealized gains and
losses included in net income.
22
<PAGE> 23
1. (CONTINUED)
- Debt and equity securities not classified in
either of the above categories are classified as
"available-for-sale securities" and are reported
at fair value, with unrealized gains and losses
excluded from earnings and reported, net of tax,
as a separate component of shareholders' equity.
There were no securities classified as "trading" during 1996, 1995,
or 1994.
Premiums and discounts on debt securities are recognized as interest
income using a level yield over the period to maturity. Declines in
the fair value of individual held-to- maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to
their fair value. The related write-downs are included in earnings
as realized losses. The specific identification method is used to
determine realized gains and losses on sales of securities available
for sale.
LOANS
Loans are stated net of deferred fees and costs and unearned
discount. Loan interest income is accrued using various methods
which approximate a constant yield. Loan origination and commitment
fees and direct loan origination costs are deferred and recognized
over the life of the related loans.
Non-accrual loans are those on which the accrual of interest has
ceased. Loans are placed on non-accrual status if, in the opinion of
management, collection is doubtful, or when principal or interest is
past due 90 days or more unless collateral is sufficient to cover
principal and interest and the loan is in the process of collection.
Interest accrued, but not collected at the date a loan is placed on
non-accrual status, is reversed and charged against interest income.
In addition, the amortization of net deferred loan fees is suspended
when a loan is placed on non-accrual status. Subsequent cash
receipts are applied either to the outstanding principal or recorded
as interest income, depending on management's assessment of ultimate
collectibility of principal and interest. Loans are returned to an
accrual status when the borrower's ability to make periodic
principal and interest payments has returned to normal (i.e. brought
current with respect to principal or interest or restructured) and
the paying capacity of the borrower and/or the underlying collateral
is deemed sufficient to cover principal and interest in accordance
with the Company's previously established loan-to-value policies.
23
<PAGE> 24
1. (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expenses. Loans are charged against the
allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, current
economic conditions that may affect the borrowers' ability to pay,
and other relevant matters.
While management utilizes the latest available information to
determine the potential for losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions
as well as adverse changes in the financial condition of borrowers.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance. Such
agencies may require the Company or the Bank to recognize additions
to the allowance based on their judgments of information available
to them at the time of their examination.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-income Recognition and Disclosures, require that impaired loans
be measured based on the present value of expected future cash flows
discounted at the loans' effective interest rate, the loans'
observable market price, or the fair value of the underlying
collateral.
For purposes of applying the measurement criteria for impaired loans
under SFAS No. 114, as amended, the Company excludes large groups of
smaller-balance homogeneous loans, primarily consisting of
residential real estate loans and consumer loans, as well as
commercial, financial, and agricultural loans with balances less
than $100,000. For applicable loans, the Company evaluates the need
for impairment recognition when a loan becomes non-accrual, or
earlier if based on management's assessment of the relevant facts
and circumstances, it is probable that the Bank will be unable to
collect all proceeds due according to the contractual terms of the
loan agreement. The Company's policy for the recognition of interest
income on impaired loans is the same as for non-accrual loans
discussed previously. Impaired loans are charged-off when the
Company determines that foreclosure is probable and the fair value
of the collateral is less than the recorded investment of the
impaired loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Costs of major replacements,
improvements and additions are capitalized. Depreciation expense is
computed on the straight line basis over the estimated useful lives
of the assets (ranging from 5 to 40 years), or for leasehold
improvements, over the life of the related lease if less than the
estimated useful life. Accelerated methods are used in depreciating
certain assets for income tax purposes.
24
<PAGE> 25
1. (CONTINUED)
REAL ESTATE OWNED OTHER THAN BANK PREMISES
Real estate owned is recorded at the lower of the recorded
investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in
the carrying value provided that the resultant carrying value does
not exceed fair value less estimated disposal costs. Costs relating
to holding the assets are charged to expense in the current period.
An allowance for estimated losses is provided when declines in fair
value below the carrying value are identified.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the periods in which those temporary differences are expected to
be recovered or settled.
The First Jermyn Corp. and its subsidiaries file a consolidated
Federal income tax return and the amount of income tax expense or
benefit is computed and allocated on a separate return basis.
CUSTOMER LIST
An intangible asset representing a customer list purchased is stated
at cost less accumulated amortization and is included in other
assets. Amortization expense is computed on the straight-line basis
over the estimated useful life of the asset (seven years).
