<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 September 30, 1998
------------------
Commission file number 0-133312
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FIRST LIBERTY BANK CORP.
-----------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Issuer's telephone number 717-876-6500
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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>
<S> <C>
Class Outstanding at September 30,1998
----- --------------------------------
Common stock, $1.25 par value 1,599,874
</TABLE>
<PAGE> 2
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 1
Consolidated Statements of Income - Three Months and Nine Months
Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Nine Months Ended September 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 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 29,731 13,419
Federal funds sold 10,745 7,970
Securities available for sale 125,792 123,765
Investment securities (market value of $61,539 and
$62,583 at September 30, 1998 and December 31, 1997.) 60,213 61,364
Loans, gross 369,184 361,724
Less: Unearned discount and origination fees (1,023) (1,130)
Allowance for loan losses (4,694) (4,562)
- -------------------------------------------------------------------------------------------------------
Loans, net 363,467 356,032
Accrued interest receivable 3,909 4,244
Bank premises, leasehold improvements and furniture and equipment -net 9,390 9,134
Real estate owned other than bank premises 532 953
Other assets 6,786 8,170
- -------------------------------------------------------------------------------------------------------
Total assets $ 610,565 585,051
=======================================================================================================
LIABILITIES
- -------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing demand $ 49,427 48,628
Interest-bearing 448,236 436,174
- -------------------------------------------------------------------------------------------------------
Total deposits 497,663 484,802
- -------------------------------------------------------------------------------------------------------
Other borrowed money 50,681 40,744
Accrued interest payable 2,684 2,287
Other liabilities 1,370 1,634
- -------------------------------------------------------------------------------------------------------
Total liabilities 552,398 529,467
- -------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
Common stock, $1.25 par value, authorized 2,500,000 shares;
Outstanding 1,599,874 and 1,588,885 respectively shares 2,000 1,987
Surplus 5,692 5,347
Retained earnings 50,418 48,613
Accumulated other comprehensive income 253 (167)
Less treasury stock-at cost (15,205 shares) (196) (196)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 58,167 55,584
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 610,565 585,051
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statement
1
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FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three months Nine months
Ended September 30 Ended September 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,605 7,374 22,736 21,918
Interest on balances with banks 178 4 385 6
Interest and dividends on securities:
Taxable 2,040 2,304 6,468 7,132
Non-Taxable 618 449 1,746 1,301
Interest on federal funds sold 146 202 490 518
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 10,587 10,333 31,825 30,875
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,983 4,829 14,878 14,417
Other borrowed money 713 527 2,102 1,533
Fed Funds Purchased - 58 25 68
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 5,696 5,414 17,005 16,018
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 4,891 4,919 14,820 14,857
Provision for loan losses 135 105 405 495
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 4,756 4,814 14,415 14,362
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 122 187 518 550
Gains/(losses) on sales of securities AFS 15 17 47 (88)
Trust services 111 91 358 254
Other 247 113 414 256
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 495 408 1,337 972
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 1,854 1,752 5,311 4,826
Net occupancy and furniture/equipment expenses 590 601 1,785 1,825
Data processing services 156 170 463 483
Fidelity recovery --- --- --- (372)
Merger related costs --- --- 1,098 ---
Other expenses 1,009 874 2,926 3,002
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,609 3,397 11,583 9,764
- -----------------------------------------------------------------------------------------------------------------------
Income before federal income tax provision 1,642 1,825 4,169 5,570
Federal income tax provision 404 525 1,295 1,450
- -----------------------------------------------------------------------------------------------------------------------
Net income 1,238 1,300 2,874 4,120
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gains on securities
Unrealized holding (loss)/gain arising
during the period 266 (426) 291 (604)
Less reclassification adjustment for gains 49 (34) 129 65
included in net income
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 1,553 840 3,294 3,581
=======================================================================================================================
Per share information
Net income-basic $ .78 .83 1.82 2.62
Net income-diluted .78 .82 1.80 2.61
Weighted average shares outstanding-basic 1,580,000 1,574,000 1,579,000 1,574,000
Weighted average shares outstanding-diluted 1,595,000 1,581,000 1,594,000 1,580,000
</TABLE>
See accompanying notes to consolidated financial statement.
