[GRAPHIC OMITTED]
AMERICAN
BANCORPORATION
1998
ANNUAL REPORT
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<TABLE>
<CAPTION>
American Bancorporation and Subsidiaries
FINANCIAL HIGHLIGHTS
(In thousands, except per share) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Income:
Net Income................................ $ 5,202 $ 4,509 $ 3,666 $ 3,052 $ 1,696
Basic Earnings Per Share................ 1.66 1.44 1.17 0.98 0.56
Balance Sheet:
Assets...................................... $ 611,405 $ 484,606 $ 461,632 $ 353,995 $ 338,116
Deposits.................................. 431,240 355,734 319,811 292,665 292,341
Loans - net............................... 297,580 283,407 267,886 246,518 225,129
Stockholders' equity..................... 36,447 33,694 30,423 28,012 26,193
Book Value per share..................... 11.65 10.77 9.72 8.95 8.37
<CAPTION>
QUARTERLY PRICE RANGES AND DIVIDENDS
Common Shares Trust Preferred
1998: High Low Dividends High Low
<S> <C> <C> <C> <C> <C>
Fourth.................... 27 1/2 18 7/8 $0.15 10 1/2 9 7/8
Third..................... 25 7/8 21 0.14 10 1/2 10
Second.................... 27 1/2 22 0.14 10 1/2 10
First..................... 30 1/2 25 0.125 N/A N/A
1997: High Low Dividends High Low
Fourth.................... 30 1/2 20 1/2 $0.125 N/A N/A
Third..................... 24 1/2 16 1/8 0.125 N/A N/A
Second.................... 16 3/4 14 1/2 0.125 N/A N/A
First.................... 15 5/16 12 1/8 0.125 N/A N/A
</TABLE>
American Bancorporation's common stock is traded on the Nasdaq Stock Market
under the ticker symbol AMBC. Per share data, stock prices and dividends have
been retroactively restated to reflect two for one stock splits which became
effective March 16, 1994 and October 23, 1997. American Bancorporation's Capital
Trust I is traded on the Nasdaq Stock Market under the ticker symbol AMBCP.
Prior to April 21, 1998 no trust preferred securities were issued. Interest,
rather than dividends, is paid on trust preferred securities.
CORPORATE PROFILE
American Bancorporation (the "Company"), is a registered Ohio bank holding
company headquartered in Wheeling, West Virginia. The Company was organized in
1966. At December 31, 1998, the Company owned one affiliate bank, Wheeling
National Bank, which serves its customers through twenty full service offices
located in Ohio County, Hancock County and Wetzel County, West Virginia and
Belmont County, Harrison County, Guernsey County, Jefferson County and Franklin
County, Ohio.
In addition to the banking offices, the Company operates four non-bank
subsidiaries: American Mortgages, Inc. which originates and services mortgage
loans, American Bancdata Corporation which provides electronic data processing
services to the Company and Wheeling National Bank, American Bancservices, Inc.,
which provides the Company's transfer agent services, and American
Bancorporation Capital Trust I, a Delaware statutory business trust.
The approximate number of common stockholders of record was 2,771 on January 31,
1999.
CONTENTS
Financial Highlights.............................................See above
Quarterly Stock Price Ranges.....................................See above
Corporate Profile................................................See above
Chairman's Letter................................................1 - 2
Financial Statements.............................................3 - 27
Independent Auditors' Report ..................................29
Five Year Selected Financial Data................................30
Management's Discussion and Analysis.............................31 - 47
<PAGE>
THE CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
During 1998 American Bancorporation continued to carry out its basic
strategy of prudent growth.
Assets grew 26.2% from $485 million at year end 1997 to $611 million at
year end 1998.
Earnings grew 15.4% from $4.5 million at year end 1997 to $5.2 million at
year end 1998.
This represents $1.66 basic earnings per share for 1998 compared to $1.44
basic earnings per share for 1997.
Dividends were raised 20% from $0.125 per quarter or $0.50 per year
during the first quarter to $0.15 per quarter or $0.60 per year during the
fourth quarter.
Despite the fierce competition for new quality loans, your Company grew
its loan portfolio in 1998 4.9% from $287 million at year end 1997 to $301
million at year end 1998, yet our net charge-offs (0.16%) compare very favorably
to the national average of more than .20%.
Some years ago we outsourced our internal audit function to S. R.
Snodgrass, A.C. That company also has the responsibility of reviewing, on an
ongoing basis, management's loan quality assessments of our loan portfolio,
which action, along with constant attention to underwriting, has helped improve
our overall loan quality.
Investment securities available for sale grew 55.9% from $169 million at
year end 1997 to $264 million at year end 1998. This additional liquidity
provides us with a comfortable position in this time of economic uncertainty.
As reported to you in our First Quarter Report, on April 27, 1998 your
Company issued 1,265,000 shares of 8.50% Cumulative Trust Preferred shares at
$10.00 per share for gross proceeds of $12,650,000. After expenses our net
proceeds were $11,886,000 which the regulators will count as Tier 1 capital.
On June 30, 1998 the Company transferred $3 million from the net proceeds
on the sale of Cumulative Trust Preferred shares to our wholly owned subsidiary,
Wheeling National Bank, as an addition to Wheeling National's capital account to
support its growth.
1
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We continued to support the growth of Wheeling National Bank by placing
another $1.2 million in its capital account on December 29, 1998.
Your Company has worked long and hard on the Y2K problem and has met all
regulatory requirements including testing.
We are confident that your Company will find entry into the new
millennium a non- event.
We deeply appreciate your continued strong support.
Sincerely,
Jeremy C. McCamic
Chairman and Chief Executive Officer
2
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET American Bancorporation and Subsidiaries
December 31, 1998 and 1997
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks................................................................$ 12,316,176 $ 11,027,692
Federal funds sold ..................................................................... 17,747,025 2,414,812
Investment securities available for sale ............................................... 263,827,239 169,175,987
Loans
Commercial, financial and agricultural .............................................. 113,622,577 93,318,923
Real estate mortgage ................................................................ 138,050,626 144,179,037
Installment ......................................................................... 48,948,681 49,193,091
300,621,884 286,691,051
Less allowance for loan losses ...................................................... 3,042,269 3,284,338
297,579,615 283,406,713
Premises and equipment - net ........................................................... 9,735,582 10,070,377
Accrued interest receivable ............................................................ 3,393,337 2,713,240
Excess of cost over net assets acquired ................................................ 1,633,464 1,968,940
Other assets ........................................................................... 5,173,024 3,828,711
TOTAL ASSETS .................................................................... $611,405,462 $484,606,472
LIABILITIES
Deposits
Demand - non-interest bearing...................................................... $ 39,497,617 $ 33,512,712
Demand - interest bearing......................................................... 26,291,654 26,893,378
Savings............................................................................ 93,605,716 92,608,169
Time - under $100,000............................................................... 216,310,149 157,985,640
Time - over $100,000.............................................................. 55,535,059 44,734,433
TOTAL DEPOSITS................................................................. 431,240,195 355,734,332
Borrowed funds........................................................................ 123,891,183 87,574,152
Accrued interest payable............................................................. 2,306,854 1,782,668
Other liabilities.................................................................... 4,858,495 4,396,674
Notes payable and other long term debt............................................. 11,242 1,424,800
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior subordinated
debentures of the Company........................................................... 12,650,000 -
TOTAL LIABILITIES.............................................................. 574,957,969 450,912,626
STOCKHOLDERS' EQUITY
Preferred stock.......................................................... - -
Common stock without par value, stated value $5 a share,
authorized 6,500,000 shares, issued and outstanding 3,129,674................... 7,824,185 7,824,185
Additional paid-in capital....................................................... 10,301,982 10,301,982
Retained earnings................................................................ 18,430,141 14,965,228
Accumulated other comprehensive income (loss), net of
tax of ($176,544) in 1998 and $267,301 in 1997................................ (108,815) 602,451
TOTAL STOCKHOLDERS' EQUITY...................................................... 36,447,493 33,693,846
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $611,405,462 $484,606,472
<FN>
<F1>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
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American Bancorporation and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans ........................................... $25,759,177 $24,890,709 $ 22,500,530
Investment securities
Taxable interest income ....................... 13,003,297 9,718,745 6,377,858
Non-taxable interest income ................... 398,051 90,386 127,880
Dividends ..................................... 384,316 491,420 461,557
13,785,664 10,300,551 6,967,295
Short-term investments .......................... 755,802 347,905 417,703
Total interest income ...................... 40,300,643 35,539,165 29,885,528
INTEREST EXPENSE
Deposits
Interest bearing demand ....................... 609,938 628,799 630,275
Savings ....................................... 2,584,443 2,686,435 2,783,607
Time - under $100,000 ......................... 11,255,479 7,767,168 6,269,821
Time - over $100,000 .......................... 3,131,532 2,101,660 1,247,259
17,581,392 13,184,062 10,930,962
Borrowings
Borrowed funds .................................. 5,047,018 5,005,959 2,782,434
Notes payable and other long-term debt .......... 811,571 87,634 88,714
Total interest expense ...................... 23,439,981 18,277,655 13,802,110
NET INTEREST INCOME ............................. 16,860,662 17,261,510 16,083,418
PROVISION FOR LOAN LOSSES .......................... 240,000 -- --
Net interest income after provision for loan losses 16,620,662 17,261,510 16,083,418
OTHER INCOME
Service charges on deposit accounts ........... 716,512 749,680 864,557
Insurance commissions ......................... 90,938 87,592 106,990
Net gains on sale of loans .................... 2,178,609 1,303,363 511,171
Net securities gains (losses) ................. 946,742 34,336 (922)
Other income .................................. 761,680 750,873 910,302
Total other income ......................... 4,694,481 2,925,844 2,392,098
OTHER EXPENSE
Salaries and employee benefits ................ 6,677,506 5,910,116 5,589,526
Occupancy expense ............................. 1,241,005 1,261,026 1,137,334
Furniture and equipment expense ............... 1,133,690 1,128,188 1,117,577
Other expenses ................................ 5,291,035 4,801,750 4,862,734
Total other expense ........................ 14,343,236 13,101,080 12,707,171
INCOME BEFORE INCOME TAXES ......................... 6,971,907 7,086,274 5,768,345
PROVISION FOR INCOME TAXES ......................... 1,770,025 2,577,467 2,102,367
NET INCOME ......................................... $ 5,201,882 $ 4,508,807 $ 3,665,978
Basic Earnings Per Share .................... $ 1.66 $ 1.44 $ 1.17
<FN>
<F1>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
American Bancorporation and Subsidiaries
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Additional other comprehensive Total
Common paid-in Retained income (loss), stockholders'
stock capital earnings net of tax equity
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ... 7,824,185 10,301,982 9,763,633 122,622 28,012,422
Comprehensive results:
Net Income ................. -- -- 3,665,978 -- 3,665,978
Other comprehensive income,
net of tax of $101,765 .... -- -- -- 152,647 152,647
Total comprehensive results -- -- 3,665,978 152,647 3,818,625
Dividends ($0.45 per share) -- -- (1,408,353) -- (1,408,353)
Balance at December 31, 1996 . 7,824,185 10,301,982 12,021,258 275,269 30,422,694
Comprehensive results:
Net Income ................. -- -- 4,508,807 -- 4,508,807
Other comprehensive income,
net of tax of $218,121 .... -- -- -- 327,182 327,182
Total comprehensive results -- -- 4,508,807 327,182 4,835,989
Dividends ($0.50 per share) -- -- (1,564,837) -- (1,564,837)
Balance at December 31, 1997 . 7,824,185 10,301,982 14,965,228 602,451 33,693,846
Comprehensive results:
Net Income ................. -- -- 5,201,882 -- 5,201,882
Other comprehensive loss,
net of tax of ($302,004) .. -- -- -- (343,504) (343,504)
Reclassification adjustment,
net of tax of ($141,841) . -- -- -- (367,762) (367,762)
Total comprehensive results -- -- 5,201,882 (711,266) 4,490,616
Dividends ($0.555 per share) -- -- (1,736,969) -- (1,736,969)
Balance at December 31, 1998 . $7,824,185 $10,301,982 $ 18,430,141 $(108,815) $ 36,447,493
<FN>
<F1>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
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American Bancorporation and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31, 1998, 1997 and
1996
<S> <C> <C> <C>
Operating Activities: .......................................................... 1998 1997 1996
Net income ..................................................................... $ 5,201,882 $ 4,508,807 $ 3,665,978
Adjustments to reconcile net income to net cash from operating activities:
Depreciation ................................................................. 843,842 805,499 658,103
Amortization of intangibles .................................................. 335,476 335,476 327,130
Net amortization of investment securities .................................... 662,117 336,384 250,869
Provision for loan losses .................................................... 240,000 -- --
Net (gain) loss on sale of investment securities ............................. (946,742) (34,336) 922
Net gain on sale of loans .................................................... (2,178,609) (1,303,363) (511,171)
Change in assets and liabilities net of effects from the purchase of branch
assets:
Net (increase) decrease in accrued interest receivable ....................... (680,097) 272,082 (917,883)
Net increase in accrued interest payable ..................................... 524,186 293,669 335,941
Net (increase) decrease in other assets ...................................... (1,220,484) 1,632,174 (1,584,158)
Net increase (decrease) in other liabilities ................................. 650,877 (697,637) 1,044,189
Net decrease from other operating activities ................................. 62,427 449,035 255,996
Net cash provided by operating activities .............................. 3,494,875 6,597,790 3,525,916
Investing Activities:
Purchase of branch assets, net of cash acquired .............................. -- -- 14,171,001
Investment securities available for sale:
Proceeds from maturities and repayments ................................ 148,926,057 39,638,162 22,998,696
Proceeds from sales .................................................... 19,978,365 54,567,143 16,474,939
Purchases .............................................................. (264,426,160) (119,664,429) (114,944,324)
Net increase in loans ........................................................ (12,234,293) (14,217,291) (20,606,716)
Purchase of premises and equipment ........................................... (520,842) (1,222,909) (1,686,300)
Net cash used by investing activities .................................. (108,274,788) (40,899,324) (83,592,704)
Financing Activities:
Net increase (decrease) in non-interest bearing demand deposits .............. 5,984,905 (3,231,604) 3,974,744
Net increase (decrease) in interest bearing demand and savings deposits ...... 395,823 (9,890,172) (4,338,517)
Net increase in time deposits ................................................ 69,125,135 49,045,290 12,360,154
Net increase (decrease) in borrowed funds .................................... 36,317,031 (16,521,891) 76,573,377
Principal repayment of long-term debt ........................................ (2,413,558) (11,931) (109,442)
Proceeds from issuance of long-term debt ..................................... 13,650,000 499,050 --
Cash dividends paid .......................................................... (1,658,726) (1,564,837) (1,330,113)
Net cash provided by financing activities .............................. 121,400,610 18,323,905 87,130,203
Net Increase (Decrease) in Cash and Cash Equivalents ........................... 16,620,697 (15,977,629) 7,063,415
Cash and Cash Equivalents Beginning Balance .................................... $ 13,442,504 $ 29,420,133 $ 22,356,718
Cash and Cash Equivalents Ending Balance ....................................... $ 30,063,201 $ 13,442,504 $ 29,420,133
Supplemental schedule of noncash investing and financing activities:
Business Acquisitions:
Fair value of assets acquired ............................................ $ -- $ - $ 1,098,572
Cash received in the acquisition ......................................... -- -- 14,171,001
Liabilities assumed ...................................................... $ - $ -- $ 15,269,573
Cash paid during the year for:
Interest................................................................. $ 22,915,795 $ 17,983,986 $ 13,346,426
Income taxes............................................................. $ 2,105,000 $ 2,630,000 1,883,000
Non-cash investing and financing activities:
Loan foreclosures and repossessions...................................... $ 1,026,117 $ 427,339 $ 324,539
Transfer of premises and equipment to other real estate owned ............. $ - $ 77,913 $ 287,774
<FN>
<F1>
The accompanying notes are an integral part of these financial statements
</FN>
</TABLE>
6
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NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Note A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bancorporation (the "Company"), which was organized in 1966, is a
registered Ohio bank holding company with its headquarters located in Wheeling,
West Virginia. The Company's wholly owned subsidiaries are Wheeling National
Bank ("WNB"), American Bancdata Corporation, American Bancservices, Inc.,
American Mortgages, Inc. ("AMI") and American Bancorporation Capital Trust I
(the "Trust"). The Company's subsidiaries primarily engage in commercial banking
and mortgage banking. The subsidiary bank branch offices are primarily located
in the northern panhandle of West Virginia, and central and eastern Ohio.
The accounting and reporting policies of American Bancorporation and
Subsidiaries conform to generally accepted accounting principles and with
general practice within the banking industry. The following is a description of
the significant policies.
Principles of Consolidation
The consolidated financial statements include the accounts of American
Bancorporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Subsidiaries acquired in purchase
transactions are included in the consolidated financial statements from the date
of acquisition.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold. Generally, federal funds are sold for
one-day periods.
Investment Securities
The Company has adopted a methodology for the classification of securities
at the time of their purchase as either held to maturity or available for sale.
If it is management's intent and the Company has the ability to hold such
securities until their maturity, these securities are classified as held to
maturity and are carried on the Company's books at cost, adjusted for
amortization of premium and accretion of discount on a level yield basis.
Alternatively, if it is management's intent at the time of purchase to hold
securities for an indefinite period of time and/or to use such securities as
part of its asset/liability management strategy, the securities are classified
as available for sale and are carried at fair value, with net unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of applicable income taxes. Investment securities
available for sale include securities which may be sold in response to changes
in interest rates, resultant prepayment risk and other factors related to
interest rate or prepayment risk. Gains and losses on sales of securities are
recognized using the specific identification method.
Loans
Loans are reported at their principal amounts, net of any deferred
origination fees and costs and the allowance for loan losses. Interest on loans
is computed primarily on the principal balance outstanding. For loans not
primarily secured by real estate or in the process of collection, the Company
discontinues the accrual of interest when a loan is 90 days past due or
collection of the interest is doubtful. Real estate loans are placed on
nonaccrual status when, in management's judgement, collection is in doubt or
when foreclosure proceedings are initiated, which is generally 180 days past the
due date. Income on discounted
7
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NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
loans is principally recognized on the sum-of-the-months digits method, which
approximates a level yield. Loan origination and commitment fees, as well as
certain direct loan origination costs, are deferred and amortized as a yield
adjustment over the lives of the related loans via a method which approximates a
level yield.
The Company grants commercial and industrial loans, commercial and
residential mortgages and consumer loans to customers primarily in north eastern
West Virginia, southwestern Pennsylvania and central and eastern Ohio. The
Company's loan portfolio can be adversely impacted by downturns in the local
economic and real estate markets as well as employment conditions.
A loan is considered to be impaired, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan", when it is probable that the Company will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. All of the Company's nonaccrual loans, excluding consumer and
single family residential loans, are considered to be impaired loans. Large
groups of smaller homogenous loans, such as loans secured by first and second
liens on residential properties and other consumer loans, are evaluated
collectively for impairment. Under SFAS No. 114, impaired loans subject to the
statement are required to be measured based upon the present value of expected
future cash flows, discounted at the loan's initial effective interest rate, or
at the loan's market price or fair value of the collateral if the loan is
collateral dependent. If the loan valuation is less than the recorded value of
the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on the adequacy of
the reserve for credit losses. Interest receipts on nonaccrual and impaired
loans are recognized as interest revenue or are applied to principal when
management believes the ultimate collectibility of principal is in doubt.
Allowance for Loan Losses
The determination of the balance in the allowance for loan losses is based
on an analysis of the portfolio and reflects an amount which, in management's
judgement, is appropriate to provide for probable losses after giving
consideration to the character of the portfolio, current economic conditions,
past loss experience and such other factors that deserve current recognition.
The regulatory examiners may require the Company to recognize additions to the
allowances based upon their judgements about information available to them at
the time of their examinations. The provision for loan losses is charged to
current operations.
Mortgage Loan Servicing
On January 1, 1996 the Company adopted SFAS No. 122 "Accounting for Mortgage
Servicing Rights", which requires that a mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans recognize those rights as separate assets by allocating the total
costs of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Purchased mortgage servicing rights are recorded at cost.
On January 1, 1997 the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 establishes the criteria for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
8
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
SFAS No. 125 supersedes several accounting standards including SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Adoption of this statement was
immaterial to the Company's financial position and results of operations.
The Company measures the impairment of the mortgage servicing rights based
on their current fair value. Current fair value is determined through the
discounted present value of the estimated future net servicing cashflows using a
risk-based discount rate and assumptions based upon market estimates for future
servicing revenues and expenses (including prepayment expectations, servicing
costs, default rates and interest earnings on escrows). For impairment
measurement purposes, servicing rights are stratified by interest rate. If the
carrying value of an individual stratum exceeds its fair value, a valuation
allowance is established.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided on the straight-line method, distributing
the cost of premises over an estimated useful life of twenty to fifty years and
the cost of equipment over an estimated useful life of three to fifteen years.
Excess of Cost over Net Assets Acquired
Excess of cost over net assets acquired include both goodwill and core
deposit intangibles. Goodwill is being amortized on a straight-line basis over a
period of twelve to thirty years. Core deposit intangibles are being amortized
over a period of eight years. Such assets are periodically evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Other Real Estate Owned
Other real estate owned in connection with loan settlements, including real
estate acquired, is stated at the lower of estimated fair value less estimated
costs to sell, or the carrying amount of the loan. Decreases in fair value
between annual appraisals, net gains or losses on the sale of other real estate
owned, and net direct operating expense attributable to these assets are
included in other income/other expense. Other real estate owned is included in
other assets.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases using enacted tax laws and rates.
Pension Plan
Pension costs, based on actuarial computations, are charged to expense and
funded as required by minimum Internal Revenue Service standards. (See Note S
"Pension Plan and Profit Sharing 401(k) Savings Plan").
Earnings Per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings Per
Share". This statement establishes standards for computing and presenting basic
and diluted earnings per common share ("EPS"). It supersedes Accounting
Principles Board ("APB") Opinion No. 15 that required the
9
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NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
presentation of both primary and fully diluted EPS. Prior period amounts have
been restated for the adoption of the new standard.
Basic EPS is computed by dividing net income applicable to common stock by
the weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing net
income applicable to common stock by the weighted average number of common
shares and common stock equivalents for items that are dilutive, net of shares
assumed to be repurchased using the treasury stock method using the average
share price for the Company's common stock during the period. Common stock
equivalents arise from the assumed conversion of outstanding stock options,
warrants and convertible capital notes. During the years 1998, 1997 and 1996 the
Company had no common stock equivalents. The weighted average number of shares
used in the calculation of basic earnings per share was 3,129,674 for 1998, 1997
and 1996.
Comprehensive Results
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 defines comprehensive income as net income, as currently reported, as well
as unrealized gains and losses on assets available for sale and certain other
items not currently included in the income statement. In complying with the
reporting requirements of this statement, the Company retitled the line item in
the Consolidated Balance Sheet and the Statement of Changes in Stockholders'
Equity from "Unrealized gain (loss) on securities available for sale, net" to
"Accumulated other comprehensive income (loss), net of tax". Other comprehensive
income (loss) includes unrealized gains (losses) on investment securities
available for sale.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Estimates
are used when accounting for allowance for loan losses, realization of deferred
tax assets, fair values of certain assets and liabilities, determination and
carrying value of impaired loans, carrying value of other real estate, carrying
value and amortization of intangibles, employee benefit plans and other areas.
Reclassifications
Certain prior year financial information has been reclassified to conform to
the presentation in 1998.
Note B-BRANCH ACQUISITIONS
On February 9, 1996, the Company acquired certain assets and assumed certain
liabilities of Bank One, Wheeling-Steubenville, N.A. The Company acquired
liabilities totalling $15.3 million, with deposits totalling $15.1 million and
purchased the equipment of the St. Clairsville and Flushing, Ohio branch offices
of Bank One. The Company paid a $801,000 premium based on core deposits which is
being amortized over a period of eight years.
10
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note C-CASH AND DUE FROM BANKS
The Company's banking subsidiary is required to maintain with a Federal
Reserve bank reserve balances based principally on deposits outstanding.
Balances maintained are included in cash and due from banks. The required
reserves were approximately $150,000 at December 31, 1998 and 1997.
Note D-INVESTMENT SECURITIES
Securities Available for Sale
The amortized cost and approximate market value of investment securities
available for sale at December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury..........................................$ 2,257,757 $ 15,450 $ - $ 2,273,207
United States Federal agencies................................. 8,441,989 19,785 7,259 8,454,515
United States agency mortgage-backed securities................. 212,590,075 406,732 736,304 212,260,503
States and political subdivisions.............................. 34,173,178 124,090 263,854 34,033,414
Total Debt Securities........................................ 257,462,999 566,057 1,007,417 257,021,639
Equity securities.............................................. 6,649,600 156,000 - 6,805,600
Total Securities Available for Sale ......................$264,112,599 $ 722,057 $ 1,007,417 $263,827,239
1997
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
United States Treasury........................................ $ 5,274,484 $ 11,990 $ 1,686 $ 5,285,788
United States Federal agencies................................. 69,328,084 390,638 44,224 69,674,498
United States agency mortgage-backed securities............... 86,925,102 340,130 106,619 87,158,613
States and political subdivisions............................ 972,966 78,022 - 1,050,988
Other..................................................... 5,000 - - 5,000
Total Debt Securities....................................... 162,506,636 820,780 152,529 163,174,887
Equity securities............................................. 5,799,600 201,500 - 6,001,100
Total Securities Available for Sale .................... $168,306,236 $1,022,280 $152,529 $169,175,987
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Included in equity securities at December 31,1998 are Federal Home Loan Bank
and Federal Reserve Bank stock of $5,950,000 and $279,600, respectively. At
December 31, 1997 these stock investments were $3,700,000 and $279,600,
respectively.
The amortized cost and approximate market value of debt securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
Due in one year or less ........................ $ 1,258,392 $ 1,263,828
Due after one year through five years .......... 8,433,995 8,514,971
Due after five years through ten years ......... 4,646,835 4,642,036
Due after ten years ............................ 243,123,777 242,600,804
$257,462,999 $257,021,639
Proceeds from the sale of securities available for sale for the years
ended December 31, 1998, 1997 and 1996 were $19,978,365, $54,567,143 and
$16,474,939, respectively. Gross realized gains on the sale of securities
available for sale were $946,825 in 1998, $156,591 in 1997 and $41,070 in 1996.
Gross realized losses on the sale of securities available for sale were $83 in
1998, $122,255 in 1997 and $41,992 in 1996.
At December 31, 1998 the book value of securities pledged to secure public
deposits or for other purposes required or permitted by law aggregated
$24,707,000.
12
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note E-NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans, past
due loans and other real estate owned. Nonaccrual loans are loans on which
interest recognition has been suspended until realized because of doubts as to
the borrowers' ability to repay principal or interest. Restructured loans are
loans where the terms have been altered to provide a reduction or deferral of
interest or principal because of a deterioration in the financial position of
the borrower. Past due loans are accruing loans which are contractually past due
90 days or more as to interest or principal payments. The following summarizes
the nonperforming assets at December 31:
1998 1997 1996
Nonperforming loans
Nonaccrual ........... $1,347,000 $ 815,000 $ 547,000
90 days past due ..... 1,271,000 1,277,000 744,000
Restructured ......... 342,000 566,000 672,000
$2,960,000 $2,658,000 $1,963,000
Other real estate owned 183,000 236,000 607,000
Total ................ $3,143,000 $2,894,000 $2,570,000
There were no commitments to advance additional funds to such borrowers at
December 31, 1998. Gross interest income that would have been recorded if
nonaccrual loans and restructured loans had been current and in accordance with
their original terms approximated $130,000, $72,000 and $49,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest recognized on
such loans approximated $64,000, $33,000 and $6,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
Impaired loans totalled $1,347,000 and $815,000 at December 31, 1998 and
1997, respectively. Impaired loans totalling $196,000 and $642,000 at the end of
1998 and 1997, respectively, had a corresponding specific allowance for credit
losses of $68,000 and $115,000. The average balance of impaired loans was
$899,000 in 1998 and $558,000 in 1997. Interest income recognized on impaired
loans totalled $64,000, $33,000 and $6,000 in 1998, 1997 and 1996, respectively.
Note F-RELATED PARTY TRANSACTIONS
At December 31, 1998, receivables, both direct and indirect, from persons
related to the Company and subsidiaries as directors, executive officers or
principal shareholders, exclusive of loans to such persons which in the
aggregate do not exceed $60,000, approximated $990,000. Other changes reflect
related party loans which were less than $60,000 in the aggregate at December
31, 1997 and exceeded the $60,000 threshold in 1998. The following is an
analysis of the activity with respect to such loans for the year ended December
31, 1998:
Aggregate outstanding balance at January 1, 1998 . $ 1,220,000
Additions ..................................... 89,000
Retirements ................................... (370,000)
Other changes ................................. 51,000
Aggregate outstanding balance at December 31, 1998 $ 990,000
13
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note G-ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
Years ended December 31, ......... 1998 1997 1996
Balance at beginning of year $ 3,284,338 $ 3,563,774 $ 3,853,633
Provision for loan losses . 240,000 -- --
Loans charged-off ......... (733,361) (578,184) (427,602)
Less recoveries ........... 251,292 298,748 137,743
Net loans charged-off .... (482,069) (279,436) (289,859)
Balance at end of year ..... $ 3,042,269 $ 3,284,338 $ 3,563,774
Note H-MORTGAGE LOAN SERVICING
At December 31, 1998, 1997 and 1996, the Company was servicing approximately
1,800, 1,700 and 1,600 mortgage loans for various investors with aggregate
balances of approximately $137,437,000, $109,647,000 and $92,228,000,
respectively.
Originated mortgage servicing rights capitalized during 1998 and 1997
totalled $845,000 and $426,000 respectively. At December 31, 1998 and 1997 the
Company had capitalized mortgage servicing rights of $1,512,000 and $1,095,000
respectively, which related to approximately $136 million and $107 million,
respectively, of the aggregate $137 million and $110 million, respectively, in
loans serviced. The mortgage servicing rights associated with the remaining $1
million serviced at December 31, 1998 and the remaining $3 million in loans
serviced at December 31, 1997 are not subject to capitalization because the
loans were originated and sold prior to the Company's adoption of SFAS No. 122
on January 1, 1996 (See Note A "Summary of Significant Accounting Policies").
In connection with these loans serviced for others, the Company held
advances by borrowers for taxes and insurance in the amount of $1,854,000 and
$1,550,000 at December 31, 1998 and 1997, respectively.
The fair value of the capitalized mortgage servicing rights at December 31,
1998 and 1997 approximated $1,662,000 and $1,340,000, respectively. The fair
value of the mortgage servicing rights not subject to capitalization due to the
loans being originated or sold prior to the adoption of SFAS No. 122
approximated $28,000 at December 31, 1997. Based on management's estimate of the
fair value of the designated strata, an impairment valuation allowance of
$58,000 was established during fiscal year1998.
The Company amortizes the capitalized mortgage servicing rights in
proportion to, and over the period of, the estimated net servicing income. The
amortization for the years ending December 31, 1998, 1997 and 1996 was $370,000,
$147,000 and $101,000, respectively.
Mortgage loans originated for sale totalled $131,700,000 and $80,048,000
during 1998 and 1997, respectively. Mortgage loans sold during 1998 and 1997
totalled $124,932,000 and $64,815,000, respectively. Net gains on mortgage loans
sold aggregated $1,941,000 and $1,303,000 during 1998 and 1997, respectively.
Mortgage loans available for sale, which are carried at lower cost or market
value on a net aggregate basis included in real estate mortgage loans, totalled
$7,142,000 and $4,082,000 at December 31, 1998 and 1997, respectively.
14
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note I-PREMISES AND EQUIPMENT
A summary of premises and equipment and accumulated depreciation and
amortization follows:
December 31, ................. 1998 1997
Premises and Equipment
Buildings ................... $ 7,164,406 $ 7,117,053
Equipment ................... 6,689,076 6,255,086
Leasehold improvements ...... 855,484 853,763
14,708,966 14,225,902
Less accumulated depreciation
and amortization ......... 7,663,595 6,845,736
7,045,371 7,380,166
Land ........................ 2,690,211 2,690,211
$ 9,735,582 $10,070,377
Depreciation and amortization of premises and equipment charged to expense
for the years ended December 31, 1998, 1997 and 1996 was $844,000, $807,000 and
$658,000 respectively.
At December 31, 1998 the Company and certain subsidiaries were obligated
under various noncancellable operating leases for premises and equipment. The
leases, expiring at various dates to 2005, generally provide options to renew
and to purchase at fair value and require payment of taxes, insurance and
maintenance costs. Total rental expense for all operating leases for the years
ended December 31, 1998, 1997 and 1996 was $742,000, $715,000 and $709,000
respectively. Future minimum payments under operating leases were as follows at
December 31, 1998:
1999......................................... $ 247,000
2000........................................ 144,000
2001...................................... 77,000
2002....................................... 61,000
2003....................................... 61,000
After 2003.................................. 525,000
Total minimum lease payments................. $1,115,000
Note J - DEPOSITS
At December 31, 1998, the scheduled maturity of time deposits for the years
1999 through 2003 are as follows: $185,533,000, $60,342,000, $15,327,000,
$4,862,000 and $5,405,000, respectively.
15
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note K-BORROWED FUNDS, NOTES PAYABLE AND LONG TERM DEBT
Borrowed Funds
The following summarizes the short term borrowings at December 31:
1998 1997
Securities sold under repurchase agreements $ 3,118,888 $ 7,912,220
Treasury tax and loan notes ............... 288,750 2,260,236
Warehouse revolving line of credit ........ 1,483,545 3,401,696
Federal Home Loan Bank advances ........... 119,000,000 74,000,000
Total short term borrowings ............. $123,891,183 $87,574,152
The Company utilizes a warehouse revolving line of credit with a regional
bank for purposes of funding loan originations. Under the terms of this loan,
the Company may borrow up to $6,000,000 at any one time at an interest rate of
prime (7.75% at December 31, 1998). The Company pledges a security interest in
the originated mortgage loans as collateral. Proceeds from the sale of the
originated mortgage loans in the secondary market are used to repay the
warehouse loan which expires in 1999, subject to extension.
Securities sold under repurchase agreements are retained by the Company's
custodian under written agreements that recognize the customer's interests in
the securities. The subsidiary bank has an agreement with its Federal Reserve
district bank to be an authorized treasury tax and loan depository.
WNB is a member of the Federal Home Loan Bank of Pittsburgh (the "FHLB").
Membership in the FHLB makes available short-term and long-term borrowing
capacity in the form of collateralized advances. In addition to the $119,000,000
outstanding at December 31, 1998 from the FHLB, WNB had approximately
$165,624,000 of available borrowing capacity in the form of collateralized
advances from the FHLB at prevailing interest rates.
Interest expense on FHLB advances was $4,612,000, $4,491,000 and $2,606,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The following table summarizes information regarding the Federal Home Loan
Bank advances at December 31:
1998 1997
Balance, end of year ......................... $119,000,000 $ 74,000,000
Weighted average interest rate, end of year .. 5.48% 5.76%
Average amount outstanding during the year ... 82,342,740 81,616,301
Weighted average interest rate during the year 5.60% 5.50%
Maximum amount outstanding at any month end .. 119,000,000 105,000,000
16
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Notes Payable and Other Long Term Borrowings
The following summarizes notes payable and other long term borrowings at
December 31:
1998 1997
Variable rate note, due December 2002 $ -- $1,399,050
Capitalized lease obligations ....... 11,242 25,750
$ 11,242 $1,424,800
The variable rate term note had an interest rate of 8.28% at December 31,
1997.
Note L-GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
On April 27, 1998, the Trust, a statutory business trust created under
Delaware law issued $12,650,000 of 8.5% Trust Preferred Securities ("Preferred
Securities") with a stated value and liquidation preference of $10 per share.
The Trust's obligations under the Preferred Securities issued are fully and
unconditionally guaranteed by the Company. The proceeds from the sale of the
Preferred Securities of the Trust, as well as proceeds from the issuance of
common securities to the Company, were utilized by the Trust to invest in
$13,041,000 of 8.5% Junior Subordinated Debentures (the "Debentures") of the
Company. The Debentures are unsecured and rank subordinate and junior in right
of payment to all indebtedness, liabilities and obligations of the Company. The
Debentures represent the sole assets of the Trust. Interest on the Preferred
Securities is cumulative and payable quarterly in arrears. The Company has the
right to optionally redeem the Debentures prior to the maturity date of April
30, 2028, on or after April 30, 2003, at 100% of the stated liquidation amount,
plus accrued and unpaid distributions, if any, to the redemption date. Under the
occurrence of certain events, specifically, a Tax Event, Investment Company
Event or Capital Treatment Event as more fully defined in the ABC Capital Trust
I Prospectus dated April 21, 1998, the Company may redeem in whole, but not in
part, the Debentures prior to April 30, 2003. Proceeds from any redemption of
the Debentures would cause a mandatory redemption of the Preferred Securities
and the common securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed.
The Trust is a wholly owned subsidiary of the Company, has no independent
operations and has issued securities that contain a full and unconditional
guarantee of its parent, the Company. Accordingly, on October 21, 1998, the
Securities and Exchange Commission exempted the Trust from the reporting
requirements of the Securities Exchange Act of 1934.
