FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report Under Section 13 Or 15 (d) Of The Securities Exchange
Act Of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 Or 15 (D) Of The Securities
Exchange Act of 1934
For the transition period from _______________to ___________________
Commission file number 0-13312
FIRST LIBERTY BANK CORP.
(Exact name of small business registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2275242
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
645 Washington Ave; P.O. Box 39; Jermyn, Pennsylvania 18433-0039
(Address of principal executive offices) (Zip-Code)
Registrant's telephone number 570-876-6500
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12
(g) of the Act:
Common Stock, $1.25 par value
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Indicate by checkmark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing sales price of March 17, 1999, the aggregate market value
of the voting stock held by non-affiliates (which includes all common stock,
$1.25 par value other than shares beneficially owned by directors or executive
officers) of the registrant was $73,254,435.
The number of shares outstanding of the registrant's common stock, $1.25 par
value was 1,587,137 at March 15, 1999.
<PAGE>
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the annual report to shareholders for the year ended December
31, 1998 are incorporated by reference into Part I, Part II, Part III, and Part
IV.
(2) Portions of the definitive annual meeting proxy statement to be filed,
pursuant to regulation 14A, within 120 days after December 31, 1998 are
incorporated by reference into Part I and Part III.
<PAGE>
FIRST LIBERTY BANK CORP.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
ITEM 1. Description of Business 1-4
ITEM 2. Description of Properties 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to a Vote of Security Holders 5
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters 6
ITEM 6. Selected Financial Data 6
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 6
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 6
ITEM 8. Financial Statements and Supplementary Data 6
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 6
PART III
ITEM 10. Directors, and Executive Officers of the Registrant 7
ITEM 11. Executive Compensation 7
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 7
ITEM 13. Certain Relationships and Related Transactions 7
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 8
SIGNATURES 9-10
<PAGE>
PART I
ITEM 1. Description of Business
General
The registrant, First Liberty Bank Corp. (Company), is a Pennsylvania
corporation organized on February 13, 1984. The Company is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended. The
Company conducts its principal activities through its banking subsidiary, First
Liberty Bank & Trust, a Pennsylvania banking institution.
The Company's principal activities consist of owning and supervising
the Bank, which engages in a full-service wholesale and retail banking business.
As of December 31, 1998, approximately 204 persons were employed on a full-time
equivalent basis. Through the Bank, the Company derives substantially all of its
income from the furnishing of banking and banking related services.
Recent Acquisition
On June 30, 1998,the Company consummated its acquisition of Upper
Valley Bancorp, Inc. (Upper Valley) the holding company of NBO National Bank
(NBO). At June 30, 1998, NBO was a $271 million national-chartered bank with
three branches in Olyphant, Scranton, and Pittston, Pennsylvania. Upper Valley
shareholders received .689 share of Company common stock for each Upper Valley
share owned. The transaction was accounted for as a pooling of interests and all
prior periods have been restated to reflect the acquisition. The total value of
the transaction was approximately $52.1 million based upon the company's stock
price prior to finalization of the acquisition. As a result of this acquisition,
the Company recognized merger related expenses of $1,098,000 in the second
quarter of 1998.
Name Change
On June 30, 1998, concurrent with its acquisition of Upper Valley, the
Company changed its name form The First Jermyn Corp. To First Liberty Bank Corp.
Subsidiaries/ Subsidiary Bank Merger and Charter Conversion
The Company originally chartered its first bank in 1902. Through
February 15, 1999, the banking business of the Company was conducted by its
wholly owned banking subsidiaries, The First National Bank of Jermyn (FNBJ) and
NBO. Effective February 16, 1999, the Company merged NBO with and into FNBJ,
with FNBJ surviving. As a result of the merger, FNBJ succeeded all of the
assets, rights, property, liabilities and commitments of NBO. Concurrently with
the merger, FNBJ converted its charter from a national banking association to a
Pennsylvania state-chartered commercial bank with trust powers, and changed its
name to "First Liberty Bank & Trust." The operations of the Banks are conducted
from nine offices located in Lackawanna County, Pennsylvania. The Banks' offices
are located in Jermyn, the Keyser Oak, Downtown and Minooka sections of
Scranton, Carbondale, Daleville, Olyphant, Kingston and an office in Jessup, all
in Lackawanna County, Pennsylvania.
Through its branch systems, the Bank provides various community
oriented domestic lending and depository services to fit both commercial and
individual needs. Lending services include commercial and individual real estate
mortgage and construction loans, secured and unsecured loans and lines of
credit. Demand for the Bank's loan products tends not to be affected by
seasonality to a significant degree, but is significantly impacted by the level
and trend of market interest rates. Deposit services include savings, clubs,
money market, NOW, checking and certificates of deposit accounts. The Bank has a
relatively stable deposit base and no material amount of deposits is obtained
from a single depositor or group of depositors, including governmental entities.
The Bank has not experienced any significant seasonal fluctuations in the amount
of its deposits.
1
<PAGE>
The Company formed a subsidiary, First of Jermyn Realty Company, Inc.,
in May 1990. This subsidiary has been inactive since its inception.
Competition
The Bank experiences stiff competition in all phases of its business
from other bank holding companies and commercial banks, savings and loan
institutions, credit unions, brokerage and insurance companies, and other
financial service providers.
The Bank competes for loans and deposits in its market area (which is
concentrated in the primary trade areas of the branch locations) with both
Pennsylvania and out-of-state banks which have been given authority to compete
within Pennsylvania boundaries. In addition, the Company faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance firms with products such as money market funds, mutual funds and
annuities. Competition may increase as a result of the continuing reduction in
the effective restrictions on interstate operations of financial institutions.
The Company recognizes that its customer base increasingly focuses on
convenience and access to services. The Company intends to continue to evaluate
and enhance its service delivery system.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provision, it is qualified in its entirety by reference
to the particular statutory and regulatory provision. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company and the Bank.
The Company
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Holding Company Act") and, is,
therefore, subject to supervision and examination by the Federal Reserve Board
under the Holding Company Act. The Company is subject to certain annual
reporting requirements regarding its business operations.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities and is subject to the periodic reporting
requirements of the Securities and Exchange Commission.
The Bank
Through February 15, 1999, FNBJ and NBO were national banks, subject to
The National Bank Act and to regulation by the Comptroller of the Currency.
After the date of the merger of FNBJ and NBO on February 16, 1999 and the
charter conversion of FNBJ to a Pennsylvania state-chartered commercial bank,
the Bank became subject to regulation by the Pennsylvania Department of Banking
and is no longer subject to regulation by the Comptroller of the Currency.
The Bank is subject to extensive regulation and examination by the FDIC
and the Federal Reserve System therefore, Some of the aspects of the lending and
deposit business of the Bank which are regulated by these agencies include
personal lending, mortgage lending, interest rates as they relate to lending,
and reserve requirements. These agencies are primarily concerned with the safety
and soundness of individual banks, but are also involved with the general
oversight of the activities of a bank directed toward the determination that the
banks are operating competitively and constructively, in accordance with
applicable regulations and statutes.
The operations of the Bank are also subject to numerous federal, state
and local laws and regulations which set forth specific restrictions and
procedure requirements with respect to the extension of credit, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
2
<PAGE>
The Banks are subject to certain restrictions on loans and extensions
of credit to the Company, investment in the stock or securities of the Company,
and acceptance of the stock or securities of the Company as collateral for
loans. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal and state legislation and regulation which may have
the effect of increasing the costs of doing business as well as limiting the
business activities of the Banks.
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). This Act substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes.
In addition, FDICIA directs that each federal banking agency prescribe
standards of depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares ( if feasible) and such other standards as the agency
deems appropriate. To date, these regulations have not resulted in any material
cost to the Company or any significant changes to the Company's operations.
FDICIA also contains a variety of other provisions that affected the
operations of the Company, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC. To date, compliance with this regulation has not imposed material
costs on the Company.
Prompt Corrective Action
The prompt corrective action regulations of FDICIA define specific
capital categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Institutions categorized as "undercapitalized" or
worse are subject to certain restriction, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the institution either by its primary federal regulator or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the entire institution. Once an institution becomes "critically
undercapitalized," it must generally be placed in receivership or
conservatorship within 90 days. To be considered "well capitalized," an
institution must generally have a leverage ratio of at least 5%, a Tier 1
risk-based capital ratio of at least 6%, and a total risk-based capital ratio of
at least 10%. An institution is deemed to be "critically undercapitalized" if it
has a tangible equity ratio of 2% or less. The Banks meet the definition of
"well capitalized" at December 31, 1998
Interstate Banking
The Reglue-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted on September 29, 1994, permits bank
holding companies to acquire banks in any state beginning in 1995. Beginning in
1997, acquired banks in different states may be merged into a single bank, and
thereafter merged banks may establish and acquire additional branches anywhere
the acquiree could have branched. States may opt out of interstate branching
until June 1, 1997, but if so, their domestic institutions will also be
prohibited from branching interstate. States may also enact laws permitting
interstate merger transactions and interstate de novo branching before June 1,
1997. Limited branch purchases are still subject to state laws.
Bank management anticipates that the Interstate Banking Act may
increase competitive pressures in the Bank's market by permitting entry of
additional competitors.
3
<PAGE>
Deposit Insurance Assessments
The Bank's deposit obligations are insured by the "Bank Insurance Fund"
("BIF") administered by the FDIC and the Bank is obligated to pay deposit
insurance premiums semiannually. The FDIC computes the Bank's premium rate based
upon the FDIC's evaluation of the Bank's risk, based principally on the Bank's
capital level and the extent of supervisory risk which bank regulators judge the
Bank to represent.
4
<PAGE>
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value
Of Property
Owned/ Date Lease Or Leasehold
Location Leased Expires Improvements (2) Deposits
(In Thousands)
<S> <C> <C> <C> <C>
Main Office Leased 2004 749 101,608
645 Washington Ave
Jermyn, Pa 18433
Keyser Ave. Branch Leased 2004 364 105,095
1700 N. Keyser Ave.
Scranton, PA 18508
Jessup Branch Owned 609 42,634
210 Church St.
Jessup, PA 18434
Minooka Branch Owned 1,740 41,769
500 Davis St.
Scranton, PA 18505
Carbondale Branch Owned 415 13,628
67 Salem Ave.
Carbondale, PA 18407
Daleville Branch Leased 2000 0 11,420
Route 502 RD 3
Moscow, PA 18444
Olyphant Branch Owned 745 116,067
128 Lackawanna Ave.
Olyphant, PA 18447
Wyoming Avenue Branch Owned 1,548 42,576
1300 Wyoming Avenue
Scranton, PA 18509
Pittston Branch Leased 2010 529 21,803
45 S. Main Street
Pittston, PA 18640
</TABLE>
ITEM 3. Legal Proceedings
The Company and the Bank are not involved in any pending legal
proceedings other than routine nonmaterial legal proceedings occurring in the
ordinary course of business.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
5
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters
Information pertaining to First Liberty Bank Corp. quarterly common
stock price ranges, dividends declared per share data, any limitations on future
dividend paying abilities, and number of shareholders are found in the Company's
Annual Report to Shareholders and is hereby incorporated by reference.
ITEM 6. Selected Financial Data
The information required herein is incorporated by reference from page
1and 2 of Exhibit 99.1- Selected pages from the 1998 Annual Report to
Shareholders.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference from pages
3-19 of Exhibit 99.1- Selected pages from the 1998 Annual Report to
Shareholders.
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
The information required herein in incorporated by reference from page
15 of Exhibit 99.1- Selected pages from the 1998 Annual Report to Shareholders.
ITEM 8. Financial Statements
Exhibit 99.1-
Selected Pages
Index to Consolidated Financial From the 1998
Statements and Supplementary Annual Report to
Financial Data To Shareholders
Page Reference
Consolidated Balance Sheets,
December 31, 1998 and 1997...................................20
Consolidated Statements of Operations,
Years Ended December 31, 1998, 1997 and 1996.................21
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1998, 1997 and 1996.................22
Consolidated Statements of Cash Flows,
Years Ended December 31, 1998,1997 and 1996..................23
Notes to Consolidated Financial Statements.....................24-43
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Not applicable.
6
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Information concerning directors and executive officers of the
registrant is incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A, within 120 days after
December 31, 1998, for the annual meeting of shareholders.
ITEM 11. Executive Compensation
Executive Compensation information is incorporated by reference from
the Company's definitive proxy statement to be filed, pursuant to Regulation
14A, within 120 days after December 31, 1998, for the annual meeting of
shareholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the Company's
definitive proxy statement to be filed pursuant to Regulation 14A, within 120
days after December 31, 1998, for the annual meeting of shareholders.
ITEM 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
with regard to indebtedness of management is incorporated herein by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A, within 120 days after December 31, 1998, for the annual meeting of
shareholders and Note 5 - Loans of the Notes to Consolidated Financial
Statements of the 1998 Annual Report to Shareholders.
7
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page
(1) The following financial statements are included in Part II Item 7:
Independent Auditors' Report...........................43*
Financial Statements:
Consolidated Balance Sheets, December 31, 1998
and 1997.........................................20*
Consolidated Statements of Operations,
Years Ended December 31, 1998 , 1997 and 1996....21*
Consolidated Statement of Changes in Shareholders'
Equity, Years Ended December 31, 1998, 1997
and 1996.........................................22*
Consolidated Statement of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996.....23*
Notes to Consolidated Financial Statements.......24-43*
Selected Quarterly Financial Data-
Years Ended December 31, 1998, and 1997..........19*
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(2) Exhibits included herein or incorporated by reference herein:
3.1 Registrant's Articles of Incorporation, as amended (Incorporated herein by
reference to Exhibit 99.1 of the Registrant's Current Report on Form 8-K
filed on July 15,1998.)
3.2 Registrant's Bylaws (Incorporated herein by reference to Exhibit 99.2 of
the Registrant's Current Report on Form 8- K filed on July 15, 1998.)
.
10.1 Lease Agreement, Option Agreement and Memorandum of Lease made the 29th day
of August 1974 by and between Sterling Industrial Corporation and The First
National Bank of Jermyn for the Bank's office buildings located in Jermyn
and the Keyser Oak section of Scranton, Pennsylvania, filed with the Form
10-K for the year ended December 31, 1993 and incorporated herein by
reference.
10.2 Employment Agreement dated June 9, 1993, by and between The First National
Bank of Jermyn and William M. Davis (Incorporated herein by reference to
Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.)
10.3 Employment Agreement dated June 9, 1993, by and between The First National
Bank of Jermyn and Steven R. Tokach (Incorporated herein by reference to
Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.)
10.4 Agreement and Plan of Merger between Registrant and Upper Valley Bancorp,
Inc. dated October 15, 1997, filed with Form 8-K dated November 14, 1997
and incorporated herein by reference
11.1 Computation of Earnings Per Share is incorporated by reference from page 29
of Exhibit 99.1- Selected pages from the 1998 Annual Report to
Shareholders.
21 Subsidiaries of the Registrant
23.1 Consent of Kronick, Kalada, Berdy & Co.
27 Financial Data Schedule
99.1 Selected Pages from the 1998 Annual Report to Shareholders
(b) The Registrant did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1998.
*Refers to page numbers in selected pages from Annual Report to Shareholders
attached hereto as Exhibit 99.1
8
<PAGE>
S I G NA T U R E S
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First Liberty Bank Corp.
(Registrant)
By /S/ William M. Davis Chairman, President March 29, 1999
William M. Davis and Director
(Principal Executive Officer)
By/S/ Martha Myshak Treasurer March 29, 1999
Martha Myshak
(Principal Financial Officer)
By/S/ Donald J. Gibbs Vice President, March 29, 1999
Donald J. Gibbs Finance\Control
(Principal Accounting Officer) Division Manager
Pursuant of the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ Peter A. Sabia Director March 29,1999
Peter A. Sabia
/S/ Kuzma Leschak, Jr. Director March 29,1999
Kuzma Leschak, Jr.
/S/ Robert T. Kelly Director March 29,1999
Robert T. Kelly
/S/ David M. Epstein Director March 29,1999
David M. Epstein
/S/ I. Leo Moskovitz Director March 29,1999
I. Leo Moskovitz
/S/ Dr. Edmund J. Biancarelli Director March 29,1999
Dr. Edmund J. Biancarelli
/S/ Thomas G. Speicher Director March 29,1999
Thomas G. Speicher
/S/ William K. Nasser, Jr. Director March 29,1999
William K Nasser, Jr.
/S/ Steven R. Tokach Director March 29,1999
Steven R. Tokach
/S/ Garfield G. Thomas Secretary March 29,1999
Garfield G. Thomas and Director
/S/ William M. Davis Chairman, March 29,1999
William M. Davis President and Director
9
<PAGE>
/S/ Harold P. McGovern Director March 29, 1999
Harold P. McGovern
/S/ Saul Kaplan Director March 29, 1999
Saul Kaplan
/S/ Joseph P. Coviello, Esq. Director March 29, 1999
Joseph P. Coviello
/S/ Michael A. Barbetti Director March 29, 1999
Michael A. Barbetti
/S/ Fred J. Gentile Director March 29, 1999
Fred J. Gentile
/S/ Harold S. Kaplan Director March 29, 1999
Harold S. Kaplan
/S/ Norman E. Woodworth Director March 29, 1999
Norman E. Woodworth
10
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
First Liberty Bank Corp.:
We consent to incorporation by reference in the Form 10-K of First Liberty Bank
Corp. of our report dated January 16, 1998, relating to the consolidated balance
sheet of Upper Valley Bancorp, Inc. and subsidiary as of December 31, 1997, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two year period ended
December 31, 1997, which report is incorporated by reference in the December 31,
1998 annual report on Form 10-K of First Liberty Bank Corp. and which report
appeared in the registration statement (No. 333-49391) on Form S-4 filed on
April 3, 1998.
/s/ Kronick, Kalada, Berdy & Co.
Kingston, PA
March 29, 1999
<PAGE>
Exhibit 99.1 - Selected portions of Annual Report to Shareholders
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Financial Highlights
(Dollars In Thousands, Except Share Data)
For the Year 1998 1997 1996
--------------- -------------- ---------
<S> <C> <C> <C>
Total interest income $42,365 $41,316 $39,939
Total interest expense 22,673 21,575 20,523
Net interest income 19,692 19,741 19,416
Provision for loan losses 540 600 833
Non-interest income 1,778 2,044 2,254
Non-interest expense 15,359 14,328 14,024
Income tax provision 1,570 1,737 1,743
Net income 4,001 5,120 5,070
Cash dividends paid 2,179 2,119 1,925
At Year End
Assets $615,370 $585,051 $576,696
Loans, gross 376,856 361,724 343,623
Allowance for loan losses 4,618 4,562 5,017
Securities 196,563 185,129 191,208
Deposits 496,600 484,802 487,584
Shareholders' equity 58,908 55,584 51,642
Share Data
Net income - basic $ 2.53 $ 3.25 $ 3.22
Net income - diluted 2.51 3.22 3.21
Cash dividends 1.40 1.40 1.25
Book value (1) 37.12 35.32 32.82
Number of shares outstanding, net (at year end) 1,587,137 1,574,065 1,573,680
Selected Ratio
Return on assets (net income divided by average total assets) 0.66% 0.88% 0.91%
Return on equity (net income divided by average equity) 7.06% 9.59% 10.18%
Common stock dividend payout rate (dividends declared divided
by net income) 54.46% 41.39% 37.97%
Equity to assets ratio (average equity divided by average total assets) 9.35% 9.21% 8.92%
Tier I Leverage Ratio 9.44% 9.33% 8.98%
Risk-Based Capital Ratio, Tier I 17.66% 15.81% 15.97%
Risk-Based Capital Ratio, Total 18.91% 17.06% 17.23%
<FN>
(1) Based on shareholders' equity and number of shares outstanding at year end.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Financial Review
Selected Financial Data
(Dollars In Thousands, Except Share Data)
For the Year 1998 1997 1996 1995 1994
-------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 42,365 $ 41,316 $ 39,939 $ 37,727 $ 33,232
Total interest expense 22,673 21,575 20,523 19,952 14,675
Net interest income 19,692 19,741 19,416 17,775 18,557
Provision for loan losses 540 600 833 1,365 1,845
Non-interest income 1,778 2,044 2,254 1,469 1,373
Non-interest expense 15,359 14,328 14,024 13,589 12,513
Income tax provision 1,570 1,737 1,743 869 1,366
Net income 4,001 5,120 5,070 3,421 4,206
Cash dividends paid 2,179 2,119 1,925 1,968 1,930
At Year End
Assets $ 615,370 $ 585,051 $ 576,696 $ 546,483 $ 507,389
Loans, gross 376,856 361,724 343,623 301,829 287,657
Allowance for loan losses 4,618 4,562 5,017 4,787 5,193
Securities 196,563 185,129 191,208 203,347 187,660
Deposits 496,600 484,802 487,584 492,788 457,599
Shareholders' equity 58,908 55,584 51,642 48,658 43,448
Share Data
Net Income - basic $ 2.53 $ 3.25 3.22 $ 2.17 2.67
Net Income - diluted 2.51 3.22 3.21 2.17 2.67
Cash dividends 1.40 1.40 1.25 1.15 1.05
Book value (1) 37.12 35.32 32.82 30.92 27.61
Number of shares outstanding, net 1,587,137 1,574,065 1,573,680 1,573,680 1,573,680
(at year end)
<FN>
(1) Based on shareholders' equity and number of shares outstanding at year
end.
</FN>
</TABLE>
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operation
Introduction and Business
The following discussion and analysis presents the significant changes in the
results of operations and financial condition for the periods shown. The
discussion should be read in conjunction with the consolidated financial
statements and notes included elsewhere in this report. Tabular information is
presented in thousands of dollars, except as indicated.
At December 31, 1998, First Liberty Bank Corp. (Company) owned all of the
outstanding common stock of its two bank subsidiaries, The First National Bank
of Jermyn (FNBJ) and NBO National Bank (NBO) (collectively, Banks). The Company
formed a non-bank subsidiary, First of Jermyn Realty Company, Inc. (Realty),
during 1990. Realty has been inactive since inception.
Recent Acquisition
On June 30, 1998, the Company consummated its acquisition of Upper Valley
Bancorp, Inc. (Upper Valley) the holding company of NBO. NBO is, as of December
31, 1998, a $263 million national-chartered bank with three branches in
Olyphant, Scranton, and Pittston, Pennsylvania. Upper Valley shareholders
received .689 shares of Company common stock for each Upper Valley share owned.
The transaction was accounted for as a pooling of interests and all prior
periods have been restated to reflect the acquisition. The total value of the
transaction was approximately $52.1 million based upon the Company's stock price
prior to finalization of the acquisition. As a result of this acquisition, the
Company recognized merger related expenses of $1,098,000 in the second quarter
of 1998.
The Company operated and managed FNBJ and NBO as separate subsidiaries and
segments until approximately the first quarter of 1999.
On February 16, 1999, the Company merged FNBJ and NBO under the name of "First
Liberty Bank & Trust." Concurrent with this merger, the Company changed its bank
charter from a national bank to a state-chartered commercial bank subject to
regulation by the Pennsylvania Department of Banking. The Bank operates a branch
bank system located in Lackawanna County, Pennsylvania. The Bank offers all
services normally provided by a community bank, including deposit, safekeeping,
loan functions, and trust services through its branch systems.
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.
Forward Looking Statements
Included in this annual report are 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 these financial statements. Management
has used "forward looking statements" to describe the future plans and
strategies including the expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans and
strategies is inherently uncertain. The Company's actual results could differ
materially from those management expectations. 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, changes in federal and state
regulation among others. These factors should be considered in evaluating the
"forward looking statements," and undue reliance should not be placed on such
statements.
3
<PAGE>
Results of Operations
Net income for 1998 was $4,001,000, a decrease of 21.86% from the prior year.
This decrease was primarily attributable to a $1,098,000 charge in the second
quarter of 1998 for merger-related costs of the Upper Valley acquisition. The
net income for 1997 was $5,120,000, an increase of 0.99% from 1996. The
following table (Table 1) presents the amount and percentage of increase
(decrease) for the major components of net income for the years under review.
<TABLE>
<CAPTION>
TABLE 1
INCREASE (DECREASE)
1998 vs. 1997 1997 vs. 1996
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Interest income $1,049 2.54% $1,377 3.45 %
Interest expense 1,098 5.09% 1,052 5.13 %
Net interest income (49) ( .25)% 325 1.67 %
Provision for loan losses (60) (10.00)% (233) (27.97)%
Net interest income after provision for loan losses 11 .06 % 558 3.00 %
Noninterest income (266) (13.01)% (210) (9.32)%
Noninterest expense 1,031 7.20 % 304 2.17 %
Income before Federal income tax provision (1,286) (18.75)% 44 .65 %
Federal income tax provision (167) (9.61)% (6) (.34)%
Net income $(1,119) (21.86)% $ 50 .99%
</TABLE>
4
<PAGE>
Net Interest Income
Table II illustrates average balances and the average tax-equivalent yield
earned by the Bank on its interest-earning assets and the average interest rate
associated with its interest-bearing liabilities for 1998, 1997, and 1996. Table
II exhibits the volume and yield/rate variances for interest-earning assets and
interest-bearing liabilities. <TABLE> <CAPTION>
TABLE II
AVERAGE BALANCES AND RATES
1998 1997 1996
Average Revenue/ Yield/ Average Revenue/Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans
Commercial, financial
and agriculture $ 107,387 $ 8,240 7.67% $ 96,831 $ 8,178 8.45% $ 85,546 $ 7,595 8.88%
Real estate - commercial
and residential
mortgage 191,988 15,589 8.12% 191,361 15,767 8.24% 181,996 15,189 8.35%
Installment - net 68,247 6,522 9.56% 62,418 5,606 8.98% 48,480 4,277 8.82%
Total loans (including fees) 367,622 30,351 8.26% 350,610 29,551 8.43% 316,022 27,061 8.56%
Securities:
Taxable 140,474 8,453 6.02% 152,307 9,465 6.22% 180,944 11,338 6.27%
Tax-exempt 46,456 3,574 7.69% 34,151 2,678 7.84% 24,735 1,940 7.84%
Total securities 186,930 12,027 6.43% 186,458 12,143 6.51% 205,679 13,278 6.46%
Federal funds sold 11,214 606 5.40% 12,964 718 5.54% 9,405 507 5.39%
Interest-bearing deposits
in banks 11,285 642 5.69% 290 16 5.52% -- --
Total interest-earning assets 577,051 $43,626 7.56% 550,322 $42,428 7.71% 531,106 $40,846 7.69%
Noninterest-earning assets 29,133 29,070 26,871
TOTAL ASSETS $606,184 $579,392 $557,977
Interest-bearing liabilities:
Deposits
Savings, Club, NOW,
and money market
accounts $ 149,019 $3,532 2.37% $161,590 $ 4,310 2.67% $162,481 $4,509 2.77%
Certificates of deposits 299,118 16,302 5.45% 275,296 14,984 5.44% 279,084 14,934 5.35%
Total interest-bearing deposits 448,137 19,834 4.43% 436,886 19,294 4.42% 441,565 19,443 4.40%
Federal funds purchased 30 1 3.33% 38 2 7.89% 449 22 5.35%
Borrowed funds 50,031 2,767 5.53% 38,309 2,201 5.75% 17,023 973 5.72%
Capitalized lease obligation 699 71 10.16% 779 78 10.0% 853 85 9.96%
Total interest-bearing liabilities 498,897 $22,673 4.55% 476,012 $21,575 4.53% 459,890 $20,523 4.46%
Noninterest bearing liabilities 50,619 50,008 48,306
Shareholders' equity 56,668 53,372 49,781
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $606,184 $579,392 $557,977
Net interest income $20,953 $20,853 $20,323
Interest rate spread 3.01% 3.18% 3.23%
Margin analysis:
Interest income/interest -
earning assets 7.56% 7.71% 7.69%
Interest expense/interest -
earning assets 3.93% 3.92% 3.86%
Net interest income/interest -
earning assets 3.63% 3.79% 3.83%
Tax equivalent adjustments:
Loans $46 $ 201 $ 247
Securities 1,215 911 660
Total $1,261 $ 1,112 $ 907
<FN>
1. Installment loans are stated net of unearned income. 2. Average loan balances
include non-accrual loans. 3. Average balances represent average daily balances.
4. Yields on securities available for sale were computed using historical
amortized cost.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TABLE III
VOLUME AND YIELD/RATE VARIANCES
1998 compared to 1997 1997 compared to 1996
Yield/ Yield/
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $1,434 $(634) $800 $2,961 $(471) $2,490
Securities
Taxable (736) (276) (1,012) (1,796) (77) (1,873)
Tax-exempt 964 (68) 896 739 (1) 738
Federal funds sold 97 (209) (112) 192 19 211
Interest-bearing deposits
in banks 607 19 626 16 -- 16
Total interest-earning assets 2,367 (1,169) 1,198 2,112 (530) 1,582
Interest expense:
Savings, Club, NOW, and
money market accounts (336) (442) (778) (25) (174) (199)
Certificates of deposit 1,295 23 1,318 (203) 253 50
Federal funds purchased (1) (0) (1) (20) -- (20)
Borrowed Funds 674 (108) 566 1,218 10 1,228
Capitalized lease obligation (8) 1 (7) (7) -- (7)
Total interest-bearing liabilities 1,624 (526) 1,098 963 89 1,052
Net interest income $743 $(643) $100 $1,149 $ (619) $ 530
<FN>
1. The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of change in each.
2. Balances of non-accrual loans and related income recognized have been
included for computation purposes.
3. Tax-exempt income has been converted to a tax-equivalent basis using an
incremental rate of 34% in each of the three years.
</FN>
</TABLE>
The increase in 1998 taxable equivalent interest income was driven by increased
average balances of loans and taxable securities, partially offset by decreases
in the yields on all earning asset categories, except interest-bearing deposits
in banks. The increase in 1997 taxable equivalent interest income as compared to
1996 was due to the same positive volume and negative rate relationship. The
1998 increase in interest expense was primarily due to increased balances in
certificates of deposit and borrowed funds, while the 1997 increase in interest
expense was primarily due to higher levels of borrowed funds.
As shown in Table II and III, 1998 taxable-equivalent net interest income
increased $100,000 (0.5%) compared to 1997. Interest income increased $1,198,000
and interest expense increased $1,098,000. The 1998 net interest margin was
3.01% (17 basis points below 1997). The decline in the net interest margin was a
result of competitive pressures causing yields/rates to decrease for total
interest-earning assets while remaining relatively constant for total
interest-bearing liabilities. Net interest income as a percentage of interest
income also fell in 1998 compared to 1997 due to increased competition in the
local retail banking market.
Taxable-equivalent net interest income for 1997 increased $530,000 (2.6%) over
1996. Interest income increased $1,582,000 and interest expense increased
$1,052,000. The 1997 net interest margin was 3.18% (6 basis points below 1996).
The decline in the net interest margin was a result of competitive pressures
causing yields/rates to increase for total interest-bearing liabilities.
6
<PAGE>
Allowance and Provision for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance is an amount that management believes will be
adequate to absorb known and inherent losses in the existing loan portfolio. See
Note 1 to the consolidated financial statements with regard to the Bank's policy
for its provision and allowance for loan losses.
The allowance for loan losses was $4,618,000 at December 31, 1998 as compared to
$4,562,000 at December 31, 1997, an increase of 1.2%. The allowance was 1.23% of
total loans (net of unearned discount and fees) at December 31, 1998 and 1.28%
at December 31, 1997. The provision for loan losses remained relatively
consistent at $540,000 and $600,000 in 1998 and 1997, respectively, both of
which were lower than the 1996 provision of $833,000.
A significant portion of the Bank's loans are collateralized by residential and
commercial real estate located in Northeastern Pennsylvania with a primary
concentration in Lackawanna County. The Bank's primary concentration of credit
risk is related to the real estate market in the aforementioned area. The
ultimate collectibility of most of the Bank's loan portfolio is greatly affected
by the economic conditions within Northeastern Pennsylvania. Management is not
aware of any other significant concentrations of credit risk within its loan
portfolio.
Table IV illustrates the changes in allowance for loan losses for the previous
five years including charge-offs, recoveries and percent of net charge-offs to
average loans outstanding during each period. Table V illustrates the allocation
of the allowance for loans for each period. These allocations are no more than
estimates and are subject to revision as conditions change.
<TABLE>
<CAPTION>
TABLE IV
CHANGES IN ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period $4,562 $5,017 $4,787 $5,193 $4,891
Charge-offs:
Domestic:
Commercial, financial and agricultural 313 315 330 347 509
Real estate commercial and residential
mortgage 256 821 366 1,584 1,341
Installment 208 171 69 59 50
Total $777 $1,307 $765 $1,990 $1,900
Recoveries:
Domestic:
Commercial, financial and agricultural 232 189 98 134 337
Real estate-commercial and residential
mortgage 28 35 48 63 10
Installment 33 28 16 22 10
Total $293 $252 $162 $219 $357
Net charge-offs 484 1,055 603 1,771 1,543
Additions charged to operations $540 $600 $833 $1,365 $1,845
Allowance for loan losses at end of period 4,618 4,562 5,017 4,787 5,193
Percentage of net charge-offs during the period
to average loans outstanding during the period .13% .30% .19% .58% .55%
Percentage of allowance for loan losses to total loans -
net of unearned income, period end 1.23% 1.28% 1.46% 1.59% 1.81%
Percentage of allowance for loan losses to total
nonperforming loans, period end 211% 243% 88% 119% 125%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TABLE V
ALLOCATION OF ALLOWANCES FOR LOAN LOSSES
December 31,
1998 1997 1996 1995 1994
% Of % Of % Of % Of % Of
Loans Loans Loans Loans Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agriculture $1,196 18% $ 934 18% $1,001 13% $1,322 14% $1,118 16%
Real estate - commercial
and residential
mortgage 1,284 64% 1,424 64% 1,898 70% 2,001 71% 2,710 71%
Installment 138 18% 242 18% 210 17% 158 15% 93 13%
Unallocated 2,000 -- 1,962 -- 1,908 -- 1,306 -- 1,272 --
Total $4,618 100% $4,562 100% $5,017 100% $4,787 100% $5,193 100%
</TABLE>
Allocations for commercial, financial and agricultural loans are determined by
reviewing significant loans. Allocations for real estate and consumer loans are
based on historical losses, delinquency trends and current economic conditions.
The unallocated portion is established by management to absorb inherent losses
in the portfolio. The allocated allowances for commercial real estate and
installment loans decreased in 1998 over 1997 based on the lower levels of
nonperforming loans in those categories. These allocations are no more than
estimates and are subject to revision as conditions change.
Noninterest Income
Noninterest income generally consists of service charges on deposits, fees for
customer services, fees from the Small Business Administration, gains on sales
of loans, and other infrequent types of transactions.
Service charges and fee income decreased by $108,000 for the year ended December
31, 1998, as compared to 1997 primarily as a result of the Bank recovering a
$372,000 Fidelity loss in 1997.
In 1997, the Company recognized $385,000 of benefits in noninterest income
relating to the restructuring of deferred compensation plans of Upper Valley.
Included in noninterst income in 1996 is a $600,000 gain on a legal settlement.
Also included in 1996 noninterest income was $330,000 of proceeds from a split
dollar life insurance policy.
8
<PAGE>
Noninterest Expense
The following table (Table VI) summarizes major components of non-interest
expense for the periods shown.
<TABLE>
<CAPTION>
1998 1997 1996
Percent To Total Percent To Total Percent To Total
Interest Earning Interest Earning Interest Earning
Amount Assets Amount Assets Amount Assets
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 7,080 1.21% $ 7,460 1.36% $ 7,249 1.36%
Net occupancy, furniture and
equipment expense 2,426 .41% 2,198 .40% 1,813 .34%
Data processing services 650 .11% 627 .11% 568 .11%
Foreclosure and other real estate
expenses 351 .06% 496 .09% 475 .09%
Merger related costs 1,098 .19% -- -- -- --
Fidelity loss/(recovery) -- -- (372) (.07)% 320 .06%
Other expense 3,754 .64% 3,919 .71% 3,599 .68%
Total $15,359 2.62% $14,328 2.60% $14,024 2.64%
</TABLE>
Salaries and benefits have increased from 1996 to 1997 due to salary adjustments
and increases in related benefits. Salaries and benefits decreased in 1998 as a
result of efficiencies achieved from the UVB merger. Total full-time equivalent
employees numbered 204 at December 31, 1998, 213 at December 31, 1997, and 216
at December 31, 1996. The level of full-time equivalent employees decreased in
1998 as compared to 1997 and 1996 as a result of efficiencies gained from the
merger.
Occupancy costs and furniture and equipment expense increased in 1998 primarily
as a result of the increased costs associated with a full year of occupancy of
the Daleville office. Merger-related expenses of $1,098,000 were charged to
income in the second quarter of 1998 as a result of the June 30, 1998 merger
with UVB. Other expense decreased in 1998 due primarily to decreases in
advertising partially offset by amortization of customer list intangible which
had been acquired in December 1997. During the first quarter of 1997 the Company
discovered certain irregularities involving an employee. Management accrued its
full estimate of the fidelity loss as of December 31, 1996 in noninterest
expense. In 1997, the amount of the loss was recovered (less a $50,000
deductible) under the Company's Fidelity Bond Insurance Policy.
Occupancy costs increased in 1996 primarily as a result of the increased costs
associated with a full year of occupancy of the Carbondale office. Other expense
increased in 1996 due to additional advertising, and legal and collection costs
as well as costs associated with real estate owned.
Income Tax Provision
Fluctuations in the 1998, 1997 and 1996 income tax provisions and effective tax
rates result, generally, from the changes in federal taxable income and in
tax-free income on securities and loans. The increase in the effective tax rate
from 25.3% for 1997 to 28.2% for 1998 is, in large part, attributable to
merger-related costs that were charged to earnings but are not deductible for
federal income tax purposes. The provision for income taxes includes federal,
state and local income taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets
and liabilities.
9
<PAGE>
The deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the periods in which those temporary
differences are expected to be recovered or settled.
Securities
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk and to
complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of deploying
excess funding not utilized for loan organizations. Generally, the Bank's
investment policy is more restrictive than applicable banking regulations allow
and, accordingly, the Bank has invested primarily in U.S. government and agency
securities, which qualify as liquid assets under applicable regulations, federal
funds, and U.S. government sponsored agency issued mortgage-backed securities.
The Bank's investment portfolio consists of those securities that are
categorized as held-to-maturity, available-for-sale or held for trading. The
Bank does not currently maintain a portfolio of securities categorized as held
for trading. At December 31, 1998, the available-for-sale securities portfolio
totaled $196,563,000, or 31.94% of assets.
The following table (Table VII) shows maturity data and related weighted-average
yields as of December 31, 1998 and carrying values as of December 31, 1998,
1997, and 1996. Yields on available for sale securities are computed using
historical amortized cost.
10
<PAGE>
<TABLE>
<CAPTION>
TABLE VII
SECURITIES PORTFOLIO
December 31, 1998
After one After five
One year through through After ten No stated
or less five years ten years years maturity Total
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale
U.S. Treasuries
Market value $ 19,236 $ 3,043 -- -- -- $ 22,279
Yield 5.90% 5.75% 5.88%
Municipal securities
Market value $ 491 $ 6,160 $ 5,224 $ 36,700 -- $ 48,575
Yield 5.72% 4.36% 5.16% 5.20% 5.10%
Mortgage-backed securities and
U.S. government agencies
Market value $ 2,577 $ 34,890 $ 6,256 $ 26,586 -- $ 70,309
Yield 5.51% 6.24% 6.21% 6.02% 6.16%
Collateralized mortgage obligations and
U.S. government agencies
Market value $ 6,475 $ 30,659 $ 10,323 $ 1,989 -- $ 49,446
Yield 6.29% 6.10% 6.11% 6.29% 6.05%
Other securities
Market value $ 250 -- -- $ 5,704 $ 5,954
Yield 6.73% 6.41% 6.43%
Total market value $ 34,483 $ 75,002 $ 21,803 $65,275 $5,704 $196,563
Weighted average yield (1) 5.95% 6.01% 5.91% 5.57% 6.41% 5.84%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Securities available for sale
U.S. Treasuries $ 22,279 $ 15,512 $ 85,071
Municipal securities 48,575 5,657 5,538
Mortgage-backed securities and
U.S. government agencies 70,309 37,819 17,989
Collateralized mortgage obligations and U.S.
government agencies 49,446 63,172 14,618
Other securities 5,954 1,605 531
Total $196,563 $123,765 $123,747
Investment securities held to maturity
U.S. Treasuries -- $27,180 $39,354
Municipal securities -- 30,891 24,506
Other -- 3,293 3,601
Total -- $61,364 $67,461
<FN>
(1.) Yields are presented on a taxable equivalent basis utilizing an effective
tax rule of 34% for all maturities.