RETIREMENT PLAN
The First National Bank of Jermyn has a retirement plan which covers
substantially all employees. The provisions of SFAS No. 87,
Employers' Accounting for Pensions are utilized to calculate net
pension cost.
EARNINGS PER COMMON SHARE
Earnings per common share are computed based on the weighted average
number of shares outstanding during each period.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The average
amounts of those reserve balances approximated $1,209,000 and
$1,158,000 in 1996 and 1995, respectively.
25
<PAGE> 26
3. SECURITIES
The amortized cost and fair value of securities is shown below (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1996
U.S. Treasury $24,052 $ 48 $ (15) $24,085
Marketable equity 150 - - 150
------- ----- ------ -------
$24,202 $ 48 $ (15) $24,235
======= ===== ====== =======
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
DECEMBER 31, 1996
Collateralized mortgage obligations
of U.S. government agencies
and corporations $14,998 $ 27 $ (407) $14,618
Mortgage-backed securities 10,231 175 (18) 10,388
------- ----- ------ -------
$25,229 $ 202 $ (425) $25,006
======= ===== ====== =======
INVESTMENT SECURITIES HELD
TO MATURITY:
DECEMBER 31, 1996
U.S. Treasury $39,354 $ 763 $ (102) $40,015
Obligations of states and
political subdivisions 18,273 376 (19) 18,630
Corporate obligations 200 4 - 204
------- ----- ------ -------
$57,827 $1,143 $ (121) $58,849
======= ===== ====== =======
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1995
U.S. Treasury $13,046 $ 179 $ - $13,225
Marketable equity 150 - - 150
------- ----- ------ -------
$13,196 $ 179 $ - $13,375
======= ===== ====== =======
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
DECEMBER 31, 1995
Collateralized mortgage obligations
of U.S. government agencies
and corporations $14,353 $ 25 $ (476) $13,902
Mortgage-backed securities 12,113 200 (9) 12,304
------- ----- ------ -------
$26,466 $ 225 $ (485) $26,206
======= ===== ====== =======
INVESTMENT SECURITIES HELD
TO MATURITY:
DECEMBER 31, 1995
U.S. Treasury $56,538 $1,697 $ (7) $58,228
U.S. government agencies 61 - - 61
Obligations of states and
political subdivisions 18,266 394 (10) 18,650
Corporate obligations 202 3 - 205
Foreign debt 250 - - 250
------- ----- ------ -------
$75,317 $2,094 $ (17 ) $77,394
======= ===== ====== =======
</TABLE>
26
<PAGE> 27
3. (CONTINUED)
During the first six months of 1994, the Bank monitored closely its
liquidity position and asset/liability gap position using new
modeling techniques. Based on these analyses, the Bank redefined its
determination of liquidity needs and identified approximately
$45,000,000 of securities (consisting of all municipal bonds, U.S.
Treasury securities with maturities generally greater than two
years, and various other securities with maturities generally
greater than two years) which the Bank believes it has the ability
and intent to hold to maturity. As a result, on June 30, 1994, the
Bank transferred these securities from the available for sale
category to the investment securities held to maturity portfolio at
fair value in accordance with Paragraph 15 of SFAS No. 115. The
remaining unrealized loss of $349,000, net of tax, continues to be
reported as a component of shareholders' equity and is being
amortized over the remaining lives of the individual securities as
an adjustment to yield. In addition, none of the securities
reclassified to the investment securities held to maturity portfolio
at June 30, 1994 were subsequently transferred to securities
available for sale in connection with the FASB's issuance of its
Special Report in November 1995.
The amortized cost and fair value of securities at December 31, 1996
by contractual maturity, are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Mortgage-backed securities Held-to-maturity
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Within one year $23,053 $23,085 $146 $147 $12,197 $12,312
After one year but
within five years 999 1,000 365 372 27,835 28,396
After five years but
within ten years - - 1,822 1,809 2,942 3,000
After ten years - - 22,896 22,678 14,853 15,141
Marketable equity 150 150 - - - -
------- ------- ------- ------- ------- -------
Total $24,202 $24,235 $25,229 $25,006 $57,827 $58,849
======= ======= ======= ======= ======= =======
</TABLE>
There were no sales of securities during 1996, 1995, and 1994.
At December 31, 1996 and 1995, securities with an amortized cost of
approximately $27,789,755 and $16,697,161 (fair value of
approximately $28,307,248 and $17,429,348), respectively, were
pledged to secure public deposits as required or permitted by law.
