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, 1999
-----------------
[ ] 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
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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 570-803-6500
------------
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, $.31 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 15, 2000, the aggregate market value
of the voting stock held by non- affiliates (which includes all common stock,
$.31 par value other than shares beneficially owned by directors or executive
officers) of the registrant was $57,040,326.
The number of shares outstanding of the registrant's common stock, $.31 par
value was 6,366,984 at March 15, 2000.
<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, 1999 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, 1999 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 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters 7
ITEM 6. Selected Financial Data 7
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 7
ITEM 7A. Quantitative and Qualitative Disclosures about
Market Risk 7
ITEM 8. Financial Statements and Supplementary Data 7
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 7
PART III
ITEM 10. Directors, and Executive Officers of the Registrant 8
ITEM 11. Executive Compensation 8
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 8
ITEM 13. Certain Relationships and Related Transactions 8
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 9
SIGNATURES 10-11
<PAGE>
PART I
ITEM 1. Description of Business
General
The registrant, First Liberty Bank Corp. (the 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 (the Bank), 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, 1999, approximately 232 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 from 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 eleven offices located in Lackawanna and Luzerne Counties, Pennsylvania.
The Banks' offices are located in Jermyn, the Keyser Oak, Downtown and Minooka
sections of Scranton, Carbondale, Daleville, Olyphant, Jessup and an office in
Dickson City, all in Lackawanna County, Pennsylvania. The Luzerne County offices
are located in Pittston and Kingston 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
2
<PAGE>
specific restrictions and procedure requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
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.
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.
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, 1999
Interstate Banking
The Riegle-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.
3
<PAGE>
Bank management anticipates that the Interstate Banking Act may
increase competitive pressures in the Bank's market by permitting entry of
additional competitors.
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, 1999.
<TABLE>
Net Book Value
Of Property
Owned/ Date Lease Or Leasehold
Location Leased Expires Improvements Deposits
- -------- ------ ------- ------------ --------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office Leased 2004 751 88,512
645 Washington Avenue
Jermyn, Pa 18433
Keyser Ave. Branch Leased 2004 313 98,789
1700 N. Keyser Avenue
Scranton, PA 18508
Jessup Branch Owned 583 39,603
210 Church Street
Jessup, PA 18434
Minooka Branch Owned 1,694 39,332
500 Davis Street
Scranton, PA 18505
Carbondale Branch Owned 400 15,582
67 Salem Avenue
Carbondale, PA 18407
Daleville Branch Owned 1,135 13,282
Route 502 RD 3
Moscow, PA 18444
Olyphant Branch Owned 781 111,523
128 Lackawanna Avenue
Olyphant, PA 18447
Wyoming Avenue Branch Owned 1,522 51,693
1300 Wyoming Avenue
Scranton, PA 18509
Pittston Branch Leased 2010 510 22,193
45 S. Main Street
Pittston, PA 18640
Kingston Branch Leased 2002 22 3,001
480 Pierce Street
Kingston, PA 18704
Dickson City Branch Owned 1,242 1,097
901 Commerce Blvd
Dickson City, PA 18519
</TABLE>
5
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
6
<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 1999 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
3-17 of Exhibit 99.1- Selected pages from the 1999 Annual Report to
Shareholders.
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
The information required herein in incorporated by reference from pages
14-15 of Exhibit 99.1- Selected pages from the 1999 Annual Report to
Shareholders.
ITEM 8. Financial Statements
Exhibit 99.1-
Selected Pages
Index to Consolidated Financial From the 1999
Statements and Supplementary Annual Report to
Financial Data To Shareholders
---------------
Consolidated Balance Sheets,
December 31, 1999 and 1998.........................................20
Consolidated Statements of Operations,
Years Ended December 31, 1999, 1998 and 1997.......................21
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1999, 1998 and 1997.......................22
Consolidated Statements of Cash Flows,
Years Ended December 31, 1999,1998 and 1997........................23
Notes to Consolidated Financial Statements.........................24-42
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
7
<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, 1999, 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, 1999, 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, 1999, 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, 1999, for the annual meeting of
shareholders and Note 4 - Loans of the Notes to Consolidated Financial
Statements of the 1999 Annual Report to Shareholders.
8
<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:
Management's Statement on Financial Reporting..................18*
Independent Auditors' Report...................................19*
Financial Statements:
Consolidated Balance Sheets, December 31, 1999 and 1998.....20*
Consolidated Statements of Operations,
Years Ended December 31, 1999 , 1998 and 1997............21*
Consolidated Statement of Changes in Shareholders' Equity,
Years Ended December 31, 1999, 1998 and 1997.............22*
Consolidated Statement of Cash Flows,
Years Ended December 31, 1999, 1998 and 1997.............23*
Notes to Consolidated Financial Statements..............24-42*
Selected Quarterly Financial Data-
Years Ended December 31, 1999, and 1998..................17*
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.)
11.1 Computation of Earnings Per Share is incorporated by
reference from page 28 of Exhibit 99.1- Selected
pages from the 1999 Annual Report to Shareholders.
21 Subsidiaries of the Registrant
23.1 Consent of Kronick, Kalada, Berdy & Co.
23.2 Consent of KPMG LLP
27 Financial Data Schedule
99.1 Selected Pages from the 1999 Annual Report to
Shareholders
(b) The Registrant did not file any Current Reports on
Form 8-K during the quarter ended December 31, 1999.
*Refers to page numbers in selected pages from Annual Report to Shareholders
attached hereto as Exhibit 99.1
9
<PAGE>
S I G N A 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 and Director March 22, 2000
--------------------------
William M. Davis
(Principal Executive Officer)
By /S/ Donald J. Gibbs Treasurer March 22, 2000
---------------------------
Donald J. Gibbs
(Principal Financial Officer)
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 22, 2000
-----------------------------
Peter A. Sabia
/S/ Kuzma Leschak, Jr. Director March 22, 2000
-----------------------------
Kuzma Leschak, Jr.
/S/ Robert T. Kelly Director March 22, 2000
- ------------------------------
Robert T. Kelly
/S/ David M. Epstein Director March 22, 2000
-----------------------------
David M. Epstein
/S/ I. Leo Moskovitz Director March 22, 2000
- ------------------------------
I. Leo Moskovitz
/S/ Dr. Edmund J. Biancarelli Director March 22, 2000
- ------------------------------
Dr. Edmund J. Biancarelli
/S/ Thomas G. Speicher Director and Secretary March 22, 2000
- ------------------------------
Thomas G. Speicher
/S/ William K. Nasser, Jr. Director March 22, 2000
- ------------------------------
William K. Nasser, Jr.
/S/ Steven R. Tokach Director March 22, 2000
- ------------------------------
Steven R. Tokach
/S/ William M. Davis Chairman, President and Director March 22, 2000
-----------------------------
William M. Davis
10
<PAGE>
/S/ Harold P. McGovern Director March 22, 2000
- ------------------------------
Harold P. McGovern
/S/ Saul Kaplan Director March 22, 2000
- ------------------------------
Saul Kaplan
/S/ Joseph P. Coviello, Esq. Director March 22, 2000
- ------------------------------
Joseph P. Coviello
/S/ Harold P. McGovern Director March 22, 2000
- ------------------------------
Harold P. McGovern
/S/ Saul Kaplan Director March 22, 2000
- ------------------------------
Saul Kaplan
/S/ Joseph P. Coviello, Esq. Director March 22, 2000
- ------------------------------
Joseph P. Coviello
/S/ Michael A. Barbetti Director March 22, 2000
- ------------------------------
Michael A. Barbetti
/S/ Fred J. Gentile Director March 22, 2000
- ------------------------------
Fred J. Gentile
/S/ Harold S. Kaplan Director March 22, 2000
- ------------------------------
Harold S. Kaplan
/S/ Norman E. Woodworth Director March 22, 2000
- ------------------------------
Norman E. Woodworth
11
<PAGE>
<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, 1999, First Liberty Bank Corp. (Company) owned all of the
outstanding common stock of its bank subsidiary, First Liberty Bank and Trust
(FLIB or the Bank). 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 was, 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.
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 and 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 1999 was $6,027,000, an increase of 50.64% from the prior year.
This increase was primarily attributable to a non-recurring charge of
approximately $1.1 million recorded in 1998 for merger related costs. In
addition, income for Trust services and gains on the sale of securities
increased in 1999. 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>
TABLE 1
INCREASE (DECREASE)
1999 vs. 1998 1998 vs. 1997
------------- -------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Interest income $ 194 .46% $ 1,049 2.54%
Interest expense (130) (.57)% 1,098 5.09%
-------- ------ --------- --------
Net interest income 324 1.65% (49) (.25)%
Provision for loan losses 180 33.33% (60) (10.00)%
-------- ------ --------- --------
Net interest income after provision for loan losses 144 .75% 11 .06 %
Noninterest income 466 26.21% (266) (13.01)%
Noninterest expense (1,367) (8.90)% 1,031 7.20 %
-------- ------ --------- --------
Income before federal income tax provision 1,977 35.49% (1,286) (18.75)%
Federal income tax provision (49) (3.12)% (167) (9.61)%
-------- ------ --------- --------
Net income $ 2,026 50.64% $ (1,119) (21.86)%
======== ====== ========= =======
</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 1999, 1998, and 1997. Table
II exhibits the volume and yield/rate variances for interest-earning assets and
interest-bearing liabilities.
<TABLE>
TABLE II
AVERAGE BALANCES AND RATES
1999 1998 1997
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,
real estate and
agriculture $159,434 $12,733 7.99% $107,387 $ 8,240 7.67% $ 96,831 $ 8,178 8.45%
Real estate - residential
mortgage 161,943 12,288 7.56% 191,988 15,589 8.12% 191,361 15,767 8.24%
Installment - net 71,108 5,979 8.41% 68,247 6,522 9.56% 62,418 5,606 8.98%
-------- ------- -------- ------- -------- -------
Total loans (including fees) 392,485 31,000 7.90% 367,622 30,351 8.26% 350,610 29,551 8.43%
Securities:
Taxable 152,116 9,163 6.02% 140,474 8,453 6.02% 152,307 9,465 6.22%
Tax-exempt 42,112 3,268 7.76% 46,456 3,574 7.69% 34,151 2,678 7.84%
-------- ------- -------- ------- -------- -------
Total securities 194,228 12,431 6.40% 186,930 12,027 6.43% 186,458 12,143 6.51%
Federal funds sold 1,532 73 4.77% 11,214 606 5.40% 12,964 718 5.54%
Interest-bearing deposits
in banks 9,759 439 4.50% 11,285 642 5.69% 290 16 5.52%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 598,004 $43,943 7.35% 577,051 $43,626 7.56% 550,322 $42,428 7.71%
======= ======= =======
Noninterest-earning assets 34,839 29,133 29,070
-------- ------- --------
TOTAL ASSETS $632,843 $606,184 $579,392
======== ======== ========
Interest-bearing liabilities:
Deposits
Savings, Club, NOW,
and money market
accounts $144,520 $ 3,142 2.17% $149,019 $ 3,532 2.37% $161,590 $ 4,310 2.67%
Certificates of deposits 310,566 15,986 5.15% 299,118 16,302 5.45% 275,296 14,984 5.44%
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 455,086 19,128 4.20% 448,137 19,834 4.43% 436,886 19,294 4.42%
Federal funds purchased 5,603 306 5.46% 30 1 3.33% 38 2 7.89%
Borrowed funds 54,949 3,047 5.55% 50,031 2,767 5.53% 38,309 2,201 5.75%
Capitalized lease obligation 610 62 10.16% 699 71 10.16% 779 78 10.0%
-------- -------- -------- ------- -------- -------
Total interest-bearing liabilities 516,248 $ 22,543 4.37% 498,897 $22,673 4.55% 476,012 $21,575 4.53%
-------- -------- -------- ------- -------- -------
Noninterest bearing liabilities 57,992 50,619 50,008
Shareholders' equity 58,603 56,668 53,372
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $632,843 $606,184 $579,392
======== ======== ========
Net interest income $ 21,400 $20,953 $20,853
======== ======= =======
Interest rate spread 2.98% 3.01% 3.18%
Margin analysis:
Interest income/interest -
earning assets 7.35% 7.56% 7.71%
Interest expense/interest -
earning assets 3.77% 3.93% 3.92%
Net interest income/interest -
earning assets 3.58% 3.63% 3.79%
Tax equivalent adjustments:
Loans $ 273 $46 $ 201
Securities 1,111 1,215 911
------ ------ -------
Total $ 1,384 $1,261 $ 1,112
========= ====== =======
</TABLE>
[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>
5
<PAGE>
<TABLE>
TABLE III
VOLUME AND YIELD/RATE VARIANCES
1999 compared to 1998 1998 compared to 1997
--------------------- ---------------------
Yield/ Yield/
Volume Rate Net Volume Rate Net
------ ------ --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 2,059 $(1,410) $ 649 $1,434 $(634) $ 800
Securities
Taxable 710 -- 710 (736) (276) (1,012)
Tax-exempt (335) 29 (306) 964 (68) 896
Federal funds sold (523) (10) (533) 97 (209) (112)
Interest-bearing deposits
in banks (87) (116) (203) 607 19 626
------- -------- ------ ------ ------ -------
Total interest-earning assets 1,824 (1,507) 317 2,367 (1,169) 1,198
------- -------- ------ ------ ------- -------
Interest expense:
Savings, Club, NOW, and
money market accounts (105) (285) (390) (336) (442) (778)
Certificates of deposit 621 (937) (316) 1,295 23 1,318
Federal funds purchased 186 119 305 (1) (0) (1)
Borrowed Funds 269 11 280 674 (108) 566
Capitalized lease obligation (9) -- (9) (8) 1 (7)
------- -------- ------ ------ ------ -------
Total interest-bearing liabilities 962 (1,092) (130) 1,624 (526) 1,098
------- -------- ------ ------ ------ -------
Net interest income $ 862 $ (415) $447 $ 743 $(643) $ 100
======= ======== ====== ====== ====== =======
</TABLE>
[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>
The increase in 1999 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 tax-exempt securities and
commercial real estate loans. The increase in 1998 taxable equivalent interest
income as compared to 1997 was primarily due to a similar positive volume and
negative rate relationship. The 1999 decrease in interest expense was primarily
due to decreased rates on certificates of deposit and savings and NOW deposits,
while the 1998 increase in interest expense was primarily due to higher balances
of certificates of deposit and borrowed funds.