</FN>
</TABLE>
11
<PAGE>
Loans
During 1998 net loans grew $15,265,000 to $371,297,000 at December 31, 1998. The
largest increase was in real estate loans, which increased $9,057,000 to
$235,608,000 at December 31, 1998, compared to $226,551,000 at December 31,
1997. The increase in the installment loan portfolio was primarily due to home
equity loans and, to a lesser degree, auto loans.
During 1997 net loans grew $18,573,000 to $356,032,000 at December 31, 1997. An
increase of $20,092,000 occurred in the commercial loan portfolio. The increase
in loan portfolios was primarily due to aggressive pricing strategies employed
by the Bank in conjunction with the Bank's larger advertising budget, which was
successful in attracting a variety of new loans.
The following table (Table VIII) shows consolidated loans at December 31, 1998,
1997, 1996, 1995, and 1994 (including non-accrual loans) and summarizes the
maturity data for loans-gross (net of non-accrual loans) as of December 31,
1998. <TABLE> <CAPTION>
TABLE VIII
LOANS
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $235,608 $226,551 $233,191 $205,907 $198,306
Commercial, financial and agricultural 67,659 64,822 44,730 41,505 44,772
Installment 67,323 64,321 58,452 45,879 37,434
Real estate - construction 6,266 6,030 7,250 8,538 7,145
Total loans - gross 376,856 361,724 343,623 301,829 287,657
Less: unearned income 941 1,130 1,147 1,336 1,606
Total gross loans, net of unearned income $375,915 $360,594 $342,476 $300,493 $286,051
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
After One
Year but
Within Within Over
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Real estate - commercial and residential mortgage
and construction $ 9,675 $18,248 $213,951 $241,874
Commercial, financial and agricultural 5,943 19,399 42,317 67,659
Installment 1,974 38,676 26,673 67,323
Total loans - gross $ 17,592 $76,323 $282,941 $376,856
Fixed rate 9,743 66,925 189,397 266,065
Variable rate 7,849 9,398 93,544 110,791
Total loans - gross $17,592 $76,323 $282,941 $376,856
</TABLE>
Management is not aware of any trends or uncertainties within its loan portfolio
which it reasonably expects will materially impact future operating results or
capital resources nor is management aware of any information which would cause
it to have serious doubts as to the ability of its performing borrowers to
comply with current loan repayment terms.
12
<PAGE>
Table IX summarizes the Bank's non-performing assets at December 31, 1998, 1997,
1996, 1995, and 1994.
<TABLE>
<CAPTION>
TABLE IX
NON-PERFORMING ASSETS
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $1,740 $1,607 $4,449 $3,622 $7,419
Loans past due 90 days or more and still accruing 445 290 713 578 208
Total non-performing loans 2,185 1,897 5,162 4,200 7,627
Real estate owned other than bank premises 479 953 817 1,423 1,512
Total $2,664 $2,850 $5,979 $5,623 $9,139
<FN>
(1.) See Note 5 to the consolidated financial statements concerning interest
income on non-accruing loans and Note 1 to the consolidated financial
statements - Loans caption - concerning the Bank's policy with regard to
accrual of interest.
</FN>
</TABLE>
<TABLE>
<CAPTION>
An analysis of non-accrual loans as of December 31, 1998, 1997, 1996, 1995, and
1994 is as follows:
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $1,377 $ 987 $3,006 $2,569 $5,824
Commercial 363 620 1,443 1,053 1,595
Total $1,740 $1,607 $4,449 $3,622 $7,419
</TABLE>
At December 31, 1998 and 1997, the Company had impaired loans totaling
approximately $979,000 and $966,000, respectively, all of which had a related
allowance for impairment. At December 31, 1998 and 1997, the allowance for
losses on impaired loans totaled $202,000 and $94,000, respectively.
Deposits
Table X summarizes the average deposits and rates paid on deposit categories of
average total deposits for the last three years.
<TABLE>
<CAPTION>
TABLE X
AVERAGE DEPOSITS
1998 1997 1996
Average Average Average Average Average Average
Deposits Rates Deposits Rates Deposits Rates
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Domestic:
NOW accounts $ 24,383 1.77% $ 26,999 1.21% $ 27,011 2.07%
Savings deposits 94,580 2.51% 95,347 2.59% 93,394 2.56%
Other time deposits 5,222 1.22% 17,394 4.75% 17,226 4.80%
Money market accounts 24,834 2.66% 21,850 2.25% 24,850 2.36%
Certificates of deposit 299,118 5.45% 275,296 5.44% 279,084 5.35%
Total interest bearing
Noninterest-bearing demand $ 50,422 $ 46,082 $ 44,228
Total $498,559 $482,968 $485,793
</TABLE>
The level of certificates of deposit increased in 1998 due to growth in the
Bank's newest branches in Daleville and Carbondale. The level of certificates of
deposit declined in 1997 as compared to 1996 primarily as the result of the loss
of one large commercial customer whose assets were liquidated through bankruptcy
in the first quarter of 1997.
13
<PAGE>
Table XI summarizes the maturity distribution of time deposits greater than
$100,000 at December 31, 1998 and 1997 (including open time deposits and savings
accounts).
<TABLE>
<CAPTION>
TABLE XI
MATURITY DISTRIBUTION OF TIME DEPOSITS GREATER THAN $100,000
December 31, 1998 December 31, 1997
<S> <C> <C>
Domestic:
Certificates of deposit:
Three months or less $17,909 $20,859
Over three months through twelve months 20,330 18,992
Over one year through three years 12,057 8,408
Over three years 1,836 1,728
Total Certificates of deposit $52,132 $49,987
</TABLE>
Capital Adequacy
A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
consists of shareholders' equity, which provides a basis for future growth and
expansion and also provides a buffer against unexpected losses. Shareholders'
equity increased $3,324,000 to $58,908,000 at December 31, 1998. It is
management's intention to continue paying a reasonable return on shareholders'
investment while retaining adequate earnings to allow for continued growth.
However, the Company's ability to pay dividends to shareholders is dependent on
its ability to receive dividend payments from the Bank (see note 15 to the
consolidated financial statements).
The Federal Reserve Board measures capital adequacy for bank holding companies
by using a risk-based capital framework and by monitoring compliance with
minimum leverage ratio guidelines. The minimum ratio of total risk-based capital
to risk-adjusted assets is 8% at December 31, 1998, of which 4% must be Tier 1
capital. The Company's total risk-based capital was 18.91% at December 31, 1998
and 17.06% at December 31,1997. The Company's Tier 1 risk-based capital ratio
was 17.66% at December 31, 1998, and 15.81% at December 31, 1997.
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 9.44% at December 31, 1998
and 9.33% at December 31, 1997.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as
other requirements, establishes five capital tiers: "well capitalized,"
"adequately capitalized," "under-capitalized," "significantly
under-capitalized," and "critically under-capitalized." FDICIA imposes
significant restrictions on the operations of a bank which is not at least
adequately capitalized. A depository institution's capital tier will depend upon
where its capital levels are in relation to various other capital measures which
include a risk-based capital measure, a leverage ratio capital measure and other
factors. Under regulation adopted, for an institution to be well capitalized it
must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, and a Tier 1 leverage ratio of at least 5%, and
not be subject to any specific capital order or directive.
14
<PAGE>
At December 31, 1998, the FNBJ and NBO are classified as well-capitalized with
total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios
of 16.48% and 17.25%, 15.25% and 16.00%, 9.06% and 9.77%, respectively.
Market Risk and Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investment, and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Company's exposure to
differential changes in interest rates between assets and liabilities is shown
in the Company's Maturity and Rate Sensitivity Analysis.
The following table (Table XII) summarizes the Bank's sensitivity to interest
rate fluctuations at December 31, 1998 for certain interest sensitivity periods.
<TABLE>
<CAPTION>
TABLE XII
MATURITY AND RATE SENSITIVITY ANALYSIS
Over three Over six After one year
Zero to months to months to but within After five
three months six months one year five years years Total
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 33,764 $20,376 $28,897 $ 75,836 $ 37,690 $196,563
Loans (net of unearned income) 86,303 19,104 28,725 165,264 76,519 375,915
Federal funds sold and interest
earning deposits 10,785 -- -- -- -- 10,785
Total $130,852 $39,480 $57,622 $241,100 $114,209 $583,263
Interest-bearing liabilities:
Now accounts 3,191 990 1,981 11,966 3,961 22,089
Money market accounts 6,159 3,260 6,520 13,040 -- 28,979
Savings (1) 13,602 4,222 8,443 50,573 16,886 93,726
Time 87,132 62,519 57,374 86,880 607 294,512
FHLB advances and other
other borrowed money 5,027 27 5,055 35,439 10,112 55,660
Total $115,111 $71,018 $79,373 $197,898 $31,566 $494,966
Interest rate sensitivity gap 15,741 (31,538) (21,751) 43,202 82,643 88,297
Cumulative interest rate
sensitivity gap 15,741 (15,797) (37,548) 5,654 88,297 --
Cumulative interest rate
sensitivity ratio (2) 2.6% (2.6)% (6.1)% (0.9)% 14.3%
<FN>
1. The amount shown as repricing within 0 to 3 months is that portion which,
based upon average balances, is considered sensitive to changes in interest
rates. The Bank's historical experience has been that total savings account
balances exhibit minimal movement with changes in interest rates.
Accordingly, a percentage of the Bank's savings account balances are not as
rate sensitive and are classified in the "After five years" category.
2. Represents the cumulative interest rate sensitivity gap as a percentage of
total assets
</FN>
</TABLE>
15
<PAGE>
As shown above, the Bank has a negative gap (interest-sensitive assets are less
than interest-sensitive liabilities) within the next year, which generally
indicates that an increase in rates may lead to a decrease in net interest
income and a decrease in rates may lead to an increase in net interest income.
Although the Bank is substantially liability sensitive within the next year,
management believes that customer behavior patterns and product pricing allow
the Bank to reduce interest rate risk to acceptable levels.
In addition to gap management, the Company also uses simulation analysis to help
monitor and manage interest rate risk. In this analysis the Company examines the
result of a 100, 200, and 300 basis point change in market interest rates and
the effect on net interest income. It is assumed that the change is
instantaneous and that all rates move in a parallel manner. In addition, it is
assumed that rates on core deposit products such as NOWs, savings accounts, and
the MMDA accounts will be adjusted by 50% of the assumed rate change.
Assumptions are also made concerning prepayment speeds on mortgage loans and
mortgage securities. The results of this rate shock are a useful tool to assist
the Company in assessing interest rate risk inherent in their balance sheet.
Below are the results of this rate shock analysis as of December 31, 1998 and
1997.
Change in Rates Net Interest Income Change (After tax, in thousands)
December 31, 1998 December 31, 1997
+300 (1,406) (1,711)
+200 (932) (1,145)
+100 (428) (575)
-100 252 551
-200 425 999
-300 617 1,418
Accounting Developments
In September 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company has
included this new reporting information in this annual report as required. There
was no impact on earnings, financial condition, or equity.
In September 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 established standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company has included the required disclosures in this annual report.
There was no impact on earnings, financial condition, or equity.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits. This statement revises employers'
disclosures about pension and other postretrement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when SFAS No. 87, Employer's Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, were issued. This
statement is effective for fiscal years beginning after December 15, 1997 and
has been adopted by the Company in this annual report. This statement requires
changes in disclosures and does not effect the results of operations, financial
condition, or shareholders' equity of the Corporation.
16
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of certain exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment; (b) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (c) a hedge of certain
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 adopted SFAS No. 133 in its fourth quarter of 1998, including its
provision for the potential reclassification of investments, resulting in a
$60.3 million transfer of securities from held-to-maturity to available-for-sale
and an increase of $725,000 of unrealized gains, net of taxes, on securities
available for sale. The adoption of this statement did not affect operating
results of the Company.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify any retained mortgage-backed securities based on the
ability and intent to sell or hold those investments, except that a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization process.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998 with earlier adoption permitted. This statement provides a
one-time opportunity for an enterprise to reclassify, based on the ability and
intent on the date of adoption of this statement, mortgage-backed securities and
other beneficial interest retained after securitization of mortgage loans held
for sale from the trading category, except for those with commitments in place.
The Company has not yet determined the impact, if any, of this statement on
earnings, financial condition or equity.
The following section contains forward-looking statements that involve risks and
uncertainties. The actual impact on the Company of the Year 2000 issue could
materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
Year 2000 Issues
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a data 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 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 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.
17
<PAGE>
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 solve 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.
As part of this plan, the Company converted FNBJ, during the first quarter of
1999, to the same mission critical customer applications 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 the Year 2000 driven expenditures in 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 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.
Risks 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 federal banking regulators are closely monitoring the progress
of the Bank'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 modifications and testing plans and other factors.
18
<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 is currently under development with a
target completion date of June 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.
Liquidity
Liquidity involves the Company's ability to raise funds to support asset growth,
meet deposit withdrawal and other borrowing needs, maintain reserve requirements
and otherwise operate the Company on an ongoing basis. To adjust for the effects
of a changing interest rate environment and deposit structure, the Company's
management monitors its liquidity requirements through its asset/liability
management program. This program, along with other management analysis, enables
the bank to meet its cash flow requirements and adapt to the changing needs of
individual customers and the requirements of regulatory agencies.
