UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
--------------------------------
or
[ ]Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 000-20163
----------------------------------------
FIRST PHILSON FINANCIAL CORPORATION
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 25-1511866
- ------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
534 Main Street, Berlin, PA 15530
- ------------------------------- ---------------------------------
(Address of principal executive (Zip code)
offices)
(Registrant's telephone number, including area code)(814) 267-4666
---------------
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
------ ------
As of May 2, 1997, there were 435,600 shares outstanding of the
issuer's common stock.
1
<PAGE>
First Philson Financial Corporation
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of March 31,
1997 and December 31, 1996 3
Consolidated Statement of Income (Unaudited) for the
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Cash Flows (Unaudited) for
the Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements
(Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II - OTHER INFORMATION 13
Item 1. Legal Proceedings
2. Changes in Securities
3. Defaults Upon Senior Securities
4. Submission of Matters to a Vote of Security Holders
5. Other Information
6. Exhibits and Reports on Form 8-K
Signatures 14
2
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,338 $ 8,916
Federal funds sold 11,000 6,500
Investment securities available for sale 2,722 579
Investment securities held to maturity
(market values of $74,180 and $78,750) 74,658 78,702
Total loans 100,976 100,654
Less allowance for loan losses 2,908 3,017
--------- ---------
Net loans 98,068 97,637
Premises and equipment, net 2,371 2,393
Accrued interest receivable 1,914 1,707
Other assets 1,367 1,231
--------- ---------
TOTAL ASSETS $199,438 $197,665
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 20,565 $ 20,567
Interest-bearing demand 25,282 25,094
Savings 35,746 35,614
Money market 12,521 12,193
Time 79,944 80,012
--------- ---------
Total deposits 174,058 173,480
Securities sold under agreements to
repurchase 1,251 1,168
U. S. Treasury demand notes 1,179 845
Accrued interest payable 560 552
Other liabilities 670 421
--------- ---------
TOTAL LIABILITIES 177,718 176,466
--------- ---------
STOCKHOLDERS' EQUITY
Common stock ($10 par value, 500,000
shares authorized, 435,600 shares
issued and outstanding) 4,356 4,356
Capital surplus 11,644 2,354
Retained earnings 5,715 14,470
Net unrealized gain on securities 5 19
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 21,720 21,199
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $199,438 $197,665
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 2,262 $ 2,159
Interest on federal funds sold 120 90
Investment securities:
Taxable interest 982 1,104
Tax exempt interest 172 161
------------ ------------
Total interest and
dividend income 3,536 3,514
------------ ------------
INTEREST EXPENSE
Interest on deposits 1,401 1,473
Interest on borrowed funds 21 61
------------ ------------
Total interest expense 1,422 1,534
------------ ------------
NET INTEREST INCOME 2,114 1,980
Provision for loan losses - -
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,114 1,980
------------ ------------
OTHER INCOME
Service charges on deposit
accounts 130 115
Other income 94 70
------------ ------------
Total other income 224 185
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 775 757
Premises and equipment expense 199 278
Other expense 423 413
------------ ------------
Total other expense 1,397 1,448
------------ ------------
Income before income taxes 941 717
Income tax expense 253 184
------------ ------------
NET INCOME $ 688 $ 533
============ ============
EARNINGS PER SHARE $ 1.58 $ 1.22
CASH DIVIDENDS PER SHARE $ 0.35 $ 0.30
WEIGHTED AVERAGE SHARES OUTSTANDING 435,600 435,600
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 688 $ 533
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation, amortization
and accretion, net 52 117
Increase in accrued interest
receivable (207) (209)
Increase (decrease) in
accrued interest payable 8 (26)
Other, net 121 126
------------ ------------
Net cash provided by
operating activities 662 541
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities and
repayments of investment
securities held to maturity 5,033 8,877
Purchase of investment securities
Held to maturity (979) (9,583)
Available for sale (2,166) -
Net increase in loans (426) (966)
Purchase of premises and equipment (44) (18)
------------ ------------
Net cash provided by (used
for) investing activities 1,418 (1,690)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in
deposits 578 (1,181)
Increase in securities sold under
agreements to repurchase 83 427
Increase in U.S. Treasury demand
notes 334 631
Cash dividends paid (153) (131)
------------ ------------
Net cash provided by (used
for) financing activities 842 (254)
------------ ------------
Increase (decrease) in cash
and cash equivalents 2,922 (1,403)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 15,416 15,387
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 18,338 $ 13,984
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
First Philson Financial Corporation
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of
First Philson Financial Corporation (the "Company") and its
wholly-owned subsidiary First Philson Bank, National Association
(the "Bank"). All significant intercompany balances and
transactions have been eliminated in the consolidation.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and
therefore, do not necessarily include all information that would
be included in audited financial statements. The information
furnished reflects all adjustments which are, in the opinion of
Management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring
nature. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full
year.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative amounts for the previous period have been
reclassified to conform to the current period classifications.
