UNTITED 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, 1998
-------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
----------- -------------
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
- ------------------------------------------------------------------
(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 8, 1998, there were 1,742,400 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, 1998 and December 31, 1997 3
Consolidated Statement of Income (Unaudited)
for the Three Months Ended March 31, 1998
and 1997 4
Consolidated Statement of Changes in
Stockholders' Equity for the Three Months
Ended March 31, 1998 5
Consolidated Statement of Cash Flows
(Unaudited) for the Three Months Ended
March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14-16
PART II - OTHER INFORMATION 17
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 18
2
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,144 $ 6,382
Interest-bearing deposits in
other banks 511 511
Federal funds sold 9,900 8,900
Investment securities available
for sale 23,075 20,183
Investment securities held to
maturity (market values of
$54,545 and $57,767) 54,226 57,448
Total loans 105,006 105,293
Less allowance for loan losses 2,670 2,729
------------ ------------
Net loans 102,336 102,564
Premises and equipment, net 2,995 3,008
Accrued interest receivable 1,943 1,849
Other assets 1,334 1,180
------------ ------------
TOTAL ASSETS $ 202,464 $ 202,025
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 21,330 $ 22,549
Interest-bearing demand 26,559 25,086
Savings 36,269 35,274
Money market 11,629 12,733
Time 78,881 78,601
------------ ------------
Total deposits 174,668 174,243
Securities sold under agreements
to repurchase 1,901 1,674
U. S. Treasury demand notes 757 1,674
Accrued interest payable 556 546
Other liabilities 642 417
------------ ------------
TOTAL LIABILITIES 178,524 178,554
------------ ------------
STOCKHOLDERS' EQUITY
Common stock ($2.50 par value,
10,000,000 shares authorized,
1,742,400 shares issued and
outstanding) 4,356 4,356
Capital surplus 11,644 11,644
Retained earnings 7,721 7,245
Net unrealized gain on securities 219 226
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,940 23,471
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 202,464 $ 202,025
============ ============
</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,
1998 1997
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 2,388 $ 2,262
Interest-bearing deposits in
other banks 8 -
Interest on federal funds sold 122 120
Investment securities:
Taxable interest 970 982
Tax exempt interest 156 172
------------ ------------
Total interest and
dividend income 3,644 3,536
------------ ------------
INTEREST EXPENSE
Interest on deposits 1,401 1,401
Interest on borrowed funds 29 21
------------ ------------
Total interest expense 1,430 1,422
------------ ------------
NET INTEREST INCOME 2,214 2,114
Provision for loan losses 8 -
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,206 2,114
------------ ------------
OTHER INCOME
Service charges on deposit
accounts 128 130
Other income 88 94
------------ ------------
Total other income 216 224
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 830 775
Premises and equipment expense 238 199
Other expense 415 423
------------ ------------
Total other expense 1,483 1,397
------------ ------------
Income before income taxes 939 941
Income tax expense 254 253
------------ ------------
NET INCOME $ 685 $ 688
============ ============
EARNINGS PER SHARE $ 0.39 $ 0.39
CASH DIVIDENDS PER SHARE $ 0.12 $ 0.08
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,742,400 1,742,400
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Gain
(Losses) on
Securities Total
Common Capital Retained Available Stockholders'
Stock Surplus Earnings for Sale Equity
------ ------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1997 $4,356 $11,644 $ 7,245 $ 226 $ 23,471
Net Income 685 685
Other
Comprehen-
sive
income, net
of tax,
unrealized
gain on
securities,
net of
reclassifi-
cation
adjustment (7) (7)
Comprehensive
Income
Cash dividend
($.12 per
share) (209) (209)
------ ------- -------- ---------- -------------
Balance,
March 31,1998 $4,356 $11,644 $ 7,721 $ 219 $ 23,940
====== ======= ======== ========== =============
<CAPTION>
Comprehensive
Income
-------------
<S> <C>
Balance,
December 31,
1997
Net Income $ 685
Other
Comprehensive
income, net
of tax,
unrealized
gain on
securities,
net of
reclassification
adjustment (7)
Comprehensive -------------
Income $ 678
=============
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
<TABLE>
First Philson Financial Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 685 $ 688
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 8 -
Depreciation, amortization
and accretion, net 73 52
Increase in accrued interest
receivable (94) (207)
Increase in accrued interest
payable 10 8
Other, net 75 121
------------ ------------
Net cash provided by
operating activities 757 662
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities and
repayments of investment
securities held to maturity 6,236 5,033
Purchase of investment securities
Held to maturity (3,000) (979)
Available for sale (2,899) (2,166)
Net increase (decrease) in loans 223 (426)
Purchase of premises and equipment (81) (44)
------------ ------------
Net cash provided by
investing activities 479 1,418
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 425 578
Increase in securities sold
under agreements to repurchase 227 83
Increase (decrease) in U.S.
Treasury demand notes (917) 334
Cash dividends paid (209) (153)
------------ ------------
Net cash provided by
(used for) financing
activities (474) 842
------------ ------------
Increase in cash and
cash equivalents 762 2,922
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 15,282 15,416
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 16,044 $ 18,338
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<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 ("Philson") and its
wholly-owned subsidiaries, First Philson Bank, National
Association (the "Bank") and Flex Financial Consumer Discount
Company ("Flex Financial"). 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.
NOTE 2 - COMPREHENSIVE INCOME
Effective January 1, 1998, Philson adopted the Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." In adopting Statment No. 130, Philson is required to
present comprehensive income and its components in a full set of
general purpose financial statments. Philson has elected to
report the effects of Statement No. 130 as part of the Statement
of Changes in Stockholders' Equity.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 1998 increased by $439,000 from that
reported at December 31, 1997. Increases in federal funds sold of
$1,000,000 and investment securities available for sale of
$2,892,000, were funded primarily by a decrease in investment
securities held to maturity of $3,222,000.
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.
Net loans decreased $228,000 primarily as the result of a
decrease in mortgage loans of $919,000, offset by a $319,000
increase in commercial loans. The decrease in mortgage loans
occurred essentially in variable rate home equity, residential,
and commercial real estate loans. The increase in commercial
loans was primarily in fixed rate loans. The allowance for loan
losses decreased $59,000 or 2.16% as the result of charge offs
exceeding recoveries for the first three months of 1998. As of
March 31, 1998, the allowance for loan losses represents 2.54% of
the outstanding loan balances as compared to 2.59% for December
31, 1997. As in 1997, 1996 and 1995, Management continues to
emphasize consumer and small business lending. This has permitted
Philson to meet the needs of the communities for which it serves.
The increase in equity capital was attributed to net earnings of
$685,000, less dividend payments totaling $209,000 and a decrease
in net unrealized gains on available for sale securities of
$7,000. 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 Philson.
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1997.
Philson's net income decreased by $3,000 for the first three
months of 1998, as compared to net income for the first three
months of 1997. Effecting net income positively was an increase
in interest and dividend income of $108,000, while negative
effects to net income consisted of increases in interest expense
of $8,000 and other expense of $86,000.
Net interest income for 1998 increased $100,000 from 1997
primarily due to an increase in interest and dividend income. The
increase in interest and dividend income resulted primarily from
an increase in interest and fees on loans of $126,000, offset by a
decrease in interest on investment securities of $28,000. The
increase in interest and fees on loans is attributable to
increases in the average
8
<PAGE>
outstanding balance of mortgage loans of $1.7m and commercial
loans of $2.0m. The increase in mortgage loans was primarily due
to increases in fixed rate residential and commercial real estate
loans. The increase in commercial loans was primarily in fixed
rate loans. The decrease in interest on investment securities is
due to a $1.7m decrease in the average outstanding balance. The
increase of $8,000 in interest expense resulted from an increase
of $461,000 in the average outstanding balance of repurchase
agreements.
