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, 1999
Commission file number 0-133312
FIRST LIBERTY BANK CORP.
(Exact name of registrant issuer as specified in its charter)
Pennsylvania23-2275242
(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 570-876-6500
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.
Class Outstanding at September 30, 1999
----- ---------------------------------
Common stock, $1.25 par value 1,606,951
<PAGE>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income - Three Months and Nine Months
Ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1999 and 1998
and December 31, 1998 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION 14
SIGNATURES 15
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
(In thousands of dollars, except per share information)
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Assets 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $16,538 20,628
Federal funds sold --- 5,000
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 16,538 25,628
Securities available for sale 191,428 196,563
Loans, gross 412,518 376,856
Less: Unearned discount and origination fees (730) (941)
Allowance for loan losses (4,784) (4,618)
- -------------------------------------------------------------------------------------------------------------------
Loans, net 407,004 371,297
Accrued interest receivable 4,090 3,914
Bank premises, leasehold improvements and furniture and equipment-net 12,918 10,307
Real estate owned other than bank premises 562 479
Other assets 11,063 7,182
- -------------------------------------------------------------------------------------------------------------------
Total assets $643,603 615,370
Liabilities
Deposits:
Noninterest-bearing demand $ 49,309 55,272
Interest-bearing 459,680 441,328
- -------------------------------------------------------------------------------------------------------------------
Total deposits 508,989 496,600
- -------------------------------------------------------------------------------------------------------------------
Other borrowed money 50,591 55,660
Fed Funds Purchased 21,500 ---
Accrued interest payable 2,344 2,218
Other liabilities 1,676 1,984
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 585,100 556,462
- -------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $1.25 par value, authorized 2,500,000 shares;
Issued 1,606,951 and 1,602,342 respectively shares 2,009 2,003
Surplus 6,053 5,905
Retained earnings 53,912 50,435
Accumulated other comprehensive income (loss) (3,275) 761
Less treasury stock-at cost (15,205 shares) (196) (196)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 58,503 58,908
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $643,603 615,370
===================================================================================================================
</TABLE>
1
<PAGE>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(In thousands of dollars, except per share information)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
Three months Nine months
Ended September 30 Ended September 30
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,782 7,605 22,704 22,736
Interest on interest bearing deposits 11 178 433 385
Interest and dividends on securities:
Taxable 2,467 2,040 6,765 6,468
Non-Taxable 504 618 1,705 1,746
Interest on federal funds sold --- 146 72 490
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 10,764 10,587 31,679 31,825
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,800 4,983 14,371 14,878
Fed Funds Purchased 111 --- 114 25
Other borrowed money 709 713 2,108 2,102
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,620 5,696 16,593 17,005
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 5,144 4,891 15,086 14,820
Provision for loan losses 180 135 540 405
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,964 4,756 14,546 14,415
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 169 122 513 518
Gains on sale of securities 138 15 225 47
Trust 155 111 492 358
Other 205 247 530 414
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 667 495 1,760 1,337
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 1,837 1,854 5,380 5,311
Net occupancy and furniture/
equipment expenses 625 590 1,794 1,785
Data processing services 66 156 262 463
Merger related costs --- --- -- 1,098
Other expenses 981 1,009 2,841 2,926
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,509 3,609 10,277 11,583
- ----------------------------------------------------------------------------------------------------------------------------
Income before federal income tax provision 2,122 1,642 6,029 4,169
Income tax provision 430 404 1,280 1,295
- ----------------------------------------------------------------------------------------------------------------------------
Net income 1,692 1,238 4,749 2,874
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gains on securities
Unrealized holding (loss)/gain arising
during the period (870) 325 (3,887) 451
Less reclassification adjustment for gains
included in net income (91) (10) (149) (31)
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 731 1,553 713 3,294
============================================================================================================================
Per share information
Net income-basic 1.06 .78 2.99 1.82
Net income diluted 1.06 .78 2.96 1.80
</TABLE>
2
<PAGE>
<TABLE>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
1999 1998
---- ----
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 4,749 $ 2,874
Adjustments to reconcile net income to net cash provided by
operating activities :
Gains on sales of securities (225) (47)
Provision for loan losses 540 405