27
<PAGE> 28
4. LOANS AND REAL ESTATE OWNED OTHER THAN BANK PREMISES
The following is a summary of the Bank's loan portfolio on December
31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Real estate - mortgage $122,625 $113,334
Commercial, financial and agricultural 33,042 30,679
Installment loans 39,789 28,635
Real estate-construction 2,142 1,822
-------- --------
Total loans- gross $197,598 $174,470
======== ========
Less Unearned income 988 1,128
Allowance for loan losses 3,111 3,015
-------- --------
Net loans $193,499 $170,327
======== ========
</TABLE>
A significant portion of the Bank's loans are collateralized by
residential and commercial real estate located in Northeastern
Pennsylvania with a primary concentration in Lackawanna County. The
Bank's primary concentration of credit risk is related to the real
estate market in the aforementioned area. The ultimate
collectibility of most of the Bank's loan portfolio is greatly
affected by the economic conditions within Northeastern
Pennsylvania. Management is not aware of any other significant
concentrations of credit risk within its loan portfolio.
Presented below are total non-accruing loans of the Bank at December
31, 1996, 1995, and 1994. Also shown is the approximate related
amount of interest recorded as income and interest not recorded as
income for the years ended December 31, 1996, 1995, and 1994 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Non-accrual loans $3,080 $1,978 $3,043
====== ====== ======
Interest income recorded $ 114 $ 92 $ 29
Interest income not recorded 179 141 258
------ ------ ------
Total possible interest income $ 293 $ 233 $ 287
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the Bank had impaired loans totaling
approximately $1,808,000 and $1,423,000, respectively, all of which
had a related allowance for impairment. At December 31, 1996 and
1995, the allowance for losses on impaired loans totaled $425,000
and $238,000, respectively. The average balance of impaired loans
for 1996 and 1995 was $1,931,000 and $1,649,000. There were no
charge-offs or recoveries on impaired loans during either 1996 or
1995. The Bank recognizes interest income on impaired loans on a
cash basis method. Total interest income recognized on impaired
loans for the years ended December 31, 1996 and 1995 totaled $24,000
and $31,000, respectively.
28
<PAGE> 29
4. (CONTINUED)
The following table presents the amounts due the Bank from principal
officers, directors and their related businesses in excess of
$60,000 as of each December 31. The indebtedness was incurred in the
ordinary course of business, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons (in thousands):
<TABLE>
<CAPTION>
Year Ended
1996 1995
---- ----
<S> <C> <C>
Balance, at beginning of year $ 2,729 $ 3,418
Additions 1,690 1,298
Repayments (685) (1,987)
------- -------
Balance, at end of year $ 3,734 $ 2,729
======= =======
</TABLE>
An analysis of real estate owned other than Bank premises for 1996
and 1995 follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
1996 1995
---- ----
<S> <C> <C>
Balance, at beginning of year $ 296 $ 574
Transfers from real estate - commercial and real estate loans category 90 310
Real estate sales (48) (567)
Loss on disposition of real estate (139) (21)
----- -----
Balance, at end of year $ 199 $ 296
===== =====
</TABLE>
5. ALLOWANCE FOR LOAN LEASES
A summary of the transactions in the Bank's allowance for loan
losses is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Balance, January 1 $ 3,015 $ 2,835 $ 2,849
Losses charged to allowance (170) (274) (567)
Recoveries credited to allowance 83 89 99
------- ------- -------
$ (87) $ (185) $ (468)
------- ------- -------
Provision charged to operations 183 365 454
Balance, December 31 $ 3,111 $ 3,015 $ 2,835
======= ======= =======
</TABLE>
29
<PAGE> 30
6. BANK PREMISES, LEASEHOLD IMPROVEMENTS, AND FURNITURE AND EQUIPMENT
A summary of the Company's bank premises, leasehold improvements and
furniture and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
---- ----
<S> <C> <C> <C>
Land and buildings $ 3,679 $ 3,651
Land under capitalized lease 302 302
Bank premises and leasehold improvements
under capitalized lease 2,217 2,021
Furniture and equipment 2,724 2,586
------- -------
Total at cost 8,922 8,560
Less: Accumulated depreciation and
amortization (3,855) (3,370)
------- -------
Net bank premises, leasehold improvements
and furniture and equipment $ 5,067 $ 5,190
======= =======
</TABLE>
7. DEPOSITS
Interest-bearing deposits at December 31, 1996 and 1995 includes NOW
accounts of $17,555,000 and 19,177,000, respectively.