As shown in Table II and III, 1999 taxable-equivalent net interest income
increased $447,000 (2.1%) compared to 1998. Interest income increased $317,000
and interest expense decreased $130,000. The 1999 net interest margin was 3.58%
(5 basis points below 1998). The decline in the net interest margin was a result
of competitive pressures and federal monetary policy causing yields/rates to
decrease for total interest-earning assets to greater degree than the decrease
seen on rates for total interest-bearing liabilities.
Taxable-equivalent net interest income for 1998 increased $100,000 (0.5%) over
1997. Interest income increased $1,198,000 and interest expense increased
$1,098,000. The 1998 net interest margin was 3.63% (16 basis points below 1997).
The decline in the net interest margin was a result of competitive pressures
causing yields/rates to increase for total interest-bearing liabilities and
decrease for total interest-earning assets. 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.
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 $5,107,000 at December 31, 1999, as compared
to $4,618,000 at December 31, 1998, an increase of 10.59%. The allowance was
1.23% of total loans (net of unearned discount and fees) at December 31, 1999.
The provision for loan losses increased to $720,000 in 1999 from $540,000 in
1998.
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>
TABLE IV
CHANGES IN ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period $4,618 $4,562 $5,017 $4,787 $5,193
Charge-offs:
Domestic:
Commercial, financial and agricultural 238 313 315 330 347
Real estate commercial and residential
mortgage 220 256 821 366 1,584
Installment 218 208 171 69 59
------ ------ ------ ------ ------
Total $ 676 $ 777 $1,307 $ 765 $1,990
------ ------ ------ ------ ------
Recoveries:
Domestic:
Commercial, financial and agricultural 379 232 189 98 134
Real estate-commercial and residential
mortgage 25 28 35 48 63
Installment 41 33 28 16 22
------- ------ ------ ------ ------
Total $ 445 $ 293 $ 252 $ 162 $ 219
------- ------ ------ ------ ------
Net charge-offs 231 484 1,055 603 1,771
Additions charged to operations 720 540 600 833 1,365
------- ------ ------ ------ ------
Allowance for loan losses at end of period $ 5,107 $4,618 $4,562 $5,017 $4,787
Percentage of net charge-offs during the period
to average loans outstanding during the period .06% .13% .30% .19% .58%
Percentage of allowance for loan losses to total loans -
net of unearned income, period end 1.23% 1.23% 1.28% 1.46% 1.59%
Percentage of allowance for loan losses to total
nonperforming loans, period end 319% 211% 243% 88% 119%
</TABLE>
7
<PAGE>
<TABLE>
TABLE V
ALLOCATION OF ALLOWANCES FOR LOAN LOSSES
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
% 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 $1,940 15% $1,196 18% $ 934 18% $1,001 13% $1,322 14%
Real estate - commercial
and residential
mortgage 772 68% 1,284 64% 1,424 64% 1,898 70% 2,001 71%
Installment 189 17% 138 18% 242 18% 210 17% 158 15%
Unallocated 2,206 -- 2,000 -- 1,962 -- 1,908 -- 1,306 --
------ --- ------ --- ------ --- ------ --- ------ ---
Total $5,107 100% $4,618 100% $4,562 100% $5,017 100% $4,787 100%
====== === ====== === ====== === ====== === ====== ===
</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 real estate loans decreased in
1999 over 1998 based on the lower levels of nonperforming loans in that
category. These allocations are 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.
Noninterest income increased due to an increase in income from trust services.
In addition, gains on sale of securities increased by $178,000 for the year
ended December 31, 1999, as compared to 1998 primarily as a result of gains on
the sale of municipal securities approximating $138,000.
Noninterest Expense
The following table (Table VI) summarizes major components of non-interest
expense for the periods shown.
<TABLE>
1999 1998 1997
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 $ 7,212 1.21% $ 7,080 1.21% $ 7,460 1.36%
Net occupancy, furniture and
equipment expense 2,462 .41 2,426 .41% 2,198 .40%
Data processing services 352 .06 650 .11% 627 .11%
Foreclosure and other real estate
expenses 56 .00 351 .06% 496 .09%
Merger related costs -- -- 1,098 .19% -- --
Fidelity loss (recovery) -- -- -- -- (372) (.07)%
Other expense 3,910 .65 3,754 .64% 3,919 .71%
------- ----- ------- ---- ------- ----
Total $13,992 2.33% $15,359 2.62% $14,328 2.60%
======= ===== ======= ==== ======= ====
</TABLE>
8
<PAGE>
Salaries and benefits increased in 1999 as a result of growth in personnel in
1999. Total full-time equivalent employees numbered 232 at December 31, 1999,
and 204 at December 31, 1998. The level of full-time equivalent employees
increased in 1999 as compared to 1998 primarily as a result of new branches
being opened in Dickson City and Kingston.
Occupancy costs and furniture and equipment expense increased in 1999 primarily
as a result of the increased costs associated with the new branches. Data
processing services expense decreased $298,000 in 1999 primarily as a result of
the Bank discontinuing the Fiserv service contract. In 1998, the Bank had
service contracts with Fiserv and Jack Henry, the servicer for UVB. In 1999, the
Bank decided to keep only the Jack Henry contract.
The decrease in foreclosure and other real estate expenses between 1998 and 1999
was primarily due to the resolution of certain loans in the Binghamton loan
portfolio in 1998. This was a portfolio of loans purchased by NBO prior to the
merger in 1998.
Other expense increased from December 31, 1998 to December 31, 1999 primarily
due to an increase in office expense for updating stationary and other supplies
to reflect the new First Liberty logo and name. Other expense for 1999 also
includes approximately $87,000 for the first year of amortization of the
Olyphant Housing Partnership investment.
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.
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.
Income Tax Provision
Fluctuations in the 1999, 1998, and 1997 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 decrease in the effective tax rate
from 28.2% for 1998 to 20.1% for 1999 is attributable to the Company's low
income housing credit related to the Olyphant Housing Partnership investment.
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.
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-
9
<PAGE>
sale or held for trading. The Bank does not currently maintain a portfolio of
securities categorized as held for trading. At December 31, 1999, the
available-for-sale securities portfolio totaled $185,908,000, or 28.5% of
assets.
The following table (Table VII) shows maturity data and related weighted-average
yields as of December 31, 1999 and carrying values as of December 31, 1999,
1998, and 1997. Yields on available for sale securities are computed using
historical amortized cost.
<TABLE>
TABLE VII
SECURITIES PORTFOLIO
December 31, 1999
-----------------
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 $1,001 $ -- $ -- $ -- $ -- $ 1,001
Yield 5.81% -- -- -- -- 5.81%
Municipal securities
Market value 1,020 2,375 7,285 23,537 -- 34,217
Yield 4.20% 4.23% 5.22% 5.06% -- 5.01%
Mortgage-backed securities and
U.S. government agencies
Market value 1,531 7,486 -- 57,342 -- 66,359
Yield 6.24% 6.22% -- 6.14% -- 6.15%
Collateralized mortgage obligations and
U.S. government agencies
Market value -- 40,986 14,946 22,423 -- 78,355
Yield -- 5.80% 6.21% 6.19% -- 5.99%
Other securities
Market value -- 250 -- -- 5,726 5,976
Yield 6.30% 6.71% 6.69%
Total market value $3,552 $51,097 $22,231 $103,302 $5,726
====== ======= ======= ======== ====== =====
$185,908
Weighted average yield 5.53% 5.79% 5.89% 5.91% 6.71% 5.89%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
December 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Securities available for sale
U.S. Treasuries $ 1,001 $ 22,279 $ 15,512
Municipal securities 34,217 48,575 5,657
Mortgage-backed securities and
U.S. government agencies 66,359 70,309 37,819
Collateralized mortgage obligations and U.S.
government agencies 78,355 49,446 63,172
Other securities 5,976 5,954 1,605
-------- ---------- ----------
Total $185,908 $196,563 $123,765
======== ======== ========
Investment securities held to maturity
U.S. Treasuries $ -- $ -- $27,180
Municipal securities -- -- 30,891
Other -- -- 3,293
-------
Total $ -- $ -- $61,364
=======
</TABLE>
10
<PAGE>
Loans
During 1999, gross loans, net of unearned income, grew $40,635,000 to
$416,550,000 at December 31, 1999. The largest increase was in real estate
loans, which increased $35,258,000 to $270,866,600 at December 31, 1999,
compared to $235,608,000 at December 31, 1998. The increase in the installment
loan portfolio was primarily due to home equity loans and, to a lesser degree,
auto loans.
The following table (Table VIII) shows consolidated loans at December 31, 1999,
1998, 1997, 1996 and 1995 (including non-accrual loans), and summarizes the
maturity data for loans-gross as of December 31, 1999.
<TABLE>
TABLE VIII
LOANS
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate - commercial and residential mortgage $270,866 $235,608 $226,551 $233,191 $205,907
Commercial, financial and agricultural 64,513 67,659 64,822 44,730
41,505
Installment 70,760 67,323 64,321 58,452 45,879
Real estate - construction 11,110 6,266 6,030 7,250 8,538
-------- -------- -------- -------- --------
Total loans - gross 417,249 376,856 361,724 343,623 301,829
Less: unearned income 699 941 1,130 1,147 1,336
-------- -------- -------- -------- --------
Total gross loans, net of unearned income $416,550 $375,915 $360,594 $342,476 $300,493
======== ======== ======== ======== ========
</TABLE>
<TABLE>
December 31, 1999
-----------------
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 $14,108 $25,784 $237,980 $277,872
Commercial, financial and agricultural 7,923 14,054 46,640 68,617
Installment 2,645 39,551 28,564
------- ------- -------- --------
70,760
Total loans - gross $24,676 $79,389 $313,184 $417,249
======= ======= ======== ========
Fixed rate 17,582 72,586 234,773 324,941
Variable rate 7,094 6,803 78,411 92,308
------- ------- -------- --------
Total loans - gross $24,676 $79,389 $313,184 $417,249
======= ======= ======== ========
</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.
11
<PAGE>
Table IX summarizes the Bank's non-performing assets at December 31, 1999, 1998,
1997, 1996, and 1995.
<TABLE>
TABLE IX
NON-PERFORMING ASSETS
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $1,446 $1,740 $1,607 $4,449 $3,622
Loans past due 90 days or more and still accruing 154 445 290 713 578
------ ------ ------ ------ ------
Total non-performing loans 1,600 2,185 1,897 5,162 4,200
Real estate owned other than bank premises 558 479 953 817 1,423
------ ------ ------ ------ ------
Total $2,158 $2,664 $2,850 $5,979 $5,623
====== ====== ====== ====== ======
<FN>
(1.) See Note 4 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>
An analysis of non-accrual loans as of December 31, 1999, 1998, 1997, 1996, and
1995 is as follows:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Real estate - commercial and residential mortgage $1,180 $1,377 $ 987 $3,006 $2,569
Commercial 266 363 620 1,443 1,053
------ ------ ------ ------ ------
Total $1,446 $1,740 $1,607 $4,449 $3,622
====== ====== ====== ====== ======
</TABLE>
At December 31, 1999 and 1998, the Company had impaired loans totaling
approximately $798,000 and $979,000, respectively, all of which had a related
allowance for impairment. At December 31, 1999 and 1998, the allowance for
losses on impaired loans totaled $311,000 and $202,000, respectively.
Deposits
Table X summarizes the average deposits and rates paid on deposit categories of
average total deposits for the last three years.
<TABLE>
TABLE X
AVERAGE DEPOSITS
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Deposits Rates Deposits Rates Deposits Rates
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Domestic:
NOW accounts $ 22,039 1.48% $ 24,383 1.77% $ 26,999 1.21%
Savings deposits 91,923 2.12% 94,580 2.51% 95,347 2.59%
Other time deposits 3,270 2.74% 5,222 1.22% 17,394 4.75%
Money market accounts 27,288 2.15% 24,834 2.66% 21,850 2.25%
Certificates of deposit 310,566 5.15% 299,118 5.45% 275,296 5.44%
Total interest bearing
Noninterest-bearing demand $ 53,874 $ 50,422 $ 46,082
========= ========= =========
Total $ 508,960 $498,559 $482,968
========= ======== ========
</TABLE>
The level of certificates of deposit increased in 1999 due to growth in the
Bank's newest branches in Kingston and Dickson City. The level of certificates
of deposit increased in 1998 as compared to 1997 primarily due to growth in the
Bank's branches in Daleville and Carbondale.
12
<PAGE>
Table XI summarizes the maturity distribution of time deposits greater than
$100,000 at December 31, 1999 and 1998 (including open time deposits and savings
accounts).
<TABLE>
TABLE XI
MATURITY DISTRIBUTION OF TIME DEPOSITS GREATER THAN $100,000
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Domestic:
Certificates of deposit:
Three months or less $26,373 $17,909
Over three months through twelve months 25,883 20,330
Over one year through three years 7,982
12,057
Over three years 3,378 1,836
------- -------
Total Certificates of deposit $63,616 $52,132
======= =======
</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 decreased $1,691,000 to $57,217,000 at December 31, 1999. 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 14 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, 1999, of which 4% must be Tier 1
capital. The Company's total risk-based capital was 16.87% at December 31, 1999
and 18.91% at December 31,1998. The Company's Tier 1 risk-based capital ratio
was 15.62% at December 31, 1999, and 17.66% at December 31, 1998.
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 9.46% at December 31, 1999
and 9.44% at December 31, 1998.
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.
13
<PAGE>
At December 31, 1999, the Bank is classified as well-capitalized with total
risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios of
16.47%, 15.22% and 9.41%.
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, 1999 for certain interest sensitivity periods.