Depreciation and amortization of investment securities, bank
premises, leasehold improvements and furniture and equipment 812 658
Decrease/(Increase) in interest receivable and other assets (1,336) 1,626
(Decrease)/Increase in interest payable and other liabilities (182) 169
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,307 5,685
- ------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of securities held to maturity --- (18,308)
Proceeds from maturities of securities 50,979 56,707
Purchases of securities available for sale (72,540) (61,170)
Proceeds from sales of securities available for sale 20,215 22,419
Net increase in loans (36,959) (8,204)
Purchases of bank premises, leasehold improvements and
Furniture and equipment-net (3,423) (914)
Sales of assets acquired through foreclosure, net 629 785
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (41,099) (8,685)
- ------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 12,389 12,861
Increase in Fed Funds Purchased 21,500 10,000
Principal payments on capitalized lease obligation (69) (63)
Repayment of Borrowed funds (5,000) --
Proceeds of stock issued thru exercise options 154 349
Dividends paid (1,272) (1,060)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,702 22,087
- -----------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash and cash equivalents (9,090) 19,087
Cash and cash equivalents at beginning of period 25,628 21,389
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 16,538 40,476
=============================================================================================================================
Cash paid during the period:
Interest $16,467 16,760
Federal Income Taxes 1,227 1,151
- -----------------------------------------------------------------------------------------------------------------------------
Noncash transactions:
Transfer of loans to real estate owned other than bank premise $ 712 364
Net unrealized gain on securities available for sale, net of tax $(4,036) 420
=============================================================================================================================
</TABLE>
3
<PAGE>
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, 1998. The
results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
Business
The Company's principal subsidiary, First Liberty Bank & Trust (the
Bank), conducts business from its branch bank system located in
Lackawanna and Luzerne Counties, Pennsylvania. The Bank is subject to
competition from other financial institutions and other companies which
provide financial services. The Bank is subject to the regulations of
certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
Principles of Consolidation
On February 16, 1999, the Company merged its two principal subsidiaries
, The First National Bank of Jermyn and NBO National Bank, under the
name First Liberty Bank & Trust. Concurrent with this merger, the
Company converted the charter of the Bank to a State chartered
commercial bank subject to regulation by the Pennsylvania Department of
Banking and the Federal Reserve Bank.
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) 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
4
<PAGE>
Company's weighted average stock options outstanding.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands)
<TABLE>
3 months ended 9 months ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 1,692 $ 1,238 $ 4,749 $ 2,874
Denominator:
Denominator for basic
earnings per weighted
average shares 1,591 1,580 1,590 1,579
Effect of diluted securities:
Employee Stock options 11 15 12 15
Denominator for diluted earnings _____ _____ _____ _____
per share adjusted weighted
average shares and assumed
exercise 1,602 1,595 1,602 1,594
===== ===== ===== =====
Basic earnings per share $ 1.06 $ .78 $ 2.99 $ 1.82
Diluted earnings per share $ 1.06 $ .78 $ 2.96 $ 1.80
</TABLE>
5
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company's net income for the nine months ended September 30, 1999 was $
4,749,000 or $ 2.96 per diluted share compared to $ 2,874,000 and $ 1.80 per
diluted share for the same nine-months period in the preceding year. The
increase in net income was primarily attributable to an increase in noninterest
income, as well as decreases in noninterest expense.
The Company recorded an annualized return on average assets of 1.01% for the
nine-month period ending September 30, 1999, compared to .64 % for the same
period in 1998. Return on average equity of 10.80 % was recorded for the
nine-month period ended September 30, 1999, compared to
6.92 % for the same period in 1998.
At September 30, 1999, the Company had total assets of $ 643.6 million compared
to $ 615.4 million at December 31, 1998. The increase in total assets was driven
by a $ 35.7 million increase in net loans which was primarily funded by a $ 12.4
million increase in deposits and a $21.5 million increase in Federal Funds
Purchased.
The Company is susceptible to a continued increasing 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's wholly owned subsidiary, First Liberty Bank & Trust, is one of the
largest community banks in Northeastern Pennsylvania. The Company intends to
increase its market penetration through, among other things, the opening of de
novo branches.
Financial Condition
Cash and Due From Banks and Federal Funds Sold
Cash and due from banks decreased approximately $4.1 million to $16.5 million at
September 30, 1999 from $20.6 million at December 31, 1998 as the company
utilized excess liquidity to pay down other borrowed money. Federal funds sold
decreased to zero at September 30, 1999 from $5.0 million at December 31, 1998
due to normal fluctuations resulting from the conduct of customer business.
Securities
Securities available for sale have decreased $5.1 million or 2.6 % to $191.4
million at September 30, 1999 from $196.6 million at December 31, 1998. This
decrease was used to provide funding for growth in the Company's loan portfolio.
6
<PAGE>
Loans Receivable, Net
Aggregate loans receivable totaled $407.0 million at September 30, 1999, an
increase of $35.7 million from $ 371.3 million at December 31, 1998. The mix of
loans is substantially unchanged at those dates.
Non-Performing Assets
The Company's total non-performing assets decreased approximately $578,000 to
$2.1 million or 0.32 % of total assets at September 30, 1999 as compared to $2.7
million or 0.43 % of total assets at December 31, 1998. Loans greater than
ninety days delinquent but still accruing increased from $445,000 at December
31, 1998 to $ 485,000 at September 30, 1999. Nonaccrual loans decreased
approximately $701,000 to $1.0 million.
Real estate owned increased from $479,000 as of December 31, 1998 to $562,000 as
of September 30, 1999, due to six foreclosed residential properties transferred
into real estate owned. There were no significant gains or losses on the sale of
real estate owned during the quarters ended September 30, 1999 and 1998.
<TABLE>
<S> <C> <C>
9/30/99 12/31/98
Nonaccrual 1,039,000 1,740,000
Loans 90 day or more delinquent 485,000 445,000
--------- ---------
Total non-performing 1,524,000 2,185,000
Real estate owned other than
Bank premises 562,000 479,000
--------- ---------
Total non-performing assets 2,086,000 2,664,000
</TABLE>
At September 30, 1999, the Company's allowance for loan losses amounted to $4.8
million or 1.16 % of gross loans receivable. At December 31, 1998, the Company's
allowance for loan losses was $4.6 million or 1.23 % of gross loans receivable.
The allowance for loan losses as of September 30, 1999 has been deemed adequate
by management. The allowance is maintained at a level adequate to cover known
and inherent losses in the loan portfolio given the present past due,
nonperforming and classified levels.
Deposits
Deposits increased $12.4 million or 2.49 % from $496.6 million at December 31,
1998 to $509.0 million at September 30, 1999. The increase in deposits was
primarily due to an increase in Certificate of Deposits from the local market.
The Company believes this increase is due to the Bank's competitive rates.
7
<PAGE>
Equity
At September 30, 1999, total equity was $58.5 million or 9.09 % or total assets
compared to $58.9 million or 9.57 % of total assets as of December 31, 1998.
Total equity decreased primarily due to a $4 million decrease in accumulated
other comprehensive income resulting from an increase in interest rates causing
unrealized losses in the available for sale securities portfolio. This decrease
was partially offset by an increase in retained earnings due to the retention of
net income during the intervening period.
Results of Operations
Net Income
The Company's net income for the three months ended September30, 1999 increased
to $1.7 million compared to $1.2 million for the three months ended September
30, 1998 primarily due to increases of $253,000 and $172,000 in net interest
income and non interest income, respectively, as well as a $100,000 decrease in
noninterest expense.
The Company's net income was $4.7 million for the nine months ended September
30, 1999, compared to $2.9 million recorded in the comparable prior period. Net
interest income before provision for loan losses approximated $15.1 million and
$14.8 million for the nine months ended September 30, 1999 and September 30,
1998, respectively. The Company was able to increase the level of noninterest
income by $423,000 to $1.8 million for the nine months ending September 30,
1999, while noninterest expense decreased to $10.3 million for the nine months
ended September 30, 1999, compared to $11.6 million for the comparable prior
period primarily due to the merger related costs in 1998 which were not repeated
in 1999.
Net Interest Income
Net interest income before provision for loan losses amounted to $5.1 million
and $15.1 million for the three-month and nine-month periods ended September 30,
1999 versus $4.9 million and $14.8 million for the three-month and nine-month
periods ended September 30, 1998. A competitive interest rate environment
resulted in decreases in both interest income and interest expense for the nine
months ended 1999 compared to 1998. Growth in the loan portfolio, increased
total interest income, while aggressive pricing strategies decreased total
interest expense for the three months ended September 30, 1999 versus 1998.
Total interest income increased to $10.8 million for the three month period
ended September 30, 1999 from $10.6 million during the comparable prior period.
Total interest income decreased to $31.7 million for the nine month period ended
September 30, 1999 from $31.8 million during the comparable prior period. The
average interest-earning assets increased $20.6 million for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
However, this was more than offset by a 26 basis point decline in the yield
earned on average interest-earning assets during the nine months ended September
30, 1999 compared to the 1998 period.