Among the sources of asset liquidity are cash and due from banks, Federal Funds
sold, securities available for sale, mortgage loans available for sale, and
funds received from the repayment of loans and the maturing of investments. The
total carrying value of cash and due from banks, Federal Funds sold, securities
available for sale, and mortgage-backed securities available for sale, with
maturities of less than one year was $60,111,000 at December 31, 1998. In
addition to these sources of liquidity and loan repayments, the Company has the
ability to secure borrowings collateralized by the securities portfolio. At
December 31, 1998 the Company had a maximum borrowing capacity available to it
of approximately $268 million from the Federal Home Loan Bank of Pittsburgh.
Through the use of these and other sources, management believes the Company has
adequate liquidity in both the short-term and the long-term to carry out the
Company's growth and profitability strategies. The Company's ability to pay
dividends depends primarily on the ability of the Bank to pay dividends to the
Company. Note 15 of the consolidated financial statements provides information
as to the limitations on dividend and other funds transfers from the Company's
subsidiary. Such limitations are not expected to adversely impact the ability of
the Company to meet its future dividend and other cash obligations.
19
<PAGE>
Quarterly Financial Data
A comparison of quarterly financial information for 1998 and 1997 is provided in
the following table.
<TABLE>
<CAPTION>
1998
Dec. 31 Sept.30 June 30 March 31
<S> <C> <C> <C> <C>
Quarter Ended
Interest income $10,540 $10,587 $10,664 $10,574
Interest expense 5,668 5,696 5,693 5,616
Net interest income 4,872 4,891 4,971 4,958
Provision for loan losses 135 135 135 135
Net income 1,125 1,238 239 1,399
Earnings per share- basic .71 .78 .15 .89
- diluted .70 .78 .15 .88
1997
Dec. 31 Sept. 30 June 30 March 31
Quarter Ended
Interest income $10,441 $10,333 $10,405 $10,137
Interest expense 5,557 5,414 5,307 5,297
Net interest income 4,884 4,919 5,098 4,840
Provision for loan losses 105 105 195 195
Net income 999 1,300 1,580 1,241
Earnings per share - basic .63 .83 1.00 .79
- diluted .63 .82 1.00 .77
</TABLE>
Fourth Quarter Results - 1998 versus 1997
Net income for the fourth quarter of 1998 increased $126,000 from the fourth
quarter of 1997. The primary reasons for the increase in net income were
decreases in salaries and benefits and other non-interest expense in 1998
relating to efficiencies gained from the merger.
Market for First Liberty Bank Corp. Common Stock
The stock of First Liberty Bank Corp. is not listed or traded on a recognized
securities exchange and is inactively traded. Range of sale prices is gained
when available from purchaser or seller at time of transfer for less of 100
shares or more. Quarterly highs and lows are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Quarter
First $62.25 $61.50 $45.50 $43.25 $38.50 $34.00
Second $74.50 $62.25 $49.00 $44.25 $42.25 $38.75
Third $77.00 $73.00 $50.00 $46.00 $43.00 $41.00
Fourth $76.00 $73.25 $62.00 $50.00 $44.25 $43.00
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Consolidated Balance Sheets
(In Thousands of Dollars, Except Per Share Information)
December 31
------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Cash and due from banks $ 20,628 $ 13,419
Federal funds sold 5,000 7,970
Securities available for sale 196,563 123,765
Investment securities (market value 1997 - $62,583) -- 61,364
Loans, gross 376,856 361,724
Less:
Unearned income (941) (1,130)
Allowance for loan losses (4,618) (4,562)
----------------- -----------------
Loans, net 371,297 356,032
----------------- -----------------
Accrued interest receivable 3,914 4,244
Bank premises, leasehold improvements
and furniture and equipment-- net 10,307 9,134
Real estate owned 479 953
Other assets 7,182 8,170
----------------- -----------------
Total assets $ 615,370 $ 585,051
================= =================
Liabilities
Deposits:
Noninterest-bearing demand $ 55,272 $ 48,628
Interest-bearing 441,328 436,174
----------------- -----------------
Total deposits 496,600 484,802
----------------- -----------------
Other borrowed money 55,660 40,744
Accrued interest payable 2,218 2,287
Other liabilities 1,984 1,634
----------------- -----------------
Total liabilities $ 556,462 $ 529,467
-------------------------------------
Shareholders' Equity
Common stock, $1.25 par value; authorized,
2,500,000 shares; issued, 1,602,342 and
1,589,270 shares, respectively $ 2,003 $ 1,987
Surplus 5,905 5,347
Retained earnings 50,435 48,613
Accumulated other comprehensive income 761 (167)
Less: Treasury stock-- at cost (15,205 shares) (196) (196)
----------------- -----------------
Total shareholders' equity 58,908 55,584
----------------- -----------------
Total liabilities and shareholders' equity $ 615,370 $ 585,051
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Consolidated Statements of Operation
(In Thousands of Dollars, Except Per Share Information)
For the Year Ended December 31
-------------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $30,305 $ 29,350 $ 26,814
Interest on interest-bearing deposits 642 16 --
Interest and dividends on securities:
Taxable 8,453 9,465 11,338
Exempt from Federal Taxes 2,359 1,767 1,280
Interest on Federal funds sold 606 718 507
----------------------------------------------
Total interest income 42,365 41,316 39,939
----------------------------------------------
Interest expense:
Deposits 19,834 19,294 19,443
Federal funds purchased 1 2 22
Capitalized lease obligation and borrowed funds 2,838 2,279 1,058
----------------------------------------------
Total interest expense 22,673 21,575 20,523
----------------------------------------------
Net interest income 19,692 19,741 19,416
Provision for loan losses 540 600 833
----------------------------------------------
Net interest income after provision for loan losses 19,152 19,141 18,583
Non-interest income:
Service charges and fees 699 807 904
Gain/loss on sale of securities 47 (191) (23)
Restructing of deferred compensation plans -- 385 --
Insurance policy proceeds -- -- 330
Litigation recovery -- -- 600
Trust 496 402 317
Other 536 641 126
----------------------------------------------
Total noninterest income 1,778 2,044 2,254
Non-interest expense:
Salaries and benefits 7,080 7,460 7,249
Net occupancy and furniture/equipment expenses 2,426 2,198 1,813
Data processing services 650 627 568
Foreclosures and other real estate expense 351 496 475
Merger related costs 1,098 -- --
Fidelity (recovery) loss -- (372) 320
Other expense 3,754 3,919 3,599
----------------------------------------------
Total non-interest expense 15,359 14,328 14,024
----------------------------------------------
Income before income tax provision 5,571 6,857 6,813
Income tax provision 1,570 1,737 1,743
----------------------------------------------
Net income $ 4,001 $ 5,120 $ 5,070
==============================================
Net income 4,001 5,120 5,070
Other comprehensive income, net of tax
Unrealized gain on securities
Unrealized holding gains arising during period 975 736 (184)
Less: Reclassification adjustment for gains (losses)
included in net income 47 (191) (23)
----------------------------------------------
Comprehensive income $ 4,929 $ 6,047 4,909
==============================================
Earnings per share (based on net income):
Basic 2.53 3.25 3.22
Diluted 2.51 3.22 3.21
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands of Dollars, Except Per Share and Par Value Amounts)
Common Accumulated
stock other
par value Retained comprehensive Treasury
$1.25 Surplus earnings income stock Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,986 5,334 42,467 (933) (196) 48,658
Net income 5,070 5,070
Cash dividends ($1.25 per share) (1,925) (1,925)
Net unrealized losses on
securities available for sale, net of tax (161) (161)
------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1,986 5,334 45,612 (1,094) (196) 51,642
Net income -- -- 5,120 5,120
Cash dividends ($1.40 per share) (2,119) (2,119)
Stock options exercised 1 13 14
Net unrealized gains on
securities available for sale, net of tax -- 927 927
------------------------------------------------------------------------------
Balance, December 31, 1997 $ 1,987 5,347 48,613 (167) (196) 55,584
Net income 4,001 4,001
Cash dividends ($1.40 per share) (2,179) (2,179)
Stock options exercised 16 558 574
Net unrealized gains on
securities available for sale, net of tax 928 928
------------------------------------------------------------------------------
Balance, December 31, 1998 $ 2,003 5,905 50,435 761 (196) 58,908
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
FIRST LIBERTY BANK CORP.
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
For the Year Ended December 31
----------------------------------------------
1998 1997 1996
------------- ----------- -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,001 $ 5,120 $ 5,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 540 600 833
Depreciation, accretion and amortization 1,234 1,311 1,126
Deferred income taxes (255) 308 59
Gain on sales of loans - net -- 171 --
(Gain) loss on sale of securities available for sale (47) 191 23
Loss on disposition of real estate 266 145 282
Decrease (increase) in interest receivable and other assets 1,083 (355) (3,151)
(Decrease) increase in interest payable and other liabilities 281 (619) 483
----------------------------------------
Net cash provided by operating activities $ 7,103 $ 6,872 $ 4,725
----------------------------------------
Investing activities:
Maturities and principal repayments of securities available for sale $ 150,905 $ 27,301 $ 9,894
Maturities of investment securities -- 12,354 17,085
Purchases of securities available for sale (153,532) (67,896) (47,090)
Purchases of investment securities (18,308) (6,795) (8,729)
Proceeds from sale of securities available for sale 10,095 41,727 40,134
Net increase in loans (15,932) (26,510) (43,407)
Proceeds from sale of loans -- 6,401 --
Purchases of bank premises, leasehold improvements
and furniture and equipment - net (2,047) (609) (1,012)
Sales of assets acquired through foreclosure, net 846 765 1,436
----------------------------------------
Net cash used in investing activities $ (27,973) $ (13,262) $ (31,689)
----------------------------------------
Financing activities:
Net increase in noninterest-bearing demand deposits
and interest-bearing deposits $ 11,798 $ (2,782) $ (5,204)
Proceeds of stock issued 574 14 --
Proceeds from Federal funds purchased/borrowed funds -- 20,000 32,000
Repayment of Federal funds purchased/borrowed funds 5,000 (12,000) --
Principal payments on capitalized lease obligation 9,916 (77) (70)
Dividends paid (2,179) (2,119) (1,925)
----------------------------------------
Net cash provided by financing activities $ 25,109 $ 3,036 $ 24,801
----------------------------------------
Increase (decrease) in cash and cash equivalents 4,239 (3,354) (2,163)
Cash and cash equivalents at beginning of year 21,389 24,743 26,906
----------------------------------------
Cash and cash equivalents at end of year $ 25,628 $ 21,389 $ 24,743
========================================
Cash paid during the year:
Interest $ 22,742 21,479 20,325
========================================
Federal income taxes $ 1,442 1,577 1,741
========================================
Non cash transactions:
Change in unrealized (gains) losses on securities available for sale,
net of tax 928 927 (161)
========================================
Transfers of loans to real estate owned other than bank premises 378 1,027 1,112
========================================
Transfer of securities from investment securities to available for sale 60,295 -- --
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
1. Summary of Significant Accounting Policies
First Liberty Bank Corp. (First Liberty) is a bank holding company whose
principal subsidiaries as of December 31, 1998, are The First National
Bank of Jermyn (FNBJ) and NBO National Bank (NBO) (collectively, the
Banks) which operate branch bank systems located in Lackawanna County,
Pennsylvania. The Banks provide a range of banking services typically
associated with a community bank, the most important of which are the
taking of deposits and granting of loans to both individuals and
corporations within its market area. The Banks face competition in its
market from other depository institutions, some of which are
substantially larger than the Banks and from other financial services
companies, including mutual funds, mortgage companies, finance companies,
insurance companies, and others.
(a) Recent Acquisition
On June 30, 1998, First Liberty consummated its acquisition of
Upper Valley Bancorp, Inc. (Upper Valley) the holding company of
NBO. As of December 31, 1998, NBO is a $263 million
national-chartered bank with three branches in Olyphant, Scranton,
and Pittston, Pennsylvania. Upper Valley shareholders received
.689 shares of First Liberty common stock for each Upper Valley
share owned. The transaction was accounted for as a pooling of
interests and all prior periods have been restated to reflect the
acquisition. The total value of the transaction was approximately
$52.1 million based upon First Liberty's stock price prior to
finalization of the acquisition. This resulted in the issuance of
approximately 694,000 shares of First Liberty stock. The
transaction was tax-free to the shareholders for federal income
tax purposes. In connection with the acquisition, First Liberty
recognized $1,098,000 in merger-related costs in the second
quarter of 1998.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
------ ----
<S> <C> <C>
Net interest income:
FNBJ $11,312 $11,321
NBO 8,429 8,095
--------- -------
Combined 19,741 19,416
======== ======
Net income:
FNBJ 3,483 3,504
NBO 1,637 1,566
-------- -------
Combined 5,120 5,070
======== =======
As of December 31,
1997 1996
------ ----
Total assets:
FNBJ 325,737 321,563
NBO 259,314 255,133
------- ----------
Combined 585,051 576,696
======= ==========
Total deposits:
FNBJ 292,110 290,115
NBO 192,692 197,469
------- ----------
Combined 484,802 487,584
======= ==========
Total shareholders' equity:
FNBJ 31,277 28,674
NBO 24,307 22,968
--------- ---------
Combined $55,584 $ 51,642
====== =========
</TABLE>
25
<PAGE>
First Liberty operated and managed FNBJ and NBO as separate
subsidiaries and segments until approximately the first quarter of
1999 when it merged the entities under the name "First Liberty
Bank & Trust."