Pending Accounting Pronouncement
- --------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The
Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings based on control-oriented "financial-
components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of
Statement No. 125 are effective for transactions occurring after
December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December
31, 1997 by Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an amendment of FASB
Statement No. 125." The adoption of these statements is not
expected to have a material impact on financial position or
results of operations.
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per
Share." Statement No. 128 will become effective for the
Corporation beginning in 1998. This statement re-defines the
standards for computing earnings per
6
<PAGE>
share ("EPS") previously found in Accounting Principles Board
Opinion No. 15, Earnings Per Share. Statement No. 128 establishes
new standards for computing and presenting EPS and requires dual
presentation of "basic" and "diluted" EPS on the face of the
income statement for all entities with complex capital structures.
Under Statement No. 128, basic EPS is to be computed based upon
income availability to common shareholders and the weighted
average number of common shares outstanding for the period.
Diluted EPS is to reflect the potential dilution that could occur
if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Corporation. Statement No. 128 also requires the restatement of
all prior-period EPS data presented. The Corporation will adopt Statement
No. 128 on January 1, 1998 and based on current estimates, does not
believe the effect of adoption will have a significant impact on
the Corporation's financial position or results of operations.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 1997 increased by $1,773,000 from that
reported at December 31,1996. Increases in federal funds sold of
$4,500,000 and investment securities available for sale of
$2,143,000, were funded primarily by the decreases in cash and due
from banks of $1,578,000 and investment securities held to
maturity of $4,044,000.
The increase in investment securities available for sale was the
result of Management's decision to invest in available for sale
securities in 1997 in order to enhance the liquidity within the
investment portfolio. The decrease in investment securities held
to maturity resulted from maturities and calls.
The increase in net loans of $431,000 resulted primarily from
increases in mortgage loans of $619,000 offset by a decrease in
installment loans of $202,000. As in 1996, the increase in
mortgage loans continues to be in fixed rate residential and
commercial real estate loans. The allowance for loan losses
decreased $109,000 or 3.61% as charge offs exceeded recoveries for
the first quarter of 1997. As of March 31, 1997, the allowance
for loan losses represents 2.88% of the outstanding loan balances
as compared to 3.00% for December 31, 1996. As in 1996 and 1995,
Management continues to emphasize consumer and small business
lending. This has permitted the Company to meet the needs of the
communities for which it serves.
The increase in equity capital was attributed to net earnings of
$688,000, less dividend payments totaling $153,000 and the change
in net unrealized gains on available for sale securities of
$14,000. During the first quarter of 1997, Management made a
decision to transfer $9,290,000 from Retained Earnings to Capital
surplus as permanent capital for the Company.
Results of Operations
Comparison of Three Months Ended March 31, 1997 and 1996.
The Company's net income increased by $155,000 for the first
quarter of 1997, as compared to net income for the first quarter
of 1996. Effecting net income positively was an increase in
interest income of $22,000 and a decrease in interest expense of
$112,000 and other expense of $51,000. Negative effects to net
income consisted of an increase in income taxes of $69,000.
Net interest income for the first quarter of 1997 increased $134,000
as compared to the first quarter of 1996 from an increase
in interest income and a decrease in interest expense. The
increase in interest income resulted primarily from increases in
interest and fees on loans of $103,000 and interest on
8
<PAGE>
federal funds sold of $30,000, offset by a decrease in interest on
investment securities of $111,000. The increase in interest and
fees on loans from the first quarter of 1996 to the first quarter
of 1997 is attributable to an increase in the average outstanding
balance of mortgage loans, primarily in fixed rate residential
mortgages, home equity, and commercial real estate loans. The
increase in interest on federal funds sold is also due to an
increase in the average outstanding balance. The decrease in
interest on investment securities is due to a decrease in the
average outstanding balance of investment securities. The
decrease in interest expense resulted from the loss of a
repurchase agreement customer during 1996 and a reduction in the
cost of interest-bearing deposits.