Total interest expense decreased to $5.6 million and $16.6 million for the three
and nine months ended September 30, 1999 from $5.7 million and $17.0 million for
the comparable prior period.
8
<PAGE>
The decrease was due to a decrease in interest expense associated with deposits.
The average balance of interest bearing deposits increased by $14.2 million
during the nine months ended September 30, 1999, compared to the comparable 1998
period. However, the increased volume of deposits was more than offset by a 26
basis point decrease in the average rates paid for the nine months ended
September 30, 1999 over the comparable 1998 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 generally and other factors related to the collectability of the Company's
loan portfolio. The provision for loan losses as $180,000 for the three months
ended September 30, 1999 compared to $135,000 for the three months ended
September 30, 1998. For the nine-month period ended September 30, 1999, the
provision for loan losses amounted to $540,000, an increase of $135,000 compared
to $405,000 for the nine months ended September 30, 1998, primarily due to the
growth of the loan portfolio.
Although management utilizes its best judgement in providing for potential
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 judgements of information which is
available to them at the time of their examination.
Noninterest Income
Noninterest income for the three and nine month periods ended September 30, 1999
was $667,000 and $1.8 million compared to $495,000 and $1.3 million for the same
periods in the prior year. These increases were primarily the result of growth
in the Company's trust business, which generated a $134,000 increase in trust
fee income for the nine months ended September 30, 1999. Other components of
noninterest income increased by $289,000 net for the nine months ended September
30, 1999 compared to 1998 as a result of increases in the gains on sale of
securities.
Noninterest expenses for the three and nine-month periods ending September 30,
1999 decreased to $3.5 million and $10.3 million from $3.6 million and $11.6
million for the comparable prior period. The largest contributing factor to the
decrease was $1.1 million of merger related expenses in the second quarter of
1998. Salary and benefits increased $69,000 for the nine month period as a
result of employee raises. Data processing decreased by $201,000; and other
expense decreased by $85,000 over the prior nine month period as a result of
efficiencies gained from the Company's recent merger with Upper Valley Bancorp.
Income Taxes
Income tax expense totaled $430,000 and $1.28 million for the three and
nine-month periods ended September 30, 1999 compared to $404,000 and $1.3
million for the comparable prior periods.
9
<PAGE>
These amounts resulted in effective tax rates calculated at 20 % for the three
month and 21% for the nine month periods ended September 30, 1999 compared to 25
% for the three months ended September 30, 1998 and 31% for the nine months
ended September 30, 1998. The 1999 effective tax rate decrease is primarily due
to merger related costs incurred in 1998 which were not tax deductible as well
as implementation of the Company's tax strategy, including increasing tax-exempt
income as a percentage of total net income through investments in tax-exempt
securities, bank owned life insurance, and low income housing credits.
Liquidity & Capital Adequacy
The Company's primary source of funds on long term and short term basis are
deposits, principal and interest payments on loan, mortgage backed securities,
and FHLB advances. The Company uses the funds generated to support its lending
and investment activities as well as any other demands for liquidity such as
deposit out flows.
The Company has continued to maintain the required levels of liquid assets as
defined by Federal regulations.
A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
consists of shareholders' equity, which provides a basis for future growth and
expansion and also provides a buffer against unexpected losses. It is
management's intention to continue paying a reasonable return on shareholders'
investment while retaining adequate earnings to allow for continued growth.
Shareholders' equity decreased $405,000 to $58.5 million at September 30, 1999
primarily as a result of decreases in the Company's accumulated other
comprehensive income.
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, 1999, of which 4% must be Tier 1
capital. The Company's total risk-based capital ratio was 16.74% at September
30, 1999. The Company's Tier 1 risk-based capital ratio was 15.53% at September
30, 1999.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for bank holding companies that meet certain criteria,
including that they maintain the highest regulatory rating. All other bank
holding companies are required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points. The Federal Reserve
Board has not advised the Company of any specific minimum leverage ratio
applicable to it. The Company's leverage ratio was 9.62% at September 30, 1999.
