<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number 0-14506
PIONEER AMERICAN HOLDING COMPANY CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2319931
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 No. Main St., Carbondale, PA 18407
- ------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (717) 282-2662
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, Par Value $10.00 a Share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1996:
Common stock, $ 39,193,282.50 (1)
- -------------------------------
The number of shares outstanding of the issuer's classes of common stock as of
March 1, 1996:
Common stock, $10.00 par value - 1,396,175 shares
- --------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Annual Report to Shareholders for the Year Ended December 31, 1995,
Part III: 1996 Proxy Statement, Part IV: Annual Report to Shareholders for the
Year Ended December 31, 1995.
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the registrant's Common Stock outstanding, reduced by the amount of
Common Stock held by executive officers, directors and shareholders owning in
excess of 10% of the registrant's Common Stock, multiplied by the closing high
bid price for the registrant's Common Stock on March 1, 1996. The information
provided shall in no way be construed as an admission that any officer, director
or 10% shareholder may be deemed an affiliate of the registrant or that such
person is the beneficial owner of the shares reported as being held by him, and
any such inference is hereby disclaimed. The information provided herein is
included solely for record keeping purposes of the Securities and Exchange
Commission.
<PAGE>
10-K CROSS REFERENCE
Page
PART I
1. Business................................................. 3-7
2. Properties .............................................. 7
3. Legal Proceedings........................................ 8
4. Submission of Matters to a Vote of Security Holders...... 8
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters............................. 2-3
6. Selected Financial Data.................................. 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 10-37
8. Financial Statements and Supplementary Data.............. 38-66
9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure............. **
PART III
10.Directors and Executive Officers of the Registrant ...... 70
11.Executive Compensation................................... 70
12.Security Ownership of Certain Beneficial Owners and
Management...................................... 70
13.Certain Relationships and Related Transactions........... 70
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements Filed:
Pioneer American Holding Company Corp.
Consolidated Balance Sheets, December 31, 1995 and
1994.............................................. 38-39
Consolidated Statements of Income, Years ended
December 31, 1995, 1994 and 1993................. 40
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1995, 1994
and 1993.......................................... 41
Consolidated Statements of Cash Flows, Years ended
December 31, 1995, 1994 and 1993.................. 42-43
Financial Schedules Filed:
All schedules applicable to the Registrant are
included in the notes to the Financial
Statements.
There were no reports filed on Form 8-K during the
fourth quarter of 1995.
Auditors' Opinion........................................ 67
- ------------------
** Not applicable
<PAGE>
THE PIONEER AMERICAN HOLDING COMPANY CORP. AND SUBSIDIARY
Highlights of the Year
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1995 1994 % Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $ 25,575,000 21,945,000 16.54%
Total operating expense 20,722,000 17,164,000 20.73%
Income before income taxes 4,853,000 4,781,000 1.51%
Income tax expense 1,370,000 1,333,000 2.77%
Net income 3,483,000 3,448,000 1.02%
Total cash dividends declared 1,671,000 1,610,000 3.78%
AT YEAR END
Assets 320,647,000 302,408,000 6.03%
Deposits 288,252,000 270,718,000 6.48%
Loans, (net) 194,555,000 177,173,000 9.81%
Securities available for sale 68,328,000 50,467,000 35.39%
Investment securities 26,033,000 52,915,000 -50.80%
Stockholders' equity 28,492,000 24,978,000 14.07%
PER SHARE DATA
Net income 2.40 2.41
Cash dividends declared 1.20 1.16
Book value 19.61 17.43
Number of shareholders 1,347 1,334
- -----------------------------------------------------------------------------------------
</TABLE>
Company Stock Prices and Dividend Information
This range of sales prices is based upon a very limited number of
transactions for which prices are available to the Company from various sources
and accordingly may not reflect the actual high and low prices at which the
Company's stock traded. Quarterly highs and lows presented here have been
restated for 1993 to reflect the Company's two for one stock split effected in
the form of a stock dividend effective February 7, 1994:
- ----------------------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
Quarter High Low High Low High Low
- ----------------------------------------------------------------
First 35.50 34.50 27.00 24.00 18.00 17.00
Second 37.00 34.00 28.25 27.00 18.00 18.00
Third 40.50 36.75 32.00 28.25 23.00 18.00
Fourth 44.00 38.00 38.00 32.00 24.00 23.00
- ----------------------------------------------------------------
<PAGE>
Company Stock Prices and Dividend Information, (Continued)
On March 1, 1996 the Holding Company had approximately 1,347
shareholders. The market price of the stock on this date was $39.50 per share.
Cash dividends per share for 1995, 1994 and 1993 appear in the table below:
- -------------------------------------------------------------------------
Quarter (1) 1995 1994 1993
- -------------------------------------------------------------------------
First $ 0.30 0.28 0.23
Second 0.30 0.28 0.23
Third 0.30 0.30 0.27
Fourth 0.30 0.30 0.27
- -------------------------------------------------------------------------
$ 1.20 1.16 1.00
- -------------------------------------------------------------------------
(1) Per share data for year 1993 restated to reflect the Company's two for one
stock split effected in the form of a stock dividend effective February 7,
1994.
Business of Pioneer American Holding Company Corp.
Holding Company
Pioneer American Holding Company Corp. (the "Company") is a
Pennsylvania Corporation, incorporated in 1984 and is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"Holding Company Act"). The Company became an active bank holding company on May
15, 1985 when it assumed ownership of Pioneer American Bank, National
Association, (the "Bank"). The Bank is a wholly-owned subsidiary of the Company
and is its sole subsidiary.
The Company's principal activities consist of owning and supervising
the Bank, which engages in a full-service wholesale and retail banking business.
The Bank employs 166 full-time equivalents. Through the Bank, the Company
derives substantially all of its income from the furnishing of banking and
banking-related services.
The Bank
The Bank was incorporated under federal law as a national bank in 1864.
The Bank is a member of the Federal Reserve System and its deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by
law.
<PAGE>
The Bank, (Continued)
The Bank engages in a full-service wholesale and retail banking
business. Service is provided to the Bank's customers through its main office
and eighteen branch offices. Eight of these branch facilities are located within
supermarkets. Many of the Bank's locations are improved with drive-in banking
facilities and automated teller machines (ATM's) accessed through the "MAC" and
"PLUS" systems. The Bank, with its expanding branch network, serves Lackawanna
County and parts of Luzerne, Wayne, Wyoming, Susquehanna and Monroe counties in
northeastern Pennsylvania.
The Bank's services include accepting time, demand and savings
deposits, including NOW accounts, Super NOW accounts, money market checking
accounts, regular savings accounts, fixed rate certificates of deposit and club
accounts. Its services also include making secured and unsecured commercial and
consumer loans, financing commercial transactions either directly or through
regional industrial development corporations, making construction and mortgage
loans and renting of safe deposit facilities. Additional services include making
residential mortgage loans, home equity lines of credit, small business loans,
student loans, etc. The Bank's business loans include seasonal credit collateral
loans and term loans.
The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
The Bank's market area is concentrated in the primary trade areas of
the branch locations. These 18 locations are throughout Northeastern
Pennsylvania with offices in Lackawanna County (10), Luzerne County (4), Wayne
County (2), and Monroe County (2). The unemployment rate for Pennsylvania in the
fourth quarter of 1995 was approximately 6.0%. In the counties in which the
Company operates the rates were: Lackawanna 5.77% with 6,700 claims, Luzerne
7.67% with 13,400 claims; Wayne 6.1% with 1,300 claims, and; Monroe with 6.4%
with 3,700 claims. Northeastern Pennsylvania has maintained average vacancy
rates with no fear of overcapacity in the foreseeable future. The loan portfolio
of the Bank is primarily collateralized by commercial and residential real
estate located in Northeastern Pennsylvania.
All phases of the Bank's business are highly competitive. The Bank
competes with respect to its lending activities, as well as in attracting demand
deposits, with local commercial banks, other commercial banks with branches in
the Bank's market area, savings banks, savings and loan associations, insurance
companies, finance companies, leasing companies, mutual funds, credit unions,
and others. The Bank is generally competitive with financial institutions in its
service area with respect to interest rates paid on time and savings deposits,
service charges on deposit accounts and interest rates charged on loans.
<PAGE>
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company and the Bank.
The Company
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Holding Company Act") and is
therefore subject to the supervision and examination by the Federal Reserve
Board under the Holding Company Act. The Company is subject to certain annual
reporting requirements regarding its business operations.
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). This Act substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
revisions to several other federal banking statutes. A more complete discussion
of FDICIA's impact on capital requirements is contained in Management's
Discussion and Analysis, "Capital Adequacy" on pages 35-36.
In addition, FDICIA directs that each federal banking agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares (if feasible) and such other standards as the agency
deems appropriate. These regulations have not resulted in any material cost to
the Company or any significant changes to the Company's operations.
FDICIA also contains a variety of other provisions that affected the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to customers
and regulatory authorities before closing any branch, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations and a prohibition on the acceptance or renewal
of brokered deposits by depository institutions that are not well capitalized or
are adequately capitalized and have not received a waiver from the FDIC.
Compliance with these regulations did not impose material costs on the Company.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities and is subject to the periodic reporting
requirements of the Securities and Exchange Commission.
<PAGE>
Supervision and Regulation, (Continued)
The Company, (continued)
Interstate Banking - The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), enacted on September 29,
1994, permits bank holding companies to acquire banks in any state beginning in
1995. Beginning in 1997, acquired banks in different states may be merged into a
single bank, and thereafter merged banks may establish and acquire additional
branches anywhere the acquiree could have branched. States may opt out of
interstate branching until June 1, 1997, but if so, their domestic institutions
will also be prohibited from branching interstate. States may also enact laws
permitting interstate merger transactions and interstate de novo branching
before June 1, 1997. Limited branch purchases are still subject to state laws.
Bank management anticipates that the Interstate Banking Act will
increase competitive pressures in the Bank's market by permitting entry of
additional competitors.
The Bank
The Bank, as a national bank, is subject to the National Bank Act. The
Bank is also subject to the supervision of, and is regularly examined by, the
Comptroller of the Currency of the United States (the "Comptroller") and is
required to furnish quarterly reports to the Comptroller. The approval of the
Comptroller is required for the establishment of additional branch offices by
any national bank, subject to applicable state law restrictions. Under present
applicable Pennsylvania law, effective March 1990, a federally chartered bank
(such as the Bank) may, with the prior approval of the Comptroller, establish
branches generally within any county in the Commonwealth.
The Bank is a member of the FDIC and a member of Federal Reserve System
and, therefore, is subject to additional regulation by these agencies. Some of
the aspects of the lending and deposit business of the Bank which are regulated
by these agencies include personal lending, mortgage lending, interest rates as
they relate to lending and reserve requirements. These agencies are primarily
concerned with the safety and soundness of individual banks, but are also
involved with the general oversight of the activities of a bank directed toward
the determination that the bank is operating competitively and constructively,
in accordance with applicable regulations and statutes.
The operations of the Bank are also subject to numerous Federal, State
and local laws and regulations which set forth specific restrictions and
procedure requirements with respect to the extension of credit, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
The Bank is subject to certain restrictions on loans and extensions of
credit to the Company, investment in the stock or securities of the Company and
acceptance of the stock or securities of the Company as collateral for loans.
<PAGE>
The Bank, Continued
As a consequence of the extensive regulation of commercial banking activities in
the United States, the Bank's business is particularly susceptible to being
affected by federal and state legislation and regulations which may have the
effect of increasing the costs of doing business as well as limiting the
business activities of the Bank.
National Monetary Policy
In addition to being affected by general economic conditions, the
earnings and growth of the Bank and therefore the earnings and growth of the
Company, are affected by the policies of regulatory authorities, including the
Comptroller, the Federal Reserve Board and the FDIC. An important function of
the Federal Reserve Board is to regulate the money supply, conditions and
interest rates. Among the instruments used to implement these objectives are
open market operations in U.S. Government securities, changes in reserve
requirements against member bank deposits and changing the discount rate on bank
borrowings. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investments and deposits.
Their use may also affect interest rates charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on the growth and operating
results of the Bank. The effects of such policies upon the future business,
earnings and growth of the Company and the Bank cannot accurately be predicted.
Properties
The principal executive offices of the Bank and Company are located at
41 N. Main Street, in the City of Carbondale, Lackawanna County, Pennsylvania.
This building is owned by the bank and subject to a mortgage held by the former
owner. The Bank owns additional properties located at 3 John F. Kennedy Drive,
Archbald, Pennsylvania (Archbald Branch Office); Route 6, Carbondale,
Pennsylvania (Schoolside Branch Office), 105 W. Main Street, Dalton,
Pennsylvania (Dalton Branch Office); Main Avenue, Dickson City, Pennsylvania
(Dickson City Branch and Drive-In); Route 435, Elmhurst, Pennsylvania (Elmhurst
Branch Office); Route 590, Hamlin, Pennsylvania (Hamlin Branch Office); and 500
Lackawanna Avenue, Mayfield, Pennsylvania (Mayfield Branch Office), Route 940,
Mount Pocono, Pennsylvania (Mount Pocono Branch Office), Market Street,
Kingston, Pennsylvania. The Bank owns properties adjacent to the main office
utilized as parking lots.
The Bank also leases facilities for nine branch offices: four in the
Price Chopper Super Markets in Scranton (2), Dunmore and Wilkes-Barre, three in
the Mr. Z's supermarkets in Mountaintop, Dallas and Stroudsburg, one in Weis
Markets in Clarks Summit, and a free-standing office in Kingston.
<PAGE>
Legal Proceedings
The nature of the Company's business generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of management, there are no proceedings pending to which
the Company or the Bank are parties or to which their property is subject, which
would be material in relation to the Company's results of operations,
stockholders' equity or financial condition. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Company or the Bank by governmental authorities or parties.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1995 through the date of filing this report with
the Securities and Exchange Commission.
<PAGE>
Selected Financial Data
(In thousands, except per share data and number of shareholders)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Years ended December 31
-------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
For the Year
Interest income $ 23,662 20,626 19,855 20,863 21,530
Interest expense 11,227 8,157 7,514 9,048 11,484
- ------------------------------------------------------------------------------------------------------------
Net interest income 12,435 12,469 12,341 11,815 10,046
Provision for possible loan losses 420 310 837 850 950
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 12,015 12,159 11,504 10,965 9,096
Other operating income 1,913 1,319 1,750 1,323 1,433
Other operating expense 9,075 8,697 8,570 8,465 7,385
Income tax expense 1,370 1,333 1,323 1,022 800
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle $ 3,483 3,448 3,361 2,801 2,344
Cumulative effect of change in accounting
principle -- -- (75) -- --
- ------------------------------------------------------------------------------------------------------------
Net income 3,483 3,448 3,286 2,801 2,344
- ------------------------------------------------------------------------------------------------------------
Cash dividends declared $ 1,671 1,610 1,374 1,166 994
- ------------------------------------------------------------------------------------------------------------
Per Share (1)
Net income $ 2.40 2.41 2.36 2.04 1.71
Book value 19.61 17.43 17.82 16.43 15.02
Cash dividends paid 1.20 1.16 1.00 0.85 0.73
- ------------------------------------------------------------------------------------------------------------
Financial Condition
At End of Year
Assets $320,647 302,408 264,663 256,511 232,487
Deposits 288,252 270,718 237,556 231,326 208,381
Loans, net 194,555 177,173 156,979 162,640 149,975
Securities available for sale (2) 68,328 50,467 55,208 37,109 41,224
Securities held for investment (3) 26,033 52,915 25,054 36,744 24,049
Stockholders' equity 28,492 24,978 24,785 22,627 20,610
- ------------------------------------------------------------------------------------------------------------
Number of Stockholders 1,347 1,334 1,304 1,316 1,296
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data for 1993, 1992, and 1991 restated to reflect the Company's
two for one stock split effected in the form of a stock dividend effective
February 7, 1994.
(2) Carried at fair value in 1995 and 1994 and lower of cost or market prior
to 1994.
(3) Carried at historical cost, net of unamortized premiums and discounts.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following financial review and analysis is presented on a
consolidated basis and is intended to assist in understanding and evaluating the
major changes in the financial condition and earnings performance of the Company
(and the Bank) with a primary focus on the analysis of operating results for the
years ended December 31, 1995, 1994, and 1993. The information below should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes thereto, "Selected Financial Data" and other detailed
information appearing elsewhere in this report. All share and per share data for
1993 has been restated to reflect the Company's two for one stock split effected
in the form of a stock dividend effective February 7, 1994.
Results of Operations
Highlights of Operating Results
1995 vs. 1994
Net income reached $3,483,000 in 1995, $35,000 or 1.0% higher than in
1994. These earnings represent the highest annual earnings in the Company's
history. Earnings per share were $2.40 in 1995, compared to $2.41 in 1994, a
decrease of 0.4%.
All signs at the end of 1994 indicated the economic growth was robust
and inflation appeared as if it might accelerate. The Federal Reserve increased
rates in the first quarter of 1995 based on these signs. It turned out that just
the opposite was occurring which led to two rate reductions in the last two
quarters of 1995. This downward trend in interest rates in the latter part of
the year was a change from the increasing interest rate environment in 1994 and
early 1995. The trend reversal as well as the Company's special deposit rate
offers to support the opening of seven new branches from December, 1994 through
November, 1995 resulted in a slight reduction in net interest income in 1995
compared to 1994. Although the Company experienced an increase in net interest
income from changes in volume, this increase was offset by the change in
interest rates, primarily on the Company's interest bearing liabilities. The
overall change was a reduction in net interest income of $34,000 or 0.3% from
1994 to 1995. The provision for loan losses was up $110,000 year-to-year due to
growth within the loan portfolio. Other operating income was up $594,000 during
1995 from the prior period due to an increase in net securities gains and an
increase in total service charges on deposit accounts. The increase in net
securities gains was attained through the ongoing asset/liability management of
the portfolio. Other operating expenses increased during 1995 versus 1994 due to
additional salaries and benefits expense for staffing the new branches and other
recurring and non-recurring expenses associated with the new branches and growth
of the Bank.
<PAGE>
Highlights of Operating Results, (Continued)
The table below presents both the amount and percent of increase
(decrease) for items relative to net income.
Table 1
Increase (Decrease) in Components of Net Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1995 vs.1994 1994 vs. 1993
-------------------- ----------------------
Amount % Amount %
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,036,000 14.7 771,000 3.9
Interest expense 3,070,000 37.6 643,000 8.6
- --------------------------------------------------------------------------------------------------
Net interest income (34,000) (0.3) 128,000 1.0
Provision for loan losses 110,000 35.5 (527,000) (63.0)
- --------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses (144,000) (1.2) 655,000 5.7
Other operating income 594,000 45.0 (431,000) (24.6)
Other operating expense 378,000 4.3 127,000 1.5
- --------------------------------------------------------------------------------------------------
Income before income taxes 72,000 1.5 97,000 2.1
Income tax expense 37,000 2.8 10,000 0.8
- --------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle 35,000 1.0 87,000 2.6
Cumulative effect of change in accounting
principle -- -- 75,000 (100)
- --------------------------------------------------------------------------------------------------
Net income $ 35,000 1.0 162,000 4.9
- --------------------------------------------------------------------------------------------------
</TABLE>
1994 vs. 1993
Net income reached $3,448,000 in 1994, $162,000 or 4.9% higher than in
1993. Earnings per share was $2.41 in 1994, compared to $2.36 in 1993, an
increase of 2.1%.
<PAGE>
1994 vs. 1993, (Continued)
The increase in net income for 1994 over 1993 is attributable to
several factors. There was a significant increase in the overall interest rate
environment during 1994. Even though there was a reversal in the trend of
interest rates from the downward trend of the previous several years, the
increase in the Company's net interest in 1994 over 1993 was driven by an
increase in the volume of interest earning assets during the period. The
increase in interest income from the change in the volume of assets was
primarily a result of an increase in the securities portfolio. This increase
offset by an increase in the volume of interest bearing deposits which increased
interest expense. The provision for loan losses was down year-to-year due to
stability within the loan portfolio and a reduction in the total dollar amount
of delinquencies as of year end. Other operating income was down during 1994
from the prior period due to less securities gains and a reduction in the gains
on the sale of mortgages. Both are attributable to the rising interest rate
environment experienced throughout 1994. Other operating expense increased
during 1994 versus 1993 due to an increase in salaries and benefits. This
increase was primarily the result of an increase in full-time equivalents for
three new branches opened in 1994.
Net Interest Income (Taxable-Equivalent Basis)
The Company's net interest income, the difference between interest and
fees on loans, securities, and other earning assets and interest expense on
deposits is a major determinant of the Company's profitability. In the following
analyses (Tables 2 and 3) net interest income is analyzed on a tax-equivalent
basis, i.e. an adjustment is made for analysis purposes only, to increase
interest income by the amount of savings of Federal income taxes, which the
Company realizes by investing in certain tax free municipal securities and by
making loans to certain tax-exempt organizations. In this way the ultimate
economic impact of earnings from various assets can be more readily compared.
Net interest income is affected by changes in volume and changes in
interest rates. Volume refers to the amount of interest-earning assets, such as
loans and investments, and the amount of interest-costing liabilities, such as
savings and time deposits. Demand deposits and equity capital provide a source
of funds for lending or investment and enhance the interest margins since no
payment of interest expense is required (although equity capital requires no
payment of interest expense, shareholders invest in entities such as the Company
in anticipation of returns commensurate with the risk assumed with such an
investment). Similarly, certain assets, such as bank premises and equipment,
other real estate, and non-performing loans do not enhance the interest margin,
since they earn no interest income.
Pricing policies on loans and investment policies have become
increasingly important in terms of maintaining and improving the interest
margin. The Company places continuing emphasis on asset/liability management at
the senior management and director levels in order to maintain control and
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
profitability in a changing economic environment. Table 2 presents a summary of
the changes in net interest income separated between changes in volumes and
changes in rates. The portion of the change resulting from changes in rates was
determined by multiplying the change in rates during the year by the volume at
the beginning of the year. The balance of change in net interest income was
attributed to the change in volume experienced during the year.
The impact of changes in the volume of interest earning assets and
interest bearing liabilities and the change in rates for both of these areas
resulted in a decrease in net interest income on a tax equivalent basis of
$42,000 from 1994 to 1995. Tax equivalent net interest income was reduced by
$827,000 for interest rate changes from 1994 to 1995 versus $516,000 from 1993
to 1994. The tax equivalent net interest income from the volume change from 1994
and 1995 was comparable to the volume change for 1993 to 1994. The increase in
tax equivalent net interest income from volume changes from 1994 to 1995 was
$785,000 versus $651,000 from 1993 to 1994.
Net interest income in 1995/1994 was impacted by the growth of
interest bearing deposits from the seven branch openings and other promotions..
The company offered special deposit rates to support the opening of these new
branches from December 1994 through November 1995 which resulted in both an
increase in volume and rate of interest costing liabilities. This increase was
offset by a greater increase in interest income from the increase in volume of
interest earning assets. The slight decrease in net interest income from 1994 to
1995 was driven by an increase in the rate of interest bearing liabilities in
excess of the interest income from the increase in the rate of interest earning
assets.
The increase in interest income was the result of a $29,304,000
increase in the total average of interest earning assets from $263,805,000 in
1994 to $293,109,000 in 1995 and a 23 basis point increase in the return on
these assets for the same period which was 8.22% for 1995. The volume and rate
increase in interest income was primarily driven by an increase in lending
activity. Loans, net of unearned discount were up $20,732,000 from 1994 to 1995.
The related interest income was up $2,277,000 to $17,199,000 in 1995. The return
of 9.24% on net loans was a 22 basis point increase from the return in 1994.
The Company had an increase in average interest bearing liabilities of
$26,241,000 from 1994. This was due to an increase of interest bearing deposits
to $251,181,000 for 1995, a $24,735,000 increase over 1994. This increase is due
to the special rates offered on deposit products to support the opening of seven
new branches from December 1994 to November 1995. This increase in volume was
accompanied by an 84 basis point increase in the cost of interest bearing
liabilities in 1995 to 4.44% due to the new branches and the competitive rate
environment in which the Company operates. This increase in funds was utilized
in funding the growth in the loan portfolios and the purchase of investment
grade securities. The Company also borrowed short-term funds during the first
quarter of 1995 to fund this growth.
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
Table 3 provides details of the average balances outstanding during
each respective year, the amount of interest and the average rates earned or
paid. Net interest income is again presented on a taxable-equivalent basis.
Tables 2 and 3 present securities available for sale in the
securities categories.
Table 4 presents the Company's interest earning assets and interest
bearing liabilities as of December 31, 1995 and indicates the relative periods
within which these assets and liabilities will reprice. Although Table 4 shows
the Company to be liability sensitive within the next year, management believes
that factors such as product pricing, interest rate spread relationships, and
customer behavior patterns permit the Company to reduce interest rate risk to
acceptable levels.
<PAGE>
Table 2
Rate/Volume Analysis of Changes in Net Interest Income
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995/1994 1994/1993
Increase (Decrease) Increase (Decrease)
due to changes in due to changes in
------------------------- --------------------------
Volume (1) Rate Total Volume (1) Rate Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Securities:
Taxable 432 181 613 960 (218) 742
Non-taxable (2) (40) (15) (55) 174 (53) 121
- ------------------------------------------------------------------------------------------------------------------
Total securities 392 166 558 1,134 (271) 863
- ------------------------------------------------------------------------------------------------------------------
Federal funds sold 118 76 194 (84) 60 (24)
- ------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (2) 545 427 972 223 94 317
Mortgage 580 (210) 370 255 (421) (166)
Installment 785 150 935 (161) (52) (213)
- ------------------------------------------------------------------------------------------------------------------
Total loans 1,910 367 2,277 317 (379) (62)
- ------------------------------------------------------------------------------------------------------------------
Total interest income 2,420 609 3,029 1,367 (590) 777
- ------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing deposits:
NOW, Super NOW and Money Market (106) 24 (82) (34) (128) (162)
Savings (38) 6 (32) 64 (189) (126)
Time 1,696 1,399 3,095 665 243 908
- ------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,552 1,429 2,981 694 (74) 620
Short-term borrowings and note payable 95 -- 95 15 0 15
Fed Funds Purchased (11) 6 (5) 7 0 7
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 1,636 1,435 3,071 715 (73) 642
- ------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 784 (826) (42) $ 651 (516) 135
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
1) The rate/volume variance is allocated entirely to change in volume.
2) Amounts are presented on a tax-equivalent basis utilizing an effective tax
rate of 34% in 1995, 1994 and 1993. The total taxable equivalent adjustments
included above are $433,000, $439,000, and $433,000, for 1995, 1994 and 1993,
respectively.
<PAGE>
Table 3
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- --------------------------- ------------------------------
Average Average Average
(2) Average (2) Average (2) Average
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Securities:
Taxable 88,877 5,543 6.24 81,949 4,930 6.02 65,983 4,188 6.34
Non-taxable (1) 11,638 989 8.50 12,106 1,044 8.62 10,093 923 9.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 100,515 6,532 6.50 94,055 5,974 6.35 76,076 5,111 6.72
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 6,480 363 5.60 4,368 169 3.87 6,532 193 2.96
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (1) (5) 71,521 6,490 9.07 65,519 5,518 8.42 62,870 5,201 8.28
Mortgage (5) 75,553 6,643 8.79 68,956 6,273 9.10 66,155 6,439 9.73
Installment (5) 41,742 4,066 9.74 33,682 3,131 9.30 35,418 3,344 9.44
Allowance for possible loan losses (2,702) -- -- (2,775) -- -- (2,523) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 186,114 17,199 9.24 165,382 14,922 9.02 161,920 14,984 9.25
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earnings assets 293,109 24,094 8.22 263,805 21,065 7.99 244,528 20,288 8.30
Non-interest earning assets 22,278 -- -- 19,403 -- -- 16,604 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets/interest income $315,387 24,094 7.64 283,208 21,065 7.44 261,132 20,288 7.77
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Table 3, (Continued)
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- --------------------------- ------------------------------
Average Average Average
(2) Average (2) Average (2) Average
Liabilities Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing liabilities:
Deposits:
NOW, Super NOW and
Money Market $ 38,173 939 2.46 42,490 1,021 2.40 43,928 1,183 2.69
Savings 54,818 1,393 2.54 56,313 1,425 2.53 53,827 1,551 2.88
Time 158,190 8,783 5.55 127,643 5,688 4.46 112,710 4,780 4.24
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 251,181 11,115 4.43 226,446 8,134 3.59 210,465 7,514 3.57
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings
and note payable 1,872 110 5.88 255 15 5.88 -- -- --
Fed Funds Purchased 20 2 10.00 131 7 5.34 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liability 253,073 11,227 4.44 226,832 8,156 3.60 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits and
other liabilities 35,290 -- -- 31,188 -- -- 26,828 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 288,363 11,227 3.89 258,020 8,156 3.16 237,293 7,514 3.17
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 27,024 -- -- 25,188 -- -- 23,839 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity/interest expense $315,387 11,227 3.56 283,208 8,156 2.88 261,132 7,514 2.88
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 12,867 12,909 12,774
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest spread (3) 3.80% 4.39% 4.73%
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest yield (4) 4.39% 4.89% 5.22%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest and average rates are presented on a taxable-equivalent basis
utilizing an effective tax rate of 34% in 1995, 1994 and 1993. The total
taxable-equivalent adjustments included above are $433,000, $439,000 and
$433,000 for 1995, 1994, and 1993, respectively.
(2) Average balances are computed utilizing daily average balances.
Non-accruing loans have been included in average loan balances.
(3) Net interest spread is the arithmetic difference between the rate earned
on total interest earning assets and the rate paid on total interest
bearing liabilities.
(4) Net interest yield is computed by dividing net interest income by total
interest earning assets.
(5) Total interest income includes fees of $324,000, $470,000, $723,000 in 1995,
1994, and 1993, respectively.
<PAGE>
Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1 to 90 91 to 180 181 to 365 1 to 5 Beyond
Days Days Days Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Securities available for sale $ 16,571,000 15,439,000 23,394,000 8,966,000 3,958,000 68,328,000
Investment securities 3,075,000 1,289,000 3,920,000 16,782,000 967,000 26,033,000
Loans (net of unearned discount
and deferred fees) 52,485,000 9,202,000 27,195,000 52,740,000 55,675,000 197,297,000
Federal funds sold 8,500,000 -- -- -- -- 8,500,000
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 80,631,000 25,930,000 54,509,000 78,488,000 60,600,000 300,158,000
- -----------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest bearing DDA (MMA,
NOW, Super NOW) $ 37,902,000 -- -- -- -- 37,902,000
Savings (1) 10,813,000 -- -- -- 43,249,000 54,062,000
Time 21,421,000 31,145,000 47,939,000 28,591,000 -- 129,096,000
Time > $100M 8,407,000 8,210,000 11,427,000 6,233,000 -- 34,277,000
Note Payable -- -- -- -- 275,000 275,000
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 78,543,000 39,355,000 59,366,000 34,824,000 43,524,000 255,612,000
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 2,088,000 (13,425,000) (4,857,000) 43,664,000 17,076,000 44,546,000
Cumulative interest rate
sensitivity gap $ 2,088,000 (11,337,000) (16,194,000) 27,470,000 44,546,000
Cumulative interest rate
sensitivity ratio (2) 0.65% (3.53%) (5.05%) 8.57% 13.89%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount shown as repricing within 1 to 90 days is that portion which,
based upon average balances, is considered sensitive to changes in interest
rates. The Company's historical experience has been that total savings
account balances exhibit minimal movement with changes in interest rates.
Accordingly, a large percentage of the Company's savings account balances
are not as rate sensitive and are classified in the "Beyond Five Years"
category.
(2) Represents the cumulative interest rate sensitivity gap as a percentage of
total assets.
<PAGE>
Table 5
Other Operating Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 849,000 749,000 815,000
Net gains on sales of
securities available for sale 457,000 29,000 369,000
Net gains on calls of held to maturity securities 8,000 - -
Other income 599,000 541,000 566,000
- -------------------------------------------------------------------------------------------------
Total other operating income $ 1,913,000 1,319,000 1,750,000
- -------------------------------------------------------------------------------------------------
</TABLE>
Service charge income on deposit accounts increased in 1995 due to an
increase in the fees collected for returned items and an increased number of
accounts subject to service charge routines of the Bank. During 1993 pricing of
service charges and maintenance fees were increased based upon an earnings
improvement study completed by consultants for the Company. This resulted in an
increase in service charge income on deposit accounts in 1993. As these new
service charge routines seasoned, our customers adjusted accordingly. A larger
percentage of our customers complied with the requirements necessary to avoid
service charge assessment in 1994 than in 1995.
The company recognized a gain of $18,000 on the sale of mortgage loans
in 1995, a loss of $34,000 in 1994 and a gain of $105,000 in 1993, respectively.
Also recognized were gains of $31,000, $21,000 and $45,000 in 1995, 1994, and
1993 respectively, on the sale of PHEAA loans.
Net security gains are a result of management's constant monitoring of
the securities portfolio in response to changes in interest rates and changes in
the Company's asset/liability strategy. On November 15,1995, the Financial
Accounting Standards Board (FASB) released a special report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt &
Equity Securities." This guide contained a provision which allowed a one time
reclassification of securities previously classified as Held by Maturity to the
Available for Sale category. Securities in the Available for Sale category can
be sold in the normal course of managing the balance sheet, while there are
restrictions on the sale of securities from the Held to Maturity portfolio. Bank
Management believes that it was appropriate to take advantage of this
reclassification opportunity since a bank's ability to manage overall risk is
enhanced by having a larger Available for Sale portfolio. Accordingly, the Bank
reclassified securities with a book value of $11,825,000 in December 1995.
Throughout 1995 the Company sold securities from the Available for Sale
portfolio which resulted in a net gain on the sale of securities of $457,000 for
the year.
<PAGE>
Table 6
Other Operating Expenses
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 4,385,000 4,181,000 3,846,000
Net occupancy expense of bank premises 761,000 679,000 631,000
Furniture and equipment expenses 565,000 543,000 529,000
Data processing expense 332,000 339,000 346,000
FDIC Insurance 319,000 537,000 522,000
Other expenses 2,713,000 2,418,000 2,696,000
- ---------------------------------------------------------------------------------------------
Total other operating expenses $ 9,075,000 8,697,000 8,570,000
- ---------------------------------------------------------------------------------------------
</TABLE>
Other Operating Expenses, (Continued)
Salaries and employee benefits, which represent the most significant
portion of non-interest expenses, increased by 4.9 % and 8.7% in 1995 and 1994,
respectively. The 1995 increase is attributed to normal salary increases and an
increase in full-time equivalents which included the addition of staff for seven
new branches opened from December 1994 through November 1995. Salary expense
increased 10.4% and employee benefit expense decreased 9.7% in 1995. Salary
expense increased 7.3% and employee benefit expense increased 12.2 % in 1994
over 1993.
Contributions to the Company's ESOP decreased $264,000 from 1994 for a
total of $5,000 in the current year. The contributions in 1994 decreased $6,000
from 1993 for a total of $269,000. The contribution in 1995 was substantially
less because the plan had unallocated shares purchased in previous periods
negating the need for more funds in 1995.
The increase in net occupancy and furniture and equipment expense of
$104,000 or 8.5% over 1994 and the increase of $62,000 or 5.3% in 1994 over 1993
reflects the increased costs from the seven new branch facilities opened during
1994/1995. The increase is also attributable to inflation and increased costs
for snow removal.
The decrease of data processing expense of $7,000 or 2.1% in 1995 was
due to a decrease in the expense for recurring supplies and maintenance. This
was partially offset by an increase in depreciation expense for additions placed
in service in 1994. The decrease in data processing expense in 1994 was due to a
reduction in leasing expense for the teller equipment which was replaced in late
1993 with the purchase of new teller equipment.
The decreased level of insurance premiums for FDIC Insurance was
substantial in 1995 resulting in expense of $319,000 versus $537,000 for 1994.
This decrease was due to the bank insurance fund recaptialization refund
calculation due on assessments paid for the second and third quarter of 1995.
<PAGE>
Other Operating Expenses, (Continued)
Other expenses increased by 12.2 % in 1995 after decreasing by 10.3%
in 1994. The increase in 1995 is due to an increase in other miscellaneous
operating expenses associated with opening of the new branches. The Company also
had an increase in other real estate expenses of $72,000 over 1994 associated
with higher administration costs incurred in the foreclosure and continuing
maintenance of properties.
<PAGE>
Financial Position
Loan Portfolio
The Company competes actively in a marketplace characterized by
intensifying competition. Total loans, net of unearned discount and deferred
loan fees, increased $17,425,000 or 9.7% in 1995 and increased by $20,289,000 or
12.7% in 1994. The increase is attributable to growth in all three segments of
the Company's portfolio: residential real estate, commercial loans and consumer
loans. The stable downward trend in interest rates in 1995 and the increased
level of competition for loans created an aggressive rate environment for loan
products within the Company's market area. This coupled with increasing levels
of demand for commercial and consumer credit resulted in continued growth in the
Company's loan portfolio. Because of the Company's ability to retain loans with
the characteristics of residential mortgages at the interest rates these loans
were originated, management decided to retain a large percentage of newly
originated mortgages throughout the year as compared to 1994. This resulted in
the increase of mortgage loans in 1995 over 1994.
The following table summarizes loans held for portfolio by type at December 31
for each of the last five years:
Table 7
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31
------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial & $ 74,746,000 68,803,000 63,450,000 60,297,000 53,646,000
agricultural
Real estate construction 625,000 1,482,000 1,594,000 1,005,000 1,881,000
Real estate residential 112,493,000 102,708,000 88,857,000 92,358,000 83,610,000
Consumer 19,013,000 14,184,000 11,609,000 19,429,000 22,069,000
- ---------------------------------------------------------------------------------------------------------
Total loans, gross 206,877,000 187,177,000 165,510,000 173,089,000 161,206,000
Unearned discount and deferred
loan fees (9,580,000) (7,305,000) (5,927,000) (8,089,000) (9,349,000)
- ---------------------------------------------------------------------------------------------------------
Total loans, net of unearned
discount and deferred loan
fees $197,297,000 179,872,000 159,583,000 165,000,000 151,857,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Loan Portfolio, (Continued)
The following table summarizes commercial, financial, agricultural
and real estate construction loans at December 31, 1995 by maturity distribution
(based on contractual maturities) and by interest rate sensitivity:
Table 8
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
One Year One Through Over Total
or Less Five Years Five Years Gross Loans
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity Distribution:
Commercial, financial & agricultural $ 26,646,000 15,639,000 32,461,000 74,746,000
Real estate construction 625,000 - - 625,000
- ---------------------------------------------------------------------------------------------------
Total $ 27,271,000 15,639,000 32,461,000 75,371,000
- ---------------------------------------------------------------------------------------------------
Interest Rate Sensitivity:
Loans with predetermined rates 10,693,000 14,167,000 21,471,000 46,331,000
Loans with variable rates 16,578,000 1,472,000 10,990,000 29,040,000
- ---------------------------------------------------------------------------------------------------
Total $ 27,271,000 15,639,000 32,461,000 75,371,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
Variable interest rate loans and shorter maturities provide for
interest rate changes from time to time based upon changes in the Company's base
lending rate or some other barometer of market interest rates. By matching the
interest rate sensitivity of variable rate loans against the interest rate
sensitivity of liabilities, management attempts to reduce the Company's
vulnerability to future interest rate fluctuations. As in previous years,
management continues to seek commercial and residential mortgage loans with
variable interest rates. The spread between short term interest rates, which
many variable rate loans are indexed to, and long term interest rates has
enabled the Bank to increase its percentage of variable rate loans originated as
a percentage of total loans originated in 1995 than it has been able to in the
past, particularly residential mortgage loans. In 1995, the Company originated
$11,200,000 in residential mortgage loans of which $7,100,000 were variable rate
loans. The Company originated $20,988,000 in 1994 of which $ 13,041,000 were
variable rate loans. In addition, the Bank has the ability to sell fixed rate
residential mortgages and student loans it does originate into secondary markets
to reduce its exposure to future interest rate increases. Sales of mortgage and
student loans were $3,043,000 for 1995 and $6,411,000 for 1994.
<PAGE>
Risk Elements of Loan Portfolio
The following table shows various non-performing categories as of
December 31 for each of the last five years:
Table 9
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 2,161,000 2,315,000 3,613,000 4,414,000 2,939,000
Restructured loans 837,000 1,077,000 496,000 380,000 196,000
- --------------------------------------------------------------------------------------
$ 2,998,000 3,392,000 4,109,000 4,794,000 3,135,000
- --------------------------------------------------------------------------------------
</TABLE>
Prior to 1994, other loans past due ninety or more days as to interest or
principal were disclosed separately from non-accrual loans. These loans have
now been added to non-accrual loans for disclosure purposes as loans ninety or
more days past due by definition are non-accruing due to interest being
reversed in accordance with the Bank's lending policies.
The Company generally places a loan on a non-accrual status when, in
the opinion of management, the borrower does not have the ability to meet the
original terms of the loan. The Company also reverses the accrued interest on
all loans over ninety days past due unless the Bank considers the loan to be
well secured and in the process of collection. The continued reduction in
non-accrual loans is attributable to stepped-up collections effort by the Bank
and management's initiative to reduce the number of matured loans which are
classified as past due until underwriting is complete to renew the facility.
There was no interest income recognized on non-accruing loans in 1995
or 1994 and $5,000 in 1993. If the non-accruing loans had been current in
accordance with their original terms and had been outstanding throughout the
period, interest income would have been increased by $ 111,000, $109,000 and
$228,000 in 1995, 1994, and 1993, respectively.
The amount of interest on restructured loans which was recorded in
income was $73,000 in 1995, $37,000 in 1994, and $46,000 in 1993. If the
restructured loans had been current in accordance with their original terms and
had been outstanding throughout the period, interest income would have been
increased by $ 12,000, $8,000,and $13,000 in 1995, 1994, and 1993, respectively.
In 1993, the FASB issued Statement of Financial Accounting standard
(SFAS) No. 114, "Accounting By Creditors for Impairment of Loans." SFAS No. 114
requires certain impaired loans to be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's market price or the fair value of the collateral if the loan is
collateral dependent. In October 1994, the FASB issued SFAS No. 118, Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures (SFAS
No. 118), which amends SFAS No. 114 and requires certain related disclosures.
<PAGE>
Risk Elements of Loan Portfolio, (Continued)
Both SFAS No. 114 and 118 were effective for the Company beginning January 1,
1995 and have been reflected prospectively from that date. The implementation of
these statements did not have a material effect on the Company's results of
operations, financial condition, or stockholders'equity. As of December 31,1995,
the Company had impaired loans with a total recorded investment of $1,722,000
and an average recorded investment for the twelve month period ended December
31,1995 of $1,528,000. As of December 31,1995, the amount of recorded investment
in impaired loans for which there is a related allowance for credit losses and
amount of the allowance is $288,000 and $95,000, respectively. The amount of the
recorded investment in impaired loans for which there was no related allowance
for credit losses at December 31,1995 is $1,434,000. The aggregate amount of
impaired loans are measured under the fair value measurement method. For
purposes of applying the measurement criteria for impaired loans under SFAS No.
114, as amended, the Company excludes large groups of smaller-balance
homogeneous loans, primarily consisting of residential real estate loans and
consumer loans, as well as commercial, financial , and agricultural loans with
balances less than $100,000. For applicable loans, the Company evaluates the
need for impairment recognition when a loan is transferred to nonaccrual status,
or earlier if based on management's assessment of the relevant facts and
circumstances, it is probable that the Bank will be unable to collect all
proceeds due according to the contractual terms of the loan agreement. The
Company's policy for the recognition of interest income on impaired loans is the
same as for nonaccrual loans discussed previously. Impaired loans are charged
off when the Company determines that foreclosure is probable and the fair value
of the collateral is less than the recorded investment of the impaired loan.
Substantially all of the Bank's loans are secured by residential and/or
commercial real estate in the area of northeastern Pennsylvania. Accordingly,
the Bank's primary concentration of credit risk is related to the real estate
market in the northeastern Pennsylvania area and the ultimate collectibility of
this portion of the Bank's loan portfolio is susceptible to changes in economic
conditions in that area. As of December 31, 1995 and 1994, there were no other
concentrations of loans exceeding 10% of total loans. Loan concentrations are
considered to exist when there are amounts loaned to related borrowers or to a
multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic conditions.
Provision and Allowance for Possible Loan Losses
The allowance for possible loan losses constitutes the amount available
to absorb known and inherent losses within the loan portfolio. When establishing
the appropriate levels for the quarterly and annual provision and the allowance
for possible loan losses, management considers a variety of factors, in addition
to the inherent risk of loss contained in the lending process. Periodic
consideration is given to the current impact of economic conditions, the
diversification of the loan portfolio, the volume and nature of non-performing
and impaired loans, historical loss experience, the financial condition of
significant individual borrowers, the adequacy of any collateral, and other
factors. Consideration is also given to examinations performed by regulatory
authorities and the Company's independent auditors.
<PAGE>
Provision and Allowance for Possible Loan Losses, Continued
The provision for loan losses was $420,000 in 1995, $310,000 in 1994,
and $837,000 in 1993. In 1993, 1992, and 1991, Management increased the overall
level of the provision in response to the instability of the economy. Stability
within the loan portfolio, reduced number and dollar amount of delinquent loans,
and the absence of external economic factors indicative of the need for
additional reserves were the primary factors which resulted in a reduction of
the provision for loan losses in 1994. In an effort to address any risks
presented by the continued growth of the loan portfolio and the increased level
of net loans charged off, Management increased the loan loss provision $110,000
in 1995 over 1994. The current year provision has enabled the allowance for loan
losses to increase by 1.6% to $2,742,000 as of December 31, 1995, while there
was an 9.7% increase in total loans, net of unearned discount and unearned loan
fees.
<PAGE>
Provision and Allowance for Possible Loan Losses, Continued
The following table presents an analysis of the allowance for possible
loan losses for each of the last five years:
Table 10
Analysis of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years ended December 31
---------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $2,699,000 2,604,000 2,360,000 1,882,000 1,607,000
Loans charged off:
Commercial, financial &
agricultural (231,000) (66,000) (441,000) (128,000) (480,000)
Real estate construction -- -- -- -- --
Real estate residential (85,000) (179,000) (123,000) (90,000) (2,000)
Consumer (124,000) (69,000) (108,000) (243,000) (278,000)
- ---------------------------------------------------------------------------------------------------------------
Total loans charged off (440,000) (314,000) (672,000) (461,000) (760,000)
- ---------------------------------------------------------------------------------------------------------------
Recoveries on charged off loans:
Commercial, financial &
agricultural 49,000 70,000 33,000 52,000 53,000
Real estate construction. -- -- -- -- --
Real estate residential -- -- 19,000 16,000 --
Consumer 14,000 29,000 27,000 21,000 32,000
- ---------------------------------------------------------------------------------------------------------------
Total recoveries 63,000 99,000 79,000 89,000 85,000
- ---------------------------------------------------------------------------------------------------------------
Net loans charged off (377,000) (215,000) (593,000) (372,000) (675,000)
Provision for loan losses 420,000 310,000 837,000 850,000 950,000
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $2,742,000 2,699,000 2,604,000 2,360,000 1,882,000
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs during the period as
a percentage of average loans
outstanding during the period 0.20% 0.13% 0.36% .24% .46%
Allowance for possible loan losses
as a percentage of loans net of
unearned discount and loan fees
at end of period 1.39% 1.50% 1.63% 1.43% 1.24%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Provision and Allowance for Possible Loan Losses, (Continued)
The following table presents an allocation of the allowance for
possible loan losses by major category and percentage of loans in each category
to total loans for each of the last five years. It should be noted that
allocations are no more than estimates and are subject to revision as conditions
change.
Table 11
Allocation of Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------
% of % of % of % of % of
loans to loans to loans to loans to loans to
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial
& agricultural $ 258,000 36.1 531,000 36.8 431,000 38.3 390,000 34.8 400,000 33.3
Real estate
construction -- 0.3 -- 0.8 -- 1.0 -- 0.6 -- 1.2
Real estate
residential 135,000 54.4 376,000 54.9 448,000 53.7 406,000 53.4 50,000 51.9
Consumer 106,000 9.2 166,000 7.5 685,000 7.0 621,000 11.2 171,000 13.6
Unallocated 2,243,000 -- 1,626,000 -- 1,040,000 -- 943,000 -- 1,261,000 --
- -----------------------------------------------------------------------------------------------------------------------------
$2,742,000 100 2,699,000 100 2,604,000 100 2,360,000 100 1,882,000 100
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allocations for commercial, financial and agricultural loans are
determined by reviewing certain significant, non-performing, delinquent or
otherwise unusual loans and charge-offs and by analyzing historical loss
experience and delinquent trends. Losses on residential real estate loans and
consumer loans are reasonably predictable based on historical loss experience,
delinquency trends and current economic conditions. The unallocated portion of
the allowance for possible loan losses is established by management at a level
considered prudent to absorb certain inherent risks in the loan portfolio based
on such information as is currently available. In 1995 and 1994, these same
factors were used in setting specific allocations for commercial, financial and
agricultural loans, and residential mortgages. Shifts in specific allocations
for 1995 resulted from continuing refinement of loan officer risk ratings and
reductions in delinquency percentages. In 1993 and 1992, Management concluded
that an increase in the specifically allocated portion of the allowance at
December 31, 1993 and 1992 for residential mortgages and consumer loans was
warranted due to increasing delinquencies in these portfolios. These delinquency
trends tempered in 1994 and 1995 resulting in the reduction of allocated
reserves to consumer and real estate residential loans and an increase in
unallocated reserves.
<PAGE>
Securities Portfolio
The primary objectives in managing the Company's securities portfolio
are to maintain the needed flexibility to meet liquidity needs and changing
interest rates without impairing earnings, and to provide a stable source of
interest revenue. The following table presents the yield by securities type and
contractual maturity for the Bank's securities portfolio, consisting of
securities available for sale and investment securities.
<PAGE>
Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------------
After One After Five
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities Available for Sale
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government agencies:
Fair value $ 46,085,000 9,760,000 1,999,000 8,424,000 66,268,000
Yield 6.13 6.80 8.71 6.28 6.33
- --------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
Fair Value $ 101,000 -- -- -- 101,000
Yield(1) 10.08 -- -- -- 10.08
- --------------------------------------------------------------------------------------------------------------------
Other securities:
Fair value -- -- -- 1,959,000 1,959,000
Yield -- -- -- 6.42 6.42
- --------------------------------------------------------------------------------------------------------------------
Total Fair Value 46,186,000 9,760,000 1,999,000 10,383,000 68,328,000
- --------------------------------------------------------------------------------------------------------------------
Weighted average yield 6.14 6.80 8.71 6.31 6.32
- --------------------------------------------------------------------------------------------------------------------
Investment Securities
- --------------------------------------------------------------------------------------------------------------------
U. S. Treasuries & other
U.S. government agencies:
Carrying value $ 7,650,000 10,047,000 -- -- 17,697,000
Yield 5.90 5.98 -- -- 5.94
- --------------------------------------------------------------------------------------------------------------------
States & Municipal
securities:
Carrying value 424,000 6,735,000 901,000 66,000 8,126,000
Yield (1) 8.98 8.66 8.46 12.51 8.68
- --------------------------------------------------------------------------------------------------------------------
Other securities:
Carrying value 210,000 -- -- -- 210,000
Yield 7.64 -- -- -- 7.64
- --------------------------------------------------------------------------------------------------------------------
Total carrying value $ 8,284,000 16,782,000 901,000 66,000 26,033,000
- --------------------------------------------------------------------------------------------------------------------
Weighted average yield 6.10 7.05 8.46 12.51 6.81
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields are presented on a taxable equivalent basis utilizing an effective
tax rate of 34% for all maturities.
(2) Yields on securities available for sale are computed using historical
amortized cost.
<PAGE>
Securities Portfolio, (Continued)
The following table sets forth the composition and carrying value of
the Company's securities portfolio, analyzed by securities available for sale
and investment securities, as of the dates indicated:
Table 13
Securities Portfolio
Securities available for sale ( 1995 and 1994 at market value and 1993 at cost)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasuries & Other
U.S. Government Agencies $ 66,268,000 48,743,000 55,208,000
State and Municipal 101,000 -- --
Other 1,959,000 1,724,000 --
--------------------------------------------------------------------------------------------
Total $ 68,328,000 50,467,000 55,208,000
- -------------------------------------------------------------------------------------------------
Investment securities
- -------------------------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government Agencies $ 17,697,000 40,182,000 12,813,000
State & Municipal 8,126,000 12,424,000 11,636,000
Other 210,000 309,000 605,000
- -------------------------------------------------------------------------------------------------
Total $ 26,033,000 52,915,000 25,054,000
- -------------------------------------------------------------------------------------------------
</TABLE>
Approximately $15 million, or 16% of the total investment portfolio, is
invested in U.S. Agency Mortgage-Backed pools and U.S. Agency issued
Collateralized Mortgage Obligations (CMOs). This is split equally between fixed
rate and adjustable rate issues. Due to the nature of the mortgage collateral
behind these issues, the average lives of these holdings will tend to lengthen
when interest rates rise and shorten when interest rates fall. To help mitigate
this risk, management primarily focuses on instruments that have some degree of
extension and call protection, particularly in the fixed rate holdings. All of
the fixed rate holdings are, for example, planned amortization class CMO's,
which provide a higher degree of certainty with respect to cashflows. In
addition, management regularly reviews the performance of all Mortgage-Backed
holdings as well as the portfolio as a whole. This includes the projection of
principal cashflows under a current rate environment as well as given a parallel
move in the yield curve up or down 200 basis points.
<PAGE>
Deposits
One of the primary components of sound growth and profitability is
deposit accumulation and retention. Total deposits at December 31, 1995
increased by 6.5% over total deposits at December 31, 1994, which had a 14.0%
increase over total deposits at December 31, 1993. Table 14 below summarizes
deposits by type. Table 15 presents maturity information for all time deposits
and Table 16 presents maturity information for time deposits of $100,000 or
greater.
Table 14
Deposits by Major Classification
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand non-interest bearing $ 32,915,000 29,157,000 25,781,000
NOW and Super NOW 15,392,000 16,526,000 17,061,000
Savings 54,062,000 55,333,000 54,622,000
Money Market 22,510,000 24,824,000 28,008,000
Time 163,373,000 144,878,000 112,084,000
- ---------------------------------------------------------------------------------------------------------
Total $ 288,252,000 270,718,000 237,556,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Table 15
Remaining Maturities of Time Deposits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31
---------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 29,828,000 22,149,000 26,161,000
Over three through six months 39,355,000 31,056,000 36,186,000
Over six through twelve months 59,366,000 49,571,000 30,331,000
Over twelve months 34,824,000 42,102,000 19,406,000
- ---------------------------------------------------------------------------------------------------------
Total $ 163,373,000 144,878,000 112,084,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Table 16
Remaining Maturities of Time Deposits of
$100,000 or Greater
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31
----------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 8,407,000 6,110,000 5,165,000
Over three through six months 8,210,000 7,245,000 8,762,000
Over six through twelve months 11,427,000 9,070,000 9,249,000
Over twelve months 6,233,000 6,617,000 1,942,000
- ---------------------------------------------------------------------------------------------------------
Total $ 34,277,000 29,042,000 25,118,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Deposits, Continued
Federal Fund rates, which are a driving factor in the pricing of
liabilities, increased in 1994 and the beginning of 1995 then stabilized until
there were two rate reductions in the last two quarters of 1995. The instability
in interest rates led to a trend from long-term instruments to intermediate and
short-term instruments reflecting the consumers' unwillingness to commit their
funds for extended periods of time. As the interest rates offered on time
deposits continued to rise, consumers made a renewed commitment to time deposits
throughout 1994, and with special rates offered in 1995 for new branch
promotions, this trend continued throughout 1995.
Taxation
Income tax expense was $1,370,000, $1,333,000, and $1,323,000 for 1995,
1994, and 1993, respectively. The Company's effective tax rate for these periods
was 28.2%, 27.9%, and 28.3%, respectively. The increase in the Company's tax
expense is primarily due to the increasing level of income before income taxes
offset by proportionately smaller benefits from a relatively constant level of
tax-exempt obligations as a result of the Tax Reform Act of 1986.
Effective January 1, 1993 the Company adopted Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes, (SFAS No. 109)
which changes the method by which the Company accounts for deferred income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the periods in
which those temporary differences are expected to be recovered or settled. The
cumulative effect of the adoption of SFAS No. 109 was a $75,000 reduction of the
net deferred tax asset as of January 1,1993.
Liquidity
Liquidity involves the Company's ability to raise funds to support
asset growth, meet deposit withdrawal and other borrowing needs, maintain
reserve requirements and otherwise operate the Company on an ongoing basis. To
adjust for the effects of a changing interest rate environment and deposit
structure, the Company's management monitors its liquidity requirements through
its asset/liability management program. This program, along with other
management analysis, enables the bank to meet its cash flow requirements and
adapt to the changing needs of individual customers and the requirements of
regulatory agencies.
Among the sources of asset liquidity are cash and due from banks,
Federal Funds sold, securities available for sale, mortgage loans available for
sale, and funds received from the repayment of loans and the maturing of
investments. The total carrying value of cash and due from banks, Federal Funds
sold, securities available for sale and investment securities with maturities of
<PAGE>
Liquidity, (Continued)
less than one year was $97,789,000 at December 31, 1995. In addition to these
sources of liquidity and loan repayments, the Company has the ability to secure
borrowings collateralized by the securities portfolio. Through the use of these
and other sources, management believes the Company has adequate liquidity in
both the short-term and the long-term to carry out the Company's growth and
profitability strategies. The Company's ability to pay dividends depends
primarily on the ability of the Bank to pay dividends to the Company. Note 13 of
the consolidated financial statements provides information as to the limitations
on dividend and other funds transfers from the Company's subsidiary. Such
limitations are not expected to adversely impact the ability of the Company to
meet its future dividend and other cash obligations.
Effects of Economic Cycles
Economic conditions are reviewed by management in a continuing effort
to adjust to the changing environment. The effects of these changes on the
banking industry as a whole and in the Company's market area are reviewed by
management in order to compete at a level consistent with the goals of
profitability and sound management policy.
An economic recession can decrease longer term interest rates, which
will generally increase the value of existing fixed rate investment securities,
mortgage loans and other similar fixed rate assets. However, recessionary
periods also may tend to decrease the borrowing needs of consumers and cause
increased uncertainty relative to the borrowers ability to pay previously
advanced loans. Also, reinvestment of matured investments and loan principal
payments can be a problem as attractive rates are not as available. This may be
further exacerbated by accelerated prepayments in a falling interest rate
environment. The converse of the aforementioned impact of an economic recession
may be true in a period of economic expansion. Management closely monitors the
collectibility of existing loans outstanding and intends to be conservative when
authorizing new loans, especially during periods of economic uncertainty.
Impact of Other Recently Issued Accounting Standards
In March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and that any related impairment be based on the fair
value of the asset. This statement also requires that long-lived assets to be
disposed of be carried at the lower of cost or fair value less estimated
disposal costs. This statement was effective January 1,1996 and management does
not expect the adoption of this statement to materially affect the Company's
results of operations, financial condition or stockholders' equity.
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. This statement will prospectively require the Company, which
services mortgage loans for others in return for a fee, to recognize these
servicing assets, regardless of how they were acquired. Additionally, the
Company will be required to assess the fair value of these assets at each
reporting date to determine impairment. SFAS No. 122 is required to be adopted
by the Company in 1996. Management does not expect the adoption of this
statement to materially affect the Company's results of operations, financial
condition, or stockholders' equity.
In October 1995, the FASB issued SFAS No. 123 Accounting for
Stock-based Compensation. This statement encourages the adoption of fair value
accounting for stock-based compensation issued to employees. Further, in the
event that fair value accounting is not adopted, the statement requires proforma
disclosure of net income and earnings per share as if fair value accounting had
been adopted. SFAS No. 123 is required to be adopted by the Company in 1996.
Management expects that it will not adopt fair value accounting for stock-based
compensation issued to employees and, therefore, does not expect the adoption of
this statement to materially affect the Company's results of operations,
financial condition, or stockholders' equity.
Capital Adequacy
A strong capital position is important to the continued profitability
of the Company and promotes depositor and investor confidence. The Company's
capital consists of stockholders' equity, which provides a basis for future
growth and expansion and also provides a buffer against unexpected losses.
Undivided profits increased 14.2% between 1994 and 1995 and 16.8% between 1993
and 1994. The Company has paid cash dividends without interruption since 1942
and it is management's intention to continue paying a reasonable return on
stockholders' investment while retaining adequate earnings to allow for
continued growth.
The Federal Reserve Board measures capital adequacy for bank holding
companies by using a risk-based capital framework and by monitoring compliance
with minimum leverage ratio guidelines. The minimum ratio of total risk-based
capital to risk-adjusted assets is 8% at December 31, 1995, of which 4% must be
Tier I capital. The Company's total risk-based capital ratio was 16.8% at
December 31, 1995 and 16.8% at December 31, 1994. The Company's Tier I
risk-based capital ratio was 15.6% at December 31, 1995 and 15.6% at December
31, 1994.
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum leverage ratio of 3% for bank holding companies that meet certain
criteria, including that they maintain the highest regulatory rating. All other
bank holding companies are required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points. The Federal Reserve
Board has not advised the Company of any specific minimum leverage ratio
applicable to it. The Company's leverage ratio was 8.8% at December 31, 1995 and
8.3% at December 31, 1994.
<PAGE>
Capital Adequacy, Continued
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) was enacted, which substantially revises the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and makes
revisions to several other federal banking statutes.
The Act establishes minimum capital requirements for all depository
institutions and establishes five capital tiers: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly under-capitalized", and
"critically undercapitalized". FDICIA imposes significant restrictions on the
operations of a bank which is not at least adequately capitalized. A depository
institution's capital tier will depend upon where its capital levels are in
relation to various other capital measures which include a risk-based capital
measure, a leverage ratio capital measure and other factors. Under regulations
adopted, for an institution to be well capitalized it must have a total
risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of
at least 6%, and a Tier I leverage ratio of at least 5%, and not be subject to
any specific capital order or directive.
At December 31, 1995, the Bank's total risk-based capital, Tier I
risk-based capital and Tier I leverage ratios were 16.7%, 15.5%, and 8.7%,
respectively.
Certain other ratios that are commonly used in analyzing bank holding
company and bank financial statements are presented in the following table:
Table 17
Return on Equity and Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years ended December 31
-------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 1.10% 1.22% 1.26%
Return on equity (net income divided by average equity) 12.89% 13.69% 13.78%
Dividend payout ratio (cash dividends declared divided
by net income) 47.98% 46.7% 41.8%
Equity to asset ratio (average equity divided by average
total assets) 8.57% 8.9% 9.1%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Quarterly Financial Data (unaudited)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Net Interest Income $ 3,118 3,085 3,062 3,170
Provision for Possible Loan Losses 120 90 105 105
Other Operating Income 395 525 349 644
Other Operating Expense 2,316 2,428 2,097 2,234
Net Income 807 782 874 1,020
- ----------------------------------------------------------------------------------------------------
Net Income Per
Common Share Equivalent (1) $ 0.56 0.54 0.60 0.70
- ----------------------------------------------------------------------------------------------------
1994
Net Interest Income 2,997 3,001 3,109 3,362
Provision for Possible Loan Losses 130 80 70 30
Other Operating Income 316 335 335 333
Other Operating Expense 2,039 2,158 2,161 2,339
Net Income 824 748 888 988
- ----------------------------------------------------------------------------------------------------
Net Income Per
Common Share Equivalent (1) $ 0.58 0.52 0.62 0.68
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data restated to reflect the Company's two for one stock split
effected in the form of a stock dividend effective February 7, 1994.
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Assets 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 12,677,000 11,489,000
Federal funds sold 8,500,000 --
Securities available for sale (approximate cost
of $68,469,000 in 1995 and
$53,186,000 in 1994)
U.S. Treasury securities 2,463,000 3,532,000
Federal agency mortgage based obligations 15,142,000 17,012,000
Other obligations of Federal agencies 48,663,000 28,199,000
Obligations of state & political subdivision 101,000 --
Other securities 1,959,000 1,724,000
- ----------------------------------------------------------------------------------------------------
Total securities available for sale 68,328,000 50,467,000
- ----------------------------------------------------------------------------------------------------
Investment securities (approximate market value
of $25,993,000 in 1995 and
$50,479,000 in 1994):
U.S. Treasury securities -- 415,000
Other obligations of Federal agencies 17,697,000 39,767,000
Obligations of states and political subdivisions 8,126,000 12,424,000
Corporate notes 200,000 299,000
Other securities 10,000 10,000
- ----------------------------------------------------------------------------------------------------
Total investment securities 26,033,000 52,915,000
- ----------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 197,297,000 179,872,000
Allowance for possible loan losses (2,742,000) (2,699,000)
- ----------------------------------------------------------------------------------------------------
Net loans 194,555,000 177,173,000
- ----------------------------------------------------------------------------------------------------
Accrued interest receivable 2,633,000 3,023,000
Premises and equipment, net 4,783,000 3,462,000
Other real estate owned 932,000 824,000
Other assets 1,499,000 2,310,000
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $836,000 in 1995
and $798,000 in 1994) 707,000 745,000
- ----------------------------------------------------------------------------------------------------
Total assets $ 320,647,000 302,408,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets, (Continued)
December 31, 1995 and 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 32,915,000 29,157,000
NOW and Super NOW 15,392,000 16,526,000
Savings 54,062,000 55,333,000
Money Market 22,510,000 24,824,000
Time 163,373,000 144,878,000
- ---------------------------------------------------------------------------------------------------
Total deposits 288,252,000 270,718,000
- ---------------------------------------------------------------------------------------------------
Accrued interest payable 2,102,000 1,716,000
Dividends payable 418,000 416,000
Short term borrowings -- 3,150,000
Note payable 275,000 275,000
Other liabilities 1,108,000 1,155,000
- ---------------------------------------------------------------------------------------------------
Total liabilities 292,155,000 277,430,000
- ---------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $10 par value per share,
25,000,000 shares authorized; 1,393,175
shares in 1995; 1,387,445 in 1994 issued
and outstanding 13,932,000 13,875,000
Additional paid-in capital 35,000 92,000
Undivided profits 14,618,000 12,806,000
Net unrealized loss on securities available for sale (93,000) (1,795,000)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 28,492,000 24,978,000
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 320,647,000 302,408,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP
Consolidated Statements Of Income
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 17,087,000 14,823,000 14,857,000
Interest on Federal funds sold 363,000 169,000 193,000
Interest on investments:
Taxable 5,543,000 4,930,000 4,188,000
Non-taxable 669,000 704,000 617,000
- -----------------------------------------------------------------------------------------------------------------
Total interest income 23,662,000 20,626,000 19,855,000
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on Federal funds purchased 2,000 7,000 --
Interest on short term borrowing 93,000 15,000 --
Interest on deposits 11,115,000 8,135,000 7,514,000
Interest on notes payable 17,000 -- --
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 11,227,000 8,157,000 7,514,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income 12,435,000 12,469,000 12,341,000
Provision for possible loan losses 420,000 310,000 837,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,015,000 12,159,000 11,504,000
- -----------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 849,000 749,000 815,000
Gains on calls of securities held to maturity 8,000 -- --
Gains on sales of securities available for sale 483,000 185,000 369,000
Losses on sales of securities available for sale (26,000) (156,000) --
Other income 599,000 541,000 566,000
- -----------------------------------------------------------------------------------------------------------------
Total other operating income 1,913,000 1,319,000 1,750,000
- -----------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,385,000 4,181,000 3,846,000
Net occupancy expense of bank premises 761,000 679,000 631,000
Furniture and equipment expenses 565,000 543,000 529,000
Data processing expense 332,000 339,000 346,000
FDIC Insurance 319,000 537,000 522,000
Other expenses 2,713,000 2,418,000 2,696,000
- -----------------------------------------------------------------------------------------------------------------
Total other operating expenses 9,075,000 8,697,000 8,570,000
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of change in
accounting principle 4,853,000 4,781,000 4,684,000
Income tax expense 1,370,000 1,333,000 1,323,000
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting
principle 3,483,000 3,448,000 3,361,000
Cumulative effect of change in accounting
for income taxes -- -- (75,000)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 3,483,000 3,448,000 3,286,000
- -----------------------------------------------------------------------------------------------------------------
Per Share Data:
Income before cumulative effect of change in
accounting principle 2.40 2.41 2.41
Cumulative effect of change in accounting for
income taxes -- -- (0.05)
- -----------------------------------------------------------------------------------------------------------------
Net income per common share equivalent $ 2.40 2.41 2.36
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Net
Employee Unrealized
Benefits Loss on
Additional Related to Securities Total
Common Paid-in Undivided Guaranteed Available Stockholders'
Stock Capital Profits Debt of ESOP for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 13,721,000 -- 9,056,000 (150,000) -- 22,627,000
Net income -- -- 3,286,000 -- -- 3,286,000
Cash dividends declared -
$1.00 per share -- -- (1,374,000) -- -- (1,374,000)
Guaranteed debt of ESOP -- -- -- 150,000 -- 150,000
Exercise of stock options 60,000 36,000 -- -- -- 96,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 13,781,000 36,000 10,968,000 -- -- 24,785,000
Net income -- -- 3,448,000 -- -- 3,448,000
Cash dividends declared -
$ 1.16 per share -- -- (1,610,000) -- -- (1,610,000)
Change in net unrealized loss on securities
available for sale, net of taxes -- -- -- -- (1,795,000) (1,795,000)
Exercise of stock options 94,000 56,000 -- -- -- 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 13,875,000 92,000 12,806,000 -- (1,795,000) 24,978,000
Net income -- -- 3,483,000 -- -- 3,483,000
Cash dividends declared -
$1.20 per share -- -- (1,671,000) -- -- (1,671,000)
Change in net unrealized loss on securities
available for sale, net of taxes -- -- -- -- 1,702,000 1,702,000
Exercise of stock options 57,000 (57,000) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 13,932,000 35,000 14,618,000 -- (93,000) 28,492,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,483,000 3,448,000 3,286,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Net gain on sales of securities available
for sale (457,000) (29,000) (369,000)
Net gain on calls on investments securities (8,000) - -
Accretion of discount on securities
and money market investments (87,000) (107,000) (63,000)
Amortization of premium on investment
securities 159,000 168,000 173,000
Provision for possible loan losses 420,000 310,000 837,000
Increase (decrease) in deferred loan fees 70,000 (31,000) 31,000
Increase in deferred tax benefit (143,000) (58,000) (83,000)
Decrease (increase) in accrued interest receivable 390,000 (957,000) (44,000)
Depreciation and amortization of premises
and equipment 787,000 703,000 638,000
Gain on sales of premises and equipment (2,000) (1,000) (22,000)
Loss on sale of other real estate 100,000 140,000 49,000
Gain on lease termination - (78,000) -
Proceeds from the sale of mortgage
and PHEAA loans 3,043,000 6,411,000 12,168,000
Net increase in mortgage & PHEAA
loans held for sale, excluding provision
for loans losses and change in deferred loan fees (3,392,000) (7,851,000) (8,711,000)
(Decrease) increase in other assets 78,000 (76,000) 9,000
Amortization of goodwill 38,000 39,000 39,000
Increase (decrease) in accrued interest payable 386,000 665,000 (117,000)
Increase (decrease) in other liabilities (48,000) 263,000 132,000
- --------------------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
provided by operating activities 1,334,000 (489,000) 4,667,000
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,817,000 2,959,000 7,953,000
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of investment securities
and securities available for sale 36,717,000 8,506,000 23,462,000
Proceeds from sales of securities available for sale 29,497,000 8,131,000 5,920,000
Purchases of investment securities and securities
available for sale (54,222,000) (42,508,000) (35,532,000)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (17,960,000) (15,183,000) (3,596,000)
Acquisition of premises and equipment (2,142,000) (1,046,000) (686,000)
Proceeds from sales of premises and equipment 36,000 17,000 43,000
Proceeds from sale of other real estate 230,000 638,000 814,000
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,844,000) (41,445,000) (9,575,000)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows, (Continued)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, NOW and Super NOW,
savings, money market and time deposits. $ 17,534,000 33,161,000 6,230,000
Dividends paid (1,669,000) (1,571,000) (1,475,000)
Notes payable -- 275,000 --
Short-term borrowings (3,150,000) 3,150,000 --
Exercise of stock options -- 150,000 96,000
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,715,000 35,165,000 4,851,000
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,688,000 (3,321,000) 3,229,000
Cash and cash equivalents at beginning of year 11,489,000 14,810,000 11,581,000
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 21,177,000 11,489,000 14,810,000
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 10,841,000 7,492,000 7,631,000
Cash payments for income taxes 1,355,000 1,204,000 1,405,000
Transfer of assets from loans
to other real estate 438,000 322,000 2,082,000
Change in net unrealized loss on securities
available for sale 2,578,000 2,719,000 --
Tax effect on change in unrealized loss
on securities available for sale 876,000 924,000 --
Reclassification of investment
securities to available for sale 11,825,000 -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include
the accounts of the Pioneer American Holding Company Corp. (the
"Company") and its wholly-owned subsidiary, Pioneer American Bank,
National Association (the "Bank"). The Bank provides a wide range of
banking services to individual and corporate customers through its
branch banks in Lackawanna, Luzerne, Monroe and Wayne Counties in
Pennsylvania. The Bank operates within two major markets in
Northeastern Pennsylvania consisting of: the Scranton-Wilkes-Barre -
Hazleton metropolitan statistical area (MSA) and the Poconos. These two
markets are quite diverse. The MSA consists of a stable industrial
complex and a growing service industry. The MSA also has a relatively
stable population base. The Poconos is a more transient market with a
growing industrial and service complex, but is still primarily driven
by the vacation resort and tourist trade.
The Bank operates its branch network in three distinct manners:
supermarket banking (8 offices), traditional branch banking (8
offices), and personal banking offices (2 offices). A large percentage
of the Bank's loans and deposits were originated and are being serviced
by the traditional branches. All of the branches are full service and
offer commercial and retail products. These products include checking
accounts (non-interest and interest bearing), savings accounts,
certificate of deposits, commercial and installment loans, real estate
mortgages and home equity loans. The Bank also offers ancillary
services which complement these products.
The Bank is subject to competition from other financial institutions
and other financial services companies. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
All material intercompany balances and transactions between the Company
and its subsidiary have been eliminated. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for possible loan losses, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, and the
valuation of deferred tax assets.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(1) Continued
In connection with the determination of the allowances for possible
loan losses and real estate owned, management obtains independent
appraisals for significant properties to the extent considered
practical.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and Federal funds sold.
Generally, Federal funds are sold for one-day periods.
Mortgage Loans Held for Sale
The Company periodically identifies certain loans as held for sale at
the time of origination. These loans consist primarily of fixed rate
residential mortgages and are recorded at the lower of cost or
estimated market value.
Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115), which addresses the
accounting and reporting for investments in debt and equity securities
that have readily determinable fair values and for all investments in
debt securities. Applicable investments are classified in three
categories consisting of held-to-maturity, trading and available for
sale. Trading securities are those which are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities for which the Company
has the ability and intent to hold the security until maturity. All
other securities not included in trading or held to maturity are
classified as available for sale. Held-to-maturity securities are
reported at amortized cost, while trading securities and
available-for-sale securities are reported at fair value. For trading
securities the unrealized gains and losses are included in current
earnings. Available-for-sale securities are accounted for by reporting
unrealized gains and losses as a separate component of shareholders'
equity, net of tax.
Prior to 1994 securities available for sale were recorded at the lower
of amortized cost or market and reported separately on the consolidated
balance sheets.
The Company believes it has the intent and ability to hold to maturity
its portfolio of investment securities as part of its portfolio of
long-term interest earning assets. Gains and losses on sales of
securities available for sale are computed on a specific identification
cost basis. Premiums and discounts on all securities are amortized over
the estimated lives of the securities on a level yield method.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(1) Continued
On November 15, 1995, the Financial Accounting Standards Board (FASB)
released a special report entitled "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". This guide contained a provision which allowed a one time
reclassification of securities previously classified as Held to
Maturity to the Available for Sale category. Securities in the
Available for Sale category can be sold in the normal course of
managing the balance sheet, while there are restrictions on the sale of
securities from the Held to Maturity protfolio. Bank Management
believes that it was appropriate to take advantage of this
reclassification opportunity since a bank's ablility to manage overall
risk is enhanced by having a larger Available For Sale portfolio.
Accordingly, the Bank reclassified securities with a book value of
$11,825,000 on November 15,1995.
Interest Revenue and Expense
Interest revenue and expense are accrued on various methods which
approximate a level yield or cost when related to principal amounts
outstanding. Unearned discount on loans is amortized to income by a
method which also approximates a level yield on the principal amounts
outstanding.
Non-accrual Loans
The accrual of interest on loans is discontinued when payment of
principal or interest is considered doubtful of collection. Loans on
which payments are ninety days or more past due are considered
non-accrual unless the loan is both well secured and in the process of
collection. When interest accrual is discontinued, the interest
receivable which was previously credited to income is reversed. If a
loan demonstrates the ability to pay over a period of time and is
current as to principal and interest, then the loan is returned to
accrual status.
Loan Fees
Loan origination fees and direct loan origination costs are recognized
over the life of the related loan as an adjustment of the loan's yield.
Allowance for Possible Loan Losses
The provision for possible loan losses charged to operating expense
reflects the amount deemed appropriate by management to maintain the
allowance for possible loan losses at a level to absorb known and
inherent losses in light of the present risk characteristics of the
Bank's loan portfolio. Management's judgment is based on the evaluation
of individual loans and their overall risk characteristics, past
experiences with respect to the relationship of its loan losses to the
loan portfolio, the assessment of current economic conditions and other
relevant factors.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(1) Continued
Management believes that the allowance for possible loan losses is
adequate. While management uses available information to make its
evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for possible loan losses. Such agencies may require
the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examination.
Loan losses are charged directly against the allowance and recoveries
on previously charged-off loans are added to the allowance.
On January 1,1995, the Company prospectively implemented Statement of
Financial Accounting Standard (SFAS) No. 114, "Accounting By Creditors
for Impairment of Loans," and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures (SFAS No.
118), which amends SFAS No. 114 and requires certain related
disclosures. SFAS No. 114, as amended, requires certain impaired loans
to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's market
price or the fair value of the collateral if the loan is collateral
dependent. The implementation of these statements did not have a
material effect on the Company's results of operations, financial
condition, or stockholders' equity.
For purposes of applying the measurement criteria for impaired loans
under SFAS No. 114, as amended, the Company excludes large groups of
smaller-balance homogeneous loans, primarily consisting of residential
real estate loans and consumer loans, as well as commercial, financial,
and agricultural loans with balances less than $100,000. For applicable
loans, the Company evaluates the need for impairment recognition when a
loan becomes nonaccrual, or earlier if based on management's assessment
of the relevant facts and circumstances, it is probable that the Bank
will be unable to collect all proceeds due according to the contractual
terms of the loan agreement. The Company's policy for the recognition
of interest income on impaired loans is the same as for nonaccrual
loans discussed previously. Impaired loans are charged off when the
Company determines that foreclosure is probable and the fair value of
the collateral is less than the recorded investment of the impaired
loan.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed on a straight-line basis
over the estimated lives of the related assets as follows: buildings
20-33 years; building and land improvements 5-10 years; equipment 3-12
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(1) Continued
years; and leasehold improvements over 10-15 years. No depreciation is
taken on capital projects-in-progress until such projects are completed
and placed in service. Maintenance and repairs are charged to
operations as incurred.
Other Real Estate Owned
Other real estate owned consists of real estate acquired through
foreclosure and is stated at the lower of estimated fair value, less
estimated disposal costs. Allowances for declines in value subsequent
to acquisition were not necessary at both December 31, 1995 and 1994.
While management uses the best information available to make its
evaluations, future adjustments to the valuation of other real estate
may be necessary if economic conditions differ significantly from the
assumptions used in making the evaluations.
Cost in Excess of Fair Value of Net Assets Acquired
Cost in excess of fair value of net assets acquired arose from an
acquisition in 1976 and is being amortized on a straight-line basis
over a period of 40 years.
Income Taxes
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, (SFAS No.
109) which changed the method by which the Company accounts for
deferred income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the periods in which those
temporary differences are expected to be recovered or settled.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(2) Securities Available for Sale
Securities available for sale at December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Cost Unrealized Carrying Value
- ------------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury securities $ 2,465,000 -- (2,000) 2,463,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 1,810,000 -- (26,000) 1,784,000
Federal Home Loan Mortgage Corporation 6,524,000 -- (106,000) 6,418,000
Government National Mortgage Association 6,912,000 28,000 -- 6,940,000
Other obligations of Federal agencies 48,699,000 94,000 (130,000) 48,663,000
State and municipals 100,000 1,000 -- 101,000
Other securities 1,959,000 -- -- 1,959,000
- ------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 68,469,000 123,000 (264,000) 68,328,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------------
Cost Unrealized Carrying Value
- ------------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury securities $ 3,506,000 25,000 -- 3,532,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 1,975,000 -- (274,000) 1,701,000
Federal Home Loan Mortgage Corporation 8,869,000 -- (673,000) 8,196,000
Government National Mortgage Association 7,669,000 -- (553,000) 7,115,000
Other obligations of Federal agencies 29,443,000 22,000 (1,266,000) 28,199,000
Other securities 1,724,000 -- -- 1,724,000
- ------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 53,186,000 47,000 (2,766,000) 50,467,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available for sale at
December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------------
Securities Available for Sale
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 46,271,000 46,186,000
Due after one year through five years 9,837,000 9,760,000
Due after five years through ten years 2,000,000 1,999,000
Due after ten years 10,361,000 10,383,000
- -----------------------------------------------------------------------------------------
Total securities available for sale $ 68,469,000 68,328,000
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(3) Investment Securities
Investment securities at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of Federal agencies $ 17,697,000 2,000 (159,000) 17,540,000
Obligations of state and politcal subdivisions 8,126,000 162,000 (48,000) 8,240,000
Coroporate notes 200,000 3,000 -- 203,000
Other securities 10,000 -- -- 10,000
- --------------------------------------------------------------------------------------------------------------------
Securities held for investment $ 26,033,000 167,000 (207,000) 25,993,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury securities $ 415,000 -- -- 415,000
Obligations of Federal agencies 39,767,000 27,000 (2,090,000) 37,704,000
Obligations of states and political subdivisions 12,424,000 161,000 (536,000) 12,049,000
Corporate notes 299,000 3,000 302,000
Other securities 10,000 -- (1,000) 9,000
- --------------------------------------------------------------------------------------------------------------------
Securities held for investment $ 52,915,000 191,000 (2,627,000) 50,479,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of investment securities at December 31,
1995:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
December 31, 1995
------------------------------------------
Amortized Fair
Cost Value
-----------------------------------------------------------------------------------------------------
Investment Securities
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 8,284,000 8,226,000
Due after one year through five years 16,782,000 16,812,000
Due after five years through ten years 901,000 890,000
Due after ten years 66,000 65,000
-----------------------------------------------------------------------------------------------------
Total investment securities $ 26,033,000 25,993,000
-----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(3) Continued
At December 31, 1995 and 1994, securities with an aggregate book value
of $13,485,000 and $14,600,000 respectively, were pledged to secure
public deposits.
There were no sales of investments securities during the periods
presented herein.
(4) Loans
Loans at December 31, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 74,746,000 68,803,000
Real estate construction 625,000 1,482,000
Real estate residential (mortgage and installment) 112,493,000 102,708,000
Consumer 19,013,000 14,184,000
----------------------------------------------------------------------------------------------
Total loans, gross 206,877,000 187,177,000
Unearned discount (8,489,000) (6,284,000)
Deferred loan fees (1,091,000) (1,021,000)
----------------------------------------------------------------------------------------------
Total loans, net of unearned discount
and deferred loan fees $ 197,297,000 179,872,000
----------------------------------------------------------------------------------------------
</TABLE>
Substantially all of the Bank's loans are secured by both residential
and commercial real estate in the area of northeastern Pennsylvania.
Loans secured by commercial or residential real estate outside of
Northeastern Pennsylvania constitute less than 2% of the Bank's loans
outstanding at December 31, 1995 and 1994. Accordingly, the Bank's
primary concentration of credit risk is related to the real estate
market in the northeastern Pennsylvania area and the ultimate
collectibility of this portion of the Bank's loan portfolio is
susceptible to changes in economic conditions in that area. Management
of the Bank does not believe there are any other significant
concentrations of credit risk in the loan portfolio.
Interest was not being recorded on total loans aggregating
approximately $2,161,000 as of December 31, 1995 and $2,315,000 as of
December 31, 1994. If all non-accrual loans had been current in
accordance with their original terms and had been outstanding
throughout the period, interest income would have increased by
$111,000, $109,000, and $228,000 for the years ended December 31, 1995,
1994, and 1993, respectively. The amount of interest income on
non-accruing loans which was recorded in income was $0 in 1995 and 1994
and $5,000 in 1993. The amount of interest on restructured loans which
was recorded in income was $73,000, $37,000, and $46,000 during 1995,
1994, and 1993, respectively. If the restructured loans had been
current in accordance with their original terms and had been
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(4) Continued
outstanding throughout the period, interest income would have increased
by $12,000, $8,000, and $13,000 for the years ended December 31,1995,
1994, and 1993. As of December 31,1995, the Company had impaired loans
with a total recorded investment of $1,722,000 and an average recorded
investment for the twelve month period ended December 31,1995 of
$1,528,000. As of December 31,1995, the amount of recorded investment
in impaired loans for which there is a related allowance for credit
losses and amount of the allowance is $288,000 and $95,000,
respectively. The amount of the recorded investment in impaired loans
for which there was no related allowance for credit losses at December
31,1995 is $1,434,000. The aggregate amount of impaired loans are
measured under the fair value measurement method.
The aggregate amount of loans by the Company to its directors and
executive officers, including loans to related persons and entities,
was $1,584,000 and $2,294,000 at December 31, 1995 and 1994,
respectively. These loans were made in the ordinary course of business
at substantially the same terms and conditions as those with other
borrowers.
An analysis of the activity of these loans follows:
1995
----------------------------------------------------------------------
Balance January 1 $ 2,294,000
New loans 82,000
Repayments 792,000
----------------------------------------------------------------------
Balance December 31 $ 1,584,000
----------------------------------------------------------------------
In 1995, 1994 and 1993 the Company sold newly originated mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation.
The proceeds from the sale of these loans were $1,255,000, $5,470,000,
and $7,303,000 respectively. The Company recognized a gain of $18,000
in 1995 and a loss of $34,000 and a gain of $105,000 in 1994 and 1993,
respectively, from these transactions. The proceeds from the sale of
PHEAA loans by the Company were $1,788,000, $941,000 and $4,865,000 in
1995,1994, and 1993, resulting in gains of $31,000, $21,000, and
$45,000, respectively.
Loans serviced for the benefit of others approximated $17,923,000 and
$18,009,000 as of December 31,1995 and 1994, respectively.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(5) Allowance for Possible Loan Losses
Activity in the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,699,000 2,604,000 2,360,000
Additions and (deductions):
Loans charged-off (440,000) (314,000) (672,000)
Recoveries 63,000 99,000 79,000
---------------------------------------------------------------------------------------------
Net loans charged-off (377,000) (215,000) (593,000)
---------------------------------------------------------------------------------------------
Provision for loan losses 420,000 310,000 837,000
---------------------------------------------------------------------------------------------
Balance at end of period $ 2,742,000 2,699,000 2,604,000
---------------------------------------------------------------------------------------------
</TABLE>
(6) Premises and Equipment
Premises and equipment are comprised of the following at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C>
Premises owned $ 4,365,000 3,370,000
Furniture and equipment 6,162,000 5,555,000
Leasehold improvements 733,000 299,000
-------------------------------------------------------------------------------------------
11,260,000 9,224,000
Accumulated depreciation and amortization (6,477,000) (5,762,000)
-------------------------------------------------------------------------------------------
$ 4,783,000 3,462,000
-------------------------------------------------------------------------------------------
</TABLE>
Occupancy expenses are reduced by rental income from premises owned of
$27,000 in 1995, $27,000 in 1994 and $29,000 in 1993.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(7) Leased Property Under Capital Leases
During 1994, the Bank purchased the Main Office of the Company from a
third party that owned the facility and leased it to the Company. The
Bank had entered into a sale and leaseback transaction with the third
party for the Main Office in 1964. The purchase price was $275,000
which represents the note payable of the Company as of December
31,1995. The note is held by the same third party and bears interest at
a rate of 6.5% with 192 interest payments of $1,490 and a balloon
payment of $275,000 due on May 1, 2010. The gain recognized from the
termination of the sales and leaseback transaction was $78,000 and is
included in other income in 1994.
(8) Deposits
Included in time deposits are certificates of deposit and money market
certificates. Although such certificates are often renewed, the
following is a summary by maturity date of these certificates at
December 31, 1995 and 1994:
Maturity 1995 1994
---------------------------------------------------------------------
Less than one year $ 128,549,000 102,776,000
Greater than one year 34,824,000 42,102,000
---------------------------------------------------------------------
$ 163,373,000 144,878,000
---------------------------------------------------------------------
The aggregate amount of certificates of deposit, each $100,000 or more,
was $ 34,277,000 and $29,042,000 at December 31, 1995 and 1994,
respectively. Interest expense associated with certificates of deposit,
each $100,000 or more, was approximately $1,863,000, $1,146,000, and
$836,000, respectively, for the years ended December 31, 1995, 1994 and
1993.
(9) Short Term Borrowings
The Bank maintains a collateralized line of credit with the Federal
Home Loan Bank of Pittsburgh. The commitment expires November 1996 and
has maximum borrowing amount of $31,621,000. The rate of this facility
resets daily. The line is collaterlized by eligible securities and
loans that are in control of the Bank. At December 31,1995, there were
no short term borrowings outstanding and $3,150,000 was outstanding at
December 31,1994. The maximum amount of outstanding month-end
short-term borrowings during 1995 was $3,600,000 and $5,150,000 in
1994. The approximate average outstanding balance for 1995 was
$1,597,000 and $232,000 for 1994. The average interest rate on the
balances during 1995 and 1994 were 5.88% respectively.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(10) Commitments, Contingent Liabilities, Off Balance Sheet Risk
The Company leases three branch offices under year-to-year operating
leases. The Company is currently obligated for six noncancelable,
long-term commitments under operating leases for six branch offices.
Total rental expense, which consists primarily of the rent for the
branch offices and computer equipment was $191,000, $147,000 and
$190,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The following is a schedule by years for future minimum rental payments
required for operating leases as of December 31, 1995:
Years ending December 31:
1996 $ 211,000
1997 144,000
1998 133,000
1999 129,000
2000 78,000
2001 thereafter 355,000
------------
Total minimum
payments required $ 1,050,000
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to
extend credit, which are not reflected in the consolidated financial
statements. Management does not anticipate any unusual losses as a
result of these commitments. The Company had outstanding standby
letters of credit in the amount of approximately $1,302,000 and
$1,931,000 and unfunded loan and line of credit commitments in the
amount of approximately $15,757,000 and $12,780,000 at December 31,
1995 and 1994, respectively. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The exposure to credit loss in
the event of non-performance by the counter party to the financial
instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(10) Continued
various collateral to support these commitments. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank
evaluated each customer's creditworthiness on a case by case basis. The
amount of collateral, if any, obtained upon extension of credit is
based on management's credit evaluation of the borrower. Collateral
held usually consists of real estate, but may include securities,
property or other assets.
(11) Stockholders' Equity and Per Share Data
In the fourth quarter of 1993 the Company's Board of Directors declared
a two for one stock split effected in the form of a stock dividend. The
split was effective on February 7, 1994. The shareholders in 1993
approved an increase in the number of authorized shares of common stock
from 1,000,000 ($10 par value) to 25,000,000 ($10 par value). These
financial statements have been adjusted to reflect the stock split.
Earnings per share for 1995, 1994 and 1993 were determined by dividing
net income by the weighted average number of shares of common stock and
common stock equivalents outstanding when dilutive. The common stock
equivalents consist of common stock options.
The average number of shares outstanding (including dilutive common
stock equivalents) in 1995, 1994 and 1993 were 1,453,191, 1,433,198,
and 1,390,624 shares, respectively. The Company currently has one
million shares of authorized, but unissued preferred stock.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(12) Employee Stock Option Plan
In 1990, the Company's Board of Directors adopted an employee stock
option plan (the Plan) which reserved 150,000 shares of authorized but
unissued stock, as adjusted for the stock split effective February
7, 1994. The Plan provides for the grant of incentive stock options and
nonqualified stock options. The exercise price of the options when
issued was at least 100% of the fair market value of the Company's
common stock as of the date the options were granted. The exercise of
the stock options is subject to a vesting schedule and certain
termination provisions. Stock options have been issued for all of the
authorized shares of stock reserved under the plan. The following table
summarizes data related to the stock options.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Option Price Common
Per Share (1) Shares (1)
---------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1992 $16.00 90,000
Granted $18.00 - $23.00 39,000
Exercised $16.00 (6,000)
Terminated $16.00 (9,000)
----------------------------------------------------------------------------------------
Balance at December 31, 1993 $16.00 - $23.00 114,000
Granted $26.00 30,000
Exercised $16.00 (9,371)
Terminated -- --
----------------------------------------------------------------------------------------
Balance at December 31, 1994 $16.00 - $26.00 134,629
Granted -- --
Exercised $16.00 (10,490)
Terminated -- --
----------------------------------------------------------------------------------------
Balance at December 31, 1995 $16.00 - $26.00 124,139
----------------------------------------------------------------------------------------
</TABLE>
(1) The figures have been restated to reflect the Company's two for one
split effected in the form of a stock dividend, effective February
7, 1994.
(13) Regulatory Matters
Dividends payable to the Company by the Bank are subject to certain
regulatory limitations. The payment of dividends in any year without
regulatory permission is limited to the net profits (as defined for
regulatory purposes) for that year plus the retained net profits for
the preceding two calendar years. Accordