<PAGE> 1
FORM 10-K
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, 1997
[ ] 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.
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(Exact name of small business registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2275242
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(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
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Securities registered under Section 12 (b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
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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-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State issuer's revenues for its most recent year. $ 23,296,000
------------
Based on the closing sales price of March 17, 1998, 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 executive
officers) of the registrant was $17,673,000.
The number of shares outstanding of the registrant's common stock, $1.25 par
value was 884,680 at March 15, 1998.
<PAGE> 2
FORM 10-K
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, 1997 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, 1997 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-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I
ITEM 1. Description of Business 1-4
ITEM 2. Description of Properties 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. Selected Financial Data 6
ITEM 7. Management's Discussion and Analysis or Plan of Operation 6
ITEM 8. Financial Statements and Supplementary Data 6
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 6
PART III
ITEM 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 7
ITEM 11. Executive Compensation 7
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 7
ITEM 13. Certain Relationships and Related Transactions 7
PART IV
ITEM 14. 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, 1997, the Company's subsidiary employed approximately 122
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.
PENDING ACQUISITION
On October 15, 1997, the Company entered into a definitive merger
agreement with Upper Valley Bank Corp, Inc. (Upper Valley) whereby Upper Valley
will be merged with and into the Company. As soon as practicable after the
merger Upper Valley's sole subsidiary NBO National Bank will be merged with and
into the Bank. This combination will create a regional community bank with
approximately $600 million in total assets and strong geographic market presence
in Northeastern Pennsylvania.
SUBSIDIARIES
The Bank (a Pennsylvania chartered commercial bank) was established in
1902. The operations of the Bank are conducted from six 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.
<PAGE> 5
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.
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.
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,
<PAGE> 6
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.
Prompt Corrective Action
The prompt corrective action regulations of FDICIA 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, 1997
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.
<PAGE> 7
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY
OWNED/ DATE LEASE OR LEASEHOLD
LOCATION LEASED EXPIRES IMPROVEMENTS (2) DEPOSITS
- -------- ------ ------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FNBJ
Main Office Leased 2004 805 89,364
645 Washington Ave
Jermyn, Pa 18433
Keyser Ave. Branch Leased 2004 420 104,939
1700 N. Keyser Ave.
Scranton, PA 18508
Jessup Branch Owned 632 42,123
210 Church St.
Jessup, PA 18434
Minooka Branch Owned 1,784 37,488
500 Davis St.
Scranton, PA 18505
Carbondale Branch Owned 431 11,073
67 Salem Ave.
Carbondale, PA 18407
Daleville Branch Leased 2000 0 7,123
Route 502 RD 3
Moscow, PA 18444
</TABLE>
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
Discuss the vote on the UVB/NBO merger
<PAGE> 8
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. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from page
7 of the Company's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required herein is incorporated by reference from pages
3-18 of the Company's Annual Report.
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL ANNUAL REPORT
STATEMENTS AND SUPPLEMENTARY TO SHAREHOLDERS
FINANCIAL DATA PAGE REFERENCE
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<S> <C> <C>
Consolidated Balance Sheets,
December 31, 1997 and 1996..................................................19
Consolidated Statements of Income,
Years Ended December 31, 1997, 1996 and 1995................................20
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1997, 1996 and 1995................................21
Consolidated Statements of Cash Flows,
Years Ended December 31, 1997,1996 and 1995.................................21
Notes to Consolidated Financial Statements....................................22-33
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
<PAGE> 9
PART III
ITEM 10. 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, 1997, for the annual meeting of shareholders.
ITEM 11. 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, 1997, for the annual meeting of
shareholders.
ITEM 12. 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, 1997, for the annual meeting of shareholders.
ITEM 13. 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, 1997, for the annual meeting of
shareholders and Note 4 - Loans of the Notes to Consolidated Financial
Statements of the 1997 Annual Report to Shareholders.
<PAGE> 10
PART IV
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PAGE
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ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C> <C>
(a) (1) The following financial statements are included in Part II Item 7:
Independent Auditors' Report..............................................39*
Financial Statements:
Consolidated Balance Sheets, December 31, 1997 and 1996................19*
Consolidated Statements of Income,
Years Ended December 31, 1997 , 1996 and 1995.......................20*
Consolidated Statement of Changes in Shareholders' Equity,
Years Ended December 31, 1997, 1996 and 1995........................21*
Consolidated Statement of Cash Flows,
Years Ended December 31, 1997, 1996 and 1995........................21*
Notes to Consolidated Financial Statements..........................22-33*
Selected Quarterly Financial Data-
Years Ended December 31, 1997, and 1996................................18*
</TABLE>
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(2) Exhibits included herein or incorporated by reference herein:
3.1 Registrant's Articles of Incorporation, as amended
3.2 Registrant's Bylaws
10.1 Lease Agreement, Option Agreement and Memorandum of
Lease made the 29th day of August 1974 by and
between Sterling Industrial Corporation 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 herein by reference.
10.2 Employment Agreement dated June 9, 1993, by and between The
First National Bank of Jermyn and William M. Davis
10.3 Employment Agreement dated June 9, 1993, by and between The
First National Bank of Jermyn and Steven R. Tokach
10.4 Agreement and Plan of Merger between Registrant and Upper
Valley Bankcorp, Inc. dated October 15, 1997, filed with
Form 8-K dated November 14, 1997 and incorporated herein by
reference
21 Subsidiaries of the Registrant
27 Financial Data Schedule
*Refers to page numbers in Annual Report to Shareholders incorporated by
reference
(b) Current report of Form 8-K dated November 14, 1997
<PAGE> 11
FINANCIAL HIGHLIGHTS
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE YEAR 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total interest income $22,600 $22,722 $21,492
Total interest expense 11,288 11,401 10,282
Net interest income 11,312 11,321 11,210
Provision for loan losses 180 183 365
Non-interest income 696 1,136 582
Non-interest expense 7,055 7,462 6,804
Income tax provision 1,290 1,308 1,369
Net income 3,483 3,504 3,254
Cash dividends paid 1,239 1,105 1,018
AT YEAR END
Assets $325,737 $321,563 $309,986
Loans, gross 204,464 197,598 174,470
Allowance for loan losses 2,696 3,111 3,015
Securities 101,469 107,068 114,898
Deposits 292,110 290,115 281,298
Shareholders' equity 31,277 28,674 26,209
SHARE DATA
Net income $3.94 $3.96 $3.68
Cash dividends 1.40 1.25 1.15
Book value 35.35 32.41 29.63
Number of shares outstanding, net 884,680 884,680 884,680
SELECTED RATIOS
Return on assets (net income divided by average total assets) 1.09% 1.10% 1.12%
Return on equity (net income divided by average equity) 11.66% 12.71% 13.20%
Common stock dividend payout rate (dividends declared divided
by net income) 35.57% 31.54% 31.28%
Equity to assets ratio (average equity divided by average total assets) 9.34% 8.62% 8.48%
Tier I Leverage Ratio 9.45% 8.85% 8.75%
Risk-Based Capital Ratio, Tier I 16.56% 16.50% 16.13%
Risk-Based Capital Ratio, Total 17.82% 17.76% 17.39%
</TABLE>
1
<PAGE> 12
FINANCIAL REVIEW
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE YEAR 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income $22,600 $22,722 $21,492 $18,103 $17,401
Total interest expense 11,288 11,401 10,282 7,197 7,127
Net interest income 11,312 11,321 11,210 10,906 10,274
Provision for loan losses 180 183 365 454 1,403
Non-interest income 696 1,136 582 577 500
Non-interest expense 7,055 7,462 6,804 6,726 6,284
Federal income tax provision 1,290 1,308 1,369 1,366 927
Net income 3,483 3,504 3,254 2,937 2,160
Cash dividends paid 1,239 1,105 1,018 930 885
AT YEAR END
Assets $325,737 $321,563 $309,986 $278,015 $263,427
Loans, gross 204,464 197,598 174,470 168,808 163,585
Allowance for loan losses 2,696 3,111 3,015 2,835 2,849
Securities 101,469 107,068 114,898 92,464 83,307
Deposits 292,110 290,115 281,298 250,842 239,007
Shareholders' equity 31,277 28,674 26,209 23,164 22,506
SHARE DATA
Net income $3.94 $3.96 $3.68 $3.32 $2.44
Cash dividends 1.40 1.25 1.15 1.05 1.00
Book value 35.35 32.41 29.63 26.18 25.44
Number of shares outstanding, net 884,680 884,680 884,680 884,680 884,680
</TABLE>
2
<PAGE> 13
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, Daleville, Jermyn and Jessup and two offices
in Scranton (Keyser Oak Plaza and Minooka Section), Pennsylvania. The Bank
offers all services normally provided by a community bank, including deposit,
safekeeping and loan functions through its branch system.
On October 31, 1997, the Company entered into a definitive merger agreement
with Upper Valley Bancorp, Inc. (Upper Valley) whereby Upper Valley will be
merged with and into the Company. As soon as practicable, after the merger
Upper Valley's sole subsidiary NBO National Bank will be merged with and into
the Bank. This combination will create a regional community bank with
approximately $600 million in total assets and strong geographic market
presence in northeastern Pennsylvania.
RESULTS OF OPERATIONS
Net income for 1997 was $3,483,000, a decrease of 0.6% from the prior year.
The net income for 1996, $3,504,000 an increase of 7.7% from 1995. 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>
<CAPTION>
TABLE 1
Increase (Decrease)
1997 vs. 1996 1996 vs. 1995
------------- -------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income $(122) 0.5% $1,230 5.7%
Interest expense (113) 1.0% 1,119 10.9%
----- ------
Net interest income (9) 0.1% 111 1.0%
Provision for loan losses (3) 1.6% (182) (49.9%)
----- ------
Net interest income after provision for loan losses (6) 0.1% 293 2.7%
Non-interest income (440) 38.7% 554 95.2%
Non-interest expense (407) 5.5% 658 9.7%
----- ------
Income before Federal income tax provision (39) 0.8% 189 4.1%
Federal income tax provision (18) 1.4% (61) (4.5)%
----- ------
Net income $(21) 0.6% $250 7.7%
===== ======
</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 1997, 1996, and
1995. Table II exhibits the volume and yield/rate variances for
interest-earning assets and interest-bearing liabilities.
3
<PAGE> 14
TABLE II
AVERAGE BALANCES AND RATES
<TABLE>
<CAPTION>
1997 1996 1995
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 $30,525 $2,535 8.30% $33,715 $2,961 8.78% $38,124 $3,554 9.32%
Real estate - commercial
and residential
mortgage 124,015 10,227 8.25% 112,184 9,377 8.36% 105,368 9,190 8.72%
Installment - net 43,415 3,563 8.21% 34,318 2,877 8.38% 25,678 2,197 8.56%
------- ------ ------- ------ ------- ------
Total loans (including fees) 197,955 16,325 8.25% 180,217 15,215 8.44% 169,170 14,941 8.83%
Securities:
Taxable 81,985 4,995 6.09% 101,818 6,372 6.26% 94,586 5,979 6.32%
Tax-exempt 18,088 1,447 8.00% 18,269 1,499 8.21% 6,960 568 8.16%
------- ------ ------- ------ ------- ------
Total securities 100,073 6,442 6.44% 120,087 7,871 6.55% 101,546 6,547 6.45%
Federal funds sold 6,944 385 5.54% 4,737 253 5.34% 5,520 325 5.89%
Interest-bearing deposits
in banks 290 16 5.52%
------- ------ ------- ------ ------- ------
Total interest-earning assets 305,262 23,168 7.59% 305,041 23,339 7.65% 276,236 21,813 7.90%
Noninterest-earning assets 14,498 14,858 14,341
-------- -------- --------
TOTAL ASSETS $319,760 $319,899 $290,577
======== ======== ========
Interest-bearing liabilities:
Deposits
Savings, Club, NOW,
and money market
accounts $94,119 $2,185 2.32% $94,229 $2,302 2.44% $95,969 $2,403 2.50%
Certificates of deposits 165,727 9,025 5.45% 168,005 8,992 5.35% 142,012 7,787 5.48%
------- ------ ------- ------ ------- ------
Total deposits 259,846 11,210 4.31% 262,234 11,294 4.31% 237,981 10,190 4.28%
Federal funds purchased 6 1 4.39% 414 22 5.31% 18 1 5.56%
Capitalized lease obligation 779 78 10.0% 853 85 9.96% 920 91 9.89%
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 260,631 11,289 4.33% 263,501 11,401 4.33% 238,919 10,282 4.30%
Noninterest bearing liabilities 29,251 28,825 27,009
Shareholders' equity 29,878 27,573 24,649
------ ------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $319,760 $319,899 $290,577
======== ======== ========
Net interest income $11,879 $11,938 $11,531
Interest rate spread 3.26% 3.32% 3.60%
Margin analysis:
Interest income/interest -
earning assets 7.59% 7.65% 7.90%
Interest expense/interest -
earning assets 3.70% 3.74% 3.72%
Net interest income/interest -
earning assets 3.89% 3.91% 4.18%
Tax equivalent adjustments:
Loans $76 $107 $128
Securities 492 510 193
--- --- ---
Total $568 $617 $321
</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> 15
TABLE III
VOLUME AND YIELD/RATE VARIANCES
<TABLE>
<CAPTION>
1997 compared to 1996 1996 compared to 1995
--------------------- ---------------------
Yield/ Yield/
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $1,460 $(350) $1,110 $950 $ (676) $274
Securities:
Taxable (1,209) (168) (1,377) 453 (60) 393
Tax-exempt (14) (38) (52) 928 3 931
Federal funds sold 122 10 132 (44) (28) (72)
Interest-bearing deposits
in banks (341) 357 16 - - -
------ ------ ----- ------ ------ -----
Total interest-earning assets 18 (189) (171) 2,287 (761) 1,526
------ ------ ----- ------ ------ -----
Interest expense:
Savings, Club, NOW, and
money market accounts 3 (120) (117) (43) (58) (101)
Certificates of deposit (88) 121 33 1,395 (190) 1,205
Federal funds purchased (22) - (22) 21 - 21
Capitalized lease obligation (7) - (7) (7) 1 (6)
------ ------ ----- ------ ------ -----
Total interest-bearing liabilities (114) 1 (113) 1,366 (247) 1,119
------ ------ ----- ------ ------ -----
Net interest income $132 $(190) $(58) $921 $(514) $407
====== ====== ===== ====== ====== =====
</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 decrease in 1997 taxable equivalent net interest income was driven by
declines in the yields on loans and taxable securities, partially offset by
an increase in the yield on interest-bearing deposits in banks. The most
significant component of loans is real estate mortgages which had a decrease
in yield of 8 basis points from 1996 to 1997.
As shown in Table II and III, 1997 taxable-equivalent net interest income
decreased $59,000 (0.5%) compared to 1996. Interest income decreased
$171,000 and interest expense decreased $112,000. The 1997 net interest
margin was 3.89% (2 basis points below 1996). The decline in the net
interest margin was a result of competitive pressures causing yields/rates to
decrease for total interest-earning assets while remaining constant for total
interest-bearing liabilities. Net interest income as a percentage of
interest income also fell in 1996 compared to 1995 due to increased
competition in the local retail banking market.
Taxable-equivalent net interest income for 1996 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. The 1996 versus 1995 increase in average interest-bearing
deposits ($24,253,000) was invested in loans and securities.
5
<PAGE> 16
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 $2,696,000 at December 31, 1997 as compared
to $3,111,000 at December 31, 1996, a decrease of 13.3%. The allowance was
1.32% of total loans (net of unearned discount and fees) at December 31, 1997
and 1.58% at December 31, 1996. There is no foreign loan exposure in the
Bank's loan portfolio. The provision for loan losses remained relatively
consistent at $180,000 and $183,000 in 1997 and 1996, respectively, both of
which were lower than the 1995 provision of $365,000. The lower provision in
1996 reflected a five-year low in the amount of net charge-offs. While net
charge-offs increased in 1997 due to write downs on a limited number of
individual borrowers, nonperforming loans reached a six-year low at December
31, 1997 resulting in a reduced need for a 1997 provision and a decline in
the year-end allowance for loan losses.