(b) Name Change
On June 30, 1998, concurrent with its acquisition of Upper Valley,
the bank holding company changed its name from The First Jermyn
Corp. to First Liberty Bank Corp.
(c) Principles of Consolidation and Presentation
The accompanying consolidated financial statements of First
Liberty Bank Corp. and subsidiaries (Company) include the accounts
of First Liberty Bank Corp., The First National Bank of Jermyn,
NBO National Bank, and First of Jermyn Realty Company, Inc.
(inactive since inception). All significant intercompany balances
and transactions have been eliminated in consolidation. Prior
period amounts are reclassified when necessary to conform with the
current year's presentation.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and revenues and expenses. The material
estimates that are particularly susceptible to significant change
in the near-term relates to the determination of the allowance for
loan losses, the valuation of real estate owned and deferred tax
assets.
(d) Risks and Uncertainties
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are
three main components of economic risk: interest rate risk, credit
risk, and market risk. The Company is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or
reprice at different speeds, or on different bases from its
interest-earning assets. The Company's primary credit risk is the
risk of default on the Company's loan portfolio that results from
the borrowers inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of
collateral underlying loans, the valuation of real estate held by
the Company, the valuation of loans held for sale, investment
securities, and mortgage-related securities available for sale.
The Company and the Banks are subject to the regulations of
various government agencies. These regulations can and do change
significantly from period to period. The Banks also undergo
periodic examinations by the regulatory agencies which may subject
them to further changes with respect to asset valuations, amounts
of required loss allowances, and operating restrictions resulting
from the regulators' judgments based on information available to
them at the time of their examinations.
In addition, the Company has an ongoing program designed to ensure
that its operational and financial systems will not be adversely
affected by year 2000 software failures due to processing errors
arising from calculations using the year 2000 date. While the
Company believes it is acting prudently to assure year 2000
compliance, it is to some extent dependent upon vendor
cooperation. The Company is requiring its computer systems and
software vendors to represent that the products provided are or
will be year 2000 compliant and has planned a program of testing
for compliance. It is recognized that any year 2000 compliance
failures, either internal or on the part of the Company's
customers, could result in additional expense or loss to the
Company.
26
<PAGE>
(e) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash due from banks and federal funds sold. Generally,
federal funds are sold for periods ranging up to thirty days.
(f) Securities
Securities include mortgage-backed securities, corporate bonds,
and certain equity securities.
Investments in securities that have a readily determinable fair
value and investments in debt securities are classified into
categories and accounted for as follows:
o Debt securities that the Company positively intends to hold to
maturity are classified as "held-to-maturity" and are reported
at amortized cost.
o Debt and equity securities purchased with the intention of
selling them in the near future are classified as "trading
securities" and are reported at fair value, with unrealized
gains and losses included in net income.
o Debt and equity securities not classified in either of the
above categories are classified as "available-for-sale
securities" and are reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of
tax, as a separate component of shareholders' equity.
There were no securities classified as "trading" during 1998, 1997
or 1996.
Premiums and discounts on debt securities are recognized in
interest income using the interest method over the period to
maturity. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their
cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs
are included in earnings as realized losses. The specific
identification method is used to determine realized gains and
losses on sales of securities available for sale.
(g) Loans
Loans are stated net of unearned income (deferred fees and costs
and unearned discount). Loan interest income is accrued using
various methods which approximate a constant yield. Loan
origination and commitment fees and direct loan origination costs
are deferred and recognized over the life of the related loans.
Nonaccrual loans are those on which the accrual of interest has
ceased. Loans are placed on nonaccrual status if, in the opinion
of management, collection is doubtful, or when principal or
interest is past due 90 days or more, unless collateral is
sufficient to cover principal and interest and the loan is in the
process of collection. Interest accrued, but not collected at the
date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of
net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to
the outstanding principal or recorded as interest income,
depending on management's assessment of ultimate collectibility of
principal and interest. Loans are returned to an accrual status
when the borrower's ability to make periodic principal and
interest payments has returned to normal (i.e. brought current
with respect to principal or interest or restructured) and the
paying capacity of the borrower and/or the underlying collateral
is deemed sufficient to cover contractual principal and interest.
The Company's lending activities are concentrated in Pennsylvania.
The largest concentration of the Company's loan portfolio is
located in Northeastern Pennsylvania. The ability of the Company's
borrowers to repay amounts owed is dependent on several factors,
including the economic conditions in the borrower's geographic
region and the borrower's financial condition.
27
<PAGE>
Loans are deemed to be "impaired" if in management's assessment of
the relevant facts and circumstances, it is probable that the
Company will be unable to collect all proceeds due according to
the contractual terms of the loan agreement.
The Company's policy for the recognition of interest income on
impaired loans is the same as for nonaccrual loans discussed
previously. Impaired loans are charged-off when the Company
determines that foreclosure is probable and the fair value of the
collateral is less than the recorded investment of the impaired
loan.
(h) Allowance for Loan Losses
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the
collectibility of the principal is in doubt. The allowance is an
amount that management believes will be adequate to absorb
inherent losses on existing loans, based on periodic evaluations
of the loan portfolio by management. These evaluations take into
consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific
problem loans, current economic conditions that may affect the
borrowers' ability to pay, and other relevant matters.
While management utilizes the latest available information to
determine the potential for losses on loans, future additions to
the allowance may be necessary based on changes in economic
conditions as well as adverse changes in the financial condition
of borrowers. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the allowance. Such agencies may require the Company to recognize
additions to the allowance based on their judgments of information
available to them at the time of their examination.
(i) Loans Held for Sale
Mortgage loans originated and intended for sale are carried at the
lower of cost or estimated fair value.
(j) Bank Premises, Leasehold Improvements and Furniture and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Costs of major replacements,
improvements, and additions are capitalized. Normal maintenance
costs are expensed as incurred. Depreciation expense is computed
on the straight-line basis over the estimated useful lives of the
assets (ranging from 5 to 40 years), or for leasehold
improvements, over the life of the related lease if less than the
estimated useful life. Accelerated methods are used in
depreciating certain assets for income tax purposes.
(k) Real Estate Owned
Real estate owned is recorded at the lower of the recorded
investment in the loan or fair value less estimated selling costs.
Costs subsequently incurred to improve the assets are included in
the carrying value provided that the resultant carrying value does
not exceed fair value less estimated disposal costs. Costs
relating to holding the assets are charged to expense in the
current period.
28
<PAGE>
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the periods in which those temporary differences are
expected to be recovered or settled.
FirstLiberty Bank Corp. and its subsidiaries file a consolidated
Federal income tax return and the amount of income tax
expense or benefit for each subsidiary is computed and
allocated on a separate return basis.
(m) Customer List
An intangible asset representing a customer list purchased is
stated at cost less accumulated amortization and is included in
other assets. Amortization expense is computed on the
straight-line basis over the estimated useful life of the asset
(seven years).
(n) Retirement Plans
The First National Bank of Jermyn and NBO National Bank have
retirement plans that cover substantially all employees. The
provisions of SFAS No. 87, Employers' Accounting for Pensions, are
utilized to calculate net pension cost.
(o) Earnings per Common Share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 4,001 $ 5,120 $ 5,070
=========== =========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average shares 1,579,640 1,573,837 1,573,680
Effect of dilutive securities:
Employee stock options 14,998 16,515 5,879
----------- ----------- -----------
Denominator for dilutive earnings per
share-adjusted weighted average
shares and assumed exercise 1,594,638 1,590,352 1,579,559
========= ========= =========
Basic earnings per share $ 2.53 $ 3.25$ 3.22
============= ============= =============
Diluted earnings per share $ 2.51 $ 3.22$ 3.21
============= ============= =============
</TABLE>
29
<PAGE>
2. Segment Reporting
First Liberty Bank Corp. has two reportable segments: The First National
Bank of Jermyn and NBO National Bank. Both segments provide deposit and
loan services to customers. FNBJ operates a branch bank network with six
full-service banking offices and one loan production office. NBO operates
a branch bank network with three full-service banking offices.
Additionally, NBO offers trust services at its Scranton office. Both
segments operate in Northeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations
before income taxes not including nonrecurring gains and losses. There
are no material intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
banks. NBO was acquired by the Company on June 30, 1998. The two segments
will be managed separately until approximately February 1999, when
management intends to integrate the two segments into one new segment to
be called First Liberty Bank & Trust.
The following table highlights income statement and balance sheet
information for each of the banks at or for the years ended December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
FNBJ NBO Total FNBJ NBO Total
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 23,739 $ 18,626 $ 42,365 $ 22,600 $ 18,716 $ 41,316
Interest expense 12,193 10,480 22,673 11,288 10,287 21,575
Net interest income 11,546 8,146 19,692 11,312 8,429 19,741
Total net income 2,251 1,750 4,001 3,483 1,637 5,120
Total assets 351,962 263,408 615,370 325,737 259,314 585,051
Total deposits 316,154 180,446 496,600 292,110 192,692 484,802
Total loans 223,671 153,185 376,856 204,464 157,260 361,724
</TABLE>
<TABLE>
<CAPTION>
1996
FNBJ NBO Total
<S> <C> <C> <C>
Interest income $ 22,722 $ 17,217 $ 39,939
Interest expense 11,401 9,122 20,523
Net interest income 11,321 8,095 19,416
Total net income 3,504 1,566 5,070
Total asset 321,563 255,133 576,696
Total deposits 290,115 197,469 487,584
Total loans 197,598 146,025 343,623
</TABLE>
3. Restrictions on Cash and Due from Banks
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The average
amounts of those reserve balances approximated $980,000 and $952,000 in
1998 and 1997, respectively.
30
<PAGE>
4. Securities
The amortized cost and fair value of securities is shown below (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
December 31, 1998
U.S. Treasuries $ 22,105 $ 174 $ -- $ 22,279
Municipal securities 47,435 1,167 (27) 48,575
Mortgage-backed securities and U.S.
government agencies 70,364 164 (219) 70,309
Collateralized mortgage obligations and
U.S. government agencies 49,554 166 (274) 49,446
Marketable equity 5,704 -- -- 5,704
Corporate obligations 250 -- -- 250
----- -- --- ------
$195,412 $1,671 $(520) $196,563
======= ===== ==== =======
Securities available for sale:
December 31, 1997
U.S. Treasuries $ 15,474 $ 42 $ (4) $ 15,512
Municipal securities 5,658 5 (6) 5,657
Mortgage-backed securities and U.S. 37,544 309 (34) 37,819
Government agencies
Collateralized mortgage obligations and
U.S. government agencies 63,444 253 (525) 63,172
Marketable equity 1,287 -- -- 1,287
Corporate obligations 319 -- (1) 318
--- -- --- ---
$123,726 $609 $570 $123,765
======= === === =======
Investment securities held
to maturity:
December 31, 1997
U.S. Treasuries $27,180 $ 408 $(17) $27,571
Municipal securities 30,891 828 -- 31,719
Corporate obligations 3,293 -- -- 3,293
----- ------ --- -------
$61,364 $1,236 $(17) $62,583
====== ===== === ======
</TABLE>
Proceeds from sales of securities available for sale during the year
ended December 31, 1998 were $10,095,000, resulting in gross realized
gains of $192,000 and gross related losses of $145,000. Proceeds from
sales of securities available for sale during the year ended December 31,
1997 were $41,727,000, resulting in gross realized gains of $72,000 and
gross realized losses of $263,000. Proceeds from sales of securities
available for sale during the year ended December 31, 1996 were
$40,134,000, resulting in gross realized gains of $0 and gross related
losses of $23,000.
The amortized cost and fair value of securities at December 31, 1998 by
contractual maturity, are shown below (in thousands). Expected maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
Securities
Available-for-sale
Amortized
Cost Fair Value
Within one year $28,636 $28,779
After one year but
within five years 74,916 75,002
After five years but
within ten years 21,749 21,803
After ten years 64,407 65,275
Marketable equity securities 5,704 5,704
--------- ---------
Total $195,412 $196,563
======== ========
Weighted average yield 5.85% 5.84%
31
<PAGE>
4. Continued
At December 31, 1998 and 1997, securities with an amortized cost of
approximately $22,035,000 and $26,924,000 (fair value of approximately
$22,183,000 and $26,937,000), respectively, were pledged to secure public
deposits as required or permitted by law.
Accrued interest receivable on securities amounted to $2,051,000 and
$2,362,000 at December 31, 1998 and 1997, respectively.
On October 1, 1998, the Banks transferred certain held-to-maturity
securities to the available-for-sale investment portfolio. The amortized
cost of the transferred securities was approximately $60,295,000 with an
unrealized gain net of taxes of approximately $725,000. This transfer was
in accordance with a special reassessment provision contained within
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was adopted by the
Company as of October 1, 1998. The Banks did not sell any of the
transferred securities, during the fourth quarter of 1998.
The unamortized premiums on mortgage-related securities amounted to
$497,000 and $460,000 as of December 31, 1998 and 1997, respectively. The
unearned discount on mortgage-related securities amounted to $44,000 and
$61,000 as of December 31, 1998 and 1997, respectively.
5. Loans and Real Estate Owned Other than Bank Premises
The following is a summary of the Company's loan portfolio on
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate - commercial and residential mortgage $235,608 $226,551
Commercial, financial, and agricultural 67,659 64,822
Installment loans 67,323 64,321
Real estate - construction 6,266 6,030
---------- ----------
Total loans - gross $376,856 $361,724
Less unearned income 941 1,130
Allowance for loan losses 4,618 4,562
----------- -----------
Net loans $371,297 $356,032
======= =======
</TABLE>
Accrued interest receivable on loans amounted to $1,863,000 and
$1,882,000 at December 31, 1998 and 1997, respectively.