Other expense increased $86,000 for 1998 from 1997, primarily as
the result of increases in salaries and employee benefits of
$55,000 and premises and equipment expense of $39,000, offset by
a decrease in other expense of $8,000. The increase in salaries
and employee benefits is due to annual employee increases. The
increase in premises and equipment expense in 1998 is the result
of an increase in depreciation expense for the installation of the
new mainframe computer system.
Liquidity and Cash Flows
To ensure that Philson can satisfy customer credit needs for
current and future commitments and depository withdrawal
requirements, Philson 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,
interest-bearing deposits in other 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, 1998 and December 31, 1997 (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,
1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 6,144 $ 6,382
Interest-bearing deposits
in other banks 511 511
Federal funds sold 9,900 8,900
Investment securities
available for sale 23,075 20,183
Investment securities held
to maturity, maturing in
one year or less 24,953 25,646
------------ ------------
Total 64,583 61,622
Less short-term borrowings 2,658 3,348
------------ ------------
Net liquidity position $ 61,925 $ 58,274
============ ============
As a percent of
total assets 30.59% 28.84%
</TABLE>
9
<PAGE>
Capital Resources
Capital management is an ongoing process that consists of
providing equity for both current and future financial
positioning. Philson manages its capital to execute its strategic
business plans and support its growth and investments. During the
first three months of 1998, Philson increased its capital base by
$469,000 or 2.00%, primarily through retained earnings. For the
first three months of 1997, capital increased by $521,000 or
2.46%.
Regulatory agencies have capital adequacy and risk-based capital
adequacy guidelines by which they monitor the capital adequacy of
financial institutions and holding companies. Philson 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. Tier 1 and Tier 2 capital are 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 1998. Total capital is the sum of
Tier 1 and Tier 2 capital. 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. Philson has exceeded all these
capital ratios and expects to exceed these ratios in the future to
continue to be classified as well capitalized.
Management has calculated and monitored the following capital
ratios in order to assess compliance with these regulatory
guidelines for Philson at March 31, 1998 and December 31, 1997,
(dollars in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
Amount Ratio Amount Ratio
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Total Capital
(to Weighted Assets)
Actual $ 25,268 20.60% $ 24,770 20.51%
For Capital Adequacy
Purposes 9,812 8.00 9,662 8.00
To Be Well Capitalized 12,265 10.00 12,077 10.00
Tier 1 Capital Ratio
(to Weighted Assets)
Actual $ 23,721 19.34% $ 23,245 19.25%
For Capital Adequacy
Purposes 4,906 4.00 4,831 4.00
To Be Well Capitalized 7,359 6.00 7,246 6.00
Tier 1 Capital
(to Average Assets)
Actual $ 23,721 11.78% $ 23,245 11.40%
For Capital Adequacy
Purposes 8,056 4.00 8,153 4.00
To Be Well Capitalized 10,070 5.00 10,192 5.00
</TABLE>
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a
material effect on Philson's liquidity, capital resources or
operations other than what has been disclosed.
<TABLE>
<CAPTION>
SIGNIFICANT RATIOS March 31, 1998 December 31, 1997
- ---------------------- ---------------- -------------------
<S> <C> <C>
Return on Average
Assets (Annualized) 1.38% 1.35%
Return on Average
Equity (Annualized) 11.66% 12.17%
Dividend Payout Ratio 30.08% 24.41%
</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 Philson and
the customer to correct the default.
11
<PAGE>
A loan remains on a non-accrual status until principal and
interest become current and a consistent 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 Philson did not have
any loans that met the definitions of a restructured loan or an
impaired loan as of March 31, 1998 and December 31, 1997.