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> 17
TABLE IV
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans, net of unearned income $197,955 180,217 $169,170 $161,381 $168,721
======== ======= ======== ======== ========
Allowance for loan losses at beginning of period $3,111 $3,015 $2,835 $2,849 $2,382
------ ------ ------ ------ ------
Charge-offs:
Domestic:
Commercial, financial and agricultural 174 4 53 249 931
Real estate commercial and residential
mortgage 559 130 193 293 22
Installment 50 36 28 25 60
Total 783 170 274 567 1,013
Recoveries:
Domestic:
Commercial, financial and agricultural 168 78 76 93 51
Real estate- commercial and residential
mortgage 3 - - - -
Installment 17 5 13 6 26
------ ------ ------ ------ ------
Total 188 83 89 99 77
------ ------ ------ ------ ------
Net charge-offs 595 87 185 468 936
Additions charged to operations 180 183 365 454 1,403
------ ------ ------ ------ ------
Allowance for loan losses at end of period $2,696 $3,111 $3,015 $2,835 $2,849
======== ======= ======== ======== ========
Percentage of net charge-offs during the period
to average loans outstanding during the period 0.30% 0.05% 0.11% 0.29% 0.55%
Percentage of allowance for loan losses to total loans -
net of unearned income, period end 1.32% 1.58% 1.74% 1.69% 1.75%
Percentage of allowance for loan losses to total
nonperforming loans, period end 188% 88% 121% 88% 212%
</TABLE>
TABLE V
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
% 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> <C> <C> <C>
Domestic:
Commercial, financial
and agriculture $165 17% $257 17% $680 18% $718 22% $1,242 28%
Real estate - commercial
and residential
mortgage 870 60% 1,272 63% 977 66% 1,037 65% 1,368 63%
Installment 42 23% 57 20% 86 16% 59 13% 54 9%
Unallocated 1,619 - 1,525 - 1,272 - 1,021 - 185 -
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $2,696 100% $3,111 100% $3,015 100% $2,835 100% $2,849 100%
======================================================================================
</TABLE>
7
<PAGE> 18
Allocations for commercial, financial and agricultural loans are determined
by reviewing significant or unusual loans. Allocations 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 allocated allowances for
commercial real estate and installment loans decreased in 1997 over 1996
based on the lower levels of nonperforming loans in those categories. In
1993 the Company had a five-year high in the level of net charge-offs. This
eliminated the need for some of the allocated allowances in 1994 as many of
the specifically identified losses had been addressed. However, to preserve
the total allowances at a level consistent with past trends and to provide
for losses inherent in the portfolio, management increased the unallocated
allowance in 1994.
NONINTEREST INCOME
Noninterest 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.
Service charges and fee income increased by $108,000 for the year ended
December 31, 1997 as compared to 1996 primarily as a result of the Bank
instituting a surcharge on all foreign transactions at its ATM's.
Noninterest 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 1997 or 1995.
NONINTEREST EXPENSE
The following table (Table VI) summarizes major components of non-interest
expense for the periods shown.
<TABLE>
<CAPTION>
1997 1996 1995
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 $3,740 1.23% $3,589 1.19% $3,315 1.16%
Occupancy costs 716 0.23% 575 0.19% 469 0.16%
Furniture and equipment expense 601 0.20% 556 0.18% 521 0.18%
Data processing services and
programs and supplies 428 0.14% 404 0.13% 424 0.15%
FDIC insurance 35 0.01% 2 0.00% 288 0.10%
Fidelity loss/(recovery) (372) (0.12)% 320 0.11% - -
Other expense 1,907 0.62% 2,016 0.67% 1,787 0.62%
------ ---- ------ ---- ------ ----
Total $7,055 2.31% $7,462 2.47% $6,804 2.37%
====== ==== ====== ==== ====== ====
</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 122 at December 31, 1997, 121
at December 31, 1996 and 110 at December 31, 1995. 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> 19
Occupancy costs and furniture and equipment expense increased in 1997
primarily as a result of the increased costs associated with a full year of
occupancy of the Daleville office. The Bank's FDIC insurance assessment
decreased in 1996 as a result of the Bank Insurance Fund (which provides
coverage for the Bank) having reached its goal of 1.25% of insured deposits.
Other expense decreased in 1997 due primarily to decreases in advertising and
a net loss on other real estate owned, partially offset by amortization of
customer list intangible. During the first quarter of 1997 the Company
discovered certain irregularities involving an employee. Management accrued
its full estimate of the fidelity loss as of December 31, 1996 in noninterest
expense. In 1997 the amount of the loss was recovered (less a $50,000
deductible) under the Company's Fidelity Bond Insurance Policy.
Occupancy costs increased in 1996 primarily as a result of the increased
costs associated with a full year of occupancy of the Carbondale office.
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.
INCOME TAX PROVISION
Fluctuations in the 1997, 1996, and 1995 income tax provisions and effective
tax rates result from the changes in federal taxable income and 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
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk
and to complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of
deploying excess funding not utilized for loan originations. Generally, the
Bank's investment policy is more restrictive than the OCC regulations allow
and, accordingly, the Bank has invested primarily in U.S. government and
agency securities, which qualify as liquid assets under the OCC regulations,
federal funds, and U.S. government sponsored agency issued mortgage-backed
securities. The Bank's investment portfolio consists of those securities
that are categorized as held-to-maturity, available-for-sale or held for
trading. The Bank does not currently maintain a portfolio of securities
categorized as held for trading. At December 31, 1997, the
available-for-sale securities portfolio totaled $56.4 million, or 17.3% of
assets and the held-to-maturity portfolio totaled $45.0 million, or 13.8% of
assets.
9
<PAGE> 20
The following table (Table VII) shows maturity data and related
weighted-average yields as of December 31, 1997 and carrying values as of
December 31, 1997, 1996, and 1995. Yields on available for sale securities
are computed using historical amortized cost.
TABLE VII
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
December 31, 1997
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> <C>
Securities available for sale
U.S. Treasuries
Market value $4,997 - - - $4,997
Yield (2) 5.87% - - - 5.87%
------ ------- ------ ------- -------
Total Market Value $4,997 - - - $4,997
====== ======= ====== ======= =======
Weighted average yield 5.87% - - - 5.87%
====== ======= ====== ======= =======
Investment securities held to maturity
U.S. Treasuries
Carrying value $9,963 $17,217 - - $27,180
Yield 6.37 5.92% - - 6.09%
States and municipal securities
Carrying value $- $1,588 $3,481 $12,784 $17,853
Yield (1) - 5.28% 5.14% 5.40% 5.34%
------ ------- ------ ------- -------
Total carrying value $9,963 $18,805 $3,481 $12,784 $45,033
====== ======= ====== ======= =======
Weighted average yield 6.37% 5.87% 5.14% 5.40% 5.79%
====== ======= ====== ======= =======
</TABLE>
10
<PAGE> 21
TABLE VII (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
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 $718 $29,550 $5,298 - $35,566
Yield (2) 7.62% 6.41% 6.70% - 6.47%
Collateralized mortgage obligations
of U.S. government agencies
Market value $- $1,453 $9,576 $3,557 $14,586
Yield (2) - 6.01% 5.89% 6.30% 6.00%
------ ------- ------- ------- -------
Total market value $718 $31,003 $14,874 $3,557 $50,152
====== ======= ======= ======= =======
Weighted average yield 7.62% 6.39% 6.18% 6.30% 6.33%
====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasuries and other U.S. government agencies $4,997 $24,085 $13,225
Other 1,287 150 150
------- ------- -------
Total $6,284 $24,235 $13,375
======= ======= =======
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasuries and other U.S government agencies $27,180 $39,354 $56,599
States and municipal 17,853 18,273 18,266
Other - 200 452
------- ------- -------
Total $45,033 $57,287 $75,317
======= ======= =======
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities $35,566 $10,388 $12,304
Collateralized mortgage obligations of U.S. government agencies 14,586 14,618 13,902
Other - - -
------- ------- -------
Total $50,152 $25,006 $26,206
======= ======= =======
</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> 22
LOANS
Net loans grew $7,000,000 to $203,610,000 at December 31, 1997. The largest
increase was in installment loans which increased $7,479,000 to $47,268,000
at December 31, 1997 compared to $39,789,000 at December 31, 1996. The
increase in the installment loan portfolio was primarily due to home equity
loans and, to a lesser degree, auto loans.
Net loans grew $23,268,000 to $196,610,000 at December 31, 1996. Increases
of $9,291,000 and $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 as been
successful in attracting a variety of new loans.
The following table (Table VIII) shows consolidated loans at December 31,
1997, 1996, 1995, 1994, and 1993 (including non-accrual loans) and summarizes
the maturity data for loans-gross (net of non-accrual loans) as of December
31, 1997.
TABLE VIII
LOANS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate - commercial and
residential mortgage $122,175 $122,625 $113,334 $107,448 $100,827
Commercial, financial and agricultural 33,732 33,042 30,679 37,154 46,178
Installment 47,268 39,789 28,635 21,408 15,136
Real estate - construction 1,289 2,142 1,822 2,798 1,444
-------- -------- -------- -------- --------
Total loans - gross $204,464 $197,598 $174,470 $168,808 $163,585
-------- -------- -------- -------- --------
Less unearned income (854) (988) (1,128) (1,296) (1,226)
-------- -------- -------- -------- --------
Total gross loans, net of unearned income $203,610 $196,610 $173,342 $167,512 $162,359
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
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 $13,958 $7,672 $99,765 $121,395
Commercial, financial and agricultural 10,995 3,332 18,993 33,320
Installment 5,672 31,197 10,399 47,268
Real estate - construction 1,289 - - 1,289
------- ------- -------- --------
Total loans - gross (net of non-accrual) $31,914 $42,201 $129,157 $203,272
======= ======= ======== ========
Fixed rate $7,042 $34,664 $86,195 $127,901
======= ======= ======== ========
Variable rate 24,872 7,537 42,962 75,371
------- ------- -------- --------
Total loans - gross (net of non-accrual) $31,914 $42,201 $129,157 $203,272
======= ======= ======== ========
</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> 23
Table IX summarizes the Bank's non-performing assets at December 31, 1997, 1996,
1995, 1994, and 1993.
TABLE IX
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $1,192 $3,080 $1,978 $3,043 $5,595
Loans past due 90 days or more and still accruing 242 468 511 185 448
------ ------ ------ ------ ------
Total non-performing loans 1,434 3,548 2,489 3,228 6,043
Real estate owned other than bank premises 188 199 296 574 516
------ ------ ------ ------ ------
Total $1,622 $3,747 $2,785 $3,802 $6,559
====== ====== ====== ====== ======
</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, 1997, 1996, 1995, 1994, and
1993 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $781 $2,216 $1,397 $1,939 $3,075
Commercial 411 864 581 1,104 2,520
------ ------ ------ ------ ------
Total $1,192 $3,080 $1,978 $3,043 $5,595
====== ====== ====== ====== ======
</TABLE>
DEPOSITS
Table X summarizes the average deposits and rates paid on deposit categories of
average total deposits for the last three years.
TABLE X
Average Deposits
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average Average Average Average
Deposits Rates Deposits Rates Deposits Rates
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Domestic:
NOW accounts $19,161 1.71% $17,955 2.13% $17,739 2.47%
Savings deposits 56,768 2.51% 56,180 2.51% 56,373 2.51%
Other time deposits 2,051 3.56% 2,006 3.48% 1,829 2.99%
Money market accounts 16,139 2.24% 18,088 2.44% 20,028 2.49%
Certificates of deposit 165,727 5.45% 168,005 5.35% 142,012 5.48%
-------- ------- -------- ------- -------- ------
Total interest bearing $259,846 4.31% $262,234 4.31% $237,981 4.28%
Non interest bearing demand 27,561 27,064 25,503
-------- -------- --------
Total $287,406 $289,298 $263,484
======== ======== ========
</TABLE>
The level of certificates of deposit declined in 1997 as compared to 1996
primarily as the result of the loss of one large commercial customer whose
assets were liquidated through bankruptcy in the first quarter of 1997.
13
<PAGE> 24
Table XI summarizes the maturity distribution of time deposits greater than
$100,000 at December 31, 1997 and 1996 (including open time deposits and savings
accounts).
TABLE XI
MATURITY DISTRIBUTION OF TIME DEPOSITS GREATER THAN $100,000
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Domestic:
Certificates of deposit:
Three months or less $7,856 $11,475
Over three months through six months 3,560 7,700
Over six months through twelve months 7,230 3,509
Over twelve months 5,174 3,417
------- -------
Total certificates of deposit $23,820 $26,101
Open-account time deposits and savings accounts 4,687 4,946
------- -------
Total $28,507 $31,047
======= =======
</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 $2,603,000 to $31,277,000 at December 31, 1997. 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, 1997, of which 4% must be Tier 1
capital. The Company's total risk-based capital was 17.82% at December 31, 1997
and 17.76% at December 31,1996. The Company's Tier 1 risk-based capital ratio
was 16.56% at December 31, 1997 and 16.50% at December 31, 1996.
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 9.45% at December 31, 1997
and 8.85% at December 31, 1996.
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> 25
At December 31, 1997, the Bank is classified as well-capitalized with total
risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios of
17.82%, 16.56%, and 9.45%, respectively.
MARKET RISK AND INTEREST RATE RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investment, and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Company's exposure to
differential changes in interest rates between assets and liabilities is shown
in the Company's Maturity and Rate Sensitivity Analysis.
The following table (Table XII) summarizes the Bank's sensitivity to interest
rate fluctuations at December 31, 1997 for certain interest sensitivity periods.
TABLE XII
Maturity Rate Sensitivity Analysis
<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 $20,853 $13,152 $15,648 $47,636 $4,180 $101,469
Loans (net of unearned income) 57,981 10,242 13,440 68,559 54,242 204,464
Federal funds sold 5,110 - - - - 5,110
------- ------- ------- ------- ------- --------
Total $83,944 $23,394 $29,088 $116,195 $58,422 $311,043
======= ======= ======= ======= ======= ========
Interest-bearing liabilities:
Now accounts $2,828 $878 $1,755 $10,531 $3,510 $19,502
Money market accounts 3,225 1,708 3,416 6,832 - 15,181
Savings (1) 8,241 2,558 5,115 30,693 10,231 56,838
Time 41,836 35,026 32,570 36,892 - 146,324
Time >100M 7,856 3,560 7,230 5,174 - 23,820
Capitalized lease obligation 26 26 53 424 215 744
------- ------- ------- ------- ------- --------
Total $64,012 $43,756 $50,139 $90,546 $13,956 $262,409
======= ======= ======= ======= ======= ========
Interest rate sensitivity gap $19,932 $(20,632) $(21,051) $25,649 $44,466 $48,634
======= ======= ======= ======= ======= ========
Cumulative interest rate
sensitivity gap $19,932 $(430) $(21,481) $4,168 $48,634 $-
======= ======= ======= ======= ======= ========
Cumulative interest rate
sensitivity ratio (2) 6.2% (.13%) (6.6%) 1.3% 14.9% -
======= ======= ======= ======= ======= ========
</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> 26
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.
In addition to gap management, the Company also uses simulation analysis to help
monitor and manage interest rate risk. In this analysis the Company examines the
result of a 100, 200, and 300 basis point change in market interest rates and
the effect on net interest income. It is assumed that the change is
instantaneous and that all rates move in a parallel manner. In addition, it is
assumed that rates on core deposit products such as NOWs, savings accounts, and
the MMDA accounts will be adjusted by 50% of the assumed rate change.
Assumptions are also made concerning prepayment speeds on mortgage loans and
mortgage securities. The results of this rate shock are a useful tool to assist
the Company in assessing interest rate risk inherent in their balance sheet.
Below are the results of this rate shock analysis as of December 31, 1997.
<TABLE>
<CAPTION>
Change in Rates Net Interest Income Change (After tax, in thousands)
--------------- ----------------------------------------------------
<S> <C>
+300 (731)
+200 (485)
+100 (235)
-100 188
-200 279
-300 338
</TABLE>
ACCOUNTING DEVELOPMENTS
In February 1997 the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly-held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted, however, restatement of prior
periods is required. All EPS information in this annual report has been
presented in accordance with SFAS No. 128.