<TABLE>
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 $ 20,939 $ 9,498 $ 17,486 $ 84,344 $53,624 $185,891
Loans (net of unearned income) 69,865 22,809 42,854 229,816 51,206 416,550
Federal funds sold and interest
earning deposits 6,019 -- -- -- -- 6,019
--------- -------- -------- -------- ------- --------
Total $ 96,823 $ 32,307 $ 60,340 $314,160 $104,830 $ 608,460
========= ======== ======== ======== ======== =========
Interest-bearing liabilities:
Now accounts 3,374 1,047 2,095 12,567 4,189 23,272
Money market accounts 4,304 2,279 4,557 9,114 -- 20,254
Savings (1) 12,975 4,578 9,491 48,321 16,107 91,472
Time 100,097 68,611 54,819 74,768 1,650 299,945
FHLB advances and federal
funds purchased 67,478 28 10,056 25,452 5,003 108,017
--------- -------- -------- -------- -------- ---------
Total $ 188,228 $ 76,543 $ 81,018 $170,222 $ 26,949 $ 542,960
========= ======== ======== ======== ======== =========
Interest rate sensitivity gap (91,405) (44,236) (20,678) 143,938 77,801 65,500
Cumulative interest rate
sensitivity gap (91,405) (135,641) (156,319) (12,381) 65,500 --
Cumulative interest rate
sensitivity ratio (2) (13.99)% (20.76)% (23.93)% (1.90)% 10.03%
</TABLE>
[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>
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
14
<PAGE>
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, 1999 and
1998.
Change in Rates Net Interest Income Change (After tax, in thousands)
--------------- ----------------------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
+300 $(3,203) $(1,406)
+200 (2,126) (932)
+100 (1,059) (428)
-100 907 252
-200 1,673 425
-300 2,253 617
Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement (as amended by SFAS No. 137 in June 1999) 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. SFAS No. 133,
as amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. 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.
Year 2000
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations, causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations. The Company did not incur any additional costs for the Year
2000 in the year ended December 31, 1999. While lingering concern exists about
certain dates during Year 2000, the most significant date, January 1, 2000, has
passed without incident. As of the date of this filing, the Company has not
experienced any significant Year 2000 problems relating to its internal or
third-party computer systems, nor has the Company experienced any issues
regarding the ability of commercial customers to meet debt services as a result
of Year 2000 issues. The Company will continue to monitor systems for problems
in the future; however, the costs related to that process are not expected to be
significant.
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
15
<PAGE>
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 $29,575,000 at December 31, 1999. 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, 1999 the Company had a maximum borrowing capacity available to it
of approximately $263 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.
16
<PAGE>
Quarterly Financial Data
A comparison of quarterly financial information for 1999 and 1998 is provided in
the following table.
<TABLE>
1999
----
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Quarter Ended
Interest income $10,880 $10,764 $10,617 $10,298
Interest expense 5,950 5,620 5,565 5,408
Net interest income 4,930 5,144 5,052 4,890
Provision for loan losses 180 180 180 180
Net income 1,278 1,692 1,539 1,518
Earnings per share - basic .20 .27 .24 .24
- diluted .19 .27 .24 .24
1998
----
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
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 .17 .20 .04 .22
- diluted .17 .20 .04 .22
</TABLE>
Fourth Quarter Results - 1999 versus 1998
Net income for the fourth quarter of 1999 increased $153 from the fourth quarter
of 1998. The primary reasons for the increase in net income were increases in
Trust service income and decreases in other non-interest expense in 1999.
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>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
---- ---- ----
High Low High Low High Low
---- --- ---- --- ---- ---
Quarter
First $18.94 $18.38 $15.56 $15.38 $11.38 $10.81
Second $18.75 $17.75 $18.63 $15.56 $12.25 $11.06
Third $18.38 $16.75 $19.25 $18.25 $12.50 $11.50
Fourth $18.25 $16.75 $19.00 $18.31 $15.50 $12.50
17
<PAGE>
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Shareholders:
Management of First Liberty Bank Corp. (the "Company") is responsible for
establishing and maintaining effective internal control over financial reporting
presented in conformity with generally accepted accounting principles. This
internal control contains monitoring mechanisms, and actions are taken to
correct deficiencies identified.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the degree of effectiveness of internal control structure
may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 1999. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 1999, the Company maintained effective internal control over
financial reporting presented in conformity with generally accepted accounting
principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Pennsylvania State Department of Banking and the Federal Deposit Insurance
Corporation as safety and soundness laws and regulations.
The Company assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that First Liberty Bank Corp. compiled, in all material respects, with the
designated laws and regulations related to safety and soundness as of December
31, 1999.
William M. Davis Donald J. Gibbs
President & CEO Chief Financial Officer
18
<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, 1999 and 1998, 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,
1999. 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, 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,
which report total assets constituting 44% and total interest income
constituting 43% 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
February 8, 2000
19
<PAGE>
<PAGE>
1. Summary of Significant Accounting Policies
First Liberty Bank Corp. (the Company) is a bank holding company whose
principal subsidiary as of December 31, 1999, is First Liberty Bank and
Trust (the Bank) which operates branch bank systems located in Lackawanna
County, Pennsylvania. The Bank provides 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 Bank faces competition in its
market from other depository institutions, some of which are
substantially larger than the Bank and from other financial services
companies, including mutual funds, mortgage companies, finance companies,
insurance companies, and others.
(a) Recent Acquisition
On June 30, 1998, the Company consummated its acquisition of Upper
Valley Bancorp, Inc. (Upper Valley) the holding company of NBO. As
of December 31, 1998, NBO was a $263 million national-chartered
bank with three branches in Olyphant, Scranton, and Pittston,
Pennsylvania. Upper Valley shareholders received .689 shares of
the Company's 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. This resulted in the issuance of approximately
694,000 shares of the Company's stock. The transaction was
tax-free to the shareholders for federal income tax purposes. In
connection with the acquisition, the Company 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.
Year ended
December 31, 1997
Net interest income:
FNBJ $11,312
NBO 8,429
-------
Combined $19,741
=======
Net income:
FNBJ $3,483
NBO 1,637
------
Combined $5,120
======
The Company 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 subsidiary (Company) include the accounts
of First Liberty Bank Corp., First Liberty Bank and Trust 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.
24
<PAGE>
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 and the valuation of real estate owned.
(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 Bank are subject to the regulations of various
government agencies. These regulations can and do change
significantly from period to period. The Bank also undergoes
periodic examinations by the regulatory agencies which may subject
it 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.
(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 1999, 1998
or 1997.
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.
25
<PAGE>
(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.
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 known
and 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 allowance 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.
26
<PAGE>
(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.
(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. First Liberty Bank Corp. and
its subsidiaries file a consolidated Federal income tax return and
the amount of income tax expense or benefit 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 Bank has retirement plans that cover substantially all
employees. The provisions of SFAS No. 87, Employers' Accounting
for Pensions, are utilized to calculate net pension cost.
27
<PAGE>
(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).
All share related information presented in the table below has
been adjusted to reflect a four-for-one stock split made effective
on October 15, 1999 to shareholders of record as of September 30,
1999.
</TABLE>
<TABLE>
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 6,027 $ 4,001 $ 5,120
======= ======= =======
Denominator:
Denominator for basic earnings
per share-weighted average shares 6,361,013 6,318,560 6,295,348
Effect of dilutive securities:
Employee stock options 46,499 59,992 66,060
--------- ------ -----------
Denominator for dilutive earnings per
share-adjusted weighted average
shares and assumed exercise 6,407,512 6,378,552 6,361,408
========= ========= =========
Basic earnings per share $ .95 $ .63 $ .81
========= ============ ============
Diluted earnings per share $ .94 $ .63 $ .80
========= ============ ============
</TABLE>
(p) Segment Reporting
In 1998, First Liberty Bank Corp. had two reportable segments:
The First National Bank of Jermyn and NBO National Bank. NBO was
acquired by the Company on June 30, 1998. The two segments were
managed separately until February 16, 1999 when management
integrated the two segments into one new segment called First
Liberty Bank and Trust.
(q) Reclassification
Certain prior period amounts have been reclassified to conform
with the current year's presentation. These reclassifications had
no effect on net income.
2. 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 $3,550,000 and $980,000 in
1999 and 1998, respectively.
28
<PAGE>
3. Securities
The amortized cost and fair value of securities is shown below (in
thousands):
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale:
December 31, 1999
U.S. Treasuries $ 1,000 $ 1 $ -- $ 1,001
Municipal securities 35,905 88 (1,776) 34,217
Mortgage-backed securities and U.S.
government agencies 68,566 71 (2,278) 66,359
Collateralized mortgage obligations and
U.S. government agencies 81,269 20 (2,934) 78,355
Marketable equity 5,726 -- -- 5,726
Corporate obligations 250 -- -- 250
-------- ------ ------- --------
$192,716 $ 180 $(6,988) $185,908
======== ====== ======= ========
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
======== ====== ======= ========
</TABLE>
Proceeds from sales of securities available for sale during the year
ended December 31, 1999 were $20,518,000 per cash flows, resulting in
gross realized gains of $285,000 and gross related losses of $60,000.
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 realized 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 related losses of $263,000.
The amortized cost and fair value of securities at December 31, 1999 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 $ 3,559 $3,552
After one year but
within five years 52,601 51,097
After five years but
within ten years 22,803 22,231
After ten years 108,027 103,302
Marketable equity securities 5,726 5,726
-------- --------
Total $192,716 $185,908
======== ========
Weighted average yield 5.89% 5.89%
At December 31, 1999 and 1998, securities with an amortized cost of
approximately $43,375,000 and $22,035,000 (fair value of approximately
$41,831,000 and $22,183,000), respectively, were pledged to secure public
deposits as required or permitted by law.
29
<PAGE>
On October 1, 1998, the Bank 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 Bank did not sell any of the
transferred securities, during the fourth quarter of 1998.
4. Loans and Real Estate Owned Other than Bank Premises
The following is a summary of the Company's loan portfolio on December 31,
1999 and 1998 (in thousands):
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Real estate - commercial and residential mortgage $270,866 $235,608
Commercial, financial, and agricultural 64,513 67,659
Installment loans 70,760 67,323
Real estate - construction 11,110 6,266
-------- --------
Total loans - gross 417,249 376,856
Less unearned income 699 941
Allowance for loan losses 5,107 4,618
-------- --------
Net loans $411,443 $371,297
======== ========
</TABLE>
Accrued interest receivable on loans amounted to $1,740,000 and
$1,863,000 at December 31, 1999 and 1998, 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, 1999, 1998, and 1997. 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, 1999, 1998, and 1997 (in thousands):
1999 1998 1997
---- ---- ----
Nonaccrual loans $1,446 $1,740 $1,607
Interest income recorded 94 68 43
Interest income not recorded 154 147 137
At December 31, 1999 and 1998, the Company had impaired loans totaling
approximately $798,000 and $979,000, respectively, all of which had a
related allowance for impairment. At December 31, 1999 and 1998, the
allowance for losses on impaired loans totaled $311,000 and $202,000,
respectively. The average balance of impaired loans for 1999, 1998 and
1997 was $889,000, $514,000 and $715,000, respectively. There were no
charge-offs or recoveries on impaired loans during either 1999, 1998, or
1997. The Bank recognizes interest income on impaired loans on a cash
basis method. There was no interest income recognized on impaired loans
for the years ended December 31, 1999, 1998 and 1997.
The following table presents 1999 activity in the amounts due to the Bank
from principal officers, directors and their related businesses in excess
of $60,000. The indebtedness was incurred in the
30
<PAGE>
ordinary course of business, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons (in
thousands):
<TABLE>
1999
----
<S> <C>
Balance, at beginning of year $7,136
Additions 2,403
Repayments (4,337)
-------
Balance, at end of year $5,203
</TABLE>
At December 31, 1999, 1998, and 1997 the Bank serviced loans for others
of $6,399,000, $7,485,000 and $3,019,000, respectively.
An analysis of real estate owned other than bank premises for 1999 and
1998 follows (in thousands):
<TABLE>
Year Ended
1999 1998
---- ----
<S> <C> <C>
Balance, at beginning of year $479 $953
Transfers from real estate - commercial and real estate loans category 712 378
Real estate sales (635) (586)
Gain (loss) on disposition of real estate 12 (266)
Writedown of real estate to fair value (10) --
---- ----
Balance, at end of year $558 $479
==== ====
</TABLE>
5. Allowance For Loan Losses
A summary of the transactions in the Bank's allowance for loan losses is
as follows (in thousands):
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $4,618 $4,562 $5,017
Losses charged to allowance 676 777 1,307
Recoveries credited to allowance 445 293 252
------ ------ ------
Net charge-offs 231 484 1,055
Provision charged to operations 720 540 600
------ ------ ------
Balance, December 31 $5,107 $4,618 $4,562
====== ====== ======
</TABLE>
6. 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):
<TABLE>
December 31,
1999 1998
---- ----
<S> <C> <C>
Land and buildings $12,646 $8,447
Land under capitalized lease 302 302
Bank premises and leasehold improvements
under capitalized lease 1,720 2,260
Furniture and equipment 7,260 6,471
------- ------
Total at cost 21,928 17,480
Less: Accumulated depreciation and
amortization (7,497) (7,173)
------- ------
Net bank premises, leasehold improvements
and furniture and equipment $14,431 $10,307
======= =======
</TABLE>
31
<PAGE>
7. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
At December 31,
1999 1998
---- ----
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% $ 23,274 4.8 1.51% $ 22,089 4.5
Savings deposits 2.02% 89,481 18.5 2.02% 93,726 18.9
Other time deposits 2.89% 1,989 .4 3.00% 2,022 .4
Money Market accounts 2.28% 20,255 4.2 2.28% 28,979 5.8
Certificates of deposit 5.25% 299,945 61.9 5.37% 294,512 59.3
Noninterest bearing demand 49,502 10.2 55,272 11.1
------- ---- -------- ----
Total deposits at end of period $484,446 100% $496,600 100%
======== ==== ======== ====
</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, 1999 and 1998 is as follows (in
thousands):
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Three months or less $26,373 $17,909
Over three months through twelve months 25,883 20,330
Over one year through three years 7,982 12,057
Over three years 3,378 1,836
------- -------
Total $63,616 $52,132
======= =======
</TABLE>
Interest expense approximated $3,737,000, $3,305,000 and $2,839,000 for
certificates of deposit greater than $100,000 in the years ended December
31, 1999, 1998 and 1997, respectively.
8. 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):
2000 $155
2001 155
2002 155
2003 155
2004 103
----
Total minimum lease payments $723
Less amount representing interest (155)
----
Present value of net minimum lease payments $568
====
[/TABLE]
9. Other Borrowed Money
The Bank maintains a collateralized maximum borrowing capacity of
$263,148,000 with the Federal Home Loan Bank of Pittsburgh (FHLB). The
Bank's first advance of $10,000,000 was borrowed on January 30, 1996, and
will mature on August 23, 2000, with a fixed rate of 5.79%. A $5,000,000
and $10,000,000 advance were both borrowed in September 1997 with rates
of 5.55% and 5.52%, respectively. They both have a conversion date of
September 1999, adjustable quarterly thereafter at the option of the
FHLB. An additional $5,000,000 advance was borrowed on January 16, 1998
as a seven-year/two-year convertible program with a fixed rate of 5.14%
also adjustable quarterly thereafter. In November, a 91-day, 5.43% fixed
rate advance maturing on January 3, 2000, was
32
<PAGE>
borrowed in the amount of $30,000,000. On December 3, 1999, the Bank
borrowed two additional advances; one in the amount of $10,000,000 with
a rate of 6.16% taken as a five-year/two-year convertible advance and a
90-day, 6.10% fixed rate advance.
<TABLE>
Maximum Weighted
Amount Average Average
Weighted Outstanding at Amount Interest
Balance Average Month End Outstanding Rate
End of Interest During the During the During the
1999 Period Rate Period Period Period
---- --------- ------------ ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
FHLB advances $75,000,000 5.62% $75,000,000 $54,949,000 5.55%
Federal funds purchased 32,450,000 5.00 32,450,000 5,603,000 5.46
1998
FHLB advances $50,000,000 5.51% $50,000,000 $49,589,000 5.53%
Federal funds purchased 5,000,000 4.50 5,000,000 30,000 3.33
1997
FHLB advances $40,000,000 5.62% 40,000,000 38,309,000 5.75%
Federal funds purchased -- -- 3,416,200 38,000 7.89
</TABLE>
Advances from the FHLB with fixed rates ranging from 5.14% to 6.16% at
December 31, 1999, are due as follows:
<TABLE>
Weighted
Average
Amount Rate
------ --------
<S> <C> <C>
2000 $45,000,000 5.58%
2001 -- --
2002 15,000,000 5.53
2003 -- --
2004 10,000,000 6.16
2005 5,000,000 5.14
-----------
$75,000,000
===========
</TABLE>
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.
33
<PAGE>
The following tables set forth FLIB's pension plan's status as of
and for the years indicated (in thousands):
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,502 $7,271 $6,430
Service cost 577 423 337
Interest cost 570 556 441
Actuarial loss (gain) (1,752) 1,452 242
Benefits paid (216) (200) (179)
Benefit obligation at end of year $8,681 $9,502 $7,271
======= ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year $8,464 $7,525 $6,361
Actual return on plan assets 774 979 933
Employer contributions -- 160 410
Benefits paid (216) (200) (179)
------ ------ ------
Fair value of plan assets at end of year $9,022 $8,464 $7,525
====== ====== ======
Funded status:
Funded (unfunded) status $ 341 $(1,038) $255
Unrecognized transition (asset) obligation 32 35 38
Unrecognized net prior service cost (benefit) (336) (80) (87)
Unrecognized net (gain) loss (780) 742 (310)
------- -------- -------
Net amount recognized $ (743) $ (341) $ (104)
======= ======== =======
Components of net periodic benefit cost:
Service cost $ 577 $423 $337
Interest cost 570 556 442
Expected return on plan assets (gain) loss (724) (638) (487)
Amortization of transition (asset) obligation 3 3 3
Amortization of prior service (benefit) cost (24) (6) (6)
------- -------- -------
Net periodic benefit cost $402 $338 $289
======= ======== ======= ====
Assumptions used to value the APBO: (1)
Discount rate 7.50 6.50 6.75
Expected long-term rate of return on assets 8.50 8.50 7.50
Rate of compensation increases 5.00 4.50 4.50
</TABLE>
[FN]
(1) Assumptions for 1997 reflect First National Bank of Jermyn's
rates. Assumptions for NBO National Bank at December 31,
1997, were discount rate, 7.50%; expected long-term rate of
return on assets, 8.50%; and rate of compensation increases,
4.00%.
</FN>
11. Income Taxes
The components of income tax expense (benefits) are as follows (in
thousands):
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current - Federal $1,377 $1,825 $1,429
Deferred - Federal 144 (255) 308
------ ------ ------
$1,521 $1,570 $1,737
====== ====== ======
</TABLE>
34
<PAGE>
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax expense at 34% rate $2,566 $1,894 $2,331
Interest from tax-exempt loans and investments, net (790) (794) (630)
Nondeductible merger costs -- 138 --
Cash surrender value - life insurance (78) -- --
Low income housing tax credits (74) -- --
Other, net (103) 332 36
------ ------ ------
Income tax expense $1,521 1,570 $1,737
====== ====== ======
</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, 1999 and 1998 in accordance with SFAS No. 109 are presented
below (in thousands):
<TABLE>
l999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Unrealized losses on securities available for sale $2,313 $ 0
Allowance for loan losses 1,209 984
Deferred loan fees 276 349
Deferred directors fees 64 77
Employee benefits 350 231
Tax credit carryforwards 345 645
Others, net 88 276
------ ------
Total gross deferred tax assets $4,645 $2,562
====== ======
Deferred tax liabilities:
Depreciation (128) (214)
Unrealized gains on securities
available for sale -- (392)
------ ------
Total gross deferred tax liabilities (128) (606)
Net deferred tax asset $4,517 $1,956
====== ======
</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, 1999. There can be no assurance,
however, that the Company will generate any earnings or any specific
level of continued earnings.
35
<PAGE>
The related tax effects allocated to each component of Other
Comprehensive Income are as follows (in thousands):
<TABLE>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
------ ------- ------ ------ ------- ------ ------ ------- ------
Unrealized gains on
securities:
Unrealized holding
(losses) gains arising
during period $(7,734) 2,629 (5,105) $335 (85) 250 986 (250) 736
Add: transfers from
held to maturity to
available for sale -- -- -- 1,142 (417) 725 -- -- --
Reclassification
adjustment for (gains)
losses realized in
net income (225) 76 (149) (71) 24 (47) 256 (65) 191
------ ----- ----- ------ ----- ----- ----- ----- --------
Net unrealized (losses)
gains $(7,959) 2,705 (5,254) $1,406 (478) 928 1,242 (315) 927
======== ===== ======= ====== ===== ===== ===== ===== ========
</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 275,600 awards may be granted under the Option Plan.
At December 31, 1999, there were 114,100 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 161,500 shares at an exercise price of $8.35 per share, which
are exercisable through July 2005. Options issued to members of Upper
Valley's Board of Directors totaling 77,168 vested in 1996 and became
exercisable. Options issued to officers totaling 84,332, of which 2,908
and 2,756 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, 1999, 1998 and 1997, and changes during the years then ended
is presented below:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Stock Options:
Outstanding at beginning year 98,988 $ 8.35 154,584 $ 8.35 158,992 $ 8.35
Granted -- -- -- -- -- --
Exercised (18,436) 8.35 (52,688) 8.35 (1,652) 8.35
Canceled -- (2,908) 8.35 (2,756) 8.35
------- ---------- ---------
Outstanding at end of year 80,552 98,988 8.35 154,584 8.35
Exercisable at end of year 80,552 98,988 129,348
</TABLE>
36
<PAGE>
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 $0 in 1999, $43,000 in 1998 and $45,000 in 1997 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 the
same in 1999, $3,958,000 in 1998 and $5,075,000 in 1997, and proforma
diluted earnings per share would have been the same in 1999, $.63 in
1998, $.80 in 1997.
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.
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, 1999, approximate unused
commitments were as follows (in thousands):
Revolving home equity lines $ 4,194
Real estate - mortgages 26,287
Standby letters of credit 3,740
Other 24,694
-------
Total $58,919
=======
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.
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.
37
<PAGE>
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.
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 Bank is 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, 1999, that the Banks meet all capital adequacy requirements
to which it is subject.
As of December 31, 1999, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank 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 Bank's category. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table.
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>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
FLIB $66,183 16.87% $31,379 >8.00% $39,224 >10.00%
- -
Tier I Capital (to Risk Weighted Assets):
FLIB 61,277 15.62% 15,690 >4.00% 23,535 >6.00%
- -
Tier I Capital (to Average Assets):
FLIB 61,277 9.46% 25,908 >4.00% 32,385 >5.00%
- -
</TABLE>
38
<PAGE>
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
As of December 31, 1999 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>
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 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 First Liberty Bank and Trust to the
Company as of December 31, 1999, was approximately $10,297,000.
Federal bank laws and regulations prohibit First Liberty Bank and Trust
from extending credit to the Company in excess of its capital and surplus
(as defined by the regulations). First Liberty Bank and Trust's limit on
extension of credit to the Company was approximately $8,116,000 as of
December 31, 1999.
16. Parent Company Financial Statements
<TABLE>
BALANCE SHEETS AT DECEMBER 31, 1999 AND 1998
(In Thousands of Dollars)
1999 1998
---- ----
<S> <C> <C>
ASSETS:
Investment in subsidiaries $56,899 $58,646
Cash 154 3
Other assets 164 259
------- -------
Total assets $57,217 $58,908
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Dividends payable $ -- $ --
Shareholders' equity 57,217 58,908
------- -------
Total liabilities and shareholders' equity $57,217 $58,908
======= =======
</TABLE>
39
<PAGE>
<TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands of Dollars)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
EARNINGS OF SUBSIDIARIES:
Dividends received $2,672 2,170 $2,119
Undistributed net income 3,365 1,838 3,007
Other expenses - net 10 7 8
Federal income tax benefit -- -- 2
------ ------ ------
$6,027 $4,001 $5,120
====== ====== ======
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands of Dollars)
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net income $6,027 $4,001 $5,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (3,365) (1,838) (3,007)
Depreciation 7 7 7
Decrease in dividends payable -- (220) --
Decrease in other assets, net -- 220 1
------- ------- -------
Net cash provided by operating activities 2,669 2,170 2,121
------- ------- -------
INVESTING ACTIVITIES:
(Increase) decrease in investment in subsidiaries (54) (734) --
------- ------- -------
Net cash used in investing activities (54) (734) --
------- ------- -------
FINANCING ACTIVITIES:
Dividends paid to shareholders (2,672) (2,179) (2,119)
Issuance of common stock 208 574 14
------- ------- -------
Net cash used in financing activities 2,464 (1,605) (2,105)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 151 (169) 16
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3 172 156
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 154 $ 3 $ 172
======= ======= =======
</TABLE>
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.
40
<PAGE>
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, Federal Funds Sold and Purchased, Accrued
Interest Receivable, and Accrued Interest Payable
For cash, due from banks, federal funds sold/purchased, and
accrued interest receivable/payable 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
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.
(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.
41
<PAGE>
The carrying amount and estimated fair value of the Company's
financial instruments are as follows (in thousands):
<TABLE>
December 31,
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks
and federal funds sold $ 26,023 $26,023 $ 25,628 $ 25,628
Securities available for sale 185,908 185,908 196,563 196,563
Loans, net 411,443 367,390 371,297 386,343
Accrued interest receivable 3,397 3,397 3,914 3,914
Financial liabilities:
Deposits $ 484,446 $ 486,799 $496,600 $494,866
Federal funds purchased 32,450 32,450 5,000 5,000
Other borrowed money 75,567 75,567 50,660 50,660
Accrued interest payable 2,040 2,040 2,218 2,218
The fair values of the Banks' off-balance sheet financial
instruments at December 31, 1999 and 1998, are as follows (in
thousands):
December 31,
1999 1998
---- ----
Contract Fair Contract Fair
Value Value Value Value
----- ----- ----- -----
Off-balance sheet instruments:
Commitments to extend credit $ 30,481 $ 457 $14,817 $120
Standby letters of credit 3,740 56 1,217 15
Other 24,694 370 13,224 174
</TABLE>
42
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
First Liberty Bank Corp.
We consent to incorporation by reference in the Registration Statement (No.
333-62941) on Form S-8 of First Liberty Bank Corp. of our report dated February
8, 2000, relating to the consolidated balance sheets of First Liberty Bank Corp.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, chages in shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of First Liberty
Bank Corp.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 29, 2000
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
First Liberty Bank & Trust
First Jermyn Realty Co., Inc.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000741562
<NAME> First Liberty Bank & Trust
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 20,004
<INT-BEARING-DEPOSITS> 6,019
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 185,908
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 416,550
<ALLOWANCE> 5,107
<TOTAL-ASSETS> 653,275
<DEPOSITS> 484,446
<SHORT-TERM> 32,450
<LIABILITIES-OTHER> 3,595
<LONG-TERM> 75,567
0
0
<COMMON> 2,009
<OTHER-SE> 55,208
<TOTAL-LIABILITIES-AND-EQUITY> 653,275
<INTEREST-LOAN> 30,727
<INTEREST-INVEST> 11,832
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 42,559
<INTEREST-DEPOSIT> 19,128
<INTEREST-EXPENSE> 22,543
<INTEREST-INCOME-NET> 20,016
<LOAN-LOSSES> 720
<SECURITIES-GAINS> 225
<EXPENSE-OTHER> 13,992
<INCOME-PRETAX> 7,548
<INCOME-PRE-EXTRAORDINARY> 7,548
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,027
<EPS-BASIC> .95
<EPS-DILUTED> .94
<YIELD-ACTUAL> 3.50
<LOANS-NON> 1,446
<LOANS-PAST> 154
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,618
<CHARGE-OFFS> 676
<RECOVERIES> 445
<ALLOWANCE-CLOSE> 5,107
<ALLOWANCE-DOMESTIC> 3,091
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,016
</TABLE>