2
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<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 2,874 $ 4,120
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 405 495
Depreciation and amortization of investment securities, bank
premises, leasehold improvements and furniture and equipment 658 707
Decrease in interest receivable and other assets 1,579 280
(Decrease)/Increase in interest payable and other liabilities 169 (513)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,685 5,089
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of securities held to maturity (18,308) (5,512)
Purchases of securities available for sale (61,170) (42,815)
Proceeds from maturities of securities 56,707 46,629
Proceeds from sales of securities 22,419 9,336
Net increase in loans (8,204) (13,866)
Purchases of bank premises, leasehold improvements and
Furniture and equipment-net (914) (414)
Sales of assets acquired through foreclosure 785 626
- --------------------------------------------------------------------------------------------------------------------
Net cash used by in investing activities (8,685) (6,016)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Net (decrease)/ increase in noninterest-bearing demand deposits
and interest-bearing deposits 12,861 (10,356)
Proceeds from other borrowed money 10,000 6,622
Principal payments on capitalized lease obligation (63) (58)
Proceeds of stock issued through exercise of options 349
Dividends paid (1,060) (1,279)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,087 4,929
- --------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 19,087 4,002
Cash and cash equivalents at beginning of period 21,389 24,743
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 40,476 28,745
====================================================================================================================
Cash paid during the period:
Interest $ 16,760 15,956
Federal Income Taxes 1,151 1,455
====================================================================================================================
Noncash transactions:
Transfer of loans to real estate owned other than bank premise $ 364 789
Net unrealized gain on securities available for sale, net of tax $ 420 627
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statement
3
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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 Company's
Annual Report for the period ended December 31, 1997. The results for the
nine months ended September 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 a branch bank system 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. At the time of
the merger NBO was a national bank with $271 million in assets and three
branches in Olyphant, Scranton, and Pittston, Pennsylvania. Upper Valley
shareholders received .689 shares of Company common stock for each Upper
Valley share owned with 694,327 shares of First Liberty issued in the
transaction. 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.
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<PAGE> 7
The following table highlights segment income statement and balance sheet
information for each of the Banks at or for the nine months ended September 30,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION> 1998 1997
---- ----
FNBJ NBO TOTAL FNBJ NBO TOTAL
---- --- ----- ---- --- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income 17,704 14,121 31,825 16,849 14,026 30,875
Interest Expense 9,073 7,932 17,005 8,375 7,643 16,018
Net Interest Income 8,631 6,189 14,820 8,474 6,383 14,857
Net Income 1,625 1,255 2,874 2,660 1,466 4,120
Total Assets 349,760 260,544 610,565 319,483 265,932 585,501
Total Deposits 314,580 183,083 497,663 286,188 191,158 484,802
Total Loans 214,254 153,907 368,161 200,999 154,301 360,594
</TABLE>
(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 SEPTEMBER 30 9 MONTHS ENDED SEPTEMBER 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $1,238 $1,300 $2,874 $4,120
====== ====== ====== ======
Denominator:
Denominator for basic earnings
per share weighted average
shares 1,580 1,574 1,579 1,574
Effect of dilutive securities:
Employee stock options 15 7 15 6
------ ------ ------ ------
Denominator for diluted earnings
per share adjusted weighted
average shares and assumed
exercise 1,595 1,581 1,594 1,580
====== ====== ====== ======
Basic earnings per share $ .78 $ .83 $ 1.82 $ 2.62
====== ====== ====== ======
Diluted earnings per share $ .78 $ .82 $ 1.80 $ 2.61
====== ====== ====== ======
</TABLE>
5
<PAGE> 8
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board (FASB) 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-Q,
as required. There was no impact on earnings, financial condition or
equity.
In September 1997, the Financial Accounting Standards Board issued 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 adoption of this statement will have on disclosures in future
financial statements of the Company. Because SFAS 131 relates solely to
the manner of presenting information, it will have no impact on results
of operation, financial condition or shareholders' 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 affect the results of
operations, financial condition, or shareholders' equity of the Company.
This statement is effective for fiscal years beginning after December 15,
1997.
In June 1998, the FASB 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
6
<PAGE> 9
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 results of operation, financial condition or shareholders'
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 nine-month periods ended
September 30, 1998 was $1,238,000 and $2,874,000 or $.78 and $1.80 diluted
earnings per share, compared to $1,300,000 and $4,120,000 or $.82 and $2.61 in
the same three-month and nine-month periods in the preceding year. The decrease
in net income for the three months ended September 30, 1998 primarily relates to
a $212,000 increase in total noninterest expenses resulting from increases in
salaries and benefits expense as well as other expenses relating to the
increased advertising and marketing expenses to promote the new acquisition of
Upper Valley on June 30, 1998. The decrease in net income for the 1998 nine
month period relates to one time merger related costs of $1,098,000 for the
nine-month period ended September 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 .64% for the
nine-month period ended September 30, 1998, compared to .95% for the same period
in 1997. Return on average equity of 6.83% was recorded for the nine-month
period ended September 30, 1998, compared to 10.37% for the same period in 1997.
At September 30, 1998, the Company had total assets of $611 million compared to
$585 million at December 31, 1997. The primary drivers for the increase in total
assets were a $16.3 million increase in a cash and due from banks and a $7.4
million increase in net loans. These increases were primarily funded by a $12.9
million increase in deposits and a $9.9 million increase in other borrowed
money.
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 may 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 $261 million
and total deposits of $183.6 million at September 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 Co. 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 $16.3 million to $29.7 million
at September 30, 1998 from $13.4 million at December 31, 1997 and Federal funds
sold increased by $2.8 million at September 30, 1998 from $8.0 million at
December 31, 1997 due to normal fluctuations resulting from the conduct of
customer business, and the increased liquidity created by the growth in
deposits.
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<PAGE> 11
SECURITIES
Securities, including securities available for sale, as well as investment
securities, have increased $1.0 million or 0.5% to $186.0 million from $185.0
million at December 31, 1997. This increase was primarily driven by investments
in mortgage-backed securities offset by the sales and maturity of U.S. Treasury
securities.
LOANS RECEIVABLE, NET
Aggregate loans receivable totaled $363.5 million at September 30, 1998, an
increase of $7.5 million or 2.1%from $356.0 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 $2.9 million or 0.5% of total assets at September 30, 1998 and
December 31, 1997. Loans greater than ninety days delinquent but still accruing
interest increased from $290,000 at December 31, 1997 to $612,000 at September
30, 1998. The increase in loans 90 day or more delinquent relates to an
approximately $150,000 increase in residential mortgages relating to 3
residential mortgages and approximately $100,000 of increases in consumer loan
delinquencies, predominately auto loans. Nonaccrual loans increased
approximately $173,000 to $1,780,000.
Real estate owned, decreased from $953,000 as of December 31, 1997 to $532,000
as of September 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 September 30, 1998 and 1997.
<TABLE>
<CAPTION>
9/30/98 12/31/97
------- --------
<S> <C> <C>
Nonaccrual 1,780,000 1,607,000
Loans 90 days or more delinquent 612,000 290,000
--------- ---------
Total non-performing loans 2,392,000 1,897,000
Other real estate owned other than
Bank premises 532,000 953,000
--------- ---------
Total non-performing assets 2,924,000 2,850,000
</TABLE>
9
<PAGE> 12
At September 30, 1998, the Company's allowance for loan losses amounted to $4.69
million or1.27% 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 nine-month periods ended September 30, 1998 and 1997.
9/30/98 9/30/97
------- -------
Balance at end of period $4,562,000 $5,017,000
Recoveries 264,000 127,000
Provision for loan and lease losses 405,000 495,000
Charge-offs 537,000 813,000
---------- ----------
Balance at the end of period $4,694,000 $4,826,000
OTHER ASSETS
Other assets decreased by $1.4 million form $8.2 million at December 31, 1997 to
$6.8 million at September 30, 1998 largely as a result of amortization of a core
deposit intangible and decreases in deferred tax assets.
DEPOSITS
Deposits increased $12.9 million or 2.7% from $484.8 million at December 31,
1997 to $497.7 million at September 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 September 30, 1998, total equity was $58.2 million or 9.5% 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. Also contributing to the increase in
total shareholders' equity was a $420,000 increase in accumulated other
comprehensive income relating to unrealized gains on securities available for
sale during the nine-month period ended September 30, 1998.
RESULTS OF OPERATIONS
NET INCOME
The Company's net income declined to $1.2 million for the three months ended
September 30,1998, compared to $1.3 million recorded in the comparable prior
period primarily due to a $212,000 increase in other expenses resulting from
increases in salaries and benefits expense as well as other expenses relating to
the increased advertising and marketing expenses to promote the new acquisition
of Upper
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<PAGE> 13
Valley on June 30, 1998. For the nine-month period ended September 30, 1998, net
income decreased $1.2 million compared to $4.1 million for the comparable prior
period primarily due to the recognition of expenses related to completion of the
Company's June 1998 acquisition of Upper Valley and to a $372,000 recovery of an
employee fidelity loss in the second 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 nine month operating
periods compared to such prior year periods. Noninterest expense increased to
approximately $11.6 million, from $9.8 million for the nine month ended
September 30, 1997 largely due to merger expenses related to the acquisition of
Upper Valley.
NET INTEREST INCOME
Net interest income before provision for loan losses amounted to $4.9 million
for the three-month period ended September 30, 1998. Net interest income was
$14.8 million for the nine months ended September 30, 1998 versus $14.9 million
for the period ending September 30,1997. 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 $10.6 million and $31.8 million for the
three-month and nine-month periods ended September 30, 1998 from $10.3 million
and $30.9 million during the comparable prior periods. The increase was
primarily the result of an increase in the average interest-earning assets of
$27.3 million for the nine months ended September 30,1998 compared to the nine
months ended September 30, 1997. Additionally, the yield earned on average
interest-earning assets decreased 5 basis points during the nine months ended
September 30, 1998 compared to the 1997 period.
Total interest expense increased by $0.3 million and $1.0 million to $5.7
million and $17.0 million for the three and nine months ended September 30, 1998
from $5.4 million and $16.0 million for the comparable prior periods. The
increase was due to an increase in interest expense associated with deposits,
where the average balance increased by $18,050 during the nine months ended
September 30, 1998 compared to the 1997 period. The increase in interest expense
on deposits was also caused by a 7 basis point increase in the average rates
paid for the nine months ended September 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 nine-month periods ended September 30, 1998,
the provision for loan losses amounted to $135,000 and $405,000. The provision
for loan losses was $105,000 and $495,000 for the three and nine month periods
ended September 30, 1997.
Although management utilizes its best judgment in providing for inherent 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
11
<PAGE> 14
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 nine months ending September 30, 1998 was
$495,000 and $1.3 million compared to $408,000 and $1.0 million for the
comparable prior periods. The increases in both periods were largely the result
of the growth of the Company's trust business and increases in other income
relating to ATM service fees.
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 41% growth when compared to the first nine months of
1997. Fee income from Trust was $358,000 for the first nine months of 1998, a
$104,000 increase above the $254,000 earned in the first nine months of 1997.
Other income increased to $414,000 for the nine months ended September 30, 1998
compared to $256,000 for the comparable period in 1987 largely due to increased
revenues associated with ATM service fees.
NONINTEREST EXPENSES
Total noninterest expense was $3.6 million and $11.6 million for the three and
nine months ended September 30, 1998 compared to $3.4 million and $9.8 million
for the comparable periods in 1997. The primary cause for the increase in
noninterest expense for the nine-month period 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 the nine months
of 1998 as a result of increases in salaries and benefits. For the three months
ended September 30, 1998 salaries and benefits increased as a result of a
$314,000 credit being recognized in the third quarter of 1997 for a change in
benefits plans with no similar item in 1998. Excluding the effect of the one
time gain on change in benefit plans in 1997, salaries and benefits expense for
the three months ended September 30, 1998 would have decreased by $212,000 as
compared to the comparable period in 1997, primarily as a result of efficiencies
gained through the Upper Valley merger. Other expenses for the three months
ended September 30, 1998 were $1,009,000 as compared to $874,000 for the
comparable prior period as a result of increased advertising and marketing
expenses related to the Upper Valley merger.
INCOME TAXES
Income tax expense totaled $404,000 and $1.3 million for the three-month and
nine-month periods ended September 30, 1998 compared to $525,000 and $1.5
million for the comparable prior periods. These amounts resulted in the
effective tax rates of 24.6% and 31.1% for the three and nine months ended
September 30, 1998 compared to 28.8% and 26.0 % for the comparable periods in
1997. The increase in effective tax rate during the nine-month period ending
September 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 nine-month period ended September
30, 1998.
12
<PAGE> 15
LIQUIDITY & CAPITAL ADEQUACY
Shareholders' equity increased $2.6 million to $58.2 million at September 30,
1998 due primarily to retention of earnings, net of dividends paid and increases
in unrealized gains on securities available for sale. It is management's
intention to continue paying a reasonable return on shareholders' investment
while retaining adequate earnings to allow for continued growth.
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 September 30, 1998, of which 4% must be Tier 1
capital. The Company's total risk-based capital ratio was 16.92% at June 30,
1998. The Company's Tier 1 risk-based capital ratio was 15.67% at September 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 9.31% at September 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 September 30, 1998, the Bank's total risk-based capital, Tier I risk-based
capital and Tier I leverage ratios were 16.92%, 15.67% and 9.31%, 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
13
<PAGE> 16
risk inherent in their balance sheet.
The results of this rate shock analysis as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Change in Rate Net Interest Income Change (After tax, in thousands)
-------------- ----------------------------------------------------
<S> <C>
+300 (1117)
+200 (739)
+100 (340)
-100 132
-200 169
-300 234
</TABLE>
14
<PAGE> 17
YEAR 2000 ISSUES
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operation including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
The Company has completed an assessment of its financial and operational
software systems in accordance with the various regulatory agency guidance
documents. The Company is maintaining an inventory of hardware and software
systems, which ranges from mission critical software systems and personal
computers to security and video equipment, backup generators, and general office
equipment. The Company has prioritized its hardware and software systems to
focus on the most critical systems first. In connection with the Company's
assessment, a number of the less significant third party vendors advised the
Company that their software is Year 2000 compliant, and the Company intends to
fully test that software by June 30, 1999.
From a technology perspective, the Company uses application software systems and
receives technical support from one of the world's largest data processing
providers to financial institutions, for nearly all of its mission critical
customer applications.
The Company will devote the necessary resources to test all mission critical
customer systems and resolve all significant Year 2000 issues in a timely
manner. If testing were to uncover any system problems, the vendor would work to
correct the problem and the Company would test again until resolved. At the same
time, the Company is upgrading personal computers to meet both system and Year
2000 requirements.
Over the past several years, the Company's Technology Plan has called for an
aggressive schedule for installing new systems or upgrading old systems in order
to build a technology infrastructure which will allow the Company to offer
competitive products while providing for internal efficiencies and customer
service improvement. The Technology Plan has resulted in positioning the Company
to continue its technology improvements while avoiding costly Year 2000 issues.
As part of this plan, it is the intention of the Company to convert FNBJ, during
the first quarter of 1999, to the same mission critical customer applications
currently used by NBO to avoid many potential Year 2000 issues. The Company
estimates expenditures associated with Year 2000 at $125,000 during the year
ending December 31, 1999, with approximately $45,000 amortized in that same year
and the remainder amortized in subsequent fiscal years.
The Company does not predict for the Year 2000 driven expenditures in the Year
2000. With assistance from its third party vendors, the Company is utilizing
internal staff to perform Year 2000 compliance work, including internal
Information Systems staff.
The Year 2000 issue presents potential risks of uncertain magnitude. The risks
arise both with regard to systems purchased by the Company through third party
vendors as well as those outside the control of the Company, such as with ATM
networks or credit card processors. These failures may cause delays in the
ability of customers to access their funds through automated teller machines,
point of sale terminals
15
<PAGE> 18
at retail locations, or other shared networks. The Year 2000 issue also poses
the potential risk for business disruption due to a mission critical software
system failure, which could result in inaccurate interest payment calculations,
credit transactions, or record-keeping. The Company and the Office of the
Comptroller of Currency are closely monitoring the progress of FNBJ's and NBO's
major third party vendors and, to date, the Company is satisfied with their
progress. However, if the Company, its customers, or vendors are unable to
resolve Year 2000 issues in a timely manner, it could result in a material
financial risk. The Company has not yet finalized a contingency plan; however,
it intends to develop a detailed plan by December 31, 1998.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of third
party modification and testing plans and other factors.
FORWARD LOOKING STATEMENTS
Within these financial statements we have included certain "forward looking
statements" concerning the future operations of the Company. It is management's
desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing the Company of the protections of such safe harbor with
respect to all "forward looking statements" contained in our financial
statements. We have used "forward looking statements" to describe the future
plans and strategies including our expectations of the Company's future
financial results. Management's ability to predict results or the effect of
future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Northeastern Pennsylvania, the mid-Atlantic region and country as a whole,
loan delinquency rates, Year 2000 uncertainties, and changes in federal and
state regulation. These factors should be considered in evaluating the "forward
looking statements", and undue reliance should not be placed on such statements.
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.
16
<PAGE> 19
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
SEPTEMBER 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
None
17
<PAGE> 20
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
September 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 hereunto duly
authorized.
FIRST LIBERTY BANK CORP.
------------------------
(Registrant)
<TABLE>
<S> <C> <C>
Date November 10, 1998 By /s/ William M. Davis
----------------- -----------------
William M. Davis
Chairman, President and
Director
(Principal Executive Officer)
Date November 10, 1998 By /s/ Martha Myshak
----------------- -------------------------
Martha Myshak
(Principal Financial Officer
and Treasurer)
Date November 10, 1998 By /s/ Donald J. Gibbs
----------------- --------------------------
Donald J. Gibbs
(Principal Accounting
Officer and Vice President,
Finance/Control Division
Manager)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000741562
<NAME> FIRST LIBERTY BANK CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,561
<INT-BEARING-DEPOSITS> 17,170
<FED-FUNDS-SOLD> 10,745
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,792
<INVESTMENTS-CARRYING> 60,213
<INVESTMENTS-MARKET> 62,583
<LOANS> 368,161
<ALLOWANCE> 4,694
<TOTAL-ASSETS> 610,565
<DEPOSITS> 497,663
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,054
<LONG-TERM> 50,681
0
0
<COMMON> 2,000
<OTHER-SE> 56,167
<TOTAL-LIABILITIES-AND-EQUITY> 610,565
<INTEREST-LOAN> 22,736
<INTEREST-INVEST> 9,089
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31,825
<INTEREST-DEPOSIT> 14,878
<INTEREST-EXPENSE> 17,005
<INTEREST-INCOME-NET> 14,820
<LOAN-LOSSES> 405
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 11,583
<INCOME-PRETAX> 4,169
<INCOME-PRE-EXTRAORDINARY> 4,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,874
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 3.57
<LOANS-NON> 1,780
<LOANS-PAST> 612
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,562
<CHARGE-OFFS> 537
<RECOVERIES> 264
<ALLOWANCE-CLOSE> 4,694
<ALLOWANCE-DOMESTIC> 2,701
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,993
</TABLE>