A significant portion of the Company's loans are collateralized by
residential and commercial real estate located in Northeastern
Pennsylvania with a primary concentration in Lackawanna County. The
Company's primary concentration of credit risk is related to the real
estate market in the aforementioned area. The ultimate collectibility of
most of the Company's loan portfolio is greatly affected by the economic
conditions within Northeastern Pennsylvania. Management is not aware of
any other significant concentrations of credit risk within its loan
portfolio.
Presented below are total nonaccruing loans of the Company at December
31, 1998, 1997, and 1996. Also shown is the approximate related amount of
interest recorded as income and interest which would have been recorded
as income had the loans been performing at the contractual terms for the
years ended December 31, 1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $1,740 $1,607 $4,449
Interest income recorded 68 43 114
Interest income not recorded 147 137 315
--- --- ---
</TABLE>
32
<PAGE>
5. Continued
At December 31, 1998 and 1997, the Company had impaired loans totaling
approximately $979,000 and $966,000, respectively, all of which had a
related allowance for impairment. At December 31, 1998 and 1997, the
allowance for losses on impaired loans totaled $202,000 and $94,000,
respectively. The average balance of impaired loans for 1998, 1997 and
1996 was $514,000, $715,000 and $1,584,000, respectively. There were no
charge-offs or recoveries on impaired loans during either 1998, 1997, or
1996. The Bank recognizes interest income on impaired loans on a cash
basis method. Total interest income recognized on impaired loans for the
years ended December 31, 1998, 1997 and 1996, totaled $0, $0 and $24,000,
respectively.
The following table presents 1998 activity in the amounts due to the
Banks from principal officers, directors and their related businesses in
excess of $60,000. The indebtedness was incurred in the ordinary course
of business, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons (in
thousands):
1998
Balance, at beginning of year $5,326
Additions 4,174
Repayments (2,364)
Balance, at end of year $7,136
At December 31, 1998, 1997, and 1996 the Banks serviced loans for
others of $7,485,000, $3,019,000, and $469,000, respectively.
An analysis of real estate owned other than bank premises for 1998 and
1997 follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
1998 1997
<S> <C> <C>
Balance, at beginning of year $953 $ 817
Transfers from real estate - commercial and real estate loans category 378 1,027
Real estate sales (586) (746)
Loss on disposition of real estate (266) (145)
Balance, at end of year $479 $953
==== ====
</TABLE>
6. Allowance For Loan Losses
A summary of the transactions in the Bank's allowance for loan losses is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $4,562 $5,017
$4,787
Losses charged to allowance 777 1,307 765
Recoveries credited to allowance 293 252
------- -------
162
Net charge-offs 484 1,055 603
Provision charged to operations 540 600
------ ------
833
Balance, December 31 $4,618 $4,562 $5,017
===== ===== =====
</TABLE>
33
<PAGE>
7. Bank Premises, Leasehold Improvements, and Furniture and Equipment
A summary of the Company's bank premises, leasehold improvements, and
furniture and equipment is as follows (in thousands):
December 31,
1998 1997
Land and buildings $ 8,447 $ 7,027
Land under capitalized lease 302 302
Bank premises and leasehold
improvements
under capitalized lease 2,260 2,866
Furniture and equipment 6,471 5,305
Total at cost 17,480 15,500
Less: Accumulated depreciation and
amortization (7,173) (6,366)
------- ----------
Net bank premises, leasehold improvements
and furniture and equipment $ 10,307 $ 9,134
8. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
At December 31,
1998 1997
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 1.51% $22,089 4.5 1.62% $ 27,308 5.6
Savings deposits 2.02% 93,726 18.9 2.53% 93,135 19.2
Other time deposits 3.00% 2,022 .4 3.00% 2,026 .4
Money Market accounts 2.28% 28,979 5.8 2.28% 20,318 4.2
Certificates of deposit 5.37% 294,512 59.3 5.54% 289,683 59.8
Repurchase agreements -- -- 3,704 .8
Noninterest bearing demand 55,272 11.1 48,628 10.0
---------- ------- ---------- --------
Total deposits at end of period $496,600 100% $484,802 100%
======= ======== ======= ======
</TABLE>
While the certificates frequently are renewed at maturity rather than
paid out, a summary of certificates of deposit greater than $100,000 by
contractual maturity at December 31, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Three months or less $17,909 $20,859
Over three months through twelve months 20,330 18,992
Over one year through three years 12,057 8,408
Over three years 1,836 1,728
-------- -------
Total $52,132 $49,987
====== ======
</TABLE>
Interest expense approximated $3,305,000, $2,839,000 and $2,809,000 for
certificates of deposit greater than $100,000 in the years ended December
31, 1998, 1997 and 1996, respectively.
34
<PAGE>
9. Capitalized Lease Obligation
The Bank has capitalized a noncancelable lease for two office buildings
that expires in the year 2004. The lease requires payment of property
taxes, maintenance costs, and insurance on the properties.
Future minimum payments, by year and in the aggregate, under the
capitalized lease obligation are as follows (in thousands):
1999 $ 155
2000 155
2001 155
2002 155
2003 155
Thereafter 103
---
Total minimum lease payments $878
Less amount representing interest (217)
---
Present value of net minimum lease payments $ 661
====
10. Employee Benefit Plans
(a) Employee 401(k) Savings Plan
Certain subsidiaries of the Company maintain a qualified plan in
which employees may participate. Participants in the plan may
elect to direct a portion of their wages into investment accounts
that include professionally managed mutual and money market funds.
The principal and earnings thereon are tax deferred until
withdrawn, generally. The Company does not match employee
contributions.
(b) Postretirement Benefit
The Company shares certain costs of providing health and life
insurance benefits to retired employees (and their eligible
dependents). Substantially all employees may become eligible for
these benefits if they reach normal retirement age while working
for the Company.
The Company accounts for its obligations under the provisions of
SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. SFAS No. 106 requires that the costs of these
benefits be recognized over an employee's active working career.
In December 1998, the Company adopted SFAS No. 132, Employer's
Disclosure About Pensions and Other Post Retirement Benefits,
which standardized such disclosure requirements. The following
disclosures are in accordance with SFAS No. 132.
The following tables set forth FNBJ's pension plan's status as of
and for the years indicated (in thousands):
<TABLE>
<CAPTION>
Change in benefit obligation: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Benefit obligation at beginning of year $6,107 $5,289 $4,804
Service cost 298 216 183
Interest cost 471 374 349
Actuarial loss (gain) 1,265 362 200
Benefits paid (146) (134) (131)
Plan amendments -- -- (116)
------ ------ ----
Benefit obligation at end of year $7,995 $6,107 $5,289
===== ===== =====
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Change in plan assets: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fair value of plan assets at beginning of year $6,529 $5,649 $4,894
Actual return on plan assets 814 806 700
Employer contributions 91 208 186
Benefits paid (146) (134) (131)
----- ----- -----
Fair value of plan assets at end of year $7,288 $6,529 $5,649
===== ===== ======
Funded status:
Funded (unfunded) status $(707) $422 $360
Unrecognized transition (asset) obligation 42 45 49
Unrecognized net prior service cost (benefit) (94) (102) (109)
Unrecognized net (gain) loss 663 (339) 313
------ ---- ---
Net amount recognized $ (96) $26 $(13)
====== == ====
Components of net periodic benefit cost:
Service cost $298 $216 $183
Interest cost 471 374 349
Expected return on plan assets (gain) loss (553) (419) (362)
Amortization of transition (asset) obligation 4 4 4
Amortization of prior service (benefit) cost (7) (7) (7)
------ ------ ---
Net periodic benefit cost $213 $168 $167
=== === ===
Assumptions used to value the APBO:
Discount rate 6.50 6.75 7.00
Expected long-term rate of return on assets 8.50 7.50 7.50
Rate of compensation increases 4.50 4.50 4.50
The following tables set forth NBO's pension plan's status as of
and for the years indicated (in thousands):
Change in benefit obligation: 1998 1997 1996
---- ---- ----
Benefit obligation at beginning of year $1,164 $1,141 $ 873
Service cost 125 121 121
Interest cost 85 67 64
Actuarial loss (gain) 187 (120) 108
Benefits paid (54) (45) (25)
Plan amendments -- -- --
------ ------ --------
Benefit obligation at end of year $1,507 $1,164 $1,141
===== ===== ======
Change in plan assets:
Fair value of plan assets at beginning year $996 $712 $ 603
Actual return on plan assets 165 127 59
Employer contributions 69 202 75
Benefits paid (54) (45) (25)
---- ---- ----
Fair value of plan assets at end of year $1,176 $996 $ 712
===== ===
Funded status:
Funded (unfunded) status $(331) $(167) $(429)
Unrecognized transition (asset) obligation (7) (7) (8)
Unrecognized net prior service cost (benefit) 14 15 16
Unrecognized net (gain) loss 79 29 151
----- ---- ---
Net amount recognized $ (245) $188 $(270)
======= === =====
Components of net periodic benefit cost:
Service cost $125 $121 $121
Interest cost 85 68 65
Expected return on plan assets (gain) loss (85) (68) 54
Amortization of transition (asset) obligation (1) (1) (1)
Amortization of prior service (benefit) cost 1 1 1
---- ----- ----
Net periodic benefit cost $ 125 $121 $132
- - ===== === ====
Assumptions used to value the APBO:
Discount rate 6.50 7.50 7.50
Expected long-term rate of return on assets 8.50 8.50 8.50
Rate of compensation increases 4.50 4.00 6.00
</TABLE>
36
<PAGE>
11. Income Taxes
The components of income tax expense (benefits) are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current - Federal $1,825 $1,429 $1,684
Deferred - Federal (255) 308 59
----- -------- ------
$1,570 $1,737 $1,743
===== ===== =====
</TABLE>
A reconciliation of the income tax expense in the accompanying statements
of income with the amount computed by applying the statutory federal
income tax rate to income before income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense at 34% rate $1,894 $2,331 $2,316
Interest from tax-exempt loans and investments, net (794) (630) (487)
Nondeductible merger costs 138 -- --
Nontaxable distribution of life insurance policy -- -- (112)
Other, net 332 36 26
------ ------ -----
Income tax expense $1,570 $1,737 $1,743
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 in accordance with SFAS No. 109 are presented
below (in thousands):
<TABLE>
<CAPTION>
l998 1997
<S> <C> <C>
Deferred tax assets:
Unrealized losses on securities available for sale $ -- $ 86
Allowance for loan losses 984 907
Deferred loan fees 349 332
Deferred directors fees 77 77
Employee benefits 231 214
Tax credit carryforwards 645 635
Others, net 276 150
------ ------
Total gross deferred tax assets $2,562 $2,401
Deferred tax liabilities:
Depreciation (214) (222)
Unrealized gains on securities
available for sale (392) --
Total gross deferred tax liabilities (606) (222)
Net deferred tax asset $1,956 $2,179
</TABLE>
Based on the Company's current and past taxable history and the
anticipated level of future taxable income, management of the Company
believes the existing deductible temporary differences will, more likely
than not, reverse in future periods in which the Company generates net
taxable income. Accordingly, the Company does not believe a valuation
allowance is necessary at December 31, 1998. There can be no assurance,
however, that the Company will generate any earnings or any specific
level of continued earnings.
37
<PAGE>
11. Continued
The related tax effects allocated to each component of Other
Comprehensive Income are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Tax Tax Tax
Before (Expense) Net of Before(Expense) Net of Before (Expense) Net of
Tax or Tax Tax or Tax Tax or Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains on
securities:
Unrealized holding
gains arising
during period $335 (85) 250 986 250 736 (247) 63 (184)
Add: transfers from
held to maturity to
available for sale 1,142 (417) 725 -- -- -- -- -- --
Less: reclassification
adjustment for gains
(losses) realized in
net income 71 (24) 47 (256) (65) (191) (32) 9 (23)
------- ----- ---- ----- ---- ----- ------ --- ------
Net unrealized gains $1,406 (478) 928 1,242 (315) 927 (215) 54 (161)
===== ===== === ===== ===== ======== ===== == =====
</TABLE>
12. Stock Options Plan
In connection with its acquisition of Upper Valley, the Company assumed
stock options outstanding previously granted by Upper Valley under a
stock option plan (Option Plan) for officers, directors and employees of
the Company and its subsidiaries. The Option Plan will terminate on the
tenth anniversary of its effective date, after which no awards may be
granted. A total of 68,900 awards may be granted under the Option Plan.
At December 31, 1998, there were 28,525 shares available for future
grants under the Option Plan.
The Option Plan provides for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Service Code as well as
nonincentive stock options (collectively, stock options). All awards are
to be granted at not less than the market price of the Company's common
stock on the date of the grant and expire no later than ten years from
the grant date. In August 1995, the Board of Upper Valley granted options
to purchase 40,375 shares at an exercise price of $33.38 per share, which
are exercisable through July 2005. Options issued to members of Upper
Valley's Board of Directors totaling 19,292 vested in 1996 and became
exercisable. Options issued to officers totaling 21,083, of which 827 and
689 were subsequently forfeited in 1997 and 1996, respectively, vested in
cumulative annual installments of 33 and 1/3% beginning on the first
anniversary date of the grant. As a result of change in control
provisions in the Option Plan, all options became immediately exercisable
upon Upper Valley's merger with First Jermyn on June 30, 1998.
