UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-133312
FIRST LIBERTY BANK CORP.
(Exact name of registrant issuer as specified in its charter)
Pennsylvania 23-2275242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
645 Washington Avenue; P.O. Box 39; Jermyn Pennsylvania 18433-0039
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 717-876-6500
THE FIRST JERMYN CORP.
(Former name, former address and former fiscal year, if changed
since last report) Check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No __
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
----- ----------------------------
Common stock, $1.25 par value 1,606,262
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FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
PART 1 - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income - Three Months and Six Months
Ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Six Months Ended June 30, 1999 and 1998
and December 31, 1998
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
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands of dollars, except per share information)
June 30, December 31,
Assets 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $14,921 20,628
Federal funds sold -0- 5,000
Securities available for sale 209,997 196,563
Loans, gross 387,145 376,856
Less: Unearned discount and origination fees (781) (941)
Allowance for loan losses (4,782) (4,618)
- ---------------------------------------------------------------------------------------------------------------
Loans, net 381,582 371,297
Accrued interest receivable 3,616 3,914
Bank premises, leasehold improvements and furniture and equipment -net 12,036 10,307
Real estate owned other than bank premises 527 479
Other assets 10,975 7,182
- --------------------------------------------------------------------------------------------------------------
Total assets $633,654 615,370
Liabilities
Deposits:
Noninterest-bearing demand $57,794 55,272
Interest-bearing 463,823 441,328
- --------------------------------------------------------------------------------------------------------------
Total deposits 521,617 496,600
- --------------------------------------------------------------------------------------------------------------
Other borrowed money 50,614 55,660
Accrued interest payable 2,395 2,218
Other liabilities 1,279 1,984
- --------------------------------------------------------------------------------------------------------------
Total liabilities 575,905 556,462
- --------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $1.25 par value, authorized 2,500,000 shares;
Issued 1,606,262 and 1,602,342 respectively shares 2,008 2,003
Surplus 6,031 5,905
Retained earnings 52,220 50,435
Accumulated other comprehensive income (2,314) 761
Less treasury stock-at cost (15,205 shares) (196) (196)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 57,749 58,908
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 633,654 615,370
==============================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands of dollars, except per share information)
Three months Six months
Ended June 30 Ended June 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,512 7,601 14,922 15,131
Interest on interest bearing deposits 167 107 422 207
Interest and dividends on securities:
Taxable 2,299 2,203 4,298 4,428
Non-Taxable 576 589 1,201 1,128
Interest on federal funds sold 63 164 72 344
- ------------------------------------------------------------------------------------------------------------------
Total interest income 10,617 10,664 20,915 21,238
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,860 4,987 9,571 9,895
Fed Funds Purchased 3 1 3 25
Other borrowed money 702 705 1,399 1,389
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 5,565 5,693 10,973 11,309
- ------------------------------------------------------------------------------------------------------------------
Net interest income 5,052 4,971 9,942 9,929
Provision for loan losses 180 135 360 270
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 4,872 4,836 9,582 9,659
- ------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 161 183 344 371
Gains on sale of securities 13 4 87 32
Trust 173 116 337 247
Other 194 108 325 192
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 541 411 1,093 842
- ------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 1,762 1,776 3,543 3,457
Net occupancy and furniture/
equipment expenses 618 586 1,169 1,195
Data processing services 81 152 196 307
Merger related costs --- 1,081 -- 1,098
Other expenses 978 1,010 1,860 1,917
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,439 4,605 6,768 7,974
- ------------------------------------------------------------------------------------------------------------------
Income before federal income tax provision 1,974 642 3,907 2,527
Income tax provision 435 403 850 891
- ------------------------------------------------------------------------------------------------------------------
Net income 1,539 239 3,057 1,636
- ------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gains on securities
Unrealized holding (loss)/gain
arising during the period (2,622) 36 (3,018) 25
Less reclassification adjustment
for gains included in net income (9) (13) (57) 80
Comprehensive income $ (1,092) 262 (18) 1,741
- -=================================================================================================================
Per share information
Net income-basic .97 .15 1.92 1.04
Net income-diluted .96 .15 1.91 1.03
</TABLE>
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<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands of dollars)
Six months ended June 30
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $3,057 $1,636
Adjustments to reconcile net income to net cash provided by
operating activities :
Gains on sales of securities (87) (32)
Provision for loan losses 360 270
Depreciation and amortization of investment securities, bank
premises, leasehold improvements and furniture
and equipment 483 441
Decrease/(Increase) in interest receivable and other assets (1,661) 1,175
(Decrease)/Increase in interest payable and other liabilities (528) (126)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,624 3,364
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of securities held to maturity --- (12,426)
Proceeds from maturities of securities 41,109 51,303
Purchases of securities available for sale (72,540) (45,230)
Proceeds from sales of securities available for sale 13,175 --
Net increase in loans (11,076) (12,772)
Purchases of bank premises, leasehold improvements and
Furniture and equipment-net (2,212) (287)
Sales of assets acquired through foreclosure, net 383 623
- -------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (31,161) (18,789)
- --------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 25,017 13,371
Borrow (repay) Fed Funds Purchased (5,000) 10,000
Principal payments on capitalized lease obligation (46) (42)
Borrowed funds -- --
Proceeds of stock issued thru exercise options 131 164
Dividends paid (1,272) (1,060)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,830 22,433
- -------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents (10,707) 7,008
Cash and cash equivalents at beginning of period 25,628 21,389
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 14,921 28,397
=============================================================================================================
Cash paid during the period:
Interest $ 10,796 10,983
Federal Income Taxes 877 796
- -------------------------------------------------------------------------------------------------------------
Noncash transactions:
Transfer of loans to real estate owned other than bank premise $ 431 331
Net unrealized gain on securities available for sale, net of tax $ (3,075) 105
=============================================================================================================
</TABLE>
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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, 1998. The
results for the six months ended June 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.