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
10
<PAGE>
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, 1999, the Bank's total risk-based capital, Tier I risk-based
capital and Tier I leverage ratios were 16.74 %,15.53% and 9.62%, 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 changes in market interest rates and the effect on net interest income. It
is assumed that the change is instantaneous and that all rates move in a
parallel manner. In addition, it is assumed that rates on core deposit products
such as NOWs, savings accounts, and the MMDA accounts will be adjusted by 50% of
the assumed rate change. Assumptions are also made concerning prepayment speeds
on mortgage loans and mortgage securities. The results of this rate shock are a
useful tool to assist the Company in assessing interest rate risk inherent in
their balance sheet.
The results of this rate shock analysis as of September 30, 1999 are as follows:
Change in Rate Net Interest Income Change (After tax, in thousands)
-------------- ----------------------------------------------------
+300 (2,817.8)
+200 (1,877.3)
+100 (927.8)
-100 777.6
-200 1,369.2
-300 1,815.6
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.
Company's State of Readiness
The Company has completed an assessment of its financial and operational
11
<PAGE>
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 significant third party vendors advised the Company
that their software is Year 2000 compliant, and the Company has fully tested the
software as of September 30, 1999, and found it to be Year 2000 compliant.
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.
Costs of Year 2000
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.
The Company estimates expenditures associated with Year 2000 at $125,000 (all of
which is for capital expenditures) during the year ending December 31, 1999,
with approximately $25,000 amortized in that same year and the remainder to be
amortized in subsequent fiscal years.
The Company does not expect any Year 2000 expenditures beyond 1999. 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 Company believes that the cost of addressing the Year 2000 issue will not be
a material event or uncertainty that would cause reported financial information
not to be necessarily indicative of future operating results or financial
conditions. However, if compliance is not achieved in a timely manner by the
Company or any of its significantly related third-parties, be it a supplier of
services or customer, the Year 2000 issue could possibly have a material effect
on the Company's operating and financial position.
Risk of Year 2000
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
12
<PAGE>
machines, point of sale terminals 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 banking regulators are closely monitoring the progress of First
Liberty Bank & Trust'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.
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.
Contingency Plans
The Company has obtained back-up service providers, developed contingency plans
and assessed the potential adverse risks to the Company. The Company's
contingency plans involve the use of manual labor to compensate for the loss of
certain automated computer systems and inconveniences caused by disruption in
command systems.
A contingency plan was developed for mission-critical and required mainframe and
PC based applications, third-party relationships, environmental systems,
proprietary programs, and non- computer related systems. The contingency plan
identifies scheduled completion dates, test dates and trigger dates.
A business resumption contingency plan was developed with the completion date of
June 15, 1999. The resumption contingency plan will calculate a risk factor for
each core business line and\or project. Based upon the calculated risk factor,
such business resumption contingency plan will be designed and tested.
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 of Part I is incorporated herein by reference.
13
<PAGE>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
September 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a): Exhibits:
None
(b): Reports on Form 8-K:
None
14
<PAGE>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
September 30, 1999
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 November12, 1999 By /s/ William M. Davis
---------------- --------------------
William M. Davis
Chairman, President and
Director
(Principal Executive Officer)
Date November 12, 1999 By /s/ Donald J. Gibbs
----------------- ------------------
Donald J. Gibbs
(Principal Financial Officer
And Treasurer)
15
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000741562
<NAME> First Liberty Bank Corp.
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,139
<INT-BEARING-DEPOSITS> 399
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 191,428
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 411,788
<ALLOWANCE> 4,784
<TOTAL-ASSETS> 643,603
<DEPOSITS> 508,989
<SHORT-TERM> 21,500
<LIABILITIES-OTHER> 4,020
<LONG-TERM> 50,591
0
0
<COMMON> 2,009
<OTHER-SE> 56,494
<TOTAL-LIABILITIES-AND-EQUITY> 643,603
<INTEREST-LOAN> 22,704
<INTEREST-INVEST> 8,975
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31,679
<INTEREST-DEPOSIT> 14,371
<INTEREST-EXPENSE> 16,593
<INTEREST-INCOME-NET> 15,086
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 225
<EXPENSE-OTHER> 10,277
<INCOME-PRETAX> 6,029
<INCOME-PRE-EXTRAORDINARY> 6,029
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,749
<EPS-BASIC> 2.99
<EPS-DILUTED> 2.96
<YIELD-ACTUAL> 3.53
<LOANS-NON> 1,039
<LOANS-PAST> 485
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,618
<CHARGE-OFFS> 551
<RECOVERIES> 177
<ALLOWANCE-CLOSE> 4,784
<ALLOWANCE-DOMESTIC> 2,578
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,206
</TABLE>