The following table presents information concerning
non-performing assets including non-accrual loans and loans 90
days or more past due for March 31, 1998 and December 31, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Loans on non-accrual status $ 415 $ 364
Loans past due 90 days or more 48 464
---------- ------------
Total non-performing loans 463 828
---------- ------------
Other real estate 1 1
---------- ------------
Total non-performing assets $ 464 $ 829
========== ============
Non-performing loans as a
percent of total loans 0.44% 0.79%
Non-performing assets as a
percent of total loans 0.44% 0.79%
Non-performing assets as a
percent of total assets 0.23% 0.41%
</TABLE>
Year 2000 Compliance
Philson and its subsidiaries primary business activities are
heavily dependent upon the use of sophisticated computer systems.
As the millennium ("year 2000" or "Y2K") approaches, many computer
systems worldwide do not have the capability of recognizing the
year 2000 or years thereafter. To date, Philson and its
subsidiaries have received confirmations from its primary vendors
that plans have been developed by them to address and correct the
issues associated with the year 2000 problem.
Philson is currently in the process of upgrading the mainframe
software at a cost of approximately $35,000. This upgrade will be
to a windows based software and plans are to upgrade all offices
with new communication and teller software, as well. These
upgrades will coincide with the mainframe hardware upgrade that
was completed in 1997, which will allow mainframe access thru the
existing
12
<PAGE>
network. Existing PC's were upgraded to meet year 2000
requirements along with the purchase of an additional 33 new PC's
that meet the same criteria. The existing and new hardware has
been configured for the Bank's current network. The network has
also undergone upgrades in both hardware and software totaling
approximately $35,000.
Testing has already been done on the new and existing PC hardware
for year 2000 compliance. Additional testing will be completed by
outside certified network engineers on all PC hardware and
software by the end of the third quarter 1998. The mainframe
system will be tested for year 2000 compliance by December 1998.
Philson has established a management committee to identify all of
the functions potentially affected by the year 2000, and to ensure
that re-programming of the affected systems will be completed by
December 31, 1998, thus allowing adequate time for testing. The
management committee meets on a regular basis to determine the
status and progress of the year 2000 project. Philson does not
anticipate that the year 2000 issue will pose any significant
operational problems or will have any material impact on its
results of operations.
13
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, Philson's primary components of market
risk are interest rate volatility and liquidity risk. Because of
the nature of Philson's operations, Philson is not subject to
currency exchange or commodity price risk, and since Philson has
no trading portfolio, it is not subject to trading risk. At March
31, 1998 and December 31, 1997, Philson does not have any hedging
transactions in place such as interest rate swaps and caps.
Philson currently has highly rated available for sale securities
that represent 29.9% of its investment portfolio and, therefore,
equity price risk is not significant. Fluctuations in interest
rates will ultimately impact both the level of income and expense
recorded on a large portion of Philson's assets and liabilities,
and the market value of all interest earning assets, other than
those which possess a short term maturity. Since all of Philson's
interest bearing liabilities and virtually all of Philson's
interest earning assets are located at the Bank, virtually all of
Philson's interest rate risk lies at the Bank level. As a result,
all significant interest rate risk management procedures are
performed at the Bank level. The Bank's loan portfolio,
concentrated primarily within the surrounding market area, is
subject to risks associated with the local economy.
The Bank's interest rate management strategy is designed to
stabilize net interest income and preserve capital over a broad
range of interest rate movements. Interest rate sensitivity is
measured as the difference between the volume of assets and
liabilities that are subject to repricing in a future period of
time. These differences are known as interest sensitivity gaps.
Philson utilized gap management and simulation modeling as the
primary means of measuring interest rate risk. Gap analysis
identifies and quantifies Philson's exposure or vulnerability to
changes in interest rates in relationship to Philson's interest
rate sensitivity position. A rate sensitive asset or liability is
one which is capable of being repriced (i.e. the interest rate can
be adjusted or principal can be reinvested) within a specified
period of time. Subtracting total rate sensitive liabilities
(RSL) from total rate sensitive assets (RSA) within specified time
horizons nets Philson's gap positions. These gaps will reflect
Philson's exposure to changes in market interest rates, as
discussed below.