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(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 Company's weighted average
stock options outstanding.
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings per share (in
thousands)
3 months ended June 30 6 months ended June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 1,539 $ 239 $ 3,057 $ 1,636
===== === ===== =====
Denominator:
Denominator for basic
earnings per weighted
average shares 1,591 1,579 1,589 1,579
Effect of diluted securities:
Employee Stock options 12 15 13 15
-- -- -- --
Denominator for diluted earnings
per share adjusted weighted
average shares and assumed
exercise 1,603 1,594 1,602 1,594
Basic earnings per share .97 .15 1.92 1.04
Diluted earnings per share .96 .15 1.91 1.03
</TABLE>
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company's net income for the six months ended June 30, 1999 was $3,057,000
or $1.91 per diluted share compared to $1,636,000 and $1.03 per diluted share
for the same six-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 and the federal income tax provision.
The Company recorded an annualized return on average assets of .99% for the
six-month period ending June 30, 1999, compared to .84 % for the same period in
1998. Return on average equity of 10.40% was recorded for the six-month period
ended June 30, 1999, compared to 8.95% for the same period in 1998.
At June 30, 1999, the Company had total assets of $634 million compared to $615
million at December 31, 1998. The increase in total assets was driven by a $10.3
million increase in net loans and a $13.4 million increase in securities
available for sale, which were primarily funded by a $25.0 million increase in
deposits.
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 $5.7 million to $14.9 million at
June 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 June 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 increased $13.4 million or 6.8% to 210.0
million from $196.6 million at December 31, 1998. This increase was primarily
driven by investing the funding created by growth in the Company's deposit base
which was in excess of loan demand.
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Loans Receivable, Net
Aggregate loans receivable totaled $381.6 million at June 30, 1999, an increase
of $10.3 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 $585,000 to
$2.1 million or 0.3% of total assets at June 30, 1999 as compared to $2.7
million or 0.4% of total assets at December 31, 1998. Loans greater than ninety
days delinquent but still accruing decreased from $445,000 at December 31, 1998
to $121,000 at June 30, 1999. Nonaccrual loans decreased approximately $633,000
to $1,552,000.
Real estate owned, increased from $479,000 as of December 31, 1998 to $527,000
as of June 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 June 30, 1999 and 1998.
<TABLE>
<CAPTION>
6/30/99 12/31/98
<S> <C> <C>
Nonaccrual 1,431,000 1,740,000
Loans 90 day or mor delinquent 121,000 445,000
------------ ----------
Total non-performing 1,552,000 2,185,000
Real estate owned other than
Bank premises 527,000 479,000
------------ -----------
Total non-performing assets 2,079,000 2,664,000
</TABLE>
At June 30, 1999, the Company's allowance for loan losses amounted to $4.8
million or 1.24% 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 June 30, 1999 has been deemed adequate by
management. The allowance is maintained at a level adequate to cover inherent
losses in the loan portfolio given the present past due, nonperforming and
classified levels.
Deposits
Deposits increased $25.0 million or 5.0% from $496.6 million at December 31,
1998 to $521.6 million at June 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.
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Equity
At June 30, 1999, total equity was $57.7 million or 9.1% or total assets
compared to $58.9 million or 9.6% of total assets as of December 31, 1998. Total
equity decreased primarily due to a $3.1 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 June 30, 1999 increased to
$1,539,000 compared to 239,000 for the three months ended June 30, 1998
primarily due to the recognition in the second quarter of 1998 of expenses
related to completion of the Company's June 1998 acquisition of Upper Valley
Bancorp.
The Company's net income was $3,057,000 for the six months ended June 30, 1999,
compared to $1,636,000 recorded in the comparable prior period. In a competitive
rate environment, the Company was able to substantially maintain its level of
core earnings as net interest income before provision for loan losses
approximated $9.9 million for the six months ended June 30, 1999 and June 30,
1998. The Company was able to increase the level of noninterest income by
$251,000 to $1,093,000 for the six months ending June 30, 1999, while
noninterest expense decreased to $6.8 million for the six months ended June 30,
1999, compared to $8.0 million for the comparable prior period primarily due to
the aforementioned acquisition expenses.