A summary of the status of the Company's Stock Option Plans as of
December 31, 1998, 1997 and 1996, and changes during the years then
ending is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise PriceShares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Stock Options:
Outstanding at beginning year 38,646 $ 33.38 39,748 $ 33.38 40,375 $33.38
Granted -- -- -- -- -- --
Exercised (13,172) 33.38 (413) 33.38 -- --
Canceled (727) 33.38 (689) 33.38 (627) 33.38
---------- ------- -------
Outstanding at end of year 24,747 33.38 38,646 33.38 39,748 33.38
Exercisable at end of year 24,747 32,337 25,976
</TABLE>
38
<PAGE>
12. Continued
The Black-Scholes option pricing model was used to determine the
grant-date fair-value of options. Significant assumptions used in the
model included a weighted average risk-free rate of return of 6.6%;
expected option life of 10 years; and cash dividend yield of 2.0%.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. This statement
encourages, but does not require, the adoption of fair-value accounting
for stock-based compensation to employees. The Company, as permitted, has
elected not to adopt the fair value accounting provisions of SFAS No.
123, and has instead continued to apply APB Opinion 25 and related
Interpretations in accounting for the plans and to provide the required
proforma disclosures of SFAS No. 123. Had the grant-date fair-value
provisions of SFAS No. 123 been adopted, the Company would have
recognized $43,000 in 1998, $45,000 in 1997 and $149,000 in 1996 of
compensation expense related to options granted in 1995 under its Option
Plan. As a result, proforma net income of the Company would have been
$3,958 in 1998, $5,075 in 1997 and $4,921 in 1996, and proforma diluted
earnings per share would have been $2.48 in 1998, $3.19 in 1997 and $3.12
in 1996.
The effects on proforma net income and diluted earnings per share of
applying the disclosure requirement of SFAS No. 123 in past years may not
be representative of the future proforma effects on net income and EPS
due to the vesting provisions of the options and future awards that are
available to be granted.
13. Infrequent Events
Noninterest expense for 1998 included $1,098,000 of merger-related costs
resulting from the Upper Valley acquisition, which were expensed in the
second quarter of 1998.
In 1997, the Company recognized $385,000 of benefits in noninterest
income relating to the restructuring of deferred compensation plans of
Upper Valley.
Included in noninterest income in 1996 is a $600,000 gain on a legal
settlement. Also included in 1996 noninterest income was $330,000 of
proceeds from a split dollar life insurance policy.
Included in noninterest expense for 1996 was an estimated $320,000
employee fidelity loss. Included in noninterest expense for 1997 was a
$372,000 recovery which represented reimbursement under the Company's
Fidelity Bond Insurance Policy for losses and related expenses.
14. Commitments and Contingent Liabilities
In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities that are not presented in the
accompanying financial statements. The commitments include various
commitments to extend credit. At December 31, 1998, approximate unused
commitments were as follows (in thousands):
Revolving home equity lines $6,902
Real estate - mortgages 7,915
Standby letters of credit 1,217
Other 13,224
-------
Total $29,258
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements.
39
<PAGE>
14. Continued
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluated each
customer's creditworthiness on a case by case basis. The amount of
collateral, if any, obtained upon extension of credit is based on
management's credit evaluation of the borrower. Collateral held usually
consists of real estate, but may include securities, property or other
assets.
The Bank does not anticipate any material losses as a result of its
commitments. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
balance sheet. The exposure to credit loss in the event of nonperformance
by the counter party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Bank holds various collateral to support these
commitments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
(a) Legal Proceedings
In the normal course of business, various legal proceedings are
incurred. While it is difficult to predict or determine the
ultimate outcome of such proceedings, in the opinion of
management, there are no current proceedings against the Company
which are expected to materially affect the Company's financial
position, operating results and/or liquidity.
15. Regulatory Matters
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators, that if undertaken,
could have a direct material effect on the Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Banks meet all capital adequacy requirements
to which it is subject.
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the Banks' category. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table.
40
<PAGE>
15. Continued
The following table illustrates the consolidated levels of capital
amounts and ratios for First Liberty BankCorp.(FLIB); First National Bank
of Jermyn (FNBJ) and NBO National Bank (NBO):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
FLIB $61,900 18.91% $26,188 >8.00% $32,735 >10.00%
- -
FNBJ 34,353 16.48% 16,674 >8.00% 20,843 >10.00%
-
NBO 27,542 17.25% 12,771 >8.00% 15,964 >10.00%
-
Tier I Capital (to Risk Weighted Assets):
FLIB 57,802 17.66% 13,094 >4.00% 19,641 >6.00%
- -
FNBJ 31,790 15.25% 8,337 >4.00% 12,506 >6.00%
- -
NBO 25,546 16.00% 6,386 >4.00% 9,578 >6.00%
- -
Tier I Capital (to Average Assets):
FLIB 57,802 9.44% 24,799 >4.00% 30,999 >5.00%
- -
FNBJ 31,790 9.06% 14,170 >4.00% 17,713 >5.00%
- -
NBO 25,546 9.77% 10,611 >4.00% 13,264 >5.00%
- -
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
FLIB $58,978 17.06% $27,658 >8.00% $34,572 >10.00%
- -
FNBJ 32,980 17.82% 14,809 >8.00% 18,512 >10.00%
- -
NBO 25,422 15.90% 12,849 >8.00% 16,062 >10.00%
- -
Tier I Capital (to Risk Weighted Assets):
FLIB $54,654 15.81% 13,829 >4.00% $20,743 >10.00%
- -
FNBJ 30,661 16.56% 7,405 >4.00% 11,107 >10.00%
- -
NBO 23,556 14.80% 6,425 >4.00% 16,062 >10.00%
- -
Tier I Capital (to Average Assets):
FLIB 54,654 9.33% 23,562 >4.00% 29,452 >5.00%
- -
FNBJ 30,661 9.45% 13,134 >4.00% 16,418 >5.00%
- -
NBO 23,556 9.00% 10,428 >4.00% 13,035 >5.00%
- -
</TABLE>
Banking regulations limit the amount of dividends that may be paid
without prior approval of the applicable regulatory agency. Under these
limitations, the payment in any year by national banks is limited to the
net profits (as defined by the regulations) for that year plus the
retained net profits (as defined by the regulations) for the preceding
two years. The Company and Bank are also subject to minimum capital
levels which could minimize payment of dividends, although the Company
and Bank currently have capital levels which are in excess of minimum
capital level ratios required. The limit on dividends by FNBJ and NBO to
the Company as of December 31, 1998 was approximately $9,893,000.
Federal bank laws and regulations prohibit FNBJ and NBO from extending
credit to the Company in excess of its capital and surplus (as defined by
the regulations). The Banks' limit on extension of credit to the Company
was approximately $7,908,000 as of December 31, 1998.
41
<PAGE>
16. Parent Company Financial Statements
BALANCE SHEETS AT DECEMBER 31, 1998 AND 1997
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS:
Investment in subsidiaries $58,646 $55,145
Cash 3 172
Other assets 259 487
---------- ---------
Total assets $58,908 $55,804
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Dividends payable $ -- $ 220
Shareholders' equity 58,908 55,584
------ ------
Total liabilities and shareholders' equity $58,908 $55,804
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In Thousands of Dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EARNINGS OF SUBSIDIARIES:
Dividends received $2,170 $2,119 $1,925
Undistributed net income 1,838 3,007 3,151
Other expenses - net 7 8 8
Federal income tax benefit -- 2 2
-------- ---------- ----------
$4,001 $5,120 $5,070
====== ====== ======
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In Thousands of Dollars)
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net income $4,001 $5,120 $5,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (1,838) (3,007) (3,151)
Depreciation 7 7 7
Decrease in dividends payable (220) -- --
Decrease in other assets, net 220 1 11
Net cash provided by operating activities 2,170 2,121 1,937
------- ------- -------
INVESTING ACTIVITIES:
(Increase) decrease in investment in subsidiaries (734) -- --
Net cash used in investing activities (734) -- --
-------- ------- ------
FINANCING ACTIVITIES:
Dividends paid to shareholders (2,179) (2,119) (1,925)
Issuance of common stock 574 14 --
--------- ---------- ---------
Net cash used in financing activities (1,605) (2,105) (1,925)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (169) 16 12
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 172 156 144
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3 $ 172 $ 156
========= ======= =======
</TABLE>
42
<PAGE>
17. Disclosures About Fair Value of Financial Instruments
The Company is required to provide disclosure about derivative financial
instruments and the fair values of financial instruments. The Company
does not presently invest in such derivative financial instruments and
thus has no disclosure regarding such investments. The reported fair
values of financial instruments are based on a variety of factors. In
certain cases, fair values have estimated based on assumptions regarding
the amount and timing of estimated future cash flows that are discounted
to reflect varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that will be realized in the future.
Limitations
Estimates of fair value are made at a specific point in time based upon,
where available, relevant market prices and information about the
financial instrument. Such estimates do not include any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. For a
substantial portion of the Company's financial instruments, no quoted
market exists. Therefore, estimates of fair value are necessarily based
on a number of significant assumptions (many of which involve events
outside the control of management). Such assumptions include assessments
of current economic conditions, perceived risks associated with these
financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and
therefore cannot be compared to the historical accounting model. Use of
different assumptions or methodologies are likely to result in
significantly different fair value estimates.
The estimated fair values presented neither include nor give effect to
the values associated with the Company's banking, or other businesses,
existing customer relationships, extensive branch banking network,
property, equipment, goodwill, or certain tax implications related to the
realization of unrealized gains or losses. Also, the fair value of
noninterest-bearing demand deposits, savings and NOW accounts and money
market deposit accounts is equal to the carrying amount because these
deposits have no stated maturity. Obviously, this approach to estimating
fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of
individual assets and liabilities may not be reflective of the fair value
of a banking organization that is a going concern.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
(a) Cash, Due From Banks and Federal Funds Sold
For cash, due from banks, and federal funds sold the carrying
amount is a reasonable estimate of fair value.
(b) Securities
For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
(c) Loans
Fair values are estimated for portfolios of loans with similar
characteristics. Loans are segregated by type: commercial,
commercial mortgages, construction, residential mortgages, and
consumer. The fair value of residential mortgage loans are
estimated using quoted market prices for sales of whole loans with
similar characteristics such as repricing dates, product type, and
43
<PAGE>
17. Continued
size. For residential loans that reprice frequently, the carrying
amount approximates fair value. The fair value of other types of
loans for which quoted market prices are not available is
estimated by discounting expected future cash flows using the
current rates at which similar loans would be made to borrowers
with comparable credit ratings and for similar remaining
maturities. The fair value of nonperforming loans is based on
recent external appraisals. Estimated cash flows, discounted using
a rate commensurate with the risk associated with the estimated
cash flow are utilized if appraisals are not available.
(d) Deposit Liabilities
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is equal to
the amount payable on demand. The fair value of the remaining time
deposits is based on the discounted value of the contractual cash
flows. The discount rate is estimated using the rates currently
offered for deposits with comparable remaining maturities.
(e) Off-Balance Sheet Instruments
The fair value of off-balance sheet instruments, including
commitments to extend credit and standby letters of credit, is
estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflect the present
creditworthiness of the counterparties.
The carrying amount and estimated fair value of the Company's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks
and federal funds sold $ 25,628 $ 25,628 $ 21,389 $ 21,389
Securities available for sale 196,563 196,563 123,765 123,765
Investment securities - - 61,364 62,583
Loans, net 371,297 386,343 356,032 363,313
Accounts receivable 3,914 3,914 4,244 4,244
Financial liabilities:
Deposits $496,600 $494,866 $484,802 $484,824
Other borrowed money 55,660 55,660 40,744 40,744
Accounts payable 2,218 2,218 2,287 2,287
</TABLE>
The fair values of the Banks' off-balance sheet financial
instruments at December 31, 1998 and 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
Contract Fair Contract Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Off-balance sheet instruments:
Commitments to extend credit $14,817 $120 $15,190 $180
Standby letters of credit 1,217 15 832 11
Other 13,224 174 2,173 32
</TABLE>
44
<PAGE>
Independent Auditors' Report
The Board of Directors
First Liberty Bank Corp.:
We have audited the accompanying consolidated balance sheets of The First
Liberty Bank Corp. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the three year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. As described in Note 1,
the consolidated financial statements of First Liberty Bank Corp. and
subsidiaries for December 31, 1997 and 1996, were restated for the 1998
pooling-of-interests transaction with Upper Valley Bancorp, Inc. We did not
audit the separate financial statements of Upper Valley Bancorp, Inc. for 1997
and 1996, which statements report total assets constituting 44% and total
interest income constituting 43% and 42% respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report dated January 16, 1998, has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Upper Valley Bancorp. Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Liberty Bank Corp. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the consolidated financial statements, First Liberty
Bank Corp. adopted Statement of Financial Accounting Standard No.133, Accounting
for Derivative Instruments and Hedging Activities, as of October 1, 1998.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 11, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000741562
<NAME> First Liberty Bank & Trust
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 14,843
<INT-BEARING-DEPOSITS> 5,785
<FED-FUNDS-SOLD> 5,000
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<ALLOWANCE> 4,618
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<DEPOSITS> 496,600
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<LONG-TERM> 55,660
0
0
<COMMON> 2,003
<OTHER-SE> 56,905
<TOTAL-LIABILITIES-AND-EQUITY> 615,370
<INTEREST-LOAN> 30,305
<INTEREST-INVEST> 12,060
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<INTEREST-TOTAL> 42,365
<INTEREST-DEPOSIT> 19,834
<INTEREST-EXPENSE> 22,673
<INTEREST-INCOME-NET> 19,692
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<INCOME-PRETAX> 5,571
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<NET-INCOME> 4,001
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<ALLOWANCE-OPEN> 4,562
<CHARGE-OFFS> 776
<RECOVERIES> 292
<ALLOWANCE-CLOSE> 4,618
<ALLOWANCE-DOMESTIC> 2,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,896
</TABLE>