Since many of Philson's deposit liabilities are capable of being
immediately repriced, a portion of the investment portfolio
consists of available for sale securities and Philson offers
variable rate loan products in order to maintain a proper balance
in its ability to reprice various interest bearing assets and
liabilities. Furthermore, Philson's deposit rates are not tied to
an external index over which Philson could exercise no control.
As a result, although changing market interest rates impact
repricing, Philson has retained much of its control over
repricing.
Philson actively manages interest rate risk through the use of a
simulation model which measures the sensitivity of future net
interest income and the net portfolio value to changes in interest
rates. The repricing analysis is based upon the repricing
intervals of variable rate assets and liabilities and upon
contractual maturities of fixed rate instruments with adjustments
for principal amortization of appropriate balance sheet items and
projected prepayments for loans and mortgage-backed securities.
Prepayment projections are developed from historical prepayment
data for each type of asset. The following table in summary form
shows Philson's repricing analysis at March 31, 1998.
14
<PAGE>
<TABLE>
<CAPTION>
0-90 91-180 181-365
Days Days Days
------- ------- --------
<S> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Loans $22,820 $10,430 $ 18,920
Investment securities
available for sale 1,209 386 498
Investment securities
held to maturity 4,998 5,467 14,488
Interest-bearing
deposits in other
banks - 511 -
Federal funds sold 9,900 - -
------- ------- --------
Total rate-sensitive
assets 38,927 16,794 33,906
------- ------- --------
RATE-SENSITIVE
LIABILITIES:
Deposits 35,127 17,074 27,717
Borrowings 2,658 - -
------- ------- --------
Total rate-sensitive
liabilities 37,785 17,074 27,717
------- ------- --------
Interest
sensitivity gap $1,142 $ (280) $ 6,189
Cumulative interest
sensitivity gap $1,142 $ 862 $ 7,051
Cumulative interest
sensitivity gap
ratio to total assets 0.56% 0.43% 3.48%
<CAPTION>
1 to 5 Over
Years 5 Years Total
------- ------- --------
<S> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Loans $37,152 $15,684 $105,006
Investment securities
available for sale 19,986 996 23,075
Investment securities
held to maturity 22,109 7,164 54,226
Interest-bearing
deposits in other
banks - - 511
Federal funds sold - - 9,900
------- ------- --------
Total rate-sensitive
assets 79,247 23,844 192,718
------- ------- --------
RATE-SENSITIVE
LIABILITIES:
Deposits 73,350 70 153,338
Borrowings - - 2,658
------- ------- --------
Total rate-sensitive
liabilities 73,350 70 155,996
------- ------- --------
Interest
sensitivity gap $5,897 $23,774 $ 36,722
Cumulative interest
sensitivity gap $12,948 $36,722
Cumulative interest
sensitivity gap
ratio to total assets 6.40% 18.14%
</TABLE>
The simulation model also calculates earnings of Philson based
upon what are estimated to be the largest foreseeable rate
increase and the largest foreseeable decrease. Such analysis
translates interest rate movements and Philson's rate sensitivity
position into dollar amounts by which earnings may fluctuate as a
result of rate changes. Based upon the economic forecasts of the
most likely interest rate movement, Philson's 12 month percentage
deviation of earnings from a flat rate scenario would be less than
1 percent (1%).
The data included in the Interest Sensitivity table indicates that
Philson is asset sensitive within one year. During times of
rising interest rates, an asset sensitive gap could positively
affect net interest income as rates would be increased on a larger
volume of assets as compared to deposits. As a result, interest
income would increase more rapidly than interest expense. An
asset sensitive gap could negatively affect net interest income in
an environment of decreasing interest rates as a greater amount of
interest bearing assets would be repricing at lower rates.