Other expense decreased for the first quarter of 1997 as compared
to that of 1996 primarily due to a decrease in premises and
equipment expense. The decrease in premises and equipment expense
resulted from repairs due to minor flood damage at our Confluence
office during the first quarter of 1996 and the mainframe computer
system being fully depreciated in April 1996.
The increase in income taxes for the first quarter of 1997 as
compared to the first quarter of 1996 was due to an increase in
pretax income of $224,000. The effective tax rates were 26.89%
for 1997 and 25.66% for 1996.
Liquidity and Cash Flows
To ensure that the Bank can satisfy customer credit needs for
current and future commitments and depository withdrawal
requirements, the Bank manages the liquidity position by ensuring
that there are adequate short-term funding sources available for
those needs. Liquid assets consist of cash and due from banks,
federal funds sold, investment securities available for sale and
investment securities held to maturity, maturing in one year or
less. The following table shows these liquidity sources, minus
short-term borrowings as of March 31, 1997 and December 31, 1996,
(dollars in thousands). Management feels that the liquidity
position is strong and adequate to cover any potential customer
withdrawals and credit needs.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- -----------
<S> <C> <C>
Cash and due from banks $ 7,338 $ 8,916
Federal funds sold 11,000 6,500
Investment securities available for sale 2,722 579
Investment securities held to maturity,
maturing in one year or less 19,935 18,512
---------- -----------
Total 40,995 34,507
Less short-term borrowings 2,430 2,013
---------- -----------
Net liquidity position $ 38,565 $ 32,494
As a percent of total assets 19.34% 16.44%
</TABLE>
9
<PAGE>
Capital Resources
Capital management is an ongoing process that consists of providing
equity for both current and future financial positioning. The
Company manages its capital to execute its strategic business plans
and support its growth and investments. During the first quarter of
1997, the Company increased its capital base by $521,000 or 2.46%,
primarily through retained earnings. For the first quarter of
1996, capital increased by $403,000 or 2.08%.
Bank regulatory agencies have capital adequacy and risk-based
capital adequacy guidelines by which they monitor the capital
adequacy of financial institutions and holding companies. The
Company has complied with the regulatory requirements and expects to
remain in compliance in the future.
The first measure is risk-based capital which measures the
relationship between capital, segregated between Tier 1 and Tier 2
capital, and risk-weighted assets, as defined.
Tier 1 capital generally consists of stockholders' equity, non-
cumulative perpetual preferred stock and minority interest in
consolidated subsidiaries. Tier 2 capital includes the allowance
for loan losses up to 1.25% of risk-weighted assets, cumulative
preferred stock, term subordinated debt and other hybrid capital
instruments. Total capital is reduced by such items as goodwill and
other certain intangible assets. Additionally, Tier 2 capital
cannot exceed 50% of the minimum capital requirements, which is 8%
for 1997. Risk-weighted assets are derived by applying certain
predetermined percentages, ranging from 0 to 100% to on-balance
sheet assets and off-balance sheet items based upon their defined
measure of credit risk.
The secured measure is the leverage capital ratio which evaluates
capital adequacy based upon Tier 1 capital in relation to quarterly
average assets, adjusted for the allowance for loan losses, goodwill
and certain other intangible assets. The minimum leverage capital
ratio for the highest rated institutions is 3%, with all other
institutions expected to maintain higher ratios.
Furthermore, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the Federal Banking Regulators
have set the minimum risk-based capital ratios for a well
capitalized banking institution at 6% Tier 1 capital, 10% total
capital and 5% leverage capital. The Company has exceeded all
these capital ratios and expects to exceed these ratios in the
future to continue to be classified as a well capitalized bank.
Management has calculated and monitored the following capital ratios
in order to assess compliance with these regulatory guidelines for
the Company at March 31, 1997 and December 31, 1996, (dollars in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
--------------- -----------------
Amount Ratio Amount Ratio
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total Capital (to Weighted Assets)
Actual $23,128 20.73% $22,588 20.34%
For Capital Adequacy Purposes 8,926 8.00 8,884 8.00
Tier 1 Capital Ratio (to Weighted
Assets)
Actual $21,715 19.46% $21,180 19.07%
For Capital Adequacy Purposes 4,463 4.00 4,442 4.00
Tier 1 Capital (to Average Assets)
Actual $21,715 10.97% $21,180 10.58%
For Capital Adequacy Purposes 7,915 4.00 8,006 4.00
</TABLE>
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a
material effect on the Company's liquidity, capital resources or
operations other than what has been disclosed.