Net Interest Income
Net interest income before provision for loan losses amounted to $5.1 million
and $9.9 million for the three-month and six-month periods ended June 30, 1999
versus $5.0 million and $9.9 million for the six months ended June 30, 1998. A
competitive interest rate environment lead to decreases in both interest income
and interest expense for 1999 compared to 1998.
Total interest income decreased to $10.6 million and $20.9 million for the three
and six month periods ended June 30, 1999 from $10.7 million and $21.2 million
during the comparable prior periods. The average interest-earning assets
increased $ 17.9 million for the six months ended June 30, 1999 compared to the
six months ended June 30, 1998. However, this was partially offset by a 31 basis
point decline in the yield earned on average interest-earning assets during the
six months ended June 30, 1999 compared to the 1998 period.
Total interest expense decreased to $5.6 million and $11.0 million for the three
and six months ended June 30, 1999 from $5.7 million and $11.3 million for the
comparable prior period. The decrease was due to a decrease in interest expense
associated with deposits. The average balance of deposits increased by $10.4
million during the six months ended June 30, 1999, compared to the comparable
1998 period. However, the increased volume of deposits was offset by a 23 basis
point decrease in the average rates paid for the six months ended June 30, 1999
over the comparable 1998 period.
8
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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 June 30, 1999 compared to $135,000 for the three months ended June 30,
1998. For the six-month period ended June 30, 1999, the provision for loan
losses amounted to $360,000, an increase of $90,000 compared to $270,000 for the
six months ended June 30, 1999.
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 the 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 six month periods ending June 30, 1999 was
$541,000 and $1,093,000 compared to $411,000 and $842,000 for the same periods
in the prior year. These increases were primarily the result of growth in the
Company's trust business, generated a $90,000 increase in trust fee income for
the six months ended June 30, 1999. Other noninterest income increased by
$133,000 for the six months ended June 30, 1999 compared to 1998 as a result of
increases in the cash surrender value of bank owned life insurance.
Noninterest expenses for the three and six-month periods ending June 30, 1999
decreased to $3,439,000 and $6,768,000 from the $4,605,000 and $7,974,000 for
the comparable prior period. The largest contributing factor to the decrease was
$1,081,000 of merger related expenses in the second quarter of 1998. Salary and
benefits increased $86,000 for the six month period as a result of employee
raises. Net occupancy expense decreased by $26,000; data processing decreased by
$111,000; and other expense decreased by $57,000 over the prior six month period
as a result of efficiencies gained from the Company's recent merger with Upper
Valley Bancorp.
Income Taxes
Income tax expense totaled $435,000 and $850,000 for the three and six-month
periods ended June 30, 1999 compared to $403,000 and $891,000 for the comparable
prior periods. These amounts resulted in effective tax rates calculated at 22%
for the three and six month periods ended June 30, 1999 compared to 63% for the
three months ended June 30, 1998 and 35% for the six months ended June 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.
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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.
Shareholders' equity decreased $1,159,000 to $57,749,000 at June 30, 1999
primarily as a result of decreases in the Company's accumulated other
comprehensive income. 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 June 30, 1999, of which 4% must be Tier 1
capital. The Company's total risk-based capital ratio was 17.30% at June 30,
1999. The Company's Tier 1 risk-based capital ratio was 16.05% at June 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 9.61% at June 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 capital measure, a
leverage ratio capital measure and other factors. Under regulations adopted, for
an institution to be well capitalized it must have a total risk-based capital
ratio of at least 10%, a Tier I risk-based capital ratio of at least 6%, and a
Tier I leverage ratio of at least 5%, and not be subject to any specific capital
order or directive.
At June 30, 1999, the Bank's total risk-based capital, Tier I risk-based capital
and Tier I leverage ratios were 17.30%, 16.05% and 9.61%, respectively.
10
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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 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 June 30, 1999 are as follows:
Change in Rate Net Interest Income Change (After tax, in thousands)
-------------- ----------------------------------------------------
+300 (2,388.30)
+200 (1,581.40)
+100 (783.70)
-100 543.60
-200 844.30
-300 979.50
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
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 intends to fully
test that software by September 30, 1999.
11
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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 $45,000 amortized in that same year and the remainder
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 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.
12
<PAGE>
Contingency Plans
The Company is in the process of obtaining back-up service providers, working up
contingency plans and assessing 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 will be 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
will identify 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
June 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
June 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 August 10, 1999 By /s/ William M. Davis
--------------- --------------------
William M. Davis
Chairman, President and
Director
(Principal Executive Officer)
Date August 10, 1999 By /s/ Donald J. Gibbs
--------------- ------------------
Donald J. Gibbs
(Principal Financial Officer
And Treasurer)
15
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