Generally, a liability sensitive gap indicates that declining
interest rates could positively affect net interest income as
interest expense on liabilities would decrease more rapidly than
interest income would decline. Conversely, rising rates could
15
<PAGE>
negatively affect net interest income as income from assets would
increase less rapidly than deposit costs. Although rate
sensitivity analysis enables Philson to minimize interest rate
risk, the magnitude of rate increases or decreases on assets
versus liabilities may not correlate directly. As a result,
fluctuations in interest spreads can occur even when repricing
capabilities are perfectly matched.
It is the policy of Philson to generally maintain a gap of between
.70 and 1.20 for the one year time horizon, although Philson
typically attempts to maintain a ratio of near 1.00 in order to
minimize the impact of changes in market interest rates. When
Management believes that interest rates will increase it can take
actions to increase the RSA/RSL ratio. When Management believes
interest rates will decline, it can take actions to decrease the
RSA/RSL ratio.
Changes in market interest rates can also affect Philson's
liquidity position through the impact rate changes may have on the
market value of Philson's investment portfolio. Rapid increases
in market rates can negatively impact the market values of
investment securities. As securities values decline it becomes
more difficult to sell investments to meet liquidity demands
without incurring a loss. Philson can address this by increasing
liquid funds which may be utilized to meet unexpected liquidity
needs when a decline occurs in the volume of securities which may
be sold without Philson incurring a net loss.
Information shown elsewhere in this 10Q, specifically within
Management's Discussion and Analysis, will assist in the
understanding of how Philson is positioned to react to changing
interest rates. In particular, the section on Financial
Condition, that contains the discussion of the investment
securities portfolio, loan portfolio, non-performing assets and
risk elements, allowance for loan losses, deposits, liquidity and
cash flows, inflation and changing prices, and capital resources
should be considered together with the discussion on interest rate
sensitivity.
16
<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 21, 1998
(b) The following directors were elected at the annual
meeting to serve for a three year term or until a
mandatory retirement age is reached:
Richard P. Bulow Theodore Deskevich
Gregory A. Croner H. Dean White
The following directors' terms continued after the
annual meeting:
Lewis W. Berkley George R. Shafer
James E. Croner Gary Sterner
Tommy R. Croner Earl K. Wahl, Jr.
George W. Hay
The results of the annual meeting for amending the
certificate of incorporation were as follows:
FOR AGAINST ABSTAINED
--------- -------- ----------
Richard P. Bulow 1,320,023 14,568 407,809
Gregory A. Croner 1,331,575 3,016 407,809
Theodore Deskevich 1,331,711 2,880 407,809
H. Dean White 1,332,023 2,568 407,809
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
No reports have been filed for 1998.
17
<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, 1998 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
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,144
<INT-BEARING-DEPOSITS> 511
<FED-FUNDS-SOLD> 9,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,075
<INVESTMENTS-CARRYING> 54,226
<INVESTMENTS-MARKET> 54,545
<LOANS> 105,006
<ALLOWANCE> 2,670
<TOTAL-ASSETS> 202,464
<DEPOSITS> 174,668
<SHORT-TERM> 2,658
<LIABILITIES-OTHER> 1,198
<LONG-TERM> 0
0
0
<COMMON> 4,356
<OTHER-SE> 19,584
<TOTAL-LIABILITIES-AND-EQUITY> 202,464
<INTEREST-LOAN> 2,388
<INTEREST-INVEST> 1,126
<INTEREST-OTHER> 130
<INTEREST-TOTAL> 3,644
<INTEREST-DEPOSIT> 1,401
<INTEREST-EXPENSE> 1,430
<INTEREST-INCOME-NET> 2,214
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,483
<INCOME-PRETAX> 939
<INCOME-PRE-EXTRAORDINARY> 939
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 685
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.87
<LOANS-NON> 415
<LOANS-PAST> 48
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,729
<CHARGE-OFFS> 106
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 2,670
<ALLOWANCE-DOMESTIC> 2,670
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