In September 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Bank will make
the appropriate disclosures in the applicable 1998 consolidated financial
statements, as required.
16
<PAGE> 27
In September 1997 the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 established standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of this statement on
the Bank.
In February 1998 the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and other Postretirement Benefits. This statement revises employers'
disclosures about pension and other postretrement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, Employer's Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, were issued. This statement
requires changes in disclosures and would not effect the results of operations,
financial condition, or shareholders' equity of the Corporation. This statement
is effective for fiscal years beginning after December 15, 1997.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of data-sensitive information by the Corporation's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of the operations or cash flows in future periods. However, if
the Company, its customers, or vendors are unable to resolve such processing
issues in a timely manner, it could result in a material financial risk.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
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.
17
<PAGE> 28
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 $79,793,000 at
December 31, 1997. In addition to these sources of liquidity and loan
repayments, the Company has the ability to secure borrowings collateralized by
the securities portfolio. At December 31, 1997 the Company had a maximum
borrowing capacity available to it of approximately $135 million from the
Federal Home Loan Bank of Pittsburgh. 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.
18
<PAGE> 29
QUARTERLY FINANCIAL DATA
A comparison of quarterly financial information for 1997 and 1996 is provided in
the following table.
<TABLE>
<CAPTION>
1997
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
QUARTER ENDED
Interest income $5,751 $5,670 $5,612 $5,567
Interest expense 2,913 2,839 2,733 2,803
----------- ------------ ------- --------
Net interest income 2,838 2,831 2,879 2,764
Provision for loan losses 45 45 45 45
Net income 824 794 1,052 813
Earnings per share $0.93 $0.90 $1.19 $0.92
<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
</TABLE>
FOURTH QUARTER RESULTS - 1997 VERSUS 1996
Net income for the fourth quarter of 1997 increased $287,000 from the fourth
quarter of 1996. The primary reasons for the increase in net income were the
increase in 1997 net interest income due to increased competition in the local
retail banking market, and the decrease in 1997 other expense due to a fidelity
loss recognized in the fourth quarter of 1996.
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 less of 100
shares or more. Quarterly highs and lows are presented below:
<TABLE>
<CAPTION>
1997 1996 1995
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Quarter
First $45.50 $43.25 $38.50 $34.00 $33.50 $31.63
Second $49.00 $44.25 $42.25 $38.75 $33.75 $32.00
Third $50.00 $46.00 $43.00 $41.00 $34.50 $32.25
Fourth $62.00 $50.00 $44.25 $43.00 $36.00 $33.50
</TABLE>
19
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Information)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
ASSETS:
Cash and due from banks $8,102 $8,103
Federal funds sold 5,110 1,900
Securities available for sale 6,284 24,235
Mortgage-backed securities available for sale 50,152 25,006
Investment securities (market value - 1997 - $45,895,
1996 - $58,849) 45,033 57,827
Loans, gross 204,464 197,598
Less:
Unearned income (854) (988)
Allowance for loan losses (2,696) (3,111)
----------------- ------------------
Loans, net 200,914 193,499
Accrued interest receivable 2,105 2,470
Bank premises, leasehold improvements
and furniture and equipment-- net 4,824 5,067
Real estate owned other than bank premises 188 199
Other assets 3,025 3,257
----------------- ------------------
Total assets $325,737 $321,563
================= ==================
LIABILITIES:
Deposits:
Noninterest-bearing demand $29,281 $30,437
Interest-bearing 262,829 259,678
Total deposits 292,110 290,115
Capitalized lease obligation 744 821
Accrued interest payable 1,352 1,250
Other liabilities 254 703
----------------- ------------------
Total liabilities 294,460 292,889
================= ==================
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 26,587 24,343
Net unrealized losses on securities available for sale, net of tax (115) (474)
Less: Treasury stock--at cost (15,205 shares) (196) (196)
----------------- ------------------
Total shareholders' equity 31,277 28,674
----------------- ------------------
Total liabilities and shareholders' equity $325,737 $321,563
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 31
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Information)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $16,249 $15,108 $14,813
Interest on interest-bearing deposits 16 - -
Interest and dividends on securities:
U.S. Treasury 3,001 4,648 4,710
U.S. government agencies - 6 5
Mortgage-backed securities 1,970 1,687 1,209
State and political subdivisions 955 989 375
Other taxable debt 1 22 46
Taxable equity 23 9 9
Interest on Federal funds sold 385 253 325
------------------ ------------------ -------------------
Total interest income 22,600 22,722 21,492
------------------ ------------------ -------------------
Interest expense:
Deposits 11,210 11,294 10,190
Federal funds purchased - 22 1
Capitalized lease obligation 78 85 91
------------------ ------------------ -------------------
Total interest expense 11,288 11,401 10,282
------------------ ------------------ -------------------
Net interest income 11,312 11,321 11,210
Provision for loan losses 180 183 365
------------------ ------------------ -------------------
Net interest income after provision for loan losses 11,132 11,138 10,845
Non-interest income:
Service charges and fees 631 523 539
Gain on sale of loans - net 50 - 10
Litigation recovery - 600 -
Other 15 13 33
------------------ ------------------ -------------------
Total noninterest income 696 1,136 582
------------------ ------------------ -------------------
Non-interest expense:
Salaries and benefits 3,740 3,589 3,315
Net occupancy and furniture/equipment expenses 1,317 1,131 990
Data processing services 428 404 424
FDIC insurance 35 2 288
Fidelity (recovery)/loss (372) 320 -
Other expense 1,907 2,016 1,787
------------------ ------------------ -------------------
Total non-interest expense 7,055 7,462 6,804
------------------ ------------------ -------------------
Income before income tax provision 4,773 4,812 4,623
Income tax provision 1,290 1,308 1,369
------------------ ------------------ -------------------
Net income $3,483 $3,504 $3,254
================== ================== ===================
Per share information:
Net income $3.94 $3.96 $3.68
================== ================== ===================
Weighted average shares outstanding 884,680 884,680 884,680
================== ================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 32
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, 1995 $ 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
Net income - - 3,483 - - 3,483
Cash dividends ($1.40 per share) - - (1,239) - - (1,239)
Net unrealized gains on
securities available for sale,
net of tax - - - 359 - 359
------------ ------------ ------------- --------------- ---------- ------------
Balance, December 31, 1997 $ 1,125 3,876 26,587 (115) (196) 31,277
------------ ------------ ------------- --------------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $3,483 $3,504 $3,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180 183 365
Depreciation and amortization of investment
securities, bank premises, leasehold improvements
and furniture and equipment 445 485 461
Deferred income tax 253 (15) (11)
Gain on sales of loans - net (50) - (10)
Loss on disposition of real estate 18 139 21
Decrease (increase) in interest receivable and other assets 100 (672) (141)
(Decrease) increase in interest payable and other liabilities (238) 365 433
-------------- -------------- ---------------
Net cash provided by operating activities 4,191 3,989 4,372
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Maturities of securities available for sale 22,274 4,994 13,241
Maturities of mortgage backed securities available for sale 4,254 3,193 510
Maturities of investment securities 12,794 17,699 3,633
Purchases of securities available for sale (4,000) (16,000) (10,443)
Purchases of mortgage backed securities available for sale (29,179) (1,956) (11,944)
Purchases of investment securities - - (16,622)
Net increase in loans (7,863) (23,445) (6,315)
Purchases of bank premises, leasehold improvements
and furniture and equipment - net (202) (362) (932)
Sales of assets acquired through foreclosure, net 261 48 567
-------------- -------------- ---------------
Net cash used in investing activities (1,661) (15,829) (28,305)
-------------- -------------- ---------------
FINANCING ACTIVITIES:
Net increase in noninterest-bearing demand deposits
and interest-bearing deposits 1,995 8,817 30,456
Proceeds from Federal funds purchased - - -
Repayment of Federal funds purchased - - (1,900)
Principal payments on capitalized lease obligation (77) (70) (63)
Dividends paid (1,239) (1,105) (1,018)
-------------- -------------- ---------------
Net cash provided by financing activities 679 7,642 27,475
-------------- -------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 3,209 $ (4,198) $ 3,542
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 10,003 $ 14,201 $ 10,659
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,212 $ 10,003 $ 14,201
============== ============== ===============
CASH PAID DURING THE YEAR:
Interest $ 11,186 $ 11,257 $ 9,908
============== ============== ===============
Federal income taxes $ 1,227 $ 1,390 $ 1,372
============== ============== ===============
NON CASH TRANSACTIONS
Change in unrealized (gains) losses on securities
available for sale, net of tax $ 359 $ (66) $ (809)
=====================================================
Transfers of loans to real estate owned other
than bank premises $ 268 $ 90 $ 310
=====================================================
Transfer of securities from available for sale to
investment securities $ - $ - $ -
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 34
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, Pennsylvania. 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.
A material estimate that is particularly susceptible to significant
change in the near-term relates to the determination of the
allowance for loan losses. In connection with the determination of
the allowance for loan losses, management obtains independent
appraisals for significant properties to the extent considered
practical. Management believes that this estimate is adequate.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk,
and market risk. The Bank is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at
different speeds, or on different bases from its interest-earning
assets. The Bank's primary credit risk is the risk of default on the
Bank's loan portfolio that results from the borrowers inability or
unwillingness to make contractually required payments. The Bank's
lending activities are concentrated in Pennsylvania. The largest
concentration of the Bank's loan portfolio is located in
Northeastern Pennsylvania. The ability of the Bank's borrowers to
repay amounts owed is dependent on several factors, including the
economic conditions in the borrower's geographic region and the
borrower's financial condition. Market risk reflects changes in the
value of collateral underlying loans, the valuation of real estate
held by the Bank, the valuation of loans held for sale, investment
securities, and mortgage-related securities available for sale.
24
<PAGE> 35
1. (CONTINUED)
The Bank is subject to the regulations of various government
agencies. These regulations can and do change significantly from
period to period. The Bank also undergoes periodic examinations by
the regulatory agencies which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances,
and operating restrictions resulting from the regulators' judgments
based on information available to them at the time of their
examination.
The Bank has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by
year 2000 software failures due to processing errors arising from
calculations using the year 2000 date. While the Bank believes it is
acting prudently to assure year 2000 compliance, it is to some
extent dependent upon vendor cooperation. The Bank is requiring its
computer systems and software vendors to represent that the products
provided are or will be year 2000 compliant and has planned program
of testing for compliance. It is recognized that any year 2000
compliance failures, either internal or on the part of the Bank's
customers, could result in additional expense or loss to the Bank.
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.
25
<PAGE> 36
1. (CONTINUED)
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.
- 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 1997, 1996,
or 1995.
Premiums and discounts on debt securities are recognized in interest
income using the interest method 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 unearned income (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.
26
<PAGE> 37
1. (CONTINUED)
Nonaccrual loans are those on which the accrual of interest has
ceased. Loans are placed on nonaccrual 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
nonaccrual 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 nonaccrual 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expense. 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 inherent
losses on existing loans that may become uncollectible, based on
periodic evaluations of the loan portfolio by management. These
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.
Loans are deemed to be "impaired" if in management's assessment of
the relevant facts and circumstances, it is probable that the
Company will be unable to collect all proceeds due according to the
contractual terms of the loan agreement.
27
<PAGE> 38
1. (CONTINUED)
The Company's policy for the recognition of interest income on
impaired loans is the same as for nonaccrual 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.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair value.
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.
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 selling 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.
28
<PAGE> 39
1. (CONTINUED)
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. The Company has no
potential common stock equivalents.
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 $1,261,000 and
$1,209,000 in 1997 and 1996, respectively.
29
<PAGE> 40
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>
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1997
U.S. Treasury $ 4,993 $ 5 $ (1) $ 4,997
Marketable equity 1,287 - - 1,287
-------- -------- -------- --------
$ 6,280 $ 5 $ (1) $ 6,284
======== ======== ======== ========
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
DECEMBER 31, 1997
Collateralized mortgage obligations
of U.S. government agencies
and corporations $ 14,744 $ 76 $ (234) $ 14,586
Mortgage-backed securities 35,294 304 (32) 35,566
-------- -------- -------- --------
$ 50,038 $ 380 $ (266) $ 50,152
======== ======== ======== ========
INVESTMENT SECURITIES HELD
TO MATURITY:
DECEMBER 31, 1997
U.S. Treasury $ 27,180 $ 408 $ (17) $ 27,571
Obligations of states and
political subdivisions 17,853 471 - 18,324
-------- -------- -------- --------
$ 45,033 $ 879 $ (17) $ 45,895
======== ======== ======== ========
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
======== ======== ========= ========
</TABLE>
30
<PAGE> 41
3. (CONTINUED)
The amortized cost and fair value of securities at December 31, 1997
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
penalties.
<TABLE>
<CAPTION>
Securities Mortgage-backed
Available-for-sale Securities available-for-sale 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 $4,993 $4,997 $697 $718 $9,963 $10,145
After one year but
within five years - - 30,817 31,003 18,805 19,059
After five years but
within ten years - - 14,923 14,874 3,481 3,559
After ten years - - 3,601 3,557 12,784 13,132
Marketable equity securities 1,287 1,287 - - - -
------ ------ ------- ------- ------- -------
Total $6,280 $6,284 $50,038 $50,152 $45,033 $45,895
====== ====== ======= ======= ======= =======
</TABLE>
There were no sales of securities during 1997, 1996, and 1995.
At December 31, 1997 and 1996, securities with an amortized cost of
approximately $11,936,853 and $27,789,755 (fair value of
approximately $11,995,542 and $28,307,248), respectively, were
pledged to secure public deposits as required or permitted by law.
4. LOANS AND REAL ESTATE OWNED OTHER THAN BANK PREMISES
The following is a summary of the Bank's loan portfolio on December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate - mortgage $122,175 $122,625
Commercial, financial, and agricultural 33,732 33,042
Installment loans 47,268 39,789
Real estate - construction 1,289 2,142
-------- --------
Total loans - gross $204,464 $197,598
Less unearned income 854 988
Allowance for loan losses 2,696 3,111
-------- --------
Net loans $200,914 $193,499
======== ========
</TABLE>
31
<PAGE> 42
4. (CONTINUED)
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 nonaccruing loans of the Bank at December
31, 1997, 1996, and 1995. Also shown is the approximate related
amount of interest recorded as income and interest not recorded as
income for the years ended December 31, 1997, 1996, and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $1,192 $3,080 $1,978
====== ====== ======
Interest income recorded 43 114 92
Interest income not recorded 94 179 141
------ ------ ------
Total possible interest income $137 $293 $233
====== ====== ======
</TABLE>
At December 31, 1997 and 1996, the Bank had impaired loans totaling
approximately $435,146 and $1,808,000, respectively, all of which
had a related allowance for impairment. At December 31, 1997 and
1996, the allowance for losses on impaired loans totaled $65,214 and
$425,000, respectively. The average balance of impaired loans for
1997, 1996, and 1995 was $560,340; $1,931,000; and $1,649,000,
respectively. There were no charge-offs or recoveries on impaired
loans during either 1997 or 1996. 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,
1997, 1996, and 1995 totaled $0; $24,000; and $31,000, respectively.
The following table presents 1997 activity in the amounts due to the
Bank from principal officers, directors and their related businesses
in excess of $60,000. 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>
1997
----
<S> <C>
Balance, at beginning of year $3,734
Additions 3,656
Repayments (2,446)
------
Balance, at end of year $4,944
======
</TABLE>
32
<PAGE> 43
4. (CONTINUED)
At December 31, 1997, 1996, and 1995 the Bank serviced loans for
others of $2,788,000, $469,000, and $0, respectively.
An analysis of real estate owned other than Bank premises for 1997
and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
1997 1996
---- ----
<S> <C> <C>
Balance, at beginning of year $199 $296
Transfers from real estate - commercial and real
estate loans category 268 90
Real estate sales (261) (48)
Loss on disposition of real estate (18) (139)
----- -----
Balance, at end of year $188 $199
===== =====
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the Bank's allowance for loan
losses is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $3,111 $3,015 $2,835
Losses charged to allowance (783) (170) (274)
Recoveries credited to allowance 188 83 89
------ ------ ------
$(595) $(87) $(185)
Provision charged to operations 180 183 365
------ ------ ------
Balance, December 31 $2,696 $3,111 $3,015
====== ====== ======
</TABLE>
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,
1997 1996
---- ----
<S> <C> <C>
Land and buildings $3,682 $3,679
Land under capitalized lease 302 302
Bank premises and leasehold improvements
under capitalized lease 2,256 2,217
Furniture and equipment 2,826 2,724
------ -----
Total at cost 9,066 8,922
Less: Accumulated depreciation and
amortization (4,242) (3,855)
------ -----
Net bank premises, leasehold improvements
and furniture and equipment $4,824 $5,067
====== ======
</TABLE>
33
<PAGE> 44
7. DEPOSITS
Deposits consist of the following major classifications (in
thousands):
<TABLE>
<CAPTION>
At December 31,
1997 1996
---- ----
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
---- ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 1.71 19,502 6.7 2.13 17,555 6.1
Savings deposits 2.51 56,838 19.5 2.51 56,344 19.4
Other time deposits 3.55 1,164 0.4 3.48 1,073 0.4
Money Market accounts 2.24 15,181 5.2 2.44 16,264 5.6
Certificates of deposit 5.45 170,144 58.2 5.35 168,442 58.1
Noninterest bearing demand 29,281 10.0 30,437 10.4
------- ---- ------- ----
Total deposits at end of period 292,110 100% 290,115 100%
======= ==== ======= ====
</TABLE>
While the certificates frequently are renewed at maturity rather
than paid out, a summary of certificates of deposit greater than
$100,000 by contractual maturity at December 31, 1997 and 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Three months or less $7,856 $11,475
Over three months through twelve months 10,790 11,209
Over one year through five years 5,174 3,417
------- -------
Total $23,820 $26,101
======= =======
</TABLE>
Interest expense approximated $1,300,000, $1,527,000, and $1,214,000
for certificates of deposit greater than $100,000 in the years ended
December 31, 1997, 1996, and 1995, respectively.
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>
<S> <C>
1998 $155
1999 155
2000 155
2001 155
Thereafter 410
------
Total minimum lease payments $1,030
Less amount representing interest (286)
------
Present value of net minimum lease payments $744
</TABLE>
34
<PAGE> 45
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
1997, 1996, and 1995 approximated $208,000, $186,000, and $221,000,
respectively.
The following table sets forth the Bank's plan's funded status as
of December 31, 1997 and 1996 and amounts recognized in the
consolidated balance sheets at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Projected benefit obligation:
Accumulated benefit obligation:
Vested benefits $4,011 $3,533
Nonvested benefits 327 284
------ ------
Accumulated benefit obligation total 4,338 3,817
Effect of projected future compensation levels 1,769 1,472
------ ------
Projected benefit obligation total 6,107 5,289
Plan assets at fair value 6,529 5,649
------ ------
Projected benefit obligation total less than plan assets
at fair value 422 360
Unrecognized net (gain) loss (339) (313)
Unrecognized transition obligation 45 49
Unrecognized prior service cost (102) (109)
------ ------
Prepaid/(Accrued) pension cost included on consolidated
balance sheet $26 $(13)
====== ======
</TABLE>
Net pension cost for 1997, 1996, and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $216 $183 $149
Interest cost 374 349 310
Actual return on plan assets (806) (688) (825)
Amortization of transitional obligation 4 4 4
Amortization of prior service cost (7) (7) -
Asset gain deferred 388 326 531
----- ----- ----
Net pension cost $169 $167 $169
===== ===== ====
</TABLE>
In determining the estimated costs of the plan, the weighted-average
discount rate used was 7.00% for 1997, 1996, and 1995. The
weighted-average rate of increase in compensation levels was 4.50%,
compounded annually for 1997, 1996, and 1995. The weighted-average
expected long-term rate of return on plan assets used in determining
net periodic pension cost was 7.50% for 1997, 1996, and 1995. The
plan's assets consist primarily of mutual funds and short-term
investments administered by an independent bank.
35
<PAGE> 46
10. INCOME TAXES
The components of income tax expense (benefits) are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current - Federal $1,037 $1,323 $1,380
Deferred - Federal 253 (15) (11)
------ ------ ------
$1,290 $1,308 $1,369
====== ====== ======
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax expense at 34% rate $1,623 $1,636 $1,572
Interest from tax exempt loans and investments, net (326) (329) (204)
Other, net (7) 1 1
------ ------ ------
Income tax expense $1,290 $1,308 $1,369
====== ====== ======
</TABLE>
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 in accordance with SFAS
No. 109 are presented below (in thousands):
<TABLE>
<CAPTION>
l997 1996
--- ----
<S> <C> <C>
Deferred tax assets:
Unrealized gains on securities available
for sale $59 $244
Allowance for loan losses 607 677
Deferred loan fees 198 277
Deferred directors fees 77 78
Fidelity loss - 109
Others, net 150 177
----- -----
Total gross deferred tax assets 1,091 1,562
===== =====
Deferred tax liabilities:
Depreciation (87) (96)
Prepaid pension - (23)
Amortization of customer list - (1)
----- -----
Total gross deferred tax liabilities (87) (120)
----- -----
Net deferred tax asset $1,004 $1,442
====== ======
</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, 1997.
There can be no assurance, however, that the Company will generate
any earnings or any specific level of continued earnings.
36
<PAGE> 47
11. NONRECURRING EVENTS
Included in noninterest income in 1996 is a $600,000 gain on a
legal settlement. This is a nonrecurring transaction with no
comparable items in 1997 or 1995.
Included in noninterest expense for 1996 was an estimated $320,000
employee fidelity loss. Included in noninterest expense for 1997 was
a $372,000 recovery which represented reimbursement under the
Company's Fidelity Bond Insurance Policy.
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, 1997,
approximate unused commitments were as follows (in thousands):
<TABLE>
<S> <C>
Revolving home equity lines $2,529
Real estate - mortgages 248
Standby letters of credit 503
Other 2,049
------
Total $5,329
</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
nonperformance 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.
37
<PAGE> 48
12. (CONTINUED)
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.
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, 1997, that the Bank meets
all capital adequacy requirements to which it is subject.
38
<PAGE> 49
13. (CONTINUED)
As of December 31, 1997, 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. There are no conditions or events since that
notification that management believes have changed the Bank's
category. 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 following table.
The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Greater than Greater than
Assets) $32,980,000 17.82% or equal to $14,809,000 or equal to 8.00%
Tier I Capital
(to Risk Weighted Greater than Greater than
Assets) 30,661,000 16.56% or equal to 7,405,000 or equal to 4.00%
Tier I Capital Greater than Greater than
(to Average Assets) 30,661,000 9.45% or equal to 13,134,000 or equal to 4.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Greater than Greater than
Assets) $30,918,000 17.76% or equal to $13,927,000 or equal to 8.00%
Tier I Capital
(to Risk Weighted Greater than Greater than
Assets) 28,730,000 16.50% or equal to 6,964,000 or equal to 4.00%
Tier I Capital Greater than Greater than
(to Average Assets) 28,730,000 8.85% or equal to 12,984,000 or equal to 4.00%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------ -----
<S> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Greater than Greater than
Assets) or equal to $18,512,000 or equal to 10.00%
Tier I Capital
(to Risk Weighted Greater than Greater than
Assets) or equal to 11,107,000 or equal to 6.00%
Tier I Capital Greater than Greater than
(to Average Assets) or equal to 16,418,000 or equal to 5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Greater than Greater than
Assets) or equal to $17,409,000 or equal to 10.00%
Tier I Capital
(to Risk Weighted Greater than Greater than
Assets) or equal to 10,446,000 or equal to 6.00%
Tier I Capital Greater than Greater than
(to Average Assets) or equal to 16,230,000 or equal to 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, 1997 was
approximately $6,882,000.
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 $5,001,000 as of December 31, 1997.
39
<PAGE> 50
14. PARENT COMPANY FINANCIAL STATEMENTS-THE FIRST JERMYN CORP.
BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS:
<S> <C> <C>
Investment in subsidiaries $31,204 $28,600
Cash 1 2
Other assets 72 72
------- -------
Total assets $31,277 $28,674
======= =======
SHAREHOLDERS' EQUITY $31,277 $28,674
======= =======
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
EARNINGS OF SUBSIDIARIES:
Dividends received $1,239 $1,105 $1,018
Undistributed net income 2,245 2,400 2,237
OTHER EXPENSES - NET (1) (1) (1)
FEDERAL INCOME TAX BENEFIT - - 2
------ ------ ------
NET INCOME $3,483 $3,504 $3,254
====== ====== ======
</TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $3,483 $3,504 $3,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,245) (2,400) (2,237)
------ ------ ------
Net cash provided by operating activities 1,238 1,104 1,017
------ ------ ------
FINANCING ACTIVITIES:
Dividends paid to shareholders (1,239) (1,105) (1,018)
------ ------ ------
Net cash used in financing activities (1,239) (1,105) (1,018)
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) (1) (1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2 3 4
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1 $2 $3
====== ====== ======
NONCASH TRANSACTIONS
Transfer of other assets between parent and subsidiary $- $- $ (9)
</TABLE>
40
<PAGE> 51
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank is required to provide disclosure about derivative
financial instruments and the fair values of financial instruments.
The Company does not presently invest in such derivative financial
instruments and thus has no disclosure regarding such investments.
The reported fair values of financial instruments are based on a
variety of factors. In certain cases, fair values represent quoted
market prices for identical or comparable instruments. In other
cases, fair values have been estimated based on assumptions
regarding the amount and timing of estimated future cash flows which
are discounted to reflect varying degrees of risk. Accordingly, the
fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that
will be realized in the future.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
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.
SECURITIES
For securities, 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 nonperforming 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.
41
<PAGE> 52
15. (CONTINUED)
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as
noninterest-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 standby 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.
The carrying amount and estimated fair value of the Company's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $13,212 $13,212 $10,003 $10,003
Securities available for sale 6,284 6,284 24,235 24,235
Mortgage-backed
securities available for sale 50,152 50,152 25,006 25,006
Investment securities 45,033 45,895 57,827 58,849
Loans, net 200,914 201,500 193,499 193,838
Financial liabilities:
Deposits $292,110 $292,220 $290,115 $290,503
</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,
1997 1996
---- ----
Contract Fair Contract Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Off-balance sheet instruments:
Commitments to extend credit $2,777 $56 $2,930 $59
Standby letters of credit 503 - 784 -
Other 2,049 - 3,339 -
</TABLE>
42
<PAGE> 53
16. PENDING ACQUISITION
On October 15, 1997, the Company entered into a definitive agreement
to acquire Upper Valley Bancorp, Inc. (UVB) the holding company for
NBO National Bank (NBO). NBO is a $259 million national-chartered
bank with three branches in Olyphant, Scranton, and Pittston,
Pennsylvania. Under the terms of the agreement, UVB shareholders
will receive .689 shares of The First Jermyn Corp. common stock for
each UVB share owned. The transaction will be accounted for as a
pooling-of-interests and is subject to regulatory, UVB shareholder
and The First Jermyn Corp. shareholder approvals. The total value of
the transaction is approximately $42.7 million subject to change
based upon First Jermyn Corp.'s stock price prior to finalization of
the acquisition. When consummated, the transaction is expected to
create a company with approximately $585 million in assets and $56
million in total shareholder's equity.
43
<PAGE> 54
[KPMG PEAT MARWICK LLP LETTERHEAD]
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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 13, 1998
<PAGE> 55
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.
<TABLE>
The First Jermyn Corp.
-----------------------------
(Registrant)
<S> <C> <C>
By /S/ William M. Davis Chairman, President and Director March 26, 1998
-----------------------------
William M. Davis
(Principal Executive Officer)
By /S/ Martha Myshak Treasurer March 26, 1998
-----------------------------
Martha Myshak
(Principal Financial Officer)
By /S/ Donald J. Gibbs Vice President, Finance\ March 26, 1998
----------------------------- Control Division Manager
Donald J. Gibbs
(Principal Accounting Officer)
</TABLE>
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.
<TABLE>
<S> <C> <C>
/S/ Peter A. Sabia Director March 26,1998
- -----------------------------
Peter A. Sabia
/S/ Kuzma Leschak, Jr. Director March 26,1998
- -----------------------------
Kuzma Leschak, Jr.
/S/ Robert T. Kelly Director March 26,1998
- -----------------------------
Robert T. Kelly
/S/ David M. Epstein Director March 26,1998
- -----------------------------
David M. Epstein
/S/ I. Leo Moskovitz Director March 26,1998
- -----------------------------
I. Leo Moskovitz
/S/ Dr. Edmund J. Biancarelli Director March 26,1998
- -----------------------------
Dr. Edmund J. Biancarelli
/S/ Thomas G. Speicher Director March 26,1998
- -----------------------------
Thomas G. Speicher
/S/ William K. Nasser Director March 26,1998
- -----------------------------
William K Nasser
/S/ Steven R. Tokach Director March 26,1998
- -----------------------------
Steven R. Tokach
/S/ Garfield G. Thomas Secretary and Director March 26,1998
- -----------------------------
Garfield G. Thomas
/S/ William M. Davis Chairman, President and Director March 26,1998
- -----------------------------
William M. Davis
</TABLE>
<PAGE> 1
Exhibit 3.1
Articles of Incorporation, as amended,
of Registrant
1. Name of Corporation: The First Jermyn Corp.
2. Address of Registered Office in Pennsylvania: 645 Washington Avenue,
Jermyn, Lackawanna County, Pennsylvania 18433.
3. Explain the Purpose or Purposes of the Corporation:
To have unlimited power to engage in and do any lawful act
concerning any or all lawful business for which corporations may be
incorporated under the provisions of the Business Corporation Law of the
Commonwealth of Pennsylvania. The Corporation is incorporated under the
provisions of the Business Corporation Law of the Commonwealth of
Pennsylvania (Act of May 5, 1933, P.L 364 as amended).
4. Aggregate Number Shares, Classes of Shares and Par Value Which the
Corporation Shall have Authority to Issue: The total number of Common Shares
that the corporation shall have the authority to issue is 2,500,000 shares of
the par value of $1.25 per share.
5. Term of Existence: Perpetual
6. The Name and Address of Each Incorporator, and the Number and Class
of Shares Subscribed to by each incorporator:
William M. Davis 1 share common stock
10 Old Mill Road
Jermyn, PA 18433
I. Leo Moskovitz 1 share common stock
8 Old Mill Road
Jermyn, PA 18433
Garfield G. Thomas 1 share common stock
20 Washington Street
Carbondale, PA 18047
<PAGE> 2
ARTICLES OF INCORPORATION
7. Cumulative Voting Rights
Cumulative voting rights shall not exist with respect to the
election of directors.
8. Opposition of Tender (or other offer)
A. The Board of Directors may, if it deems it advisable, oppose
a tender, or other offer for the corporation's securities,
whether the offer is in cash or in securities of a
corporation or otherwise. When considering whether to oppose
an offer, the Board of Directors may, but it is not legally
obligated to, consider any pertinent issues; by way of
illustration, but not of limitation, the Board of Directors
may, but shall not be legally obligated to, consider any and
all of the following:
(1) Whether the offer price is acceptable based on the
historical and present operating results or financial
condition of the corporation.
(2) Whether a more favorable price could be obtained for
the corporation's securities in the future.
(3) The impact which an acquisition of the corporation would
have on its employees, depositors and customers of the
corporation and its subsidiaries in the community which
they serve.
(4) The reputation and business practices of the offeror and
its management and affiliates as they would affect the
employees, depositors and customers of the corporation
and its subsidiaries and the future value of the
corporation's stock.
(5) The value of the securities, if any, which the offeror
is offering in exchange for the corporation's
securities, based on an analysis of the worth of the
corporation as compared to the corporation or other
entity whose securities are being offered.
(6) Any antitrust or other legal and regulatory issues that
are raised by the offer.
B. If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its
purpose including, but not limited to, any and all of the
following: advising shareholders not to accept the offer;
litigation against the
<PAGE> 3
offeror; filing complaints with all governmental and
regulatory authorities; acquiring the authorized but unissued
securities or treasury stock or granting options with respect
thereto; acquiring a company to create an antitrust or other
regulatory problem for the offeror; and obtaining a more
favorable offer from another individual or entity.
9. Classification of Directors
The Board of Directors of the Corporation shall be divided into
three classes, the respective terms of office of which shall end in
successive years. The number of directors in each class shall be
specified in the Bylaws and shall be nearly as equal as possible.
Unless they are elected to fill vacancies, the directors in each
class shall be elected to hold office until the third successive
annual meeting of shareholders after their election and until their
successors shall have been elected and qualified. At each annual
meeting of shareholders the directors of only one class shall be
elected, except directors who may be elected to fill vacancies.
10. Filling of Vacancies in Board of Directors Caused by Increase in
Number of Directors
Any directorship to be filled by reason of an increase in the number
of directors may be filled by the Board of Directors. The Board of
Directors shall specify the class in which a director so elected
shall serve. Any director elected by the Board of Directors shall
hold office only until the next annual meeting of the shareholders
and until his successor shall have been elected and qualified,
notwithstanding that the term of office of the other directors in
the class of which he is a member does not expire at the time of
such meeting. His successor shall be elected by the shareholders to
a term of office which shall expire at the same time as the term of
office of the other directors in the class to which he is elected.
11. Number of Directors
The Board of Directors shall consist of not less than five (5) nor
more than twenty-five (25) shareholders, the exact number to be
fixed and determined from time to time by resolution of a majority
of the shareholders at any annual or special meeting thereof.
12. Preemptive Rights
No holder of shares of any class or of any series of any class shall
have any preemptive right to subscribe for, purchase or receive any
shares of the corporation, whether now or hereafter authorized, or
any obligations or other
<PAGE> 4
securities convertible into or carrying options to purchase any such
shares of the corporation, or any options or rights to purchase any
such shares or securities, issued or sold by the corporation for
cash or any other form of consideration, and any such shares,
securities or rights may be issued or disposed of by the Board of
Directors to such persons and on such terms as the Board in its
discretion shall deem advisable.
13. Indebtedness
The corporation shall have authority to borrow money and the Board
of Directors, without the approval of the shareholders and acting
within their sole discretion, shall have the authority to issue debt
instruments of the corporation upon such terms and conditions and
with such limitation as the Board of Directors deems advisable. The
authority of the Board of Directors shall include, but not be
limited to, the power to issue convertible debentures.
14. Indemnification
Every person who is or was a director, officer, employee, or agent
of the corporation, or of any Corporation which he served as such at
the request of the Corporation, shall be indemnified by the
Corporation to the fullest extent permitted by law against all
expenses and liabilities reasonably incurred by or imposed upon him,
in connection with any proceeding to which he may be made, or
threatened to be made, a party, or in which he may become involved
by reason of his being or having been a director, officer, employee
or agent of the Corporation, or of such other Corporation, whether
or not he is a director, officer, employee or agent of the
Corporation or such other Corporation at the time the expenses or
liabilities are incurred.
15. Shareholder Action
No merger, consolidation, liquidation or dissolution of the
Corporation nor any action that would result in the sale or other
disposition of all or substantially all of the assets of the
Corporation shall be valid unless first approved by the affirmative
vote of the holders of at least sixty-six and two thirds percent
(66 2/3%) of the outstanding shares of Common Stock. This Article
15. may not be amended unless first approved by the affirmative vote
of the holders of at least sixty-six and two thirds percent (66
2/3%) of the outstanding shares of Common Stock.
<PAGE> 1
Exhibit 3.2
BYLAWS
OF
THE FIRST JERMYN CORP.
These Bylaws are supplemental to the Pennsylvania Business Corporation Law
and other applicable provisions of law, as the same shall from time to
time be in effect.
ARTICLE I. MEETINGS OF SHAREHOLDERS.
Section 101. Place of Meetings. All meetings of the shareholders shall be
held at such place or places, within or without the Commonwealth of
Pennsylvania, as shall be determined by the Board of Directors from time to
time.
Section 102. Annual Meetings. The annual meeting of the shareholders for
the election of Directors and the transaction of such other business as may
properly come before the meeting shall be held at such date or hour as may be
fixed by the Board of Directors. Any business which is a proper subject for
shareholder action may be transacted at the annual meeting, irrespective of
whether the notice of said meeting contains any reference thereto, except as
otherwise provided by applicable law.
Section 103. Special Meetings. Special meetings of the shareholders may be
called at any time by the Board of Directors, or by any three or more
shareholders owning, in the aggregate, not less than twenty-five percent of the
stock of the association.
Section 104. Conduct of Shareholders' Meetings. The Chairman shall preside
at all shareholders' meetings. In the absence of the Chairman of the Board, the
President shall preside or, in his/her absence, any Officer designated by the
Board of Directors. The Officer presiding over the shareholders' meeting may
establish such rules and regulations for the conduct of the meeting as he/she
may deem to be reasonably necessary or desirable for the orderly and expeditious
conduct of the meeting. Unless the Officer presiding over the shareholders'
meeting otherwise requires, shareholders need not vote by ballot on any
question.
ARTICLE II. DIRECTORS AND BOARD MEETINGS.
Section 201. Management by Board of Directors. The business and affairs of
the Corporation shall be managed by its Board of Directors. The Board of
Directors may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute, regulation, the Articles of Incorporation
or these Bylaws directed or required to be exercised or done by the
shareholders.
<PAGE> 2
Section 202. Nomination for Directors. (B) Nominations for directors to be
elected at an annual meeting of shareholders must be submitted to the Secretary
of the Corporation in writing not later than the close of business on the
twentieth (20th) day immediately preceding the date of the meeting. Such
notification shall contain the following information to the extent known to the
notifying shareholder: (a) name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares of
capital stock of the Corporation that will be voted for each proposed nominee;
(d) the name and residence address of the notifying shareholder; and (e) the
number of shares of capital stock of the Corporation owned by the notifying
shareholder. Nominations not made in accordance herewith may, in his/her
discretion, be disregarded by the Presiding Officer of the meeting, and upon
his/her instruction, the vote tellers may disregard all votes cast for each such
nominee. In the event the same person is nominated by more than one shareholder,
the nomination shall be honored, and all shares of capital stock of the
Corporation shall be counted if at least one nomination for that person complies
herewith.
Section 203. Directors Must be Shareholders. Every Director must be a
shareholder of the Corporation and shall own in his/her own right the number of
shares (if any) required by law in order to qualify as such Director. Any
Director shall forthwith cease to be a Director when he/she no longer holds such
shares, which fact shall be reported to the Board of Directors by the Secretary,
whereupon the Board of Directors shall declare the seat of such Directors
vacated.
Section 204. Classification of Directors. The Directors shall be divided
into three (3) classes, as nearly equal in number as possible, known as Class 1,
consisting of not more than eight (8) Directors; Class 2, consisting of not more
than eight (8) Directors; and Class 3, consisting of not more than nine (9)
Directors. The initial Directors of Class 1 shall serve until the third (3rd)
annual meeting of shareholders. At the third (3rd) annual meeting of the
shareholders, the Directors of Class 1 shall be elected for a term of three (3)
years and, after expiration of such term, shall thereafter be elected every
three (3) years for three (3) year terms. The initial Directors of Class 2 shall
serve until the second (2nd) annual meeting of shareholders. At the second (2nd)
annual meeting of the shareholders, the Directors of Class 2 shall be elected
for a term of three (3) years and, after the expiration of such term, shall
thereafter be elected every three (3) years for three (3) year terms. The
initial Directors of Class 3 shall serve until the first (1st) annual meeting of
shareholders. At the first (lst) annual meeting of shareholders, the Directors
of Class 3 shall be elected for a term of three (3) years and, after the
expiration of such term, shall thereafter be elected every three (3) years for
three (3) year terms. Each Director shall serve until his/her successor shall
have been elected and shall qualify, even though his/her term of office as
herein provided has otherwise expired, except in the event of his/her earlier
resignation, removal or disqualification.
-2-
<PAGE> 3
Section 205. Compensation of Directors. No Director shall be entitled to
any salary as such; but the Board of Directors may fix, from time to time, a
reasonable annual fee for acting as a Director and a reasonable fee to be paid
each Director for his/her services in attending meetings of the Board and
meetings of committees appointed by the Board. The Corporation may reimburse
Directors for expenses related to their duties as a member of the Board.
Section 206. Regular Meetings. Regular meetings of the Board of Directors
shall be held on such day, at such hour, and at such place, consistent with
applicable law, as the Board shall from time to time designate or as may be
designated in any notice from the Secretary calling the meeting. The Board of
Directors shall meet for reorganization at the first regular meeting following
the annual meeting of shareholders at which the Directors are elected. Notice
need not be given of regular meetings of the Board of Directors which are held
at the time and place designated by the Board of Directors. If a regular meeting
is not to be held at the time and place designated by the Board of Directors,
notice of such meeting, which need not specify the business to be transacted
thereat and which may be either verbal or in writing, shall be given by the
Secretary to each member of the Board at least twenty-four (24) hours before
the time of the meeting.
A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business. If at the time fixed for the meeting,
including the meeting to organize the new Board following the annual meeting of
shareholders, a quorum is not present, the directors in attendance may adjourn
the meeting from time to time until a quorum is obtained.
Except as otherwise provided herein, a majority of those directors present
and voting at any meeting of the Board of Directors, shall decide each matter
considered. A director cannot vote by proxy, or otherwise act by proxy at a
meeting of the Board of Directors.
Section 207. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board or at the request of three (3) or
more members of the Board of Directors. A special meeting of the Board of
Directors shall be deemed to be any meeting other than the regular meeting of
the Board of Directors. Notice of the time and place of every special meeting,
which need not specify the business to be transacted thereat and which may be
either verbal or in writing, shall be given by the Secretary to each member of
the Board at least twenty-four (24) hours before the time of such meeting
excepting the Organization Meeting following the election of Directors.
Section 208. Reports and Records. The reports of Officers and Committees
and the records of the proceedings of all Committees shall be filed with the
Secretary of the Corporation and presented to the Board of Directors, if
practicable,
-3-
<PAGE> 4
at its next regular meeting. The Board of Directors shall keep complete records
of its proceedings in a minute book kept for that purpose. When a Director shall
request it, the vote of each Director upon a particular question shall be
recorded in the minutes.
ARTICLE III. COMMITTEES.
Section 301. Committees. The following two (2) Committees of the Board of
Directors shall be established by the Board of Directors in addition to any
other Committee the Board of Directors may in its discretion establish:
Executive and Audit
Section 302. Executive Committee. The Executive Committee shall consist of
any five (5) or more Directors. A majority of the members of the Executive
Committee shall constitute a quorum, and actions of a majority of those present
at a meeting at which a quorum is present shall be actions of the Committee.
Meetings of the Committee may be called at any time by the Chairman or Secretary
of the Committee, and shall be called whenever two (2) or more members of the
Committee so request in writing. The Executive Committee shall have and exercise
the authority of the Board of Directors in the management of the business of the
Corporation between the dates of regular meetings of the Board.
Section 303. Audit Committee. The Audit Committee shall consist of at
least four (4) Directors, none of whom shall be Officers of the Corporation.
Meetings of the Committee may be called at any time by the Chairman or Secretary
of the Committee, and shall be called whenever two (2) or more members of the
Committee so request in writing. A majority of the members of the Committee
shall constitute a quorum, and actions of a majority of those present at a
meeting at which a quorum is present shall be actions of the Committee. The
Committee shall supervise the audit of the books of the Corporation and
recommend for approval by the Board the services of a reputable Certified Public
Accounting firm to examine the affairs of the Corporation.
Section 304. Appointment of Committee Members. The Board of Directors
shall elect the members of the Committees and the Chairman and Vice-Chairman of
each such Committee to serve until the next annual meeting of shareholders. The
President shall appoint or shall establish a method of appointing, subject to
the approval of the Board of Directors, the members of any other Committees
established by the Board of Directors, and the Chairman and Vice Chairman of
such Committee, to serve until the next annual meeting of shareholders. The
Board of Directors may appoint, from time to time, other committees, for such
purposes and with such powers as the Board may determine.
Section 305. Organization and Proceedings. Each Committee of the Board of
Directors shall effect its own organization by the appointment of a Secretary
and such other Officers, except the Chairman and Vice Chairman, as it may deem
necessary.
-4-
<PAGE> 5
A record of proceedings of all Committees shall be kept by the Secretary of such
Committee and filed and presented as provided in Section 208 of these Bylaws.
ARTICLE IV. OFFICERS.
Section 401. Chairman and Vice-Chairman of the Board. The Board of
Directors shall appoint one of its members to be the Chairman and Vice-Chairman
of the Board to serve at the pleasure of the Board. He shall preside at all
meeting of the Board of Directors. The Chairman of the Board shall supervise the
carrying out of the policies adopted or approved by the Board. He shall have
general executive powers, as well as the specific powers conferred by these
bylaws. He shall also have and may exercise such further powers and duties as
from time to time may be conferred upon, or assigned to him by the Board of
Directors. The Board of Directors shall appoint a Vice-Chairman of the Board to
preside at all meetings of the Board of Directors in the absence of the Chairman
of the Board and exercise any specific powers that may be conferred upon or
assigned to him by the Board of Directors.
Section 402. President. The Board of Directors shall appoint one of its
members to be President of the Corporation. In the absence of the Chairman, and
Vice-Chairman, he shall preside at any meeting of the Board. The President shall
HAVE general executive powers, and shall have and may exercise any and all other
powers and duties pertaining by law, regulation, or practice, to the office of
President, or imposed by these Bylaws. He shall also have and may exercise such
further powers and duties as from time to time may be conferred upon or assigned
to him by the Board of Directors.
Section 403. Vice President. The Board of Directors may appoint one or
more Vice Presidents. Each Vice President shall have such powers and duties as
may be assigned to him by the Board of Directors. One Vice President shall be
designated by the Board of Directors, in the absence of the President, to
perform all the duties of the President.
Section 404. Secretary. The Board of Directors shall appoint a Secretary,
who shall be Secretary of the Board and of the Corporation, and shall keep
accurate minutes of all meetings. He shall attend to the giving of all notices
required by these Bylaws to be Given. He shall be custodian of the corporate
seal, records, documents and papers of the Corporation. He shall provide for the
keeping of proper records of all transactions of the Corporation. He shall have
and may exercise any and all other powers and duties pertaining by law,
regulation or practice, to the office of Secretary, or imposed by these Bylaws.
He shall also perform such other duties as may be assigned to him, from time to
time, by the Board of Directors.
-5-
<PAGE> 6
Section 405. Treasurer. The Treasurer shall act under the supervision of
the President or such other Officer as the President may designate. The
Treasurer shall have custody of the Corporation's funds and such other duties as
may be prescribed by the Board of Directors, President or such other Supervising
Officer as the President may designate.
Section 406. Assistant Officers. Unless otherwise provided by the Board of
Directors, each Assistant Officer shall perform such duties as shall be
prescribed by the Board of Directors, the President or the Officer to whom
he/she is an Assistant. In the event of the absence or disability of an Officer
or his/her refusal to act, his/her Assistant Officer shall, in the order of
their rank, and within the same rank in the order of their seniority, have the
powers and authorities of such Officer.
Section 407. Compensation. Unless otherwise provided by the Board of
Directors, the salaries and compensation of all Officers and Assistant Officers,
except the President shall be fixed by or in the manner designated by the
President.
Section 408. General Powers. The Officers are authorized to do and perform
such corporate acts as are necessary in the carrying on of the business of the
Corporation, subject always to the direction of the Board of Directors.
ARTICLE V. SHARES OF CAPITAL STOCK.
Section 501. Authority to Sign Share Certificates. Every share certificate
of the Corporation shall be signed by the President and by the Secretary or one
of the Assistant Secretaries. Certificates may be signed by a facsimile
signature of the President and the Secretary or one of the Assistant Secretaries
of the Corporation.
Section 502. Lost or Destroyed Certificates. Any person claiming a share
certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if such person shall have: (a) requested such
replacement certificate before the Corporation has notice that the shares have
been acquired by a bona fide purchaser; (b) provided the Corporation with an
indemnity agreement satisfactory in form and substance to the Board of
Directors, or the President or the Secretary; and (c) satisfied any other
reasonable requirements (including providing an affidavit and a surety bond)
fixed by the Board of Directors, or the President or the Secretary.
ARTICLE VI. GENERAL.
Section 601. Fiscal Year. The fiscal year of the Corporation shall begin
on the first (1st) day of January in each year and end on the thirty-first
(31st) day of December in each year.
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Section 602. Record Date. The Board of Directors may fix any time
whatsoever (whether or not the same is more than fifty (50 days) prior to the
date of any meeting of shareholders, or the date for the payment of any dividend
or distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or will go into effect,
as a record date for the determination of the shareholders entitled to notice
of, or to vote at, any such meetings, or entitled to receive payment of any such
dividend or distribution, or to receive any such allotment of rights, or to
exercise the rights in respect to any such change, conversion or exchange of
shares.
Section 603. Absentee Participation in Meetings. One (1) or more Directors
may participate in a meeting of the Board of Directors, or of a Committee of the
Board, by means of a conference telephone or similar communications equipment,
by means of which all persons participating in the meeting can hear each other.
Section 604. Emergency Bylaws. In the event of any emergency resulting
from a nuclear attack or similar disaster, and during the continuance of such
emergency, the following Bylaw provisions shall be in effect, notwithstanding
any other provisions of the Bylaws:
(a) A meeting of the Board of Directors or of any Committee thereof
may be called by any Officer or Director upon one (1) hour's notice to all
persons entitled to notice whom, in the sole judgment of the notifier, it is
feasible to notify;
(b) The Director or Directors in attendance at the meeting of the
Board of Directors or of any Committee thereof shall constitute a quorum; and
(c) These Bylaws may be amended or repealed, in whole or in part, by
a majority vote of the Directors attending any meeting of the board of
Directors, provided such amendment or repeal shall only be effective for the
duration of such emergency.
Section 605. Severability. If any provision of these Bylaws is illegal or
unenforceable as such, such illegality or unenforceability shall not affect any
other provision of these Bylaws and such other provisions shall continue in full
force and effect.
ARTICLE VII. AMENDMENT OR REPEAL.
Section 701. Amendment or Repeal by the Board of Directors. These Bylaws
may be amended or repealed, in whole or in part, by a majority vote of members
of the Board of Directors at any regular or special meeting of the Board duly
convened. Notice need not be given of the purpose of the meeting of the Board of
Directors at which the amendment or repeal is to be considered.
Section 702. Recording Amendments and Repeals. The text of all amendments
and repeals to these Bylaws shall be attached to the Bylaws with a notation of
the date and vote of such amendment or repeal.
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<PAGE> 8
ARTICLE VIII. APPROVAL OF AMENDED BYLAWS AND RECORD OF AMENDMENTS AND REPEALS.
Section 801. Approval and Effective Date. These Bylaws have been approved
as the Bylaws of the Corporation this 23rd day of February, 1984, and shall be
effected as of said date.
Garfield G. Thomas
--------------------------------
Garfield G. Thomas, Secretary
Section 802. Amendments or Repeals.
<TABLE>
<CAPTION>
Section Involved Date Amended
---------------- or Repealed Approved By
----------- -----------
<S> <C> <C>
#501 Treasurer is March 6, 1985 Board of Directors
authorized to sign at a regular meeting
stock certificates of the corporation.
of corporation.
#303 Audit Committee March 19, 1986 Board of Directors
(Changed from 4 at a regular
directors to three meeting of the
directors). Remainder corporation.
of Section 303
remains the same.
</TABLE>
ARTICLE IX. LIABILITY OF DIRECTORS: INDEMNIFICATION.
Section 901. Elimination of Liability. To the fullest extent permitted by
the Directors' Liability Act. (42 Pa. C.S. Section 8361 et seq.) and the
Business Corporation Law of the Commonwealth of Pennsylvania, a director of the
corporation shall not be personally liable for monetary damages for any action
taken or any failure to take any action unless the director has breached or
failed to perform the duties of his or her office as set forth in the Directors'
Liability Act and such breach or failure constitutes self-dealing, willful
misconduct or recklessness. The provisions of this Section 901 shall not apply
with respect to the responsibility or liability of a director under any criminal
statute or the liability of a director for the payment of taxes pursuant to
local, state or federal law.
Section 902. Indemnification. The corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative by reason of the fact that such person is or
was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), amounts paid in
settlement, judgments, and fines actually and reasonably incurred by such person
in connection with such action, suit, or proceeding; provided, however, that no
indemnification shall be made in any case where the act or failure to act giving
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<PAGE> 9
rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness.
Section 903. Expenses. Expenses (including attorneys' fees) incurred in
defending a civil or criminal action, suit, or proceeding shall be paid by the
corporation in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee, or agent to repay such amount if it shall be ultimately
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article IX.
Section 904. Non-Exclusive. The indemnification and advancement of
expenses provided by this Article IX shall not be deemed exclusive of any other
right to which persons seeking indemnification and advancement of expenses may
be entitled under any agreement, vote of shareholders or disinterested
directors, or otherwise, both as to actions in such persons' official capacity
and as to their actions in another capacity while holding office, and shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such person.
Section 905. Insurance, Etc. The corporation may purchase and maintain
insurance on behalf of any person, may enter into contracts of indemnification
with any person, may create a fund of any nature (which may, but need not be,
under the control of a trustee) for the benefit of any person, and may otherwise
secure in any manner its obligations with respect to indemnification and
advancement of expenses, whether arising under this Article IX or otherwise, to
or for the benefit of any person, whether or not the corporation would have the
power to indemnify such person against such liability under the provisions of
this Article IX.
Section 906. Amendment. Notwithstanding anything herein contained to the
contrary, this Article IX may not be amended or repealed, and a provision
inconsistent herewith may not be adopted, except by the affirmative vote of 75%
of the members of the entire Board of Directors or by the affirmative vote of
shareholders of the corporation entitled to cast at least 75% of all votes which
shareholders of the corporation are then entitled to cast, except that, if the
Business Corporation Law or the Directors' Liability Act is amended or any other
statute is enacted so as to decrease the exposure of directors to liability or
to increase the indemnification rights available, this Article IX and any other
provision of these Bylaws inconsistent with such decreased exposure or increased
indemnification rights shall be amended, automatically and without any further
action on the part of shareholders or directors, to reflect such decreased
exposure or to include such increased indemnification rights, unless such
legislation expressly otherwise requires. Any repeal or modification of this
Article IX by the shareholders of the corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the corporation or any right to indemnification for any action taken
or any failure to take any action occurring prior to the time of such repeal or
modification.
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<PAGE> 10
Section 907. Severability. If, for any reason, any provision of this
Article IX shall be held invalid, such invalidity shall not affect any other
provision not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Article IX shall be held invalid in part, such invalidity shall in no
way affect the remainder of such provision, and the remainder of such provision,
together with all other provisions of this Article IX shall, to the full extent
consistent with law, continue in full force and effect.
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<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 9th day of June, 1993, by and between THE
FIRST NATIONAL BANK OF JERMYN, a Pennsylvania business corporation (hereinafter
referred to as "the Bank"), and WILLIAM M. DAVIS, an individual (hereinafter
referred to as "the Executive".)
W I T N E S S E T H:
WHEREAS, the Bank is a wholly-owned subsidiary of First Jermyn
Corporation, a Pennsylvania business corporation, and
WHEREAS, the Bank desires to employ the Executive as its President;
and
WHEREAS, the Bank and the Executive desire to set forth the terms
and conditions of said employment, and the Executive accepts employment upon the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the Bank and the Executive, intending to be legally
bound hereby, agree as follows:
1. Employment. The Bank hereby employs the Executive as President,
and the Executive hereby accepts this employment and agrees to render such
services to the Bank on the terms and conditions set forth in this Agreement.
2. Duties of the Executive.
2.1 The Executive shall perform and discharge well and faithfully
such duties as an executive officer of the
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<PAGE> 2
Bank as may be assigned to the Executive from time to time by the Board of
Directors of the Bank. The Executive shall be employed as President of the Bank,
and shall hold such other titles as may be given to him from time to time by the
Board of Directors of the Bank. The Executive shall devote his full time
attention and energies to the business of the Bank and shall not, during the
Employment Period (as defined in Section 3 hereof), be employed or involved in
any other business activity, whether or not such activity is pursued for gain,
profit or other pecuniary advantage; provided, however, that this Section 2
shall not be construed as preventing the Executive from (a) investing the
Executive's personal assets, (b) acting as a member of the Board of Directors of
the Bank or any other corporation or as a member of the Board of Trustees of any
other organization, or (c) being involved in any other activity with the prior
approval of the Board of Directors of the Bank.
2.2. The Executive is a Director of the Bank. The Executive agrees
that he will continue to serve as a Director without further compensation, but
the Bank is not required by this Agreement to continue the election of the
Executive as Director.
3. Term of Employment. The Executive's employment under this
Agreement shall be for a period (the "Employment Period") commencing upon the
date of this Agreement and ending at the end of the term of this Agreement
pursuant to Section 15 hereof, unless the Executive's employment is sooner
terminated in
2
<PAGE> 3
accordance with Section 5 hereof or one of the following provisions:
(a) The Executive's employment under this Agreement may be
terminated at any time during the Employment Period for "Cause" (as herein
defined), by action of the Board of Directors of the Bank, upon giving
notice of such termination to the Executive at least fifteen (15) days
prior to the date upon which such termination shall take effect. As used
in this Agreement, "Cause" means any of the following events:
(i) The Executive is convicted of or enters a plea of guilty
or nolo contendre to a felony, a crime of falsehood, or a crime
involving fraud or moral turpitude, or the actual incarceration of
the Executive for a period of thirty (30) consecutive days;
(ii) The Executive willfully fails to follow the instructions
of the Board of Directors of the Bank after the Executive's receipt
of written notice of such instructions, other than a failure
resulting from the Executive's incapacity because of physical or
mental illness;
(iii) The Office of the Comptroller of the Currency or any
other government regulatory agency recommends or orders in writing
that the Bank terminate the employment of the Executive with the
Bank or relieve him of his duties as such relate to the Bank; or
(iv) The Executive's material violation of federal or state
securities or banking laws; or
(v) The Executive's intentional failure to comply in any
material respect with the Bank's written policies and procedures of
which he has actual notice (for purposes of this clause, any failure
of the Executive to comply with a particular policy or procedure
following written notice to the Executive of a failure to comply
with such policy or procedure, and any failure of the Executive to
comply with a policy or procedure which has been designated by
written notice to the Executive to be of sufficient materiality to
the operation supervised by the Executive that such failure, if
unintentional, constituted a
3
<PAGE> 4
reckless disregard for such policy or procedure, shall be deemed to
be an intentional failure);
(vi) The Executive's failure, whether intentional or
unintentional, on three (3) or more occasions during any twelve (12)
month period (after the first of which the Executive was notified in
writing of such failure) to comply in all material respects with all
of the Bank's written policies and procedures of which he has actual
notice; or
(vii) The Executive's material breach of this Agreement.
(viii) The Executive violates the covenant not to compete
contained in Section 7 hereof.
If the Executive's employment is terminated under the provisions of this Section
3(a), then all rights of the Executive under Section 4 hereof shall cease as of
the effective date of such termination.
(b) The Executive's employment under this Agreement may be
terminated at any time during the Employment Period without "Cause" (as defined
in Section 3(a) hereof) by action of the Board of Directors of the Bank upon
giving notice of such termination to the Executive at least thirty (30) days
prior to the date upon which such termination shall take effect. If the
Executive's employment is terminated under the provisions of this Section 3(b),
then the Executive shall be entitled to receive the compensation set forth in
Section 6 hereof.
(c) If the Executive retires or dies, the Executive's employment
under this Agreement shall be deemed terminated as of the date of the
Executive's retirement or death, and all rights of the Executive under Section 4
hereof shall cease as of the date of such termination and any benefits payable
to the Executive shall be determined in accordance with the retirement and
insurance programs of the Bank then in effect.
(d) If the Executive is incapacitated by accident, sickness, or
otherwise, so as to render the Executive mentally or physically incapable of
performing the services required of the Executive under Section 2 of this
Agreement for an aggregate of one hundred eighty (180) days or one hundred
twenty (120) consecutive days during any period of twelve (12) months, then,
upon the expiration of either of such periods or at any time thereafter, by
action
4
<PAGE> 5
of the Board of Directors of the Bank, the Executive's employment under this
Agreement may be terminated immediately upon giving the Executive notice to that
effect. If the Executive's employment is terminated under the provisions of this
Section 3(d), then all rights of the Executive under Section 4 hereof shall
cease as of the last business day of the week in which such termination occurs
and any benefits payable to the Executive shall be determined in accordance with
the retirement and insurance programs of the Bank then in effect.
4. Employment Period Compensation.
(a) Salary. For services performed by the Executive under this
Agreement, the Bank shall pay the Executive a salary, in the aggregate, during
the Employment Period, at the rate of One Hundred and Thirty Thousand
($130,000.00) Dollars per year, payable at the same times as salaries are
payable to other executive employees of the Bank. The Bank may, from time to
time, increase the Executive's salary, and any and all such increases shall be
deemed to constitute amendments to this Section 4(a) to reflect the increased
amounts, effective as of the dates established for such increases by the Board
of Directors of the Bank in the resolutions authorizing such increases.
(b) Other Benefits. The Bank will provide the Executive, during the
Employment Period, with insurance, vacation, pension, and other fringe benefits
in the aggregate not less favorable than those received by other executive
employees of the Bank, including, but not limited to, a paid vacation of four
(4) weeks per year.
(c) During the term of the Agreement, the Executive will be entitled
to the use of a vehicle as may be assigned to the Executive by the Bank's Board
of Directors which shall be of the age and type of vehicle customarily driven by
the Executive (a Park Avenue or equal).
(d) The Bank shall reimburse the Executive or otherwise provide for
or pay for all reasonable expenses incurred by the Executive in furtherance or
in connection with the business of the Bank including, but not limited to,
automobile and traveling expenses, and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise)
subject to such reasonable limitations as may be established by the Bank's Board
of Directors. The Executive shall present the Bank with an itemized account of
all expenditures for which the Executive seeks reimbursement at least monthly
during the term of
5
<PAGE> 6
this Agreement. Such expenses must be deductible by the Bank for purposes of
federal income taxation to be paid by the Bank. If such expenses are paid in the
first instance by the Executive, the Bank will reimburse the Executive.
5. Resignation of the Executive for Good Reason.
(a) The Executive may resign for "Good Reason" (as herein defined)
at any time during the Employment Period following a "Change in Control" (as
defined in Section 5(b) hereof), as hereinafter set forth. As used in this
Agreement, "Good Reason" means any of the following:
(i) Any reduction in title or a material adverse change in the
Executive's responsibilities or authority which are inconsistent
with, or the assignment to the Executive of duties inconsistent
with, the Executive's status as President of the Bank;
(ii) Any reassignment of the Executive which requires the
Executive to travel from his principal residence (established as of
June 1, 1993) more than twenty-five (25) miles to his reassigned
office;
(iii) Any removal of the Executive from office except for any
termination of the Executive's employment under the provisions of
Section 3(b) hereof;
(iv) Any reduction in the Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time
to time;
(v) Any failure by the Bank to provide the Executive with
benefits at least as favorable as those enjoyed by the Executive
under any of the pension, life insurance, medical, health and
accident, disability or other employee plans of the Bank in which
the Executive participated at the time of the change in control, or
the taking of any action that would materially reduce any of such
benefits in effect at the time of the change in control, unless such
reduction is part of a reduction applicable in each case to all
employees;
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<PAGE> 7
(vi) Any delivery by the Bank to the Executive of the written
notice of nonrenewal provided for in Section 15 hereof;
(vii) Any material breach of this Agreement of any nature
whatsoever on the part of the Bank.
(b) For purposes of this Agreement, a "change in control of the
Bank" shall mean a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"). Such a change in
control shall be deemed to have occurred if:
(i) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act in effect on the date first written above,
other than the Bank or any "person" who on this date is a director
or officer of the Bank, is or becomes the "beneficial owner" as
defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of securities of the Bank representing twenty-five (25%)
percent or more of the combined voting power of the Bank's then
outstanding securities; or
(ii) a merger, consolidation or other reorganization of the
Bank, except where the resulting entity is controlled, directly or
indirectly, by the Bank; or
(iii) a merger, consolidation or other reorganization of the
Bank, except where shareholders of the Bank immediately prior to
consummation of any such transaction continue to hold at least a
majority of the voting power of the outstanding voting securities of
the legal entity resulting from or existing after any such
transaction and a majority of the members of the Board of Directors
of the legal entity resulting from or existing after any such
transaction are former members of the Bank's Board of Directors;
(iv) a sale, exchange, transfer or other disposition of
substantially all of the
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<PAGE> 8
assets of the Bank to another entity, except to an entity
controlled, directly or indirectly, by the Bank;
(v) a sale, exchange, transfer or other disposition of
substantially all of the assets of the Bank to another entity; or
(vi) a contested proxy solicitation of the shareholders of the
Bank which results in the contesting party obtaining the ability to
cast a majority of the votes entitled to be cast in an election of
directors of the Bank.
(c) At the option of the Executive, exercisable by the Executive
within ninety (90) days after the occurrence of the event constituting
"Good Reason", the Executive may resign from employment under this
Agreement by a notice in writing (the "Notice of Termination") delivered
to the Bank and the provisions of Section 6 hereof shall thereupon apply.
6. Rights in Event of Termination of Employment. In the event that the
Executive resigns from employment for Good Reason under Section 5(c) above, or
the Executive's employment is terminated by the Bank without Cause, through the
end of the term in effect under Section 15 hereof as the date of termination of
employment, the Bank shall pay as severance to the Executive an amount equal to
the product of (a) the Executive's current annual base salary in effect as of
the date of termination multiplied by (b) the number of years (including any
partial year remaining in the term of employment under this Agreement), such
payment to be made in substantially equal semi-monthly installments on the
fifteenth (15th) and last days of each month. During said period, the Executive
shall also receive a continuation of all life, disability, medical insurance and
other normal benefits in effect with respect to Executive during the two (2)
years prior
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<PAGE> 9
to his termination of employment, or, if the Bank cannot provide such benefits
because the Executive is no longer an employee, a dollar amount equal to the
cost to the Executive of obtaining such benefits (or substantially similar
benefits).
7. Covenant Not to Compete.
(a) The Executive hereby acknowledges and recognizes the highly
competitive nature of the business of the Bank and accordingly agrees that,
during and for the applicable period set forth in Section 7 (c) hereof, the
Executive shall not:
(i) Be engaged, directly or indirectly, either for his own
account or as agent, consultant, employee, partner, officer,
director, proprietor, investor (except as an investor owning less
than 5% of the stock of a publicly owned company) or otherwise of,
any person, firm, corporation, or enterprise engaged, in (1) the
banking or financial services industry, or (2) any other activity in
which the Bank or any of its subsidiaries is engaged during the
Employment Period, in any county in which, at any time during the
Employment Period or at the date of termination of the Executive's
employment, a branch office or other facility of the Bank or any of
its subsidiaries is located; (the "Non-Competition Area");
(ii) Provide financial or other assistance to any person,
firm, corporation, or enterprise engaged in (1) the banking or
financial services industry, or (2) any other activity in which the
Bank or any of its subsidiaries is engaged during the Employment
Period, in the Non-Competition Area.
(b) It is expressly understood and agreed that, although the
Executive and the Bank consider the restrictions contained in Section 7(a)
hereof reasonable for the purpose of preserving for the Bank and its
subsidiaries their good will and other proprietary rights, if a final judicial
determination is made by a court having jurisdiction that the time or territory
or any other restriction contained in Section 7(a) hereof is an unreasonable or
otherwise unenforceable restriction against the
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<PAGE> 10
Executive, the provisions of Section 7(a) hereof shall not be rendered void but
shall be deemed amended to apply as to such maximum time and territory and to
such other extent as such court may judicially determine or indicate to be
reasonable.
(c) The provisions of this Section 7 shall be applicable commencing
on the date of this Agreement and ending on one of the following periods, as
applicable:
(i) If the Executive's employment is terminated in accordance
with the provisions of Section 3 (other than Section 3(a) or
Section 15 hereof) the effective date of termination of employment,
but if such termination of employment is in accordance with the
provisions of Section 3(b) hereof, the provisions of Section 16
shall apply notwithstanding the termination of the applicability of
this Section 7;
(ii) If Executive's employment is terminated in accordance
with the provisions of Section 3(a) hereof or Executive voluntarily
terminates his employment other than in accordance with the
provisions of Section 5 hereof, thirty-six (36) months following the
effective date of termination of employment; or
(iii) If Executive voluntarily terminates his employment in
accordance with the provisions of Section 5 hereof, the date of the
Notice of Termination.
8. Remedies. Executive acknowledges and agrees that the remedy at
law of the Bank for a breach or threatened breach of any of the provisions of
Section 8 hereof would be inadequate and, in recognition of this fact, in the
event of a breach or threatened breach by the Executive of any of the provisions
of Section 8 hereof, it is agreed that, in addition to the remedy at law, the
Bank shall be entitled to, without posting any bond, and the Executive agrees
not to oppose any request of the Bank for, equitable relief in the form of
specific performance, a temporary
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<PAGE> 11
restraining order, a temporary or permanent injunction, or any other equitable
remedy which may then be available. Nothing herein contained shall be construed
as prohibiting the Bank from pursuing any other remedies available to them for
such breach or threatened breach.
9. Arbitration. The Bank and Executive recognize that in the event a
dispute should arise between them concerning the interpretation or
implementation of this Agreement, lengthy and expensive litigation will not
afford a practical resolution of the issues within a reasonable period of time.
Consequently, each party agrees that all disputes, disagreements and questions
of interpretation concerning this Agreement are to be submitted for resolution
to the American Arbitration Association ("Association") in Scranton,
Pennsylvania, and the Bank, or Executive, may initiate an arbitration proceeding
at any time by giving notice to the other in accordance with the rules of the
Association. The Association shall designate a single arbitrator to conduct the
proceeding, but the Bank, and the Executive, may, as a matter of right, require
the substitution of a different arbitrator chosen by the Association. Each such
right of substitution may be exercised only once. The arbitrator shall not be
bound by the rules of evidence and procedure of the courts of the Commonwealth
of Pennsylvania but shall be bound by the substantive law applicable to this
Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or
gross and obvious error of fact, shall be final and binding upon the
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<PAGE> 12
parties and shall be enforceable in courts of proper jurisdiction. Following
written notice of a request for arbitration, the Bank, and the Executive, shall
be entitled to an injunction restraining all further proceedings in any pending
or subsequently filed litigation concerning this Agreement, except as otherwise
provided herein.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be deemed properly given if in writing and if mailed by
registered or certified mail, postage prepaid with return receipt requested, to
the residence of the Executive, in the case of notices to the Executive, and to
the principal office of the Bank, in the case of notices to the Bank.
11. Waiver. No provisions of this Agreement may be modified, waived,
or discharged unless such waiver, modification, or discharge is agreed to in
writing and signed by the Executive, and an executive officer of the Bank, such
officer being specifically designated by the Board of Directors of the Bank. No
waiver by any party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
12. Assignment. This Agreement shall not be assignable by any party
hereto, except by the Bank to any successor in interest to the business of the
Bank.
13. Entire Agreement. This Agreement contains the
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<PAGE> 13
entire agreement of the parties relating to the subject matter of this
Agreement.
14. Successors, Binding Agreement.
(a) The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all
or substantially all of the business and/or assets of the Bank to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Bank would be required to
perform it if no such succession had taken place. Failure by the
Bank to obtain such assumption and agreement prior to the
effectiveness of any such succession shall constitute a material
breach of this Agreement. As used in this Agreement, the "Bank"
shall mean the Bank as hereinbefore defined and any successor to the
business and/or assets of the Bank as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees, and
legatees. If the Executive should die while any amount is payable to
the Executive under this Agreement if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee, or, if there is no
such designee, to the Executive's estate.
15. Termination.
(a) Unless the Executive's employment is terminated pursuant
to the provisions of Section 3 or Section 5 hereof, the terms of
this Agreement shall;
(i) Initially be a term commencing on June 1, 1993, and
ending on May 31, 1996;
(ii) Be automatically extended to provide for a three
(3) year term, annually, on June 1, 1994, and again on June 1
of each year thereafter, effective as of such respective
dates, unless either (1) the Bank or (2) the Executive shall
have given written notice of nonextension of the term of this
Agreement to the other at least thirty (30) days before the
date of any such extension.
(b) Any termination of the Executive's employment under this
Agreement or of this Agreement shall
13
<PAGE> 14
not affect the provisions of Sections 6, 7, or 8 hereof, which shall
survive any such termination and remain in full force and effect in
accordance with their respective terms.
16. Mitigation/Offset. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
employment or otherwise; provided, however, that for each dollar of compensation
earned by the Executive from another employer, a corresponding dollar amount of
any sum otherwise payable to, or for the benefit of, the Executive under Section
6 hereof shall be reduced by fifty percent (50%). Application of this Section
shall be subject to the following rules:
(i) The reduction provision of this subsection shall apply
only to compensation earned by Executive during the period of time
he is receiving payments described in Section 6 hereof.
(ii) Compensation earned from another employer shall include
compensation deferred under any qualified or nonqualified
arrangement.
(iii) Compensation earned from another employer shall be
determined on an annual basis by reference to the Executive's date
of termination of employment.
(iv) Within fifteen (15) days following each anniversary date
of the Executive's termination of employment (and within fifteen
(15) days following receipt of the last Section 6 payment), he shall
provide the Bank with such detailed information and records as may
have been reasonably requested to confirm the compensation he earned
during the preceding twelve (12) months (or shorter period, if
applicable). In the absence of a specific request for detailed
information, he shall only be required to deliver written notice of
the total of such compensation amount.
(v) Upon receipt of the earned compensation information from
Executive, the Bank shall withhold subsequent monthly payments until
the amount withheld
14
<PAGE> 15
equals the reduction required with respect to the prior year. If no
monthly payments remain to be paid, the Bank will remit to Executive a
bill, setting forth the amount overpaid to him by reason of this
subsection, which bill shall become due and payable thirty (30) days
following its receipt.
17. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
18. Applicable Law. This Agreement shall be governed by and
construed in accordance with the domestic laws (but not the law of conflict of
laws) of the Commonwealth of Pennsylvania.
19. Headings. The headings of the Sections of this Agreement are
for convenience only and shall not control or affect the meaning or construction
or limit the scope or intent of any of the provisions of this Agreement.
20. Effective Date. This Agreement shall become effective
immediately upon the execution and delivery of this Agreement by the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
THE FIRST NATIONAL BANK OF JERMYN
/s/ Kuzma Leschak Jr.
----------------------------------
Chairman
Board of Directors
("BANK")
/s/ William M. Davis (SEAL)
-----------------------------------
William M. Davis
("EXECUTIVE")
15
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 9th day of June, 1993, by and between THE
FIRST NATIONAL BANK OF JERMYN, a Pennsylvania business corporation (hereinafter
referred to as "the Bank"), and STEVEN R. TOKACH, an individual (hereinafter
referred to as "the Executive".)
W I T N E S S E T H:
WHEREAS, the Bank is a wholly-owned subsidiary of First Jermyn
Corporation, a Pennsylvania business corporation, and
WHEREAS, the Bank desires to employ the Executive as its Executive Vice
President; and
WHEREAS, the Bank and the Executive desire to set forth the terms and
conditions of said employment, and the Executive accepts employment upon the
terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants set forth herein, the Bank and the Executive, intending to be legally
bound hereby, agree as follows:
1. Employment. The Bank hereby employs the Executive as Executive Vice
President, and the Executive hereby accepts this employment and agrees to render
such services to the Bank on the terms and conditions set forth in this
Agreement.
2. Duties of the Executive.
2.1 The Executive shall perform and discharge well and faithfully
such duties as an executive officer of the
1
<PAGE> 2
Bank as may be assigned to the Executive from time to time by the Board of
Directors of the Bank. The Executive shall be employed as Executive Vice
President of the Bank, and shall hold such other titles as may be given to him
from time to time by the Board of Directors of the Bank. The Executive shall
devote his full time attention and energies to the business of the Bank and
shall not, during the Employment Period (as defined in Section 3 hereof), be
employed or involved in any other business activity, whether or not such
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that this Section 2 shall not be construed as preventing the Executive
from (a) investing the Executive's personal assets, (b) acting as a member of
the Board of Directors of the Bank or any other corporation or as a member of
the Board of Trustees of any other organization, or (c) being involved in any
other activity with the prior approval of the Board of Directors of the Bank.
2.2. If the Executive is elected or appointed Director of the Bank
during his employment, the Executive will serve as a Director without further
compensation, but the Bank is not required by this Agreement to cause the
election or appointment of the Executive as Director.
3. Term of Employment. The Executive's employment under this Agreement
shall be for a period (the "Employment Period") commencing upon the date of this
Agreement and ending at the end of the term of this Agreement pursuant to
Section 15 hereof, unless the Executive's employment is sooner terminated in
2
<PAGE> 3
accordance with Section 5 hereof or one of the following provisions:
(a) The Executive's employment under this Agreement may be
terminated at any time during the Employment Period for "Cause" (as herein
defined), by action of the Board of Directors of the Bank, upon giving
notice of such termination to the Executive at least fifteen (15) days
prior to the date upon which such termination shall take effect. As used
in this Agreement, "Cause" means any of the following events:
(i) The Executive is convicted of or enters a plea of guilty
or nolo contendere to a felony, a crime of falsehood, or a crime
involving fraud or moral turpitude, or the actual incarceration of
the Executive for a period of thirty (30) consecutive days;
(ii) The Executive willfully fails to follow the instructions
of the Board of Directors of the Bank after the Executive's receipt
of written notice of such instructions, other than a failure
resulting from the Executive's incapacity because of physical or
mental illness;
(iii) The Office of the Comptroller of the Currency or any
other government regulatory agency recommends or orders in writing
that the Bank terminate the employment of the Executive with the
Bank or relieve him of his duties as such relate to the Bank; or
(iv) The Executive's material violation of federal or state
securities or banking laws; or
(v) The Executive's intentional failure to comply in any
material respect with the Bank's written policies and procedures of
which he has actual notice (for purposes of this clause, any failure
of the Executive to comply with a particular policy or procedure
following written notice to the Executive of a failure to comply
with such policy or procedure, and any failure of the Executive to
comply with a policy or procedure which has been designated by
written notice to the Executive to be of sufficient materiality to
the operation supervised by the Executive that such failure, if
unintentional, constituted a
3
<PAGE> 4
reckless disregard for such policy or procedure, shall be deemed to
be an intentional failure);
(vi) The Executive's failure, whether intentional or
unintentional, on three (3) or more occasions during any twelve (12)
month period (after the first of which the Executive was notified in
writing of such failure) to comply in all material respects with all
of the Bank's written policies and procedures of which he has actual
notice; or
(vii) The Executive's material breach of this Agreement.
(viii) The Executive violates the covenant not to compete
contained in Section 7 hereof.
If the Executive's employment is terminated under the provisions of this Section
3(a), then all rights of the Executive under Section 4 hereof shall cease as of
the effective date of such termination.
(b) The Executive's employment under this Agreement may be
terminated at any time during the Employment Period without "Cause" (as defined
in Section 3(a) hereof) by action of the Board of Directors of the Bank upon
giving notice of such termination to the Executive at least thirty (30) days
prior to the date upon which such termination shall take effect. If the
Executive's employment is terminated under the provisions of this Section 3(b),
then the Executive shall be entitled to receive the compensation set forth in
Section 6 hereof.
(c) If the Executive retires or dies, the Executive's employment
under this Agreement shall be deemed terminated as of the date of the
Executive's retirement or death, and all rights of the Executive under Section 4
hereof shall cease as of the date of such termination and any benefits payable
to the Executive shall be determined in accordance with the retirement and
insurance programs of the Bank then in effect.
(d) If the Executive is incapacitated by accident, sickness, or
otherwise, so as to render the Executive mentally or physically incapable of
performing the services required of the Executive under Section 2 of this
Agreement for an aggregate of one hundred eighty (180) days or one hundred
twenty (120) consecutive days during any period of twelve (12) months, then,
upon the expiration of either of such periods or at any time thereafter, by
action
4
<PAGE> 5
of the Board of Directors of the Bank, the Executive's employment under this
Agreement may be terminated immediately upon giving the Executive notice to that
effect. If the Executive's employment is terminated under the provisions of this
Section 3(d), then all rights of the Executive under Section 4 hereof shall
cease as of the last business day of the week in which such termination occurs
and any benefits payable to the Executive shall be determined in accordance with
the retirement and insurance programs of the Bank then in effect.
4. Employment Period Compensation.
(a) Salary. For services performed by the Executive under this
Agreement, the Bank shall pay the Executive a salary, in the aggregate, during
the Employment Period, at the rate of Ninety Thousand Dollars ($90,000.00) per
year, payable at the same times as salaries are payable to other executive
employees of the Bank. The Bank may, from time to time, increase the Executive's
salary, and any and all such increases shall be deemed to constitute amendments
to this Section 4(a) to reflect the increased amounts, effective as of the dates
established for such increases by the Board of Directors of the Bank in the
resolutions authorizing such increases.
(b) Other Benefits. The Bank will provide the Executive, during the
Employment Period, with insurance, vacation, pension, and other fringe benefits
in the aggregate not less favorable than those received by other executive
employees of the Bank, including, but not limited to, a paid vacation of four
(4) weeks per year.
(c) During the term of the Agreement, the Executive will be entitled
to the use of a vehicle as may be assigned to the Executive by the Bank's Board
of Directors which shall be of the age and type of vehicle customarily driven by
the Executive (a Buick LeSabre or equal).
(d) The Bank shall reimburse the Executive or otherwise provide for
or pay for all reasonable expenses incurred by the Executive in furtherance or
in connection with the business of the Bank including, but not limited to,
automobile and traveling expenses, and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise)
subject to such reasonable limitations as may be established by the Bank's Board
of Directors. The Executive shall present the Bank with an itemized account of
all expenditures for which the Executive seeks reimbursement at least monthly
during the term of
5
<PAGE> 6
this Agreement. Such expenses must be deductible by the Bank for purposes of
federal income taxation to be paid by the Bank. If such expenses are paid in the
first instance by the Executive, the Bank will reimburse the Executive.
5. Resignation of the Executive for Good Reason.
(a) The Executive may resign for "Good Reason" (as herein defined)
at any time during the Employment Period following a "Change in Control" (as
defined in Section 5(b) hereof), as hereinafter set forth. As used in this
Agreement, "Good Reason" means any of the following:
(i) Any reduction in title or a material adverse change in the
Executive's responsibilities or authority which are inconsistent
with, or the assignment to the Executive of duties inconsistent
with, the Executive's status as Executive Vice President of the
Bank;
(ii) Any reassignment of the Executive which requires the
Executive to travel from his principal residence (established as of
June 1, 1993) more than twenty-five (25) miles to his reassigned
office;
(iii) Any removal of the Executive from office except for any
termination of the Executive's employment under the provisions of
Section 3(b) hereof;
(iv) Any reduction in the Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time
to time;
(v) Any failure by the Bank to provide the Executive with
benefits at least as favorable as those enjoyed by the Executive
under any of the pension, life insurance, medical, health and
accident, disability or other employee plans of the Bank in which
the Executive participated at the time of the change in control, or
the taking of any action that would materially reduce any of such
benefits in effect at the time of the change in control, unless such
reduction is part of a
6
<PAGE> 7
reduction applicable in each case to all employees;
(vi) Any delivery by the Bank to the Executive of the written
notice of nonrenewal provided for in Section 15 hereof;
(vii) Any material breach of this Agreement of any nature
whatsoever on the part of the Bank.
(b) For purposes of this Agreement, a "change in control of the
Bank" shall mean a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"). Such a change in
control shall be deemed to have occurred if:
(i) any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act in effect on the date first written above,
other than the Bank or any "person" who on this date is a director
or officer of the Bank, is or becomes the "beneficial owner" as
defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of securities of the Bank representing twenty-five (25%)
percent or more of the combined voting power of the Bank's then
outstanding securities; or
(ii) a merger, consolidation or other reorganization of the
Bank, except where the resulting entity is controlled, directly or
indirectly, by the Bank; or
(iii) a merger, consolidation or other reorganization of the
Bank, except where shareholders of the Bank immediately prior to
consummation of any such transaction continue to hold at least a
majority of the voting power of the outstanding voting securities of
the legal entity resulting from or existing after any such
transaction and a majority of the members of the Board of Directors
of the legal entity resulting from or existing after any such
transaction are former members of the Bank's Board of Directors;
7
<PAGE> 8
(iv) a sale, exchange, transfer or other disposition of
substantially all of the assets of the Bank to another entity,
except to an entity controlled, directly or indirectly, by the Bank;
(v) a sale, exchange, transfer or other disposition of
substantially all of the assets of the Bank to another entity; or
(vi) a contested proxy solicitation of the shareholders of the
Bank which results in the contesting party obtaining the ability to
cast a majority of the votes entitled to be cast in an election of
directors of the Bank.
(c) At the option of the Executive, exercisable by the Executive
within ninety (90) days after the occurrence of the event constituting
"Good Reason", the Executive may resign from employment under this
Agreement by a notice in writing (the "Notice of Termination") delivered
to the Bank and the provisions of Section 6 hereof shall thereupon apply.
6. Rights in Event of Termination of Employment. In the event that the
Executive resigns from employment for Good Reason under Section 5(c) above, or
the Executive's employment is terminated by the Bank without Cause, through the
end of the term in effect under Section 15 hereof as the date of termination of
employment, the Bank shall pay as severance to the Executive an amount equal to
the product of (a) the Executive's current annual base salary in effect as of
the date of termination multiplied by (b) the number of years (including any
partial year remaining in the term of employment under this Agreement), such
payment to be made in substantially equal semi-monthly installments on the
fifteenth (15th) and last days of each month. During said period, the Executive
shall also receive a continuation of all life, disability, medical insurance and
other normal benefits in
8
<PAGE> 9
effect with respect to Executive during the two (2) years prior to his
termination of employment, or, if the Bank cannot provide such benefits because
the Executive is no longer an employee, a dollar amount equal to the cost to the
Executive of obtaining such benefits (or substantially similar benefits).
7. Covenant Not to Compete.
(a) The Executive hereby acknowledges and recognizes the highly
competitive nature of the business of the Bank and accordingly agrees that,
during and for the applicable period set forth in Section 7 (c) hereof, the
Executive shall not:
(i) Be engaged, directly or indirectly, either for his own
account or as agent, consultant, employee, partner, officer,
director, proprietor, investor (except as an investor owning less
than 5% of the stock of a publicly owned company) or otherwise of,
any person, firm, corporation, or enterprise engaged, in (1) the
banking or financial services industry, or (2) any other activity in
which the Bank or any of its subsidiaries is engaged during the
Employment Period, in any county in which, at any time during the
Employment Period or at the date of termination of the Executive's
employment, a branch office or other facility of the Bank or any of
its subsidiaries is located (the "Non-Competition Area");
(ii) Provide financial or other assistance to any person,
firm, corporation, or enterprise engaged in (1) the banking or
financial services industry, or (2) any other activity in which the
Bank or any of its subsidiaries is engaged during the Employment
Period, in the Non-Competition Area.
(b) It is expressly understood and agreed that, although the
Executive and the Bank consider the restrictions contained in Section 7 (a)
hereof reasonable for the purpose of preserving for the Bank and its
subsidiaries their good will and other proprietary rights, if a final judicial
determination is made by a court having jurisdiction that the time or territory
or any other restriction contained in Section 7 (a) hereof is an unreasonable or
otherwise unenforceable restriction against the Executive, the provisions of
Section 7 (a) hereof shall not be
9
<PAGE> 10
rendered void but shall be deemed amended to apply as to such maximum time and
territory and to such other extent as such court may judicially determine or
indicate to be reasonable.
(c) The provisions this Section 7 shall be applicable commencing on
the date of this Agreement and ending on one of the following periods, as
applicable:
(i) If the Executive's employment is terminated in accordance
with the provisions of Section 3 (other than Section 3 (a) or
Section 15 hereof) the effective date of termination of employment,
but if such termination of employment is in accordance with the
provisions of Section 3 (b) hereof, the provisions of Section 16
shall apply notwithstanding the termination of the applicability of
this Section 7;
(ii) If Executive's employment is terminated in accordance
with the provisions of Section 3 (a) hereof or Executive voluntarily
terminates his employment other than in accordance with the
provisions of Section 5 hereof, thirty-six (36) months following the
effective date of termination of employment; or
(iii) If Executive voluntarily terminates his employment in
accordance with the provisions of Section 5 hereof, the date of the
Notice of Termination.
8. Remedies. Executive acknowledges and agrees that the remedy at law of
the Bank for a breach or threatened breach of any of the provisions of Section 8
hereof would be inadequate and, in recognition of this fact, in the event of a
breach or threatened breach by the Executive of any of the provisions of Section
8 hereof, it is agreed that, in addition to the remedy at law, the Bank shall be
entitled to, without posting any bond, and the Executive agrees not to oppose
any request of the Bank for, equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction,
or any
10
<PAGE> 11
other equitable remedy which may then be available. Nothing herein contained
shall be construed as prohibiting the Bank from pursuing any other remedies
available to them for such breach or threatened breach.
9. Arbitration. The Bank and Executive recognize that in the event a
dispute should arise between them concerning the interpretation or
implementation of this Agreement, lengthy and expensive litigation will not
afford a practical resolution of the issues within a reasonable period of time.
Consequently, each party agrees that all disputes, disagreements and questions
of interpretation concerning this Agreement are to be submitted for resolution
to the American Arbitration Association ("Association") in Scranton,
Pennsylvania, and the Bank, or Executive, may initiate an arbitration proceeding
at any time by giving notice to the other in accordance with the rules of the
Association. The Association shall designate a single arbitrator to conduct the
proceeding, but the Bank, and the Executive, may, as a matter of right, require
the substitution of a different arbitrator chosen by the Association. Each such
right of substitution may be exercised only once. The arbitrator shall not be
bound by the rules of evidence and procedure of the courts of the Commonwealth
of Pennsylvania but shall be bound by the substantive law applicable to this
Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or
gross and obvious error of fact, shall be final and binding upon the parties and
shall be enforceable in courts of proper
11
<PAGE> 12
jurisdiction. Following written notice of a request for arbitration, the Bank,
and the Executive, shall be entitled to an injunction restraining all further
proceedings in any pending or subsequently filed litigation concerning this
Agreement, except as otherwise provided herein.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be deemed properly given if in writing and if mailed by
registered or certified mail, postage prepaid with return receipt requested, to
the residence of the Executive, in the case of notices to the Executive, and to
the principal office of the Bank, in the case of notices to the Bank.
11. Waiver. No provisions of this Agreement may be modified, waived, or
discharged unless such waiver, modification, or discharge is agreed to in
writing and signed by the Executive, and an executive officer of the Bank, such
officer being specifically designated by the Board of Directors of the Bank. No
waiver by any party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
12. Assignment. This Agreement shall not be assignable by any party
hereto, except by the Bank to any successor in interest to the business of the
Bank.
13. Entire Agreement. This Agreement contains the
12
<PAGE> 13
entire agreement of the parties relating to the subject matter of this
Agreement.
14. Successors, Binding Agreement.
(a) The Bank will require any successor (whether direct or indirect,
by purchase, merger, consolidation, or otherwise) to all or substantially all of
the business and/or assets of the Bank to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Bank would be
required to perform it if no such succession had taken place. Failure by the
Bank to obtain such assumption and agreement prior to the effectiveness of any
such succession shall constitute a material breach of this Agreement. As used in
this Agreement, the "Bank" shall mean the Bank as hereinbefore defined and any
successor to the business and/or assets of the Bank as aforesaid which assumes
and agrees to perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
heirs, distributees, devisees, and legatees. If the Executive should die while
any amount is payable to the Executive under this Agreement if the Executive had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee or other designee, or, if there is no such designee, to the Executive's
estate.
15. Termination.
(a) Unless the Executive's employment is terminated pursuant to the
provisions of Section 3 or Section 5 hereof, the terms of this Agreement shall:
(i) initially be a term commencing on June 1, 1993, and ending
on May 31, 1996;
(ii) Be automatically extended to provide for a three (3) year
term, annually, on June 1, 1994, and again on June 1 of each year
thereafter, effective as of such respective dates, unless either (1)
the Bank or (2) the Executive shall have given written notice of
nonextension of the term of this Agreement to the other at least
thirty (30) days before the date of any such extension.
(b) Any termination of the Executive's employment under this
Agreement or of this Agreement shall
13
<PAGE> 14
not affect the provisions of Sections 6, 7, or 8 hereof, which shall
survive any such termination and remain in full force and effect in
accordance with their respective terms.
16. Mitigation/Offset. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking employment or
otherwise; provided, however, that for each dollar of compensation earned by the
Executive from another employer, a corresponding dollar amount of any sum
otherwise payable to, or for the benefit of, the Executive under Section 6
hereof shall be reduced by fifty percent (50%). Application of this Section
shall be subject to the following rules:
(i) The reduction provision of this subsection shall apply only to
compensation earned by Executive during the period of time he is receiving
payments described in Section 6 hereof.
(ii) Compensation earned from another employer shall include
compensation deferred under any qualified or nonqualified arrangement.
(iii) Compensation earned from another employer shall be determined
on an annual basis by reference to the Executive's date of termination of
employment.
(iv) Within fifteen (15) days following each anniversary date of the
Executive's termination of employment (and within fifteen (15) days
following receipt of the last Section 6 payment), he shall provide the
Bank with such detailed information and records as may have been
reasonably requested to confirm the compensation he earned during the
preceding twelve (12) months (or shorter period, if applicable). In the
absence of a specific request for detailed information, he shall only be
required to deliver written notice of the total of such compensation
amount.
(v) Upon receipt of the earned compensation information from
Executive, the Bank shall withhold subsequent monthly payments until the
amount withheld
14
<PAGE> 15
equals the reduction required with respect to the prior year. If no
monthly payments remain to be paid, the Bank will remit to Executive a
bill, setting forth the amount overpaid to him by reason of this
subsection, which bill shall become due and payable thirty (30) days
following its receipt.
17. Validity. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
18. Applicable Law. This Agreement shall be governed by and
construed in accordance with the domestic laws (but not the law of conflict of
laws) of the Commonwealth of Pennsylvania.
19. Headings. The headings of the Sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction or
limit the scope or intent of any of the provisions of this Agreement.
20. Effective Date. This Agreement shall become effective
immediately upon the execution and delivery of this Agreement by the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
THE FIRST NATIONAL BANK OF JERMYN
/s/ Kuzma Leschak Jr.
----------------------------------
Chairman
Board of Directors
("BANK")
/s/ Steven R. Tokach (SEAL)
-----------------------------------
Steven R. Tokach
("EXECUTIVE")
15
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
The First National Bank of Jermyn
Jermyn Realty Company, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,538
<INT-BEARING-DEPOSITS> 564
<FED-FUNDS-SOLD> 5,110
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,436
<INVESTMENTS-CARRYING> 45,033
<INVESTMENTS-MARKET> 45,895
<LOANS> 203,610
<ALLOWANCE> 2,696
<TOTAL-ASSETS> 325,737
<DEPOSITS> 292,110
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,606
<LONG-TERM> 744
0
0
<COMMON> 1,125
<OTHER-SE> 30,152
<TOTAL-LIABILITIES-AND-EQUITY> 325,737
<INTEREST-LOAN> 16,249
<INTEREST-INVEST> 6,351
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<INTEREST-TOTAL> 22,600
<INTEREST-DEPOSIT> 11,210
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<LOAN-LOSSES> 180
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<EXPENSE-OTHER> 7,055
<INCOME-PRETAX> 4,773
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<EXTRAORDINARY> 0
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<NET-INCOME> 3,483
<EPS-PRIMARY> 3.94
<EPS-DILUTED> 3.94
<YIELD-ACTUAL> 3.21
<LOANS-NON> 1,192
<LOANS-PAST> 242
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 3,111
<CHARGE-OFFS> 783
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