The following table summarizes the maturity distribution of
certificates of deposit greater than $100,000 at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Three months or less $11,475 $16,569
Over three months through twelve months 11,209 8,852
Over one year through five years 3,417 1,372
------- -------
Total $26,101 $26,793
======= =======
</TABLE>
Interest expense approximated $1,527,000, $1,214,000 and $559,000
for certificates of deposit greater than $100,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
30
<PAGE> 31
8. CAPITALIZED LEASE OBLIGATION
The Bank has capitalized a noncancelable lease for two office
buildings which expires in the year 2004. The lease requires payment
of property taxes, maintenance costs and insurance on the
properties.
Future minimum payments, by year and in the aggregate, under the
capitalized lease obligation are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 155
1998 155
1999 155
2000 155
Thereafter 565
-------
Total minimum lease payments $ 1,185
=======
Less amount representing interest. (364)
-------
Present value of net minimum lease payments $ 821
=======
</TABLE>
9. RETIREMENT PLAN
The Bank has a noncontributory defined benefit retirement plan which
covers all eligible employees. The Bank's plan provides retirement
benefits based upon years of service
and average compensation during the three years preceding
retirement. The Bank's annual funding policy is to contribute an
amount that can be deducted for Federal income tax purposes, using
an actuarial cost method (Aggregate Cost Method) and assumptions,
which differ from those used for financial reporting. Contributions
are intended to provide not only for benefits attributable to
service to date, but also for those benefits expected to be earned
in the future. The contributions for 1996, 1995, and 1994
approximated $186,000, $221,000, and $204,000, respectively.
The following table sets forth the Bank's plan's funded status as of
December 31, 1996 and 1995 and amounts recognized in the
consolidated balance sheets at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
---- ----
<S> <C> <C>
Projected benefit obligation:
Accumulated benefit obligation:
Vested benefits $ 3,533 $ 3,062
Non-vested benefits 284 243
------- -------
Accumulated benefit obligation total 3,817 3,305
Effect of projected future compensation levels 1,472 1,499
------- -------
Projected benefit obligation total 5,289 4,804
------- -------
Plan assets at fair value 5,649 4,849
Projected benefit obligation total less than plan assets at fair value 360 90
Unrecognized net (gain) loss (313) (175)
Unrecognized transaction obligation 49 53
Unrecognized prior service cost (109) --
------- -------
Accrued pension cost included on consolidated balance sheet $ (13) $ (32)
======= =======
</TABLE>
31
<PAGE> 32
9. (CONTINUED)
Net pension cost for 1996, 1995 and 1994 included the following
components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost $ 183 $ 149 $ 167
Interest cost 349 310 286
Actual return on plan assets (688) (825) 4
Amortization of transitional obligation 4 4 4
Amortization of prior service cost (7) -- --
Asset gain (loss) deferred 326 531 (299)
----- ----- -----
Net pension cost $ 167 $ 169 $ 162
===== ===== =====
</TABLE>
In determining the estimated costs of the plan, the weighted-average
discount rate used was 7.00%, 7.00%, and 8.06% for 1996, 1995, and
1994 respectively. The weighted-average rate of increase in
compensation levels was 4.50%, compounded annually for 1996, 1995,
and 1994. The weighted-average expected long-term rate of return on
plan assets used in determining net periodic pension cost was 7.50%
for 1996, 1995 and 1994 . The plan's assets consist primarily of
mutual funds and short-term investments administered by an
independent bank.
10. INCOME TAXES
The components of federal income tax expense (benefits) are as
follows (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ 1,323 $ 1,380 $ 1,406
Deferred (15) (11) (40)
------- ------- -------
$ 1,308 $ 1,369 $ 1,366
======= ======= =======
</TABLE>
A reconciliation of the income tax expense in the accompanying
statements of income with the amount computed by applying the
statutory federal income tax rate to income before income taxes is
as follows (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Tax expense at 34% rate $ 1,636 $ 1,572 $ 1,463
Interest from tax exempt loans and investments, net (329) (204) (98)
Other, net 1 1 1
------- ------- -------
Income tax expense $ 1,308 $ 1,369 $ 1,366
======= ======= =======
</TABLE>
32
<PAGE> 33
10. (CONTINUED)
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 in accordance with SFAS
No. 109 are presented below (in thousands):
<TABLE>
<CAPTION>
l996 1995
---- ----
<S> <C> <C> <C>
Deferred tax assets:
Unrealized losses on securities available for sale $ 244 $ 278
Allowance for loan losses 677 716
Deferred loan fees 277 373
Deferred directors fees 78 69
Fidelity loss 109 --
Others, net 177 166
------- -------
Total gross deferred tax assets 1,562 1,602
------- -------
Less valuation allowance -- --
Net deferred tax assets 1,562 1,602
------- -------
Deferred tax liabilities:
Depreciation (96) (125)
Prepaid Pension (23) (16)
------- -------
Amortization of customer list (1) --
Total gross deferred tax liabilities (120) (141)
------- -------
Net deferred tax asset $ 1,442 $ 1,461
======= =======
</TABLE>
Based on the Company's current and past taxable history and the
anticipated level of future taxable income, management of the
Company believes the existing deductible
temporary differences will, more likely than not, reverse in future
periods in which the Company generates net taxable income.
Accordingly, the Company does not believe a valuation allowance is
necessary at December 31, 1996. There can be no assurance, however,
that the Company will generate any earnings or any specific level of
continued earnings.
11. LITIGATION RECOVERY
Included in non-interest income in 1996 is a $600,000 gain on a
legal settlement. This is a non-recurring transaction with no
comparable items in 1995 or 1994.
33
<PAGE> 34
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank makes various commitments
and incurs certain contingent liabilities that are not presented in
the accompanying financial statements. The commitments include
various commitments to extend credit. At December 31, 1996,
approximate unused commitments were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Revolving home equity lines $2,403,000
Real estate-mortgages 527,000
Standby letters of credit 784,000
Other 3,339,000
----------
Total $7,053,000
==========
</TABLE>
The Bank does not anticipate any material losses as a result of its
commitments. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized
in the balance sheet. The exposure to credit loss in the event of
non-performance by the counter party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds various
collateral to support these commitments. The Bank uses the same
credit policies in making commitments and conditional obligations as
it does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank
evaluated each customer's creditworthiness on a case by case basis.
The amount of collateral, if any, obtained upon extension of credit
is based on management's credit evaluation of the borrower.
Collateral held usually consists of real estate, but may include
securities, property or other assets.
LEGAL PROCEEDINGS
In the normal course of business, various legal proceedings are
incurred. While it is difficult to predict or determine the ultimate
outcome, in the opinion of management, there are no current
proceedings against the Company which are expected to materially
affect the Company's financial position, operating results and/or
liquidity.
CONCENTRATIONS OF CREDIT RISK
The Bank considers its primary market area for lending and savings
activities to be the Northeastern region of Pennsylvania. Although
the Bank has a diversified loan portfolio, a substantial factor in
its debtors' ability to honor their contractual obligations is the
economic stability of that region.
34
<PAGE> 35
13. REGULATORY MATTERS
The Bank is 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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. 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 Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as
well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank
must maintain minimum Total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have
changed the Bank's category.
35
<PAGE> 36
13. (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted
Assets) $30,918,000 17.76% >=$13,927,000 >=8.00% >=$17,409,000 >=10.00%
Tier I Capital
(to Risk Weighted
Assets) 28,730,000 16.50% >=6,964,000 >=4.00% >=10,446,000 >=6.00%
Tier I Capital
(to Average Assets) 28,730,000 8.85% >=12,984,000 >=4.00% >=16,230,000 >=5.00%
As of December 31, 1995:
Total Capital
(to Risk Weighted
Assets) $28,743,000 17.39% >=$13,224,000 >=8.00% >=$16,530,000 >=10.00%
Tier I Capital
(to Risk Weighted
Assets) 26,665,000 16.13% >=6,612,000 >=4.00% >=9,918,000 >=6.00%
Tier I Capital
(to Average Assets) 26,665,000 8.75% >=12,190,000 >=4.00% >=15,237,000 >=5.00%
</TABLE>
National bank regulations limit the amount of dividends that may be
paid without prior approval of the Bank's regulatory agency. Under
this limitation, the payment in any year is limited to the net
profits (as defined by the regulations) for that year plus the
retained net profits (as defined by the regulations) for the
preceding two years. The Company and Bank are also subject to
minimum capital levels which could minimize payment of dividends,
although the Company and Bank currently have capital levels which
are in excess of minimum capital level ratios required. The limit on
dividends by the Bank to the Company as of December 31, 1996 was
approximately $6,642,000.
Federal bank laws and regulations prohibit the Bank from extending
credit to the Company in excess of its capital and surplus (as
defined by the regulations). The Bank limit on extension of credit
to the Company was approximately $4,776,000 as of December 31, 1996.
36
<PAGE> 37
14. PARENT COMPANY FINANCIAL STATEMENTS - THE FIRST JERMYN CORP.
BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
ASSETS:
Investment in subsidiaries $28,600 $26,134
Cash 2 3
Other assets 72 72
------- -------
Total assets $28,674 $26,209
======= =======
SHAREHOLDERS' EQUITY $28,674 $26,209
======= =======
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS OF SUBSIDIARIES:
Dividends received $ 1,105 $ 1,018 $ 930
Undistributed net income 2,400 2,237 2,011
OTHER EXPENSES - NET (1) (1) (6)
FEDERAL INCOME TAX BENEFIT -- -- 2
------- ------- -------
NET INCOME $ 3,504 $ 3,254 $ 2,937
======= ======= =======
</TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,504 $ 3,254 $ 2,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,400) (2,237) (2,011)
------- ------- -------
Net cash provided by operating activities 1,104 1,017 926
------- ------- -------
FINANCING ACTIVITIES:
Dividends paid to shareholders (1,105) (1,018) (930)
------- ------- -------
Net cash used in financing activities (1,105) (1,018) (930)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) (1) (4)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3 4 8
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2 $ 3 $ 4
======= ======= =======
NON-CASH TRANSACTIONS
Transfer of other assets between parent and subsidiary $ -- $ (9) $ 6
======= ======= =======
</TABLE>
37
<PAGE> 38
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, as amended by SFAS No.
119, requires the Bank to disclose estimated fair value of its
financial instruments.
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For cash, due from banks, and federal funds sold the carrying amount
is a reasonable estimate of fair value.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
LOANS
Fair values are estimated for portfolios of loans with similar
characteristics. Loans are segregated by type: commercial,
commercial mortgages, construction, residential mortgages and
consumer. The fair value of residential mortgage loans are estimated
using quoted market prices for sales of whole loans with similar
characteristics such as repricing dates, product type and size. For
residential loans that reprice frequently, the carrying amount
approximates fair value. The fair value of other types of loans for
which quoted market prices are not available is estimated by
discounting expected future cash flows using the current rates at
which similar loans would be made to borrowers with comparable
credit ratings and for similar remaining maturities. The fair value
of non-performing loans is based on recent external appraisals.
Estimated cash flows, discounted using a rate commensurate with the
risk associated with the estimated cash flow are utilized if
appraisals are not available.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is equal to
the amount payable on demand. The fair value of the remaining time
deposits is based on the discounted value of the contractual cash
flows. The discount rate is estimated using the rates currently
offered for deposits with comparable remaining maturities.
OFF-BALANCE SHEET INSTRUMENTS
The fair value of off-balance sheet instruments, including
commitments to extend credit and stand-by letters of credit, is
estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflect the present
creditworthiness of the counterparties.
38
<PAGE> 39
15. (CONTINUED)
The carrying amount and estimated fair value of the Company's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 10,003 $10,003 $14,201 $ 14,201
Securities available for sale 24,235 24,235 13,375 13,375
Mortgage-backed
securities available for sale 25,006 25,206 26,206 26,206
26,206
Investment securities 57,827 58,849 75,317 77,394
Loans, net 193,499 193,838 170,327 170,661
Financial liabilities:
Deposits $290,115 $290,503 $281,298 $281,797
</TABLE>
The fair values of the Bank's off-balance sheet financial
instruments at December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
Contract Fair Contract Fair
Value Value Value Value
<S> <C> <C> <C> <C> <C>
Off balance sheet instruments:
Commitments to extend credit $2,930 $59 $3,980 $80
Standby letters of credit 784 -- 1,007 --
Other 3,339 -- 1,010 --
</TABLE>
16. SUBSEQUENT EVENT
During the first quarter of 1997, the Company discovered certain
irregularities allegedly involving an employee. Management has
accrued its full estimate of the fidelity loss as of December 31,
1996 in non-interest expense. Management believes that this loss
will be recoverable (less a $50,000 deductible) under the Company's
Fidelity Bond Insurance Policy. Such recovery, if any, will be
recognized in the Company's financial statements when received.
39
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of The First Jermyn Corp.:
We have audited the accompanying consolidated balance sheets of The First Jermyn
Corp. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The First Jermyn
Corp. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
February 25, 1997, except as to Note 16
which is as of March 17, 1997
40
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