Note M-FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business the Company enters into contractual
commitments involving financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit, commercial letters
of credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit,
commercial letters of credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
17
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with off-balance-sheet risk. A summary
of off-balance-sheet financial instruments at December 31, 1998 and 1997 is as
follows:
Financial instruments whose contract amounts represent credit
risk:
Contract Amounts
1998 1997
Commitments to extend credit ........ $46,587,000 $37,041,000
Standby letters of credit ............. -- --
Commercial letters of credit ........ 816,000 852,000
Commitments to extend credit, approximately $685,000 at December 31, 1998
and $470,000 at December 31, 1997, of which are dealer floor plan lines, 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.
Since many of the commitments, except dealer floor plan lines, are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. A majority of the
commitments extended by the Company have variable interest rates. An adverse
movement in market interest rates is not deemed to be a significant risk on the
outstanding commitments at December 31, 1998.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Commercial letters
of credit are issued by the Company specifically to facilitate trade or
commerce. The credit risk involved in issuing letters of credit is essentially
the same as that in extending loan facilities to customers.
Note N-FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions are set forth below
for the Company's financial instruments.
Securities and Federal Funds Sold
The carrying amounts for federal funds sold approximate fair value as they
mature in 90 days or less. The fair value of investment and mortgage-backed
securities is based on quotations from an independent investment portfolio
accounting service.
Loans
Fair values are estimates for portfolios of loans with similar financial
characteristics. Loans are segregated by type and include commercial, real
estate mortgage and installment loans. Each loan category is further segmented
into fixed and adjustable rate terms, for purposes of estimating their fair
value.
The carrying values approximate fair value for variable rate loans which
reprice frequently, provided there has been no change in credit quality since
origination. Book value also approximates fair value for loans with a relatively
short term to maturity, provided there is little or no risk of default before
maturity and the
18
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
disparity between the current rate and market rate is small. Any mark-to-market
adjustment for these short-term loans would be insignificant. This estimation
methodology is applied to the Company's demand loans, lines of credit and credit
card portfolios.
The fair value of all other performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using the rates currently
offered for loans of similar remaining maturities. The estimate of maturity is
based on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. The fair value reflects market prepayment
estimates.
The fair value of nonperforming loans is calculated by discounting carrying
values adjusted for specific reserve allocations through anticipated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan.
Deposits and Other Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity, such
as demand and savings accounts, is equal to the amount payable on demand as of
December 31, 1998 and 1997. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Borrowed Funds
The fair values of the Company's short-term and long-term borrowings with
variable rates are based on carrying amounts since these borrowings reprice
frequently as market rates change. The fair value of long-term fixed rate
borrowed funds is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for similar
remaining maturities. The fair value of the Company's Preferred Securities is
based on the issue's quoted market price.
Off-Balance-Sheet Financial Instruments
The Company's off-balance-sheet financial instruments are comprised of
commitments to extend credit, 66% of which are lines of credit. These
commitments to extend credit generally are not sold or traded and estimated fair
values are not readily available. The fair value of commitments to extend credit
can be estimated by discounting the remaining contractual fees over the term of
the commitment using the fees currently charged to enter into similar
agreements. Considering the current economic environment and the
creditworthiness of the counterparties in the portfolio, the Company believes
that such a calculation would not indicate a material calculated fair value.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market data and information about each financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
19
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets that are not considered financial assets include property,
plant and equipment. The following table represents carrying values and
estimated fair values of the Company's financial instruments as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Federal Funds Sold....................... $ 17,747,000 $ 17,747,000 $ 2,415,000 $ 2,415,000
Investment Securities available for sale 263,827,000 263,827,000 169,176,000 169,176,000
Loans Receivable, net of allowance....... 297,580,000 306,394,000 283,407,000 284,864,000
FINANCIAL LIABILITIES
Fixed Maturity Deposits (1)
Time Deposits.......................... 271,845,000 277,051,000 202,720,000 202,902,000
Borrowed funds........................... 123,891,000 125,878,000 87,574,000 87,574,000
Long-term Borrowings.............. 11 11 1,425,000 1,425,000
Guaranteed preferred beneficial interest
in subordinated debt................. 12,650,000 13,283,000 - -
<FN>
<F1>
(1) SFAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits, money market and other savings
accounts, to be equal to the amount payable on demand. Therefore, the
balances of the Company's $159.4 million and $153.0 million of such
deposits at December 31, 1998 and 1997 respectively, are not included in
this table.
</FN>
</TABLE>
Note O-STOCKHOLDERS' EQUITY
The Company has authorized 200,000 shares of $100 par value preferred stock
issuable in series. No shares of preferred stock were issued or outstanding at
December 31, 1998 and 1997.
Note P-DIVIDEND RESTRICTIONS
Dividends declared by the Company may be substantially provided from
subsidiary bank dividends. The payment of dividends by bank subsidiaries is
subject to various restrictions imposed under banking regulations. For national
banks, surplus in an amount equal to capital stock is not available for
dividends and prior approval of the Comptroller of the Currency is required if
total dividends declared exceed the total (defined) net profits from the
beginning of the current year to the date of declaration, combined with the
retained net profits of the preceding two years.
Note Q-INCOME TAXES
Total income tax provision (benefit) for the three years ended December
31, 1998 was allocated as follows:
1998 1997 1996
Income from operations ................ $ 1,770,025 $2,577,467 $2,102,367
Shareholders' equity for the tax effect
of net unrealized gain (loss) on
securities available for sale ....... (443,845) 225,560 80,000
$ 1,326,180 $2,803,027 $2,182,457
20
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
The composition of the provision for income taxes from operations for the
three years ended December 31, 1998 follows:
1998 1997 1996
Federal Income Taxes
Current $ 1,879,953 $ 2,260,156 $1,777,004
Deferred ......................... 222,334 38,551 67,382
Provision for federal income taxes 2,102,287 2,298,707 1,844,386
State ................................. (332,262) 278,760 257,981
Provision for income taxes ........ $ 1,770,025 $2,577,467 $2,102,367
The following is a reconciliation of federal income tax expense to the amount
computed at the statutory rate:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
Pre-tax income at statutory rate .................... $ 2,370,449 $ 2,409,334 $ 1,961,237
Increase (decrease) resulting from:
Tax exempt income ............................... (141,212) (25,487) (38,784)
Dividends received deduction .................... (17,606) (30,940) (30,940)
Amortization of goodwill and other intangibles .. 21,467 40,579 40,586
State tax provision (net of federal tax benefit) 112,969 (94,777) (87,713)
Change in valuation allowance ................... (187,340) -- --
Other ........................................... (56,440) -- --
Provision for federal income taxes .............. $ 2,102,287 $ 2,298,709 $ 1,844,386
</TABLE>
The state tax benefit during 1998 resulted from the Company receiving state
refunds from prior years. These refunds are due to the Company's use of a more
advantageous method of filing their state income tax returns that was not
previously available.
The deferred tax assets recorded under SFAS No. 109 are expected to be
realized through carryback to taxable income in prior years, future reversals of
existing taxable temporary differences, and, to a lesser extent, future taxable
income. The valuation allowance decreased in 1998 by $220,400 as a result of the
sale of equity securities. Since no net deferred tax benefit was recorded on the
initial writedown of the asset, due to its capital nature, no tax expense or
benefit was recorded in 1998 on its recovery.
21
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1998, 1997
and 1996 consist of the following:
1998 1997 1996
Deferred tax assets:
Loan loss reserves ........................ $ 687,447 $ 746,960 $ 764,711
Equity securities ......................... 16,580 236,980 236,980
Investment securities ..................... 176,544 -- --
Pension plan .............................. 184,724 199,753 239,369
Real estate owned ......................... 10,597 10,597 7,818
Cash basis accounting ..................... 29,336 -- --
Other ..................................... 143,413 163,554 40,914
1,248,641 1,357,844 1,289,792
Deferred tax liabilities:
Fixed assets .............................. 249,462 252,384 201,467
Cash basis accounting ..................... -- 22,012 99,623
Mortgage servicing rights ................. 449,863 267,941 134,644
Investment securities ..................... -- 267,301 41,741
699,325 809,638 477,475
Net deferred tax asset before valuation
allowance 549,316 548,206 812,317
Valuation allowance ........................ 16,580 236,980 236,980
Net deferred tax asset ..................... $ 532,736 $ 311,226 $ 575,337
22
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note R-OTHER EXPENSES
Amounts included in other expenses are as follows for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
Advertising .............. $ 378,478 $ 302,031 $ 398,101
Data processing .......... 462,951 467,963 362,593
FDIC assessment .......... 185,875 171,218 428,724
Postage .................. 270,842 276,092 340,696
Professional fees ........ 702,627 601,638 588,320
Stationery and supplies .. 421,189 368,439 519,435
Taxes other than on income 276,826 375,516 405,673
Other (each less than
1% of income) ....... 2,592,247 2,238,853 1,819,192
$5,291,035 $4,801,750 $4,862,734
Note S-PENSION PLAN AND PROFIT SHARING 401(K) SAVINGS PLAN
Effective January 1, 1989, the Company established the American
Bancorporation Pension Plan (the "Plan"). This non-contributory defined benefit
plan covers certain employees of the Company and its banking and non-banking
subsidiaries. Benefits are based on employees' years of service and
compensation. The following table sets forth the changes in the Plan's benefit
obligation and Plan assets for the year ended December 31, 1998 and 1997:
1998 1997
Change in benefit obligation:
Benefit obligation at beginning of year ...........$ 917,286 $ 1,051,701
Interest cost ................................... 57,651 74,306
Actuarial loss (gain) ........................... 144,088 (63,480)
Benefits paid ................................... (70,775) (145,241)
Benefit obligation at end of year.................$1,048,250 $ 917,286
Changes in plan assets:
Plan assets at beginning of year ................ $ 744,832 $ 802,224
Actual return on plan assets ............ ....... 37,540 30,225
Employer contributions .......................... 22,005 57,624
Benefits paid ................................... (70,775) (145,241)
Plan assets at end of year ...................... $ 733,512 $ 744,832
23
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
As of December 31, 1998 and 1997, the Company's accrued pension costs were
$461,000 and $499,000, respectively. Net periodic pension cost for the years
ended December 31, 1998, 1997 and 1996 were insignificant.
The discount rate used in determining the projected benefit obligation in
1998, 1997 and 1996 was 5.50%, 6.50% and 7.25%, respectively. The expected
long-term rate of return on plan assets was 6.50%, 7.00% and 7.00% for the years
ending in 1998, 1997 and 1996, respectively.
In 1993, due to the continuation of a claim discussed below, the Company
notified the Plan participants that the planned termination of the Plan was
rescinded; however, an amendment to freeze all benefit accruals and fully vest
all participants in the benefits accrued to them as of December 31, 1992 remains
in effect at December 31, 1998 due to an additional claim made against the Plan
during 1996.
A claim was made against the Plan during 1992 by a former employee (the
"Claimant"), alleging additional benefits due him under the Plan and litigation
between the parties ensued. Prior to the Court's final ruling, all parties
agreed as to the method of computing the benefit due the claimant. The Court
found that the computation was made pursuant to the pertinent Plan provisions
and approved a joint motion by the parties to dismiss the action. As a result,
the Plan Administrator disbursed $141,135 to the Claimant during 1995 to settle
the claim and approximately $215,000 in 1996 to other affected Plan participants
as determined based on the application of the Court's final ruling. No amount of
the disbursements were recognized in the 1996 or 1995 statement of operations as
the Company recorded a reserve of $500,000 in 1994 to recognize the liability
for additional benefits due to Plan participants as determined based on the
application of the Court's decision regarding the method of computing benefits
to affected Plan participants. Management believes appropriate liabilities have
been established to recognize the application of the Court's decision and
expects to incur no further expense for this situation.
An additional claim was made against the Plan during 1996 by former
employees alleging further additional benefits due them under the Plan. The
Administrator of the Plan denied the claim and the claimants' subsequent appeal
and believes the former employees have no further rights to appeal the denial of
the claim. The Company does not expect that any additional provision need be
made in the consolidated financial statements for this matter.
The Company sponsors a profit sharing 401(k) savings plan to which eligible
employees are permitted to contribute up to fifteen percent of their salary to
the plan each year. The plan provides for matching contributions of the Company
equal to 50% of employee contributions up to the first 6% of compensation. The
Company may, at its discretion, make profit sharing contributions to the plan.
Plan participants are fully and immediately vested in Company matching
contributions and fully vested in Company profit sharing contributions after 5
years of service. Company matching contributions for the years ended December
31, 1998, 1997 and 1996 amounted to $84,000, $76,000 and $68,000, respectively.
24
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note T - REGULATORY CAPITAL REQUIREMENTS
The Company and WNB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the entities must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The entities' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Tier I and Total capital are expressed as a percentage of risk-adjusted
assets which include various credit risk-weighted percentages of on-balance
sheet exposures. The Leverage capital ratio evaluates capital adequacy on the
basis of the ratio of Tier I capital to quarterly average total assets as
reported on the Company's regulatory financial statements, net of the loan loss
reserve, goodwill and certain other intangibles. To be categorized
well-capitalized, the Company's banking subsidiary must maintain minimum Tier I,
Total and Leverage capital ratios of 6%, 10% and 5%, respectively. At December
31, 1998, the Company and its subsidiary bank, WNB, exceeded the regulatory
minimums and met the regulatory definition of well capitalized.
The following table summarizes the Company's and WNB's actual consolidated
capital amounts and ratios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Company WNB
December 31,
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1998 1997
Tier I Capital.............. $ 47,179 $ 31,185 $ 39,888 $ 31,907
Total Qualifying Capital. $ 50,737 $ 34,469 $ 43,000 $ 35,191
Risk-Adjusted Assets..... $303,127 $278,240 $299,420 $276,306
Regulatory Requirements
Well-
Minimum Capitalized
Capital Ratios
Tier I Capital Ratio. 4.00% 6.00% 15.56% 11.21% 13.99% 11.55%
Total Capital Ratio.. 8.00 10.00 16.74 12.39 15.03 12.74
Leverage Capital Ratio 3.00 5.00 7.99 6.53 7.36 6.79
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note U-PARENT COMPANY CONDENSED FINANCIAL INFORMATION
AMERICAN BANCORPORATION (Parent Company Only)
BALANCE SHEET
December 31, 1998 and 1997 .................. 1998 1997
ASSETS
Cash and short-term investments ............ $ 3,800,777 $ 36,534
Due from subsidiaries ...................... 6,720 2,731
Investment in subsidiaries
Banking ................................... 43,413,518 34,420,693
Non-banking ............................... 1,334,430 1,241,776
44,747,948 35,662,469
Premises and equipment - net ............... 17,906 12,999
Other assets ............................... 1,584,462 298,727
Total Assets ............................. $50,157,813 $36,013,460
LIABILITIES
Due to subsidiaries ....................... $ 41,887 $ 369,183
Other liabilities ......................... 1,018,433 551,381
Notes payable ............................. 12,650,000 1,399,050
Total Liabilities ....................... 13,710,320 2,319,614
STOCKHOLDERS' EQUITY ....................... 36,447,493 33,693,846
Total Liabilities and Stockholders' Equity $50,157,813 $36,013,460
STATEMENT OF INCOME (Parent Company) Years ended December 31, 1998, 1997 and
1996
1998 1997 1996
INCOME
Dividends from banking subsidiaries ... $ -- $ -- $ 1,250,000
Dividends from non-banking subsidiaries -- 100,000 100,000
Reimbursement from subsidiaries ....... 355,000 355,000 324,000
Interest income ....................... 233,730 16,747 45,464
Other income .......................... 374 521 814
Total income ........................ 589,104 472,268 1,720,278
EXPENSE
Interest expense ....................... 809,260 84,842 82,386
Other expenses ......................... 909,846 801,955 690,164
Total expense ....................... 1,719,106 886,797 772,550
(1,130,002) (414,529) 947,728
Credit for income taxes ............. (689,911) (156,442) (135,797)
(440,091) (258,087) 1,083,525
Equity in undistributed net income
of subsidiaries .............. 5,641,973 4,766,894 2,582,453
NET INCOME ........................... $ 5,201,882 $ 4,508,807 $ 3,665,978
26
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS (Parent Company)
<S> <C> <C> <C>
Years ended December 31, 1998, 1997 and 1996 ........... 1998 1997 1996
Operating Activities:
Net income .......................................... $ 5,201,882 $ 4,508,807 $ 3,665,978
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization ...................... 50,206 50,503 51,455
Equity in undistributed net income of subsidiaries . (5,641,973) (4,766,894) (2,582,453)
Net (increase) decrease in due from subsidiaries ... (3,989) 68,064 (14,367)
Net change in other assets and other liabilities ... (1,224,221) (32,881) 60,753
Net cash provided (used) by operating activities (1,618,095) (172,401) 1,181,366
Investing Activities:
Purchase of premises and equipment ................. (9,885) (1,069) (3,949)
Net change in investment in subsidiaries ........... (4,200,000) -- --
Net cash used by investing activities .......... (4,209,885) (1,069) (3,949)
Financing Activities:
Cash dividends paid ................................ (1,658,727) (1,564,837) (1,330,113)
Net increase (decrease) in notes payable ........... 11,250,950 499,050 (100,000)
Net cash applied to financing activities ....... 9,592,223 (1,065,787) (1,430,113)
Net increase (decrease) in Cash and Cash Equivalents . 3,764,243 (1,239,257) (252,696)
Cash and Cash Equivalents Beginning Balance .......... 36,534 1,275,791 1,528,487
Cash and Cash Equivalents Ending Balance ............. $ 3,800,777 $ 36,534 $ 1,275,791
Cash paid during the year for:
Interest ............................................ $ 719,656 $ 84,842 $ 82,386
<FN>
<F1>
The Parent Company paid no income taxes during 1998, 1997 or 1996.
</FN>
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED American Bancorporation and Subsidiaries
FINANCIAL STATEMENTS-CONTINUED
December 31, 1998, 1997 and 1996
Note V-SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarters Ended (In thousands, except per share)
Mar 31 June 30 Sept 30 Dec 31 Year
1998
Interest income .....................$9,328 $9,974 $10,362 $10,637 $40,301
Interest expense .................. 5,064 5,764 6,234 6,378 23,440
Net interest income ............ . 4,264 4,210 4,128 4,259 16,861
Provision for loan losses ........ 60 60 60 60 240
Net interest income after
provision for loan losses ....... 4,204 4,150 4,068 4,199 16,621
Other operating income ............ 996 1,195 1,395 1,108 4,694
Other operating expense ........... 3,392 3,587 3,649 3,715 14,343
Income before income taxes ........ 1,808 1,758 1,814 1,592 6,972
Provision for income taxes ....... 554 471 499 246 1,770
Net income ...................... $1,254 $1,287 $ 1,315 $ 1,346 $ 5,202
Basic earnings per share ...... $ 0.40 $ 0.41 $ 0.42 $ 0.43 $ 1.66
1997
Interest income ................... $8,662 $8,671 $ 9,007 $ 9,199 $35,539
Interest expense .................. 4,358 4,374 4,647 4,899 18,278
Net interest income .............. 4,304 4,297 4,360 4,300 17,261
Provision for loan losses .......... -- -- -- -- --
Net interest income after
provision for loan losses ...... 4,304 4,297 4,360 4,300 17,261
Other operating income ............ 589 703 770 864 2,926
Other operating expense ............ 3,254 3,273 3,314 3,260 13,101
Income before income taxes ........ 1,639 1,727 1,816 1,904 7,086
Provision for income taxes ....... 609 641 651 676 2,577
Net income ...................... $1,030 $1,086 $ 1,165 $ 1,228 $ 4,509
Basic earnings per share ....... $ 0.33 $ 0.35 $ 0.37 $ 0.39 $ 1.44
27
<PAGE>
KPMG
One Mellon Bank Center Telephone 412 391 9710
Pittsburgh, PA 15219 Fax 412 391 8963
Independent Auditors' Report
To the Board of Directors and Shareholders of
American Bancorporation:
We have audited the accompanying consolidated balance sheets of American
Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American
Bancorporation and subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania
March 19, 1999
|X||X||X||X| KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is
a member of KPMG International, a Swiss association
28
<PAGE>
American Bancorporation and Subsidiaries Five Year Selected Financial Data ($ in
thousands, except per share data)
<TABLE>
<CAPTION>
Consolidated Statement of Income
<S> <C> <C> <C> <C> <C>
For the years ended ........................ 1998 1997 1996 1995 1994
Interest income
Interest and fees on loans ................ $ 25,759 $ 24,891 $ 22,500 $ 21,929 $ 14,902
Interest on securities .................... 13,786 10,300 6,967 4,197 4,721
Interest on other short-term investments .. 756 348 418 370 512
40,301 35,539 29,885 26,496 20,135
Interest expense
Interest on deposits and borrowed funds ... 23,440 18,278 13,802 11,171 7,189
Net interest income ................... 16,861 17,261 16,083 15,325 12,946
Provision for loan losses .................. 240 -- -- 105 215
Net interest income
after provision for loan losses ...... 16,621 17,261 16,083 15,220 12,731
Service charges and other income ........... 4,694 2,926 2,392 1,680 1,062
Other expenses
Salaries and employee benefits ............ 6,677 5,910 5,590 5,319 4,933
Other operating expenses .................. 7,666 7,191 7,117 6,771 6,282
14,343 13,101 12,707 12,090 11,215
Income before income taxes ................. 6,972 7,086 5,768 4,810 2,578
Provision for income taxes ................ 1,770 2,577 2,102 1,758 882
Net income ................................. $ 5,202 $ 4,509 $ 3,666 $ 3,052 $ 1,696
Per common share*:
Basic earnings per share .............. $ 1.66 $ 1.44 $ 1.17 $ 0.98 $ 0.56
Dividends ............................. $ 0.555 $ 0.50 $ 0.45 $ 0.35 $ 0.25
Average common shares outstanding (000's) .. 3,130 3,130 3,130 3,130 3,013
Consolidated Balance Sheet Data
Balance at year end
Total Assets .............................. $611,405 $484,606 $461,632 $353,995 $338,116
Earning Assets ............................ 582,196 458,282 432,793 330,136 314,463
Loans ..................................... 300,622 286,691 271,450 250,372 228,866
Deposits .................................. 431,240 355,734 319,811 292,665 292,341
Borrowed funds ............................ 123,891 87,574 104,096 27,523 13,398
Notes payable and other long-term debt .... 12,661 1,425 938 1,047 2,000
Stockholders' equity ...................... 36,447 33,694 30,423 28,012 26,193
Average Balances for years ended
Total Assets .............................. 550,452 468,163 400,866 348,655 284,845
Earning Assets ............................ 521,241 439,549 373,874 323,750 263,178
Loans ..................................... 292,662 281,738 254,397 243,043 164,405
Deposits .................................. 404,906 337,684 310,746 293,415 252,916
Borrowed funds ............................ 92,786 90,676 54,644 21,736 3,942
Notes payable and other long-term debt .... 9,988 1,055 1,033 1,091 167
Stockholders' equity ...................... 35,544 31,866 29,045 27,248 25,188
Consolidated Financial Ratios (as a Percent)
Net income to average assets .............. 0.95% 0.96% 0.91% 0.88% 0.60%
Net income to average equity .............. 14.64 14.15 12.62 11.20 6.73
Dividends to net income ................... 33.39 34.71 38.42 35.89 44.84
Average equity to average assets .......... 6.46 6.81 7.25 7.82 8.84
Average debt to average equity ............ 28.10 3.31 3.56 4.00 0.66
<FN>
<F1>
*(Per share data has been retroactively restated for the adoption of SFAS No.
128 and two for one stock splits which became effective March 16, 1994 and
October 23, 1997.)
</FN>
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Income and Expense, Yields and Rates
($ in thousands) 1998 1997 1996
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
INTEREST EARNING ASSETS
Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........................... $100,415 $ 9,219 9.18% $ 91,729 $ 8,560 9.33% $ 73,366 $ 6,723 9.16%
Real estate......................... 142,272 11,767 8.27 141,642 11,495 8.12 128,361 10,533 8.21
Installment-net.................... 49,975 4,231 8.47 48,367 4,259 8.81 52,670 4,734 8.99
Fees.......................... - 542 - - 577 - - 510 -
Total loans........................ 292,662 25,759 8.80 281,738 24,891 8.83 254,397 22,500 8.84
Investment securities
Taxable............................. 209,153 13,388 6.40 153,658 10,210 6.64 111,530 6,839 6.13
Tax-exempt........................ 8,968 398 4.44 1,083 90 8.35 1,903 128 6.72
Total investment securities........ 218,121 13,786 6.32 154,741 10,300 6.66 113,433 6,967 6.14
Other short-term investments........ 10,458 756 7.23 3,070 348 11.33 6,044 418 6.91
Total earning assets............... 521,241 40,301 7.73 439,549 35,539 8.09 373,874 29,885 7.99
Non-interest Earning Assets
Cash and due from banks............. 12,297 11,164 10,592
Premises and equipment - net........ 9,856 10,053 9,091
Other assets........................ 7,058 7,397 7,309
29,211 28,614 26,992
TOTAL ASSETS...................... $550,452 $468,163 $400,866
INTEREST BEARING LIABILITIES
Deposits
NOW, Savings and MMDA............... $119,373 $ 3,194 2.68% $123,879 $ 3,315 2.68% $129,408 $ 3,414 2.64%
Time............................... 250,623 14,387 5.74 180,561 9,869 5.47 148,545 7,517 5.06
Total deposits................... 369,996 17,581 4.75 304,440 13,184 4.33 277,953 10,931 3.93
Borrowed funds...................... 92,786 5,047 5.44 90,676 5,006 5.52 54,644 2,782 5.09
Notes payable and
other long-term debt ........... 9,988 812 8.13 1,055 88 8.30 1,033 89 8.59
Total interest
bearing liabilities............... 472,770 23,440 4.96 396,171 18,278 4.62 333,630 13,802 4.14
Non-interest bearing
Demand non-interest bearing....... 34,910 33,244 32,793
Other liabilities................ 7,228 6,882 5,398
42,138 40,126 38,191
Stockholders' Equity................ 35,544 31,866 29,045
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............. $550,452 $468,163 $400,866
Net interest income........ $16,861 $17,261 $16,083
Interest rate spread...... 2.77% 3.47% 3.85%
MARGIN ANALYSIS
(as a % of Earning Assets)
Interest income................ 7.73% 8.09% 7.99%
Interest expense............... 4.50 4.16 3.69
Net interest income............ 3.23% 3.93% 4.30%
<FN>
<F1>
Averages stated are month end average balances. Installment loans are stated net
of unearned income. Average loans include nonaccrual loans. Yields do not
reflect tax equivalent adjustments.
</FN>
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
December 31, 1998, 1997 and 1996
Introduction
The discussion and analysis, when read in conjunction with the consolidated
financial statements and accompanying notes, is designed to provide information
relevant to an assessment of financial performance and management's perception
of significant events.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward- looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
Summary
American Bancorporation recognized net income of $5,202,000 or $1.66 basic
earnings per share, in 1998, compared to net income of $4,509,000 or $1.44 basic
earnings per share, in 1997. The 15.4% increase in net income was primarily the
result of an increase in other income which was partially offset by a decrease
in net interest income and increases in other expenses and provision for loan
losses. Net income for the year ended December 31, 1996 totalled $3,666,000 or
$1.17 basic earnings per share. Return on average assets and return on average
equity were 0.95% and 14.64%, respectively, for the year ended December 31, 1998
compared to 0.96% and 14.15%, respectively, for the year ended December 31, 1997
and 0.91% and 12.62%, respectively, for the year ended December 31, 1996.
Total assets at December 31, 1998 increased to $611,405,000 from
$484,606,000 at December 31, 1997, an increase of 26.2%. Deposits increased to
$431,240,000 at December 31, 1998 from $355,734,000 at December 31, 1997, an
increase of 21.1%. Total stockholders' equity was $36,447,000 at December 31,
1998 which represents an 8.2% increase over total stockholders' equity of
$33,694,000 at December 31, 1997.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
RESULTS OF OPERATIONS
The discussion and analysis of the results of operations is focused on the
three years ended December 31, 1998 and uses a format of consecutive year
comparisons. Volume and rate variances contributing to change in net interest
income are analyzed using adjusted month end average balances. Tax equivalency
is not imputed in the calculation of yields.
<TABLE>
<CAPTION>
($ in thousands)
Years ended December 31 Change
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 - 1997 1997 - 1996
Amount % Amount %
Interest income.......................... $ 40,301 $ 35,539 $ 29,885 $ 4,762 13.40% $ 5,654 18.92%
Interest expense........................ 23,440 18,278 13,802 5,162 28.24 4,476 32.43
Net interest income.................... 16,861 17,261 16,083 (400) (2.32) 1,178 7.32
Provision for loan losses............. 240 - - 240 100.00 - -
Net interest income after
provision for loan losses............. 16,621 17,261 16,083 (640) (3.71) 1,178 7.32
Other operating income................. 4,694 2,926 2,392 1,768 60.42 534 22.32
Other operating expense................. 14,343 13,101 12,707 1,242 9.48 394 3.10
Income before income taxes............. $ 6,972 $ 7,086 $ 5,768 $ (114) (1.61)% $ 1,318 22.85%
Average Balance
Earning Assets........................... $521,241 $439,549 $373,874 $81,692 18.59% $65,675 17.57%
Interest Bearing Liabilities............ 472,770 396,171 333,630 76,599 19.33 62,541 18.75
Yield/Rate
Earning Assets...................... 7.73% 8.09% 7.99%
Interest Bearing Liabilities......... 4.96 4.62 4.14
Interest Rate Spread................. 2.77 3.47 3.85
Net Interest Margin.................. 3.23 3.93 4.30
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
VOLUME AND RATE VARIANCES
1998 vs 1997 1997 vs 1996
Increase/ (decrease) due to Increase/ (decrease) due to
($ in thousands) Volume Rate Net Volume Rate Net
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Loans ...................... $ 962 $ (93) $ 869 $ 2,416 $ (25) $ 2,391
Investment securities
Taxable ................... 3,564 (387) 3,177 2,760 611 3,371
Tax-exempt ................ 369 (61) 308 (64) 26 (38)
Other short-term investments 574 (166) 408 (263) 193 (70)
Total interest income .... 5,469 (707) 4,762 4,849 805 5,654
Interest Expense
NOW, Savings and MMDA ..... (121) -- (121) (147) 49 (98)
Time ...................... 4,000 518 4,518 1,714 637 2,351
Short-term borrowings ..... 115 (74) 41 1,972 252 2,224
Long-term debt ............ 726 (2) 724 2 (3) (1)
Total interest expense ... 4,720 442 5,162 3,541 935 4,476
Net Interest Income ....... $ 749$(1,149) $ (400) $ 1,308 $(130) $ 1,178
<FN>
<F1>
The rate-volume variance has been allocated in proportion to the absolute
value attributed to each change.
</FN>
</TABLE>
Year ended December 31, 1998
Compared to Year Ended December 31, 1997
Net Income. Net income for the year ended December 31, 1998 amounted to
$5,202,000 or $1.66 basic earnings per share, compared to net income of
$4,509,000 or $1.44 basic earnings per share for the year ended December 31,
1997. The increase was primarily the result of an increase in other income which
was partially offset by a decrease in net interest income and increases in other
expenses and provision for loan losses.
Net Interest Income. Net interest income represents the amount by which
interest income on interest-earning assets, including investment securities and
loans, exceeds interest paid on interest-bearing liabilities, including deposits
and other borrowed funds. Net interest income is the principal source of the
Company's earnings. Interest rate fluctuations, as well as changes in the amount
and type of interest earning assets and liabilities, combine to effect net
interest income.
Net interest income before provision for loan losses for the year ended
December 31, 1998 amounted to $16,861,000, a decrease of $401,000 or 2.3%,
compared to the year ended December 31, 1997. The decrease resulted primarily
from a 70 basis point decrease in the Company's margin, which was partially
offset by a $81,692,000 or 18.6% increase in average interest earning assets.
Total interest income for the year ended December 31, 1998 amounted to
$40,301,000, an increase of $4,761,000 or 13.4%, compared to the year ended
December 31, 1997. The increase resulted primarily from the increase in the
average interest earning assets which was partially offset by a 36 basis point
decrease in the average yield on earning assets. Average loans outstanding
increased $10,924,000
33
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
or 3.9% with average commercial loans increasing $8,686,000 or 9.5%, average
real estate loans increased $630,000 or 0.4%, and average consumer installment
loans increased $1,608,000 or 3.3%, primarily due to increased demand. The
average yield on loans decreased from 8.83% in 1997 to 8.80% in 1998. Average
investment securities and other short-term investments outstanding increased
$70,768,000 or 44.8% and the average yield decreased from 6.75% in 1997 to 6.36%
in 1998. The increase in investment securities is primarily due to growth
strategies utilizing increases in both FHLB advances and time deposits. These
strategies leveraged the Company's capital thereby enhancing its return on
equity and earnings.
Total interest expense for the year ended December 31, 1998 amounted to
$23,440,000, an increase of $5,162,000 or 28.2%, compared to the year ended
December 31, 1997. The increase resulted primarily from a $76,599,000 or 19.3%
increase in average interest bearing liabilities and a 34 basis point increase
in interest rates paid on such liabilities. Average NOW, money market and
savings accounts decreased $4,506,000 or 3.6%. Average time deposits increased
$70,062,000 or 38.8%, primarily the result of increased marketing efforts.
Average non-interest bearing accounts increased $1,666,000 or 5.0% and
represented 8.6% of average total deposits for the year ended December 31, 1998.
Average short-term borrowings increased $2,110,000 or 2.3%. The average rate
paid on short-term borrowings decreased from 5.52% in 1997 to 5.44% in 1998.
Provision for Loan Losses. The loan loss provision for the year ended
December 31, 1998 was $240,000. There was no loan loss provision for the year
ended December 31, 1997. Net loans charged-off totalled $242,000 in 1998,
compared to net loans charged-off of $279,000 in 1997.
Other Income. Other income for the year ended December 31, 1998 amounted to
$4,694,000, an increase of $1,769,000 or 60.4%, compared to the year ended
December 31, 1997. Net gains on sale of loans totalled $2,179,000 for the year
ended December 31, 1998, including a $297,000 gain on the sale of the Company's
credit card portfolio, compared to net gains of $1,303,000 for the year ended
December 31, 1997. The remainder of the increase is primarily the result of
increased residential mortgages loans generated for sale to secondary markets.
Net gains on sale of investment securities totalled $947,000 in 1998, compared
to $34,000 in 1997.
Other Expense. Total other expense for the year ended December 31, 1998
amounted to $14,343,000, an increase of $1,242,000 or 9.5%, compared to the year
ended December 31, 1997. Salaries and employee benefits increased $767,000 or
13.0%. Occupancy and equipment expense decreased $15,000 or 0.6%. Other
(miscellaneous) expense increased $489,000 or 10.2%.
Provision for Income Taxes. The provision for income taxes for the
year ended December 31, 1998 was $1,770,000, compared to $2,577,000 for the year
ended 1997.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
Year ended December 31, 1997
Compared to Year Ended December 31, 1996
Net Income. Net income for the year ended December 31, 1997 amounted to
$4,509,000 or $1.44 basic earnings per share, compared to net income of
$3,666,000 or $1.17 basic earnings per share for the year ended December 31,
1996. The increase was the result of increases in net interest income and other
income which was partially offset by an increase in other expenses.
Net Interest Income. Net interest income represents the amount by which
interest income on interest-earning assets, including investment securities and
loans, exceeds interest paid on interest-bearing liabilities, including deposits
and other borrowed funds. Net interest income is the principal source of the
Company's earnings. Interest rate fluctuations, as well as changes in the amount
and type of interest earning assets and liabilities, combine to effect net
interest income.
Net interest income before provision for loan losses for the year ended
December 31, 1997 amounted to $17,261,000, an increase of $1,178,000 or 7.32%,
compared to the year ended December 31, 1996. The increase resulted primarily
from a $65,675,000 or 17.6% increase in average interest earning assets, which
was partially offset by a 37 basis point decrease in the Company's margin.
Total interest income for the year ended December 31, 1997 amounted to
$35,539,000, an increase of $5,654,000 or 18.9%, compared to the year ended
December 31, 1996. The increase resulted primarily from the increase in the
average interest earning assets and a 10 basis point increase in the average
yield on earning assets. Average loans outstanding increased $27,341,000 or
10.7% with average commercial loans increasing $18,363,000 or 25.0% and average
real estate loans increased $13,281,000 or 10.3%, primarily due to increased
demand. Average consumer installment loans decreased $4,303,000 or 8.2%. The
average yield on loans decreased from 8.84% in 1996 to 8.83% in 1997. Average
investment securities and other short-term investments outstanding increased
$38,335,000 or 32.1% and the average yield increased from 6.18% in 1996 to 6.75%
in 1997. The increase in investment securities is primarily due to growth
strategies utilizing increases in both FHLB advances and time deposits. These
strategies leveraged the Company's capital thereby enhancing its return on
equity and earnings.
Total interest expense for the year ended December 31, 1997 amounted to
$18,278,000, an increase of $4,476,000 or 32.4%, compared to the year ended
December 31, 1996. The increase resulted primarily from a $62,540,000 or 18.7%
increase in average interest bearing liabilities and a 48 basis point increase
in interest rates paid on such liabilities. Average NOW, money market and
savings accounts decreased $5,528,000 or 4.3%. Average time deposits increased
$32,016,000 or 21.6%, primarily the result of increased marketing efforts.
Average non-interest bearing accounts increased $452,000 or 1.4% and represented
9.8% of average total deposits for the year ended December 31, 1997. Average
short-term borrowings increased $36,031,000 or 65.9% due to the Company's
leveraging strategy. The average rate paid on short-term borrowings increased
from 5.09% in 1996 to 5.52% in 1997.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
Provision for Loan Losses. There was no loan loss provision for the years
ended December 31, 1997 or 1996. Net loans charged-off totalled $279,000 in
1997, compared to net loans charged-off of $290,000 in 1996.
Other Income. Other income for the year ended December 31, 1997 amounted to
$2,926,000, an increase of $534,000 or 22.3%, compared to the year ended
December 31, 1996. Net gains on sale of loans increased $792,000 or 155.0%, the
result of increased residential mortgage loans generated for sale to secondary
markets. Net gains on sale of investment securities totalled $34,000 in 1997
compared to net losses on sale of investment securities totalling $1,000 in
1996. Other miscellaneous income decreased by $159,000 or 17.5%.
Other Expense. Total other expense for the year ended December 31, 1997
amounted to $13,101,000, an increase of $394,000 or 3.1%, compared to the year
ended December 31, 1996. Salaries and employee benefits increased $321,000, or
5.7%. Occupancy and equipment expense increased $134,000 or 6.0%. Other
(miscellaneous) expenses decreased $61,000 or 1.3%. Included in 1996 results was
a one-time charge of $245,000 as a result of Federal legislation enacted to
recapitalize the Savings Association Insurance Fund ("SAIF"). The one-time
assessment applied to approximately $46 million in thrift deposits the Company
acquired in recent years. Without the one-time SAIF assessment in 1996, total
other expenses increased $639,000 or 5.1% and other (miscellaneous) expense
increased $184,000 or 4.0% in 1997. The increase in salaries and employee
benefits, occupancy and equipment expense and other (miscellaneous) expense are
primarily due to increased costs associated with the mortgage banking
operations.
Provision for Income Taxes. The provision for income taxes for the year
ended December 31, 1997 was $2,577,000, compared to $2,102,000 for the year
ended 1996. The increase was due to the increase in the Company's pre-tax
income.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
December 31, 1998, 1997 and 1996
FINANCIAL CONDITION
Loans
The Company's primary earning assets are loans, representing 49.2% of the
total assets at December 31, 1998. Loans outstanding were $300,622,000 at
December 31, 1998, an increase of $13,931,000 or 4.9% between 1997 and 1998. The
increase was primarily due to improved demand in the commercial lending segment
of the portfolio. At December 31, 1998 there were no concentrations of loans in
any particular industry or in a group of related industries exceeding 10% of
total loans. The table below sets forth loans by category at December 31, 1994
through 1998.
<TABLE>
<CAPTION>
TYPES OF LOANS
<S> <C> <C> <C> <C> <C>
($ in thousands) 1998 1997 1996 1995 1994
Commercial............................... $ 112,563 $ 92,295 $ 82,792 $ 63,082 $ 51,818
Real estate construction.............. 1,060 1,024 1,816 1,869 1,112
Real estate mortgage.................... 138,475 144,179 136,488 128,709 119,629
Installment............................. 48,524 49,193 50,353 56,712 56,307
$300,622 $286,691 $271,449 $250,372 $228,866
</TABLE>
It is the policy of the Company to review each prospective credit in order
to determine an adequate level of security or collateral to obtain prior to
making the loan. The type of collateral will vary and ranges from liquid assets
to real estate. Commercial business loans are made based on the financial
ability of the borrower to repay the obligation and the appraised value of
assets used as collateral. Real estate construction loans are made with
loan-to-value ratios generally below 75%. Real estate mortgage loans are made
with loan-to-value ratios generally below 80% of the appraised value. The real
estate is appraised at the time the loan is originated and is reappraised if the
loan is placed on a classified status. All consumer installment loan requests
are evaluated to determine the prospective borrowers ability and willingness to
repay the obligation and their stability as a borrower. Ability to repay is
determined by comparing an applicant's monthly debt payment including the
proposed loan payment with net monthly income. The resulting debt
service-to-income ratio generally must be below 40%. In addition, for consumer
installment loans which require collateral, the Company will make advances up to
90% of the value on certain types of collateral.
Scheduled maturity of commercial loans and real estate construction loans
is indicated as follows at December 31, 1998:
($ in thousands) One Year One to Over
or Less Five Years Five Years Total
Commercial................ $ 22,820 $ 21,184 $ 68,559 $112,563
Real estate construction.. 456 604 - 1,060
Total.................... $ 23,276 $ 21,788 $ 68,559 $113,623
For the commercial and real estate construction loans due after one year,
$38,529,000 have a predetermined interest rate and $51,818,000 have a floating
or adjustable interest rate.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Asset Quality
Total nonperforming loans were $2,960,000 at December 31, 1998, compared to
$2,658,000 at December 31, 1997. Nonaccrual loans increased by $532,000 while
loans 90 days past due decreased $6,000, and restructured loans decreased by
$224,000. Of the $183,000 total other real estate owned, $78,000 represents
former branch office facilities.
The following presents loans considered nonperforming:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
($ in thousands)
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Nonperforming loans
Nonaccrual.......................................... $ 1,347 $ 815 $ 547 $ 790 $1,214
90 days past due.................................... 1,271 1,277 744 609 766
Restructured...................................... 342 566 672 666 610
Total nonperforming loans........................ $ 2,960 $2,658 $1,963 $2,065 $2,590
Other nonperforming assets
Other real estate owned........................... 183 236 607 575 682
Total nonperforming assets....................... $ 3,143 $2,894 $2,570 $2,640 $3,272
Nonperforming loans as a percent of loans....... 1.0% 0.9% 0.7% 0.8% 1.1%
Nonperforming assets
as a percent of total assets............... 0.5% 0.6% 0.6% 0.7% 1.0%
</TABLE>
The nonaccrual category represents loans on which interest recognition has
been suspended until realized because the borrower's ability to repay principal
or interest is in doubt. For loans not primarily secured by real estate or in
the process of collection, the Company discontinues accrual when a loan is 90
days past due. Real estate loans are placed on nonaccrual status when, in
management's judgement, collection is in doubt or when foreclosure proceedings
are initiated, which is generally 180 days past the due date. Although nominally
performing, nonaccrual treatment may also be accorded on loans when information
becomes available which suggests that more than normal risk of default exists.
Restructured loans are loans, the terms of which have been altered, to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower. Past due loans are loans contractually past
due 90 days or more and are not on nonaccrual status or restructured.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Allowance for Loan Losses
The Company's loan loss experience for the five years ended December 31, 1998
is summarized as follows:
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
<S> <C> <C> <C> <C> <C>
($ in thousands) 1998 1997 1996 1995 1994
Balance at beginning of year............................ $ 3,284 $ 3,564 $ 3,854 $ 3,737 $ 3,544
Allowance acquired in loan
purchase......................................... - - - - 411
Provision for loan losses............................. 240 - - 105 215
Loans charged-off
Commercial.......................................... 228 26 54 63 205
Real estate mortgage................................ 183 111 66 21 141
Installment......................................... 322 441 308 279 491
Total loans charged-off............................. 733 578 428 363 837
Loans recovered
Commercial........................................... 121 162 3 101 93
Real estate mortgage............................... 19 16 16 108 25
Installment......................................... 111 120 119 166 286
Total loans recovered.............................. 251 298 138 375 404
Net loans charged-off (recovered)................. 482 280 290 (12) 433
Balance at end of year................................... $ 3,042 $ 3,284 $ 3,564 $ 3,854 $ 3,737
Loans outstanding end of year............................. $300,622 $286,691 $271,450 $250,372 $228,866
Average loans for the year ended......................... 292,662 281,738 254,397 243,043 164,405
Ratio of net charge-offs to average loans............ 0.16% 0.10% 0.11% 0.00% 0.26%
Ratio of allowance to loans outstanding.............. 1.01% 1.15% 1.31% 1.54% 1.63%
Ratio of provision to average loans.................. 0.08% 0.00% 0.00% 0.04% 0.13%
</TABLE>
The allowance for loan losses was equal to 1.01% of loans outstanding at
year end 1998 and in management's judgment is appropriate to absorb probable
loan losses. Based on management's analysis of the allowance for loan losses,
the Company increased the allowance with a $240,000 charge to the provision for
bad debts in 1998. There was no provision made for 1997 and 1996. While
management's on-going analysis includes, among other factors, the financial
position of particular borrowers, results of internal loan reviews, past due
loans and the Company's historical loss experience, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
federal regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Securities
The following table summarizes the carrying value and weighted average
yield of securities by type and maturity range at December 31, 1998:
<TABLE>
<CAPTION>
After After
One Year Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities Available for Sale
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities........$ 1,264 5.58% $ 1,009 5.55% $ - -% $ - -% $ 2,273 5.57%
Federal agency obligations.. - - 6,844 6.38 4,552 7.71 209,319 6.83 220,715 6.83
State and Municipal securities - - 662 8.86 90 6.38 33,281 4.80 34,033 4.88
Other...................... - - - - - - 6,806 6.38 6,806 6.38
Total Carrying Value.........$ 1,264 5.58% $ 8,515 6.47% $ 4,642 7.68% $ 249,406 6.55% $263,827 6.56%
</TABLE>
The after ten year range of Federal agency obligations represents holdings
of certificates of participation in pools of residential mortgages. Principal
repayment prior to maturity has not been reflected. The after ten year range of
other securities includes securities with no stated maturity. Yields do not
reflect tax equivalent adjustments.
Deposits
Summarized below are average deposit balances by type for the years ended
December 31, 1998, 1997 and 1996. Also presented is the maturity distribution of
time deposits in excess of $100,000 at each year end.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS 1998 1997 1996
($ in thousands) Amount % Rate Amount % Rate Amount % Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand noninterest bearing.......... $ 34,910 8.6% -% $ 33,244 9.8% -% $ 32,793 10.6% -%
Interest bearing deposits
NOW Accounts...................... 26,146 6.5 2.33 26,648 7.9 2.36 26,615 8.5 2.37
MMDA and savings accounts.......... 93,227 23.0 2.77 97,231 28.8 2.76 102,793 33.1 2.71
Time .............................. 250,623 61.9 5.74 180,561 53.5 5.47 148,545 47.8 5.06
369,996 91.4 4.75 304,440 90.2 4.33 277,953 89.4 3.93
Total................................ $404,906 100.0% 4.34% $337,684 100.0% 3.90% $310,746 100.0% 3.52%
</TABLE>
MATURITY OF TIME DEPOSITS OVER $100,000
1998 1997 1996
($ in thousands)
Within three months....... $ 13,785 $ 13,753 $ 8,511
Three to six months....... 14,282 6,447 2,813
Six months to one year.... 13,185 11,727 7,656
After one year............ 14,283 12,807 7,968
Total.................... $ 55,535 $ 44,734 $ 26,948
40
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Capital
Capital resources represent funds obtained externally through issuance of
securities and internally through the retention of earnings. Federal regulatory
authorities define core ("Tier 1") capital to include common stockholders'
equity and non-cumulative perpetual preferred stock, less certain intangible
assets. Supplementary ("Tier 2") capital includes core capital, allowance for
loan losses, perpetual preferred stock and qualifying notes and debentures.
Capital adequacy is determined after consideration of a range of factors
including organizational size, asset quality, consistency of earnings, risk
diversification, management expertise and internal controls.
Banking organizations are required to meet capital adequacy guidelines
established by federal regulators. The Company and the Bank are subject to a
risk-based capital framework and a minimum leverage ratio. Bank regulatory
authorities in the United States have issued risk-based capital standards by
which all bank holding companies and banks will be evaluated in terms of capital
adequacy. These guidelines relate to banking company's capital to the risk
profile of its assets. Tier 1 capital includes common stockholder's equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the reserves for credit losses. Banking
regulators have also issued leverage ratio requirements. The leverage ratio
requirement is measured as the ratio of Tier 1 capital to adjusted assets. The
percentages established are minimums and most banks are required to maintain
ratios at levels 100 to 200 basis points above the minimum and under certain
circumstances may be required by federal regulators to maintain ratios at higher
levels.
The following table summarizes the Company's and WNB's actual consolidated
capital amounts and ratios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Company WNB
December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital.................... $ 47,179 $ 31,185 $ 39,888 $ 31,907
Total Qualifying Capital........... $ 50,737 $ 34,469 $ 43,000 $ 35,191
Risk-Adjusted Assets............... $303,127 $278,240 $299,420 $276,306
Regulatory Requirements
Well-
Minimum Capitalized
Capital Ratios
Tier I Capital Ratio............ 4.00% 6.00% 15.56% 11.21% 13.99% 11.55%
Total Capital Ratio.............. 8.00 10.00 16.74 12.39 15.03 12.74
Leverage Capital Ratio........... 3.00 5.00 7.99 6.53 7.36 6.79
</TABLE>
41
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Liquidity
In banking, liquidity refers to the ability of an institution to
procure or generate cash in order to fund operations, satisfy commitments,
provide credit to customers and withstand contraction of deposits during varying
economic conditions without disruption of service capabilities.
Liquidity depends upon confidence of customers and financial
intermediaries and confidence is engendered by financial strength as
demonstrated by profitability, asset quality and capitalization. The primary
source of funds are deposits and to a lesser extent, amortization and prepayment
of outstanding loans, maturing investment securities and advances from the FHLB
of Pittsburgh.
Core deposits, representing the Company's largest, most stable source of
funds, totalled $375,705,000 at December 31, 1998, an increase of $64,705,000 or
20.1% as compared to December 31, 1997. At December 31, 1998 core deposits
represented 125.0% of loans, compared to 108.5% at December 31, 1997. Such
deposits generally represent a more stable alternative to more volatile money
market sources such as short-term borrowings and time deposits over $100,000.
The Company has no brokered deposits.
Cash and cash equivalents (cash and due from banks and Federal funds
sold), are the Company's most liquid assets. At December 31, 1998, cash and cash
equivalents totalled $30,063,000, an increase of $16,621,000 or 123.6% from
December 31, 1997. Additionally, the Company has secondary sources of liquidity
in investment securities available for sale totalling $263,827,000 at December
31, 1998, compared to $169,176,000 at December 31, 1997, as well as maturities
and repayments of loans.
The Company utilizes FHLB advances as a low cost funding source for
implementing investment security growth strategies. FHLB advances totalled
$119,000,000 at December 31, 1998. Management views FHLB advances as a stable
secondary funding source.
Management believes that the Company's liquidity position is
sufficient based on its level of cash, cash equivalents, core deposits and the
stability of its other funding.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Asset/Liability Management (Interest Rate Sensitivity)
The objective of asset/liability management is to insulate an institution's
rate spread from changes in interest rates and thus enable the institution to
maintain satisfactory levels of net interest income in both rising and falling
interest rate environments. In order to meet this objective, the Company
actively monitors the maturity or repricing relationship between its interest
earning assets and interest bearing liabilities and endeavors to control the
difference between such assets and liabilities maturing or repricing.
The Company uses financial modeling to measure the impact of changes in
interest rates on the net interest margin. Modeling techniques are a more
relevant method of measuring interest rate risk than the less sophisticated
interest rate sensitivity gap table shown on page 44. Assumptions are made
regarding loan prepayments and amortization rates of passbook and NOW account
withdrawal rates. Because it is difficult to accurately project the market
reaction of depositors and borrowers, the effects of actual changes in interest
on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming interest
rate risk:
Net interest margin simulation. Given a 200 basis point increase or decrease
in interest rates, the estimated net interest margin may not change by more than
10% for a one-year period.
Market value of equity simulation. The market value of the Company's equity
is the net present value of the Company's assets and liabilities. Given a 200
basis point increase or decrease in interest rates, equity may not change by
more than 30% of total stockholder equity.
The following table illustrates the simulated analysis of the impact of a
200 basis point upward or downward movement in interest rates on net interest
revenue, return on common stockholders' equity and basic earnings per share. The
analysis was prepared assuming that interest-earning assets at December 31, 1998
remain constant. The impact of the rate movements was computed by simulating the
effect of an immediate and sustained shift in interest rates over a twelve-month
period from the December 31, 1998 levels.
Interest rate simulation sensitivity analysis
Movements in interest rates from December 31, 1998 rates
Simulated impact in the next twelve months Increase 200 bp Decrease 200 bp
Compared with December 31, 1998:
Net interest income increase/(decrease) 1.35% (2.96)%
Return on average equity increase/(decrease) 42bp (91)bp
Basic earnings per share increase/(decrease) $0.05 $(0.10)
44
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
The difference between rate sensitive assets and rate sensitive liabilities
that mature or reprice within a given time period is referred to as the interest
rate sensitivity gap. A positive gap exists when rate sensitive assets exceed
rate sensitive liabilities. This mismatch generally will enhance earnings in a
rising interest rate environment and inhibit earnings when rates decline.
Conversely, a negative gap exists when rate sensitive liabilities exceed rate
sensitive assets. In this case, a rising interest rate environment generally
will inhibit earnings and declining rates generally will enhance earnings. The
Company's interest rate sensitivity analysis at December 31, 1998, is presented
in the following table. In evaluating the Company's exposure to interest rate
risk certain shortcomings inherent in this method of analysis must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to change in market interest rates. Interest bearing demand deposits and savings
deposits are presented as repricing within the earliest period as they are
subject to immediate withdrawal and rate change. However, these types of
deposits have historically shown relatively stable balances and rates have
generally changed in lesser degrees than other interest earning assets and
interest bearing liabilities.
At December 31, 1998, there were no outstanding financial futures,
options or interest rate swap agreements.
<TABLE>
<CAPTION>
December 31, 1998 Days Total
INTEREST RATE SENSITIVITY 31 61 91 181 One Year Over
($ in thousands) 0 to 30 to 60 to 90 to 180 to 1 year or Less One Year Total
INTEREST EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans...............................$ 53,445 $ 3,651 $ 8,302 $ 10,210 $ 30,460 $ 106,068 $194,554 $300,622
Investment securities......... - 502 - 252 510 1,264 262,563 263,827
Other short-term investments...... 17,747 - - - - 17,747 - 17,747
Total interest earning assets..... 71,192 4,153 8,302 10,462 30,970 125,079 457,117 582,196
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand........... 26,292 - - - - 26,292 - 26,292
Savings deposits.................. 93,606 - - - - 93,606 - 93,606
Time deposits.................... 20,186 17,412 15,281 57,493 74,959 185,331 86,514 271,845
Borrowed funds..................... 48,891 - - - - 48,891 75,000 123,891
Long-term debt................ - - - - 11 11 12,650 12,661
Total interest bearing liabilities.... 188,975 17,412 15,281 57,493 74,970 354,131 174,164 528,295
Non Interest Bearing Sources-net - - - - - - 53,901 53,901
Total Funding sources................$188,975 $ 17,412 $ 15,281 $57,493 $74,970 $ 354,131 $228,065 $582,196
INTEREST SENSITIVITY GAP.............. $(117,783) $(13,259) $ (6,979) $(47,031) $44,000 $(229,052) $229,052 $ -
CUMULATIVE INTEREST
SENSITIVITY GAP................ $(137,519) $(131,042) $(138,021) $(185,052) $(229,052) $(229,052) $ - $ -
GAP/INTEREST EARNING ASSETS....... (25.70)% (2.89)% (1.52)% (10.26)% (9.60)% (49.98)% 49.98% -
CUMULATIVE GAP/INTEREST
EARNING ASSETS............. (25.70) (28.59) (30.12) (40.38) (49.98) (49.98) - -
</TABLE>
45
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
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 on the balance sheet and measure those instruments at fair value.
This statement is effective January 1, 2000, and need not be applied
retroactively to financial statements of prior periods. The statement may be
adopted early, as of the beginning of any quarter. The company intends to adopt
this statement on January 1, 2000. The company is currently evaluating the
impact that this statement will have on its financial position and results of
operations, but it is not expected to be material.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND American Bancorporation and Subsidiaries
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
December 31, 1998, 1997 and 1996
Year 2000 Compliance
The Company may be exposed to potential losses due to business interruption
or errors which could result if any of its computer systems are not modified to
ensure that dates beginning in January, 2000 are not misinterpreted by the
system as January, 1900. This is commonly referred to as the Year 2000 Issue. A
number of computer systems which are affected by Year 2000 are utilized by the
Company to operate its day-to-day business.
Management has established a task force to develop and maintain a Year 2000
Compliance Plan. The Company's Year 2000 Compliance Plan has been prepared in
accordance with the Federal Financial Institutions Examination Council (FFIEC)
guidelines on Year 2000 Compliance and involves the following five phases:
awareness, assessment, renovation, validation and implementation. To date, the
Company has completed the awareness, assessment and renovation phases of the
Year 2000 Compliance Plan.
The validation/testing phase of mission critical third party hardware and
software systems required by the FFIEC has been completed, noting no Year 2000
compliance issues. The Company is expected to complete the Year 2000 project no
later than June 30, 1999.
The Company has contacted large commercial customers and significant
suppliers to determine their capability to resolve the Year 2000 issues and
attain compliance. Risk ratings have been assigned to customers and suppliers.
Further contact will occur based on survey results.
The Company has prepared general contingency plans to address unforeseen
Year 2000 issues. Contingency plans will be continuously monitored and updated
as conditions change throughout 1999 and into the Year 2000.
The Company has estimated that direct costs for Y2K compliance will not be
material.
Y2K problems which are inherent in the regional, national and global banking
and payments system are expected to be brought into compliance, but are
completely beyond the Company's control.
<PAGE>
47
DIRECTORS
Jack O. Cartner, President
Motrim Inc., Cambridge, OH
Paul W. Donahie, President
American Bancorporation, Wheeling, WV
Abigail McCamic Feinknopf
Feinknopf Photography, Columbus, OH
Jay T. McCamic, Attorney at Law
McCamic & McCamic, Wheeling, WV
Jeffrey W. McCamic, Attorney at Law
McCamic & McCamic, Wheeling, WV
Jeremy C. McCamic, Attorney at Law
McCamic & McCamic, Wheeling, WV
Jolyon W. McCamic, Attorney at Law
McCamic & McCamic, Wheeling, WV
The Honorable John J. Malik, Jr., Retired
Probate Court Judge, Belmont County, Ohio
OFFICERS
Jeremy C. McCamic, Chairman & CEO
Jolyon W. McCamic, Vice Chairman/Administration
Paul W. Donahie, President
Brent E. Richmond, Executive Vice President, Chief Operating Officer
Jeffrey A. Baran, CPA, Chief Financial Officer
John H. Och, IV, CPA, Controller
Linda M. Woodfin, Secretary
Paul W. Donahie, President
Wheeling National Bank
Mark D. Krupinski, President
American Bancdata Corporation
John J. Rataiczak, President
American Mortgages, Inc.
48
<PAGE>
CORPORATE INFORMATION
Annual Meeting
The annual meeting of shareholders will be held in Wheeling, West Virginia
at the corporate offices, located at Suite 800, Mull Center, 1025 Main Street.
The meeting will convene at 10:00 A.M. (E.D.S.T.) May 19, 1999. All shareholders
are invited to attend.
Stock Transfer Agent
American Bancservices, Inc.
1025 Main Street - Suite 800
Wheeling, WV 26003
Stock Listing
American Bancorporation's common stock trades on The Nasdaq Stock Market
under the symbol AMBC. Shares of American Bancorporation's Capital Trust
Preferred trade on The Nasdaq Stock Market under the symbol AMBCP.
Primary Market Makers
Legg Mason Wood Walker, Inc. Herzog, Heine, Geduld, Inc.
Wheat First Securities, Inc. Ferris Baker Watts, Inc.
F. J. Morrissey & Co., Inc.
Form 10K
Stockholders may receive a copy of American Bancorporation's 1998 Annual
Report on Form 10K, as filed with the Securities Exchange Commission, upon
written request to the Secretary, American Bancorporation, 1025 Main Street,
Suite 800, Wheeling, WV 26003.
Independent Certified Public Accountants
KPMG LLP
Pittsburgh, PA
Securities Counsel
Maloney & Knox LLP
Washington, DC
49
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,316,176
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,747,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 263,827,239
<INVESTMENTS-CARRYING> 263,827,239
<INVESTMENTS-MARKET> 263,827,239
<LOANS> 300,621,884
<ALLOWANCE> 3,042,269
<TOTAL-ASSETS> 611,405,462
<DEPOSITS> 431,240,195
<SHORT-TERM> 123,891,183
<LIABILITIES-OTHER> 7,165,349
<LONG-TERM> 12,661,242
<COMMON> 7,824,185
0
0
<OTHER-SE> 28,623,308
<TOTAL-LIABILITIES-AND-EQUITY> 611,405,462
<INTEREST-LOAN> 25,759,177
<INTEREST-INVEST> 13,785,664
<INTEREST-OTHER> 755,802
<INTEREST-TOTAL> 40,300,643
<INTEREST-DEPOSIT> 17,581,392
<INTEREST-EXPENSE> 23,439,981
<INTEREST-INCOME-NET> 16,860,662
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 946,742
<EXPENSE-OTHER> 14,343,236
<INCOME-PRETAX> 6,971,907
<INCOME-PRE-EXTRAORDINARY> 5,201,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,201,882
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 0323
<LOANS-NON> 1,347,000
<LOANS-PAST> 1,271,000
<LOANS-TROUBLED> 342,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,284,338
<CHARGE-OFFS> 733,361
<RECOVERIES> 251,292
<ALLOWANCE-CLOSE> 3,042,269
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
