<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-133312
FIRST LIBERTY BANK CORP.
(Exact name of registrant issuer as specified in its charter)
Pennsylvania 23-2275242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
645 Washington Avenue; P.O. Box 39; Jermyn Pennsylvania 18433-0039
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 717-876-6500
THE FIRST JERMYN CORP.
(Former name, former address and former fiscal year, if changed since
last report) Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the 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 ____
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1998
----- ----------------------------
<S> <C>
Common stock, $1.25 par value 1,579,007
</TABLE>
<PAGE> 2
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997 1
Consolidated Statements of Income - Three Months and Six Months
Ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Six Months Ended June 30,1998 and 1997
and December 31, 1997
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
June 30, December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 18,190 13,419
Federal funds sold 10,207 7,970
Securities available for sale 126,390 123,765
Investment securities (market value of $66,127 and
$62,583 at June 30, 1998 and December 31, 1997.) 65,249 61,364
Loans, gross 373,924 361,724
Less: Unearned discount and origination fees (1,045) (1,130)
Allowance for loan losses (4,571) (4,562)
- -------------------------------------------------------------------------------------------------
Loans, net 368,308 356,032
Accrued interest receivable 4,327 4,244
Bank premises, leasehold improvements and furniture and equipment-net 8,980 9,134
Real estate owned other than bank premises 556 953
Other assets 6,893 8,170
- -------------------------------------------------------------------------------------------------
Total assets $ 609,100 585,051
=================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 51,556 48,628
Interest-bearing 446,618 436,174
- -------------------------------------------------------------------------------------------------
Total deposits 498,174 484,802
- -------------------------------------------------------------------------------------------------
Other borrowed money 50,702 40,744
Accrued interest payable 2,739 2,287
Other liabilities 1,056 1,634
- -------------------------------------------------------------------------------------------------
Total liabilities 552,671 529,467
- -------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $1.25 par value, authorized 2,500,000 shares;
Outstanding 1,594,212 and 1,588,885 respectively shares 1,993 1,987
Surplus 5,505 5,347
Retained earnings 49,189 48,613
Accumulated other comprehensive income (62) (167)
Less treasury stock-at cost (15,205 shares) (196) (196)
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 56,429 55,584
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 609,100 585,051
=================================================================================================
</TABLE>
1
<PAGE> 4
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Three months Six months
Ended June 30 Ended June 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,601 7,419 15,131 14,544
Interest on balances with banks 107 2 207 2
Interest and dividends on securities:
Taxable 2,203 2,404 4,428 4,828
Non-Taxable 589 434 1,128 852
Interest on federal funds sold 164 146 344 316
- -----------------------------------------------------------------------------------------------------------------
Total interest income 10,664 10,405 21,238 20,542
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,987 4,774 9,895 9,588
Other borrowed money 705 527 1,389 1,006
Fed Funds Purchased 1 6 25 10
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 5,693 5,307 11,309 10,604
- -----------------------------------------------------------------------------------------------------------------
Net interest income 4,971 5,098 9,929 9,938
Provision for loan losses 135 195 270 390
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 4,836 4,903 9,659 9,548
- -----------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 208 187 396 363
Gains/(losses) on sale of securities AFS 4 -- 32 (105)
Trust services 116 70 247 163
Other 83 58 167 143
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income 411 315 842 564
- -----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 1,776 1,438 3,457 3,074
Net occupancy and furniture/equipment expenses 586 591 1,195 1,224
Data processing services 152 149 307 313
Fidelity recovery -- (372) -- (372)
Merger related costs 1,081 -- 1,098 --
Other expenses 1,010 1,119 1,917 2,128
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,605 2,925 7,974 6,367
- -----------------------------------------------------------------------------------------------------------------
Income before federal income tax provision 642 2,293 2,527 3,745
Federal income tax provision 403 713 891 925
- -----------------------------------------------------------------------------------------------------------------
Net income 239 1,580 1,636 2,820
- -----------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gains on securities
Unrealized holding (loss)/gain arising
during the period 36 (448) 25 (104)
Less reclassification adjustment for gains (13) (20) 80 31
included in net income
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 262 1,112 1,741 2,747
=================================================================================================================
Per share information
Net income-basic $ .15 1.00 1.04 1.79
Net income-diluted .15 1.00 1.03 1.79
Weighted average shares outstanding-basic 1,579,000 1,574,000 1,579,000 1,574,000
Weighted average shares outstanding-diluted 1,594,000 1,579,000 1,594,000 1,579,000
</TABLE>
2
<PAGE> 5
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Six months ended June 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,636 $ 2,820
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 270 390
Depreciation and amortization of investment securities, bank
premises, leasehold improvements and furniture and equipment 441 474
Decrease in interest receivable and other assets 1,143 444
(Decrease)/Increase in interest payable and other liabilities (126) 2,966
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,364 7,094
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of securities held to maturity (12,426) (16,558)
Purchases of securities available for sale (45,230) (22,623)
Proceeds from maturities of securities 51,303 51,127
Net increase in loans (12,772) (8,664)
Purchases of bank premises, leasehold improvements and
Furniture and equipment-net (287) (306)
Sales of assets acquired through foreclosure 623 520
- -------------------------------------------------------------------------------------------------------------
Net cash (used) provided by in investing activities (18,789) 3,496
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Net (decrease)/ increase in noninterest-bearing demand deposits
and interest-bearing deposits 13,371 (5,590)
Proceeds from federal funds purchased and
Other borrowed money 10,000 3,000
Principal payments on capitalized lease obligation (42) (38)
Proceeds of stock issued 164 --
Dividends paid (1,060) (1059)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used) financing activities 22,433 (3,687)
- -------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 7,008 6,903
Cash and cash equivalents at beginning of period 21,389 24,743
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 28,397 31,646
=============================================================================================================
Cash paid during the period:
Interest $ 10,983 10,537
Federal Income Taxes 796 997
=============================================================================================================
Noncash transactions:
Transfer of loans to real estate owned other than bank premise $ 331 670
Net unrealized gain on securities available for sale, net of tax $ 105 539
=============================================================================================================
</TABLE>
3
<PAGE> 6
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements of First Liberty
Bank Corp. and subsidiaries (the Company) were prepared in accordance
with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. However, all normal,
recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in
the Bank's Annual Report for the period ended December 31, 1997. The
results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1998.
BUSINESS
The Company's principal subsidiaries, The First National Bank of Jermyn
(FNBJ), and NBO National Bank (NBO) (collectively, Banks) conduct
business from branch bank systems located in Lackawanna County,
Pennsylvania. The Banks are subject to competition from other financial
institutions and other companies which provide financial services. The
Banks are subject to the regulations of certain federal agencies and,
undergo periodic examinations by those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all of
the Company's wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications have been made in order to conform with the
current year's presentation. The accompanying consolidated financial
statements have been prepared on an accrual basis.
(2) RECENT ACQUISITION
On June 30, 1998, the Company consummated its acquisition of Upper
Valley Bancorp, Inc. (Upper Valley) the holding company of NBO. NBO is
a $271 million national-chartered bank with three branches in Olyphant,
Scranton, and Pittston, Pennsylvania. Upper Valley shareholders
received .689 shares of Company common stock for each Upper Valley
share owned. The transaction was accounted for as a pooling of
interests and all prior periods have been restated to reflect the
acquisition. The total value of the transaction was approximately $52.1
million based upon the Company's stock price prior to finalization of
the acquisition.
The Company will operate FNBJ and NBO as separate subsidiaries until
approximately the first quarter of 1999 when it intends to merge the
entities under the name First Liberty Bank & Trust.
4
<PAGE> 7
(3) NAME CHANGE
On June 30, 1998, concurrent with its acquisition of Upper Valley, the
Company changed its name from The First Jermyn Corp. to First Liberty
Bank Corp.
(4) EARNINGS PER SHARE
Basic earnings per share were computed based on the weighted average
number of shares outstanding during each period. Diluted earnings per
share include the dilutive effect of the Company's weighted average
stock options outstanding.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30 6 MONTHS ENDED JUNE 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 239 $1,580 $1,636 $2,820
====== ====== ====== ======
Denominator:
Denominator for basic earnings
per share weighted average
shares 1,579 1,574 1,579 1,574
Effect of dilutive securities:
Employee stock options 15 5 15 5
------ ------ ------ ------
Denominator for diluted earnings
per share adjusted weighted
average shares and assumed
exercise 1,594 1,579 1,594 1,579
====== ====== ====== ======
Basic earnings per share $ .15 $ 1.00 $ 1.04 $ 1.79
====== ====== ====== ======
Diluted earnings per share $ .15 $ 1.00 $ 1.03 $ 1.79
====== ====== ====== ======
</TABLE>
(5) RECENT ACCOUNTING PRONOUNCEMENTS
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
5
<PAGE> 8
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. All EPS information in this Form 10-Q has
been presented in accordance with SFAS No. 128.
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No 130, Reporting
and 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 year
beginning after December 15, 1997. The Company has included this new
reporting information in its form 10-QS, as required. There was no
impact on earnings, financial condition or equity.
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 131,
Disclosures About Segments of an Enterprise and Related Information.
SFAS No 131 established standards for the way that public business
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 annual financial
statements for periods beginning after December 15, 1997 and in interim
financial statements thereafter. The Company has not yet determined
what impact, if any, the adaptation of this statement will have on
disclosures in future financial statements of The Company. It will have
no impact on earnings, financial condition or equity.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures
about Pensions and other Postretirement Benefits. This statement
revises employer's disclosures about pension and other postretirement
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, Employer's Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No.
106, Employer's Accounting for Postretirement 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.
6
<PAGE> 9
In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of
certain exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a
hedge of the foreign currency exposure. This Statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is permitted. The Company has not yet determined the
impact, if any, of this Statement, including its provisions for the
potential reclassifications of investment securities, on earnings,
financial condition or equity.
7
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's net income for the three-month and six-month periods ended June
30, 1998 was $239,000 and $1,741,000 or $.15 and $1.04 dilutive earnings per
share compared to $1,580,000 and $2,820,000 or $1.00 and $1.19 in the same
three-month and six-month periods in the preceding year. The decrease in net
income for the 1998 periods relates to one time merger related costs of
$1,081,000 and $1,098,000 for the three and six-month periods ended June 30,
1998 relating to the acquisition of Upper Valley. Also affecting net income in
1997 was a $372,000 recovery received from the company's Fidelity Bond Insurance
during the second quarter of 1997, with no similar item in 1998.
The Company recorded an annualized return on average assets of .84% for the
six-month period ended June 30, 1998, compared to .98% for the same period in
1997. Return on average equity of 8.95% was recorded for the six-month period
ended June 30, 1998, compared to 10.54% for the same period in 1998.
At June 30, 1998, the Company had total assets of $609 million compared to $585
million at December 31, 1997. The primary drivers for the increase in total
assets were an $11.7 million increase in net loans, an $8.2 million increase in
mortgage backed securities available for sale and a $7.2 million increase in
investment securities. These increases were primarily funded by a $16.7 million
increase in deposits and an $8.8 million decrease in securities available for
sale.
The Company is susceptible to a sustained rising interest rate environment that
may erode the net interest margin. Strategies to enhance earnings and improve
the interest rate exposure of the Company will be considered, such as the sale
of existing mortgage-backed securities available for sale and purchasing higher
yielding, rate sensitive assets with the proceeds.
The Company increased its market penetration through the acquisition of Upper
Valley and its wholly owned subsidiary NBO. NBO had total assets of $271 million
and total deposits of $195.2 million at June 30, 1998. NBO has three branches
located in Olyphant, Scranton and Pittston Pennsylvania. The Company intends to
consolidate its two largest operating subsidiaries, FNBJ and NBO under the name
First Liberty Bank & Trust. The consolidation is tentatively scheduled for the
first quarter of 1999 and will create one of the largest community banks in
Northeastern Pennsylvania.
FINANCIAL CONDITION
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
Cash and due from banks increased approximately $4.8 million to $18.2 million at
June 30, 1998 from $13.4 million at December 31, 1997 and Federal funds sold
increased by $2.2 million at June 30, 1998 from $8.0 million at December 31,
1997 due to normal fluctuations resulting from the conduct of customer business.
8
<PAGE> 11
SECURITIES
Securities, including securities available for sale, mortgage-backed securities
available for sale, as well as investment securities, have increased $6.6
million or 3.6% to $191.6 million from $185.0 million at December 31, 1997. This
increase was primarily driven by an increase of $8.2 million in mortgage-backed
securities available for sale and $7.2 million in investment securities offset
by the maturity of U.S. Treasury securities.
LOANS RECEIVABLE, NET
Aggregate loans receivable totaled $368.3 million at June 30, 1998, an increase
of $11.7 million or 3.3% from $356.6 million at December 31, 1997. The mix of
loans is substantially unchanged at those dates.
NON-PERFORMING ASSETS
The Company's total non-performing assets was relatively constant at
approximately $2.8 million or 0.5% of total assets at June 30, 1998 and December
31, 1997. Loans greater than ninety days delinquent but still accruing increased
from $290,000 at December 31, 1997 to $457,000 at June 30, 1998 . Nonaccrual
loans increased approximately$171,000 to $1,778,000.
Real estate owned, decreased from $953,000 as of December 31, 1997 to $556,000
as of June 30, 1998, due to the sale of three foreclosed properties, net of the
transfer of one new property to real estate owned from loans. There were no
significant gains or losses on the sale of real estate owned during the quarters
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
6/30/98 12/31/97
<S> <C> <C>
Nonaccrual 1,778,000 1,607,000
Loans 90 days or more delinquent 457,000 290,000
--------- ---------
Total non-performing loans 2,235,000 1,897,000
Other real estate owned other than
Bank premises 556,000 953,000
--------- ---------
Total non-performing assets 2,791,000 2,850,000
</TABLE>
9
<PAGE> 12
At June 30, 1998, the Company's allowance for loan losses amounted to $4.57
million or 1.23% of gross loans receivable. At December 31, 1997, the Company's
allowance for loan losses was $4.56 million or l.26% of gross loans receivable.
Management believes that the allowance is adequate given the asset quality of
the institution. The table below describes the roll forward of the allowance for
loan losses for the six-month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
6/30/98 6/30/97
---------- ----------
<S> <C> <C>
Balance at end of period $4,562,000 $5,017,000
Recoveries 165,000 95,000
Provision for loan and lease losses 270,000 390,000
Charge-offs 426,000 746,000
---------- ----------
Balance at the end of period $4,571,000 $4,756,000
</TABLE>
DEPOSITS
Deposits increased $16. 7 million or 3.5% from $481.5 million at December 31,
1997 to $498.2 million at June 30,1998. The increase in deposits was primarily
due to an increase in Certificates of Deposits from the local market. The
Company believes this increase is due to the Bank's competitive rates.
EQUITY
At June 30, 1998, total equity was $56.4 million or 9.3% of total assets
compared to $55.6 million or 9.5% of total assets as of December 31, 1997. Total
equity increased primarily due to the retention of net income during the
intervening period, net of dividends paid.
RESULTS OF OPERATIONS
NET INCOME
The Company's net income declined to $239,000 for the three months ended June
30,1998, compared to $1,580,000 recorded in the comparable prior period
primarily due to the recognition of expenses related to completion of the
Company's June 1998 acquisition of Upper Valley Bancorp. For the six-month
period ended June 30, 1998, net income decreased $1,636,000 compared to
$2,820,000 for the comparable prior period primarily due to the aforementioned
merger expenses and to a $372,000 recovery of an employee fidelity loss in the
first quarter of 1997 with no comparable 1998 item, partially offset by a lower
provision for loan losses. In a competitive rate environment, the Company's net
interest income (its level of "core earnings") remained relatively flat for both
the three and six month operating periods compared to such prior year periods.
Noninterest expense increased to approximately $8.0 million, from $6.4 million
for the six month ended June 30, 1997 largely due to merger expenses related to
the acquisition of Upper Valley.
10
<PAGE> 13
NET INTEREST INCOME
Net interest income before provision for loan losses amounted to $5.0 million
for the three-month periods ended June 30, 1998 versus $5.1 million for period
ended June 30, 1997.Net interest income was $9.9 million for the six months
ended June 30, 1998 and 1997. In a competitive rate environment, the Company was
able to maintain a relatively constant level of core earnings of net interest
income.
Total interest income increased to $10,664,000 and $21,238,000 for the three
month and six month periods ended June 30, 1998 from $10,405,000 and $20,542,000
during the comparable prior periods. The increase was primarily the result of an
increase in the average interest-earning assets of $26,081,000 for the six
months ended June 30,1998 compared to the six months ended June 30, 1997.
Additionally, the yield earned on average interest-earning assets decreased 9
basis points during the six months ended June 30, 1998 compared to the 1997
period.
Total interest expense increased by $386,000 and $705,000 to $5,693,000 and
$11,309,000 for the three and six months ended June 30, 1998 from $5,307,000 and
$10,604,000 for the comparable prior periods. The increase was due to an
increase in interest expense associated with deposits, where the average balance
increased by $3,713,000 during the six months ended June 30, 1998 compared to
the 1997 period. The increase in interest expense on deposits was also caused by
a 27 basis point increase in the average rates paid for the six months ended
June 30, 1998 over the comparable 1997 period.
PROVISION FOR LOAN LOSSES
The Company establishes a provision for loan losses, which is charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon an assessment of prior loss experience,
the volume and type of lending presently being conducted by the Company,
industry standards, past due loans, economic conditions in the Company's market
area and other factors related to the collectability of the Company's loan
portfolio. For the three-month and six-month periods ended June 30, 1998, the
provision for loan losses amounted to $135,000 and $270,000. The provision for
loan losses was $195,000 and $390,000 for the three and six month periods ended
June 30, 1997.
Although management utilizes its best judgment in providing for possible losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons which could adversely affect the
Company's results of operations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require the Company to recognize additions to
the allowance for loan losses based on their judgments of information which is
available to them at the time of their examination.
NONINTEREST INCOME
Noninterest income for the three and six months ending June 30, 1998 was
$411,000 and $842,000 compared to $315,000 and $564,000 for the comparable prior
periods. The increases in both periods were largely the result of gains on the
sale of securities available for
11
<PAGE> 14
sale and the growth of the Company's trust business. Gains on the sale of
securities available for sale were $32,000 for the six-months ended June 30,
1998 compared to a loss of $105,000 for the comparable period of the prior year,
an increase of $137,000.
The Company's Trust Department is located in Scranton, Pennsylvania and was
founded in 1994. It broadens the Company's array of financial services offered
to customers by adding fiduciary and investment advisory services. Trust
services experienced a 52% growth when compared to the first six months of 1997.
Fee income from Trust was $247,000 for the first six months of 1998, an $84,000
increase above the $163,000 earned in the first six months of 1997.
NONINTEREST EXPENSES
Total noninterest expense was $4,605,000 and $7,974,000 for the three and six
months ended June 30, 1998 compared to $2,925,000 and $6,364,000 for the
comparable periods in 1997. The primary cause for the increase in noninterest
expense was a $1,098,000 charge for merger related costs associated with the
acquisition of Upper Valley. These charges included investment bankers fees,
legal and accounting fees, severance payments, fixed asset disposals, data
processing and contract termination charges. The increase was also, in part, the
result of a $372,000 recovery on an employee fidelity loss in the second quarter
of 1997, thereby reducing noninterest expense in 1997. In addition, noninterest
expense increased in 1998 as a result of increases in salaries and benefits. For
the three months ended June 30, 1998, salaries and benefits increased by
$383,000 over the comparable period in the prior year, in large part due to
increases in employee salaries. Other noninterest expense categories have
decreased due to managements efforts to control costs.
INCOME TAXES
Income tax expense totaled $403,000 and $891,000 for the three-month and six
month periods ended June 30, 1998 compared to $713,000 and $925,000 for the
comparable prior periods. These amounts resulted in the effective tax rates of
62.8% and 35.3% for the three and six months ended June 30, 1998 compared to
31.1% and 24.7% for the comparable periods in 1997. The increase in effective
tax rate during the three-month and six-month periods ending June 30,1998 was
the result of a large portion of the aforementioned merger related expenses
being nondeductible for federal income tax purposes. Excluding the effect of the
one-time merger related costs. The Company's effective tax rate would have been
26% for the three and six-month periods ended June 30, 1998.
LIQUIDITY & CAPITAL ADEQUACY
Shareholders' equity increased $845,000 to $56,429,000 at June 30, 1998 due
primarily to retention of earnings, net of dividends paid. It is management's
intention to continue paying a reasonable return on shareholders' investment
while retaining adequate earnings to allow for continued growth.
12
<PAGE> 15
The Federal Reserve Board measures capital adequacy for bank holding companies
by using a risk-based capital frame-work and by monitoring compliance with
minimum leverage ratio guidelines. The minimum ratio of total risk-based capital
to risk-adjusted assets is 8% at June 30, 1998, of which 4% must be Tier 1
capital. The Company's total risk-based capital ratio was 16.66% at June 30,
1998. The Company's Tier 1 risk-based capital ratio was 15.41% at June 30, 1998.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. Those 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 9.23% at June 30, 1998.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) establishes
minimum capital requirements for all depository institutions and established
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 institutions'
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 regulations adopted, for
an institution to be well capitalized it must have a total risk-based capital
ratio of at least 10%, a Tier I risk-based capital ratio of at least 6%, and a
Tier I leverage ratio of at least 5%, and not be subject to any specific capital
order or directive.
At June 30, 1998, the Bank's total risk-based capital, Tier I risk-based capital
and Tier I leverage ratios were 16.66%, 15.41% and 9.23%, 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 uses simulation analysis to help monitor and manage interest rate
risk. In this analysis the Company examines the result of 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 market rates
move in a parallel manner. In addition, rates on the core deposit products such
as NOW's, savings accounts, and the MMDA accounts are adjusted based on
historical experience and managements' judgement. 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.
13
<PAGE> 16
The results of this rate shock analysis as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Change in Rate Net Interest Income Change (After tax, in thousands)
-------------- ----------------------------------------------------
<S> <C>
+300 (1351)
+200 (896)
+100 (441)
-100 264
-200 484
-300 701
</TABLE>
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. From a cost perspective, the
Company is already involved in upgrading its technology infrastructure as a
result of the recent acquisition of Upper Valley. Many potential Year 2000
issues were avoided by the replacement of old systems with new technology made
available by the Upper Valley merger. In addition to these improvements, another
$125,000 has been allocated to address Year 2000 issues. A substantial portion
of these additional costs will be in the form of new equipment which will be
amortized over future periods. Accordingly, the Company believes that the
incremental cost to any on future annual period will not be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth was under the caption "Market Risk and Interest Rate
Risk"under Item 2 Part I is incorporated herein by reference.
14
<PAGE> 17
THE LIBERTY BANK CORP. AND SUBSIDIARIES
JUNE 30, 1998
Part II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Shareholders (the "Meeting")
on June 26, 1998 for the purpose of (I) fixing the number of directors at 12,
(ii) electing two class II members of the Board of Directors to serve for a
period of two years from the date of election, (iii) electing three class III
members of the Board of Directors to serve for a period of three years from the
date of election and (iv) approving the Agreement and Plan of Merger, dated
October 15, 1997 (the "Merger Agreement"), between the Company and Upper Valley.
At the Meeting, all of the nominees of the Company's Board of Directors were
elected and the Merger Agreement was approved by the Company's shareholders, as
follows:
1. Fixing the Number of Directors at 12:
<TABLE>
<CAPTION>
Abstentions and
Votes For Votes Against Broker Nonvotes
--------- ------------- ---------------
<S> <C> <C>
646,318 2,760 2,075
</TABLE>
2. Election of Class II Directors:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
William K. Nasser, Jr. 644,928 6,225
Steven R. Tokach 644,508 6,645
</TABLE>
3. Election of Class III Directors:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
David M. Epstein 624,648 26,505
Robert T. Kelly 641,173 9,980
Harold T. McGovern 646,683 4,470
</TABLE>
4. Approval of Merger Agreement:
<TABLE>
<CAPTION>
Abstentions and
Votes For Votes Against Broker Nonvotes
--------- ------------- ---------------
<S> <C> <C>
645,898 1,480 3,775
</TABLE>
15
<PAGE> 18
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
June 30, 1998
SIGNATURES
In accordance with requirement of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
THE FIRST JERMYN CORP.
(Registrant)
Date August 18, 1998 By /s/ William M. Davis
----------------------------------
William M. Davis
Chairman, President and
Director
(Principal Executive Officer)
Date August 18, 1998 By /s/ Martha Myshak
----------------------------------
Martha Myshak
(Principal Financial Officer
and Treasurer)
Date August 18, 1998 By /s/ Donald J. Gibbs
----------------------------------
Donald J. Gibbs
(Principal Accounting Officer
and Vice President, Finance/
Control Division Manager)
16
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000741562
<NAME> FIRST LIBERTY BANK CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,438
<INT-BEARING-DEPOSITS> 2,752
<FED-FUNDS-SOLD> 10,207
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,390
<INVESTMENTS-CARRYING> 65,249
<INVESTMENTS-MARKET> 66,127
<LOANS> 372,879
<ALLOWANCE> 4,571
<TOTAL-ASSETS> 609,100
<DEPOSITS> 498,174
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,795
<LONG-TERM> 50,702
0
0
<COMMON> 1,993
<OTHER-SE> 54,436
<TOTAL-LIABILITIES-AND-EQUITY> 609,100
<INTEREST-LOAN> 15,131
<INTEREST-INVEST> 6,107
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,238
<INTEREST-DEPOSIT> 9,895
<INTEREST-EXPENSE> 11,309
<INTEREST-INCOME-NET> 9,929
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 39
<EXPENSE-OTHER> 7,974
<INCOME-PRETAX> 2,527
<INCOME-PRE-EXTRAORDINARY> 2,527
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.55
<LOANS-NON> 1,778
<LOANS-PAST> 457
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