<TABLE>
<CAPTION>
SIGNIFICANT RATIOS March 31, 1997 December 31, 1996
- -------------------------- --------------- -----------------
<S> <C> <C>
Return on Average Assets
(Annualized) 1.41% 1.20%
Return on Average Equity
(Annualized) 12.95% 11.76%
Dividend Payout Ratio 22.24% 22.78%
</TABLE>
NON-PERFORMING ASSETS AND RISK ELEMENTS
Reviews of the loan portfolio are conducted by an internal
committee quarterly and annually by an outside consultant. The
results of the outside consultant are then compared to the
internal reviews with detailed explanations of differences, if
any. Commercial loans and residential mortgages are placed on a
non-accrual status when principal and interest become 90 days past
due. Delinquent loans are reviewed monthly by senior management
and the Loan Committee of the Board. Generally, all consumer
loans and commercial loans less than $100,000 and not secured by
real estate, will be charged off at 90 days past due, while all
loans secured by real estate and in the process of foreclosure
will be charged off at 180 days past due. All commercial loans
greater than $100,000 and not secured by real estate, will be
subject to the conditions of the action plan between the Bank and
the customer to correct the default.
A loan remains on a non-accrual status until principal and
interest become current and a consistent
11
<PAGE>
track record of payments is established, or it is determined to be
uncollectible and is charged off against the allowance for loan
losses. A loan would be classified as restructured when the terms
have been modified, because of deterioration in the financial
position of the borrowers, to provide for a reduction of either
interest or principal. It is Management's opinion that the Company
did not have any loans that met the definition of a restructured
loan as of March 31, 1997 and December 31, 1996.
The following table presents information concerning non-performing
loans and assets at March 31, 1997 and December 31, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Loans on non-accrual status $ 674 $ 676
Loans past due 90 days or more 140 23
------------ ------------
Total non-performing loans 814 699
------------ ------------
Other real estate 1 1
------------ ------------
Total non-performing assets $ 815 $ 700
============ ============
Non-performing loans as a percent of
total loans 0.81% 0.69%
Non-performing assets as a percent of
total loans 0.81% 0.70%
Non-performing assets as a percent of
total assets 0.41% 0.35%
</TABLE>
12
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) Annual Meeting April 15, 1997
(b) The following directors were elected at the
annual meeting to serve for a three year term or
until mandatory retirement age is reached:
Lewis W. Berkley Gary W. Sterner
James E. Croner Earl K. Wahl, Jr.
The following directors' terms continued after the
annual meeting:
Richard P. Bulow George W. Hay
Gregory A. Croner George R. Shafer
Tommy R. Croner H. Dean White
Theodore Deskevich
The results of the annual meeting were as follows:
FOR AGAINST WITHHELD
-------- ------- --------
Lewis W. Berkley 334,341 48 101,211
James E. Croner 326,318 8,071 101,211
Gary W. Sterner 334,286 103 101,211
Earl K. Wahl, Jr. 334,161 228 101,211
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
No reports have been filed for 1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST PHILSON FINANCIAL CORPORATION
-------------------------------------
(Registrant)
Date May 13, 1997 By /s/ George W. Hay
------------------- -------------------------
George W. Hay
President and Chief
Executive Officer
By /s/ Theodore Deskevich
-------------------------
Theodore Deskevich
Executive Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,338
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,722
<INVESTMENTS-CARRYING> 74,658
<INVESTMENTS-MARKET> 74,180
<LOANS> 100,976
<ALLOWANCE> 2,908
<TOTAL-ASSETS> 199,438
<DEPOSITS> 174,058
<SHORT-TERM> 2,430
<LIABILITIES-OTHER> 1,230
<LONG-TERM> 0
0
0
<COMMON> 4,356
<OTHER-SE> 17,364
<TOTAL-LIABILITIES-AND-EQUITY> 199,438
<INTEREST-LOAN> 2,262
<INTEREST-INVEST> 1,154
<INTEREST-OTHER> 120
<INTEREST-TOTAL> 3,536
<INTEREST-DEPOSIT> 1,401
<INTEREST-EXPENSE> 1,422
<INTEREST-INCOME-NET> 2,114
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,397
<INCOME-PRETAX> 941
<INCOME-PRE-EXTRAORDINARY> 941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 688
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.74
<LOANS-NON> 674
<LOANS-PAST> 140
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,017
<CHARGE-OFFS> 139
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 2,908
<ALLOWANCE-DOMESTIC> 2,908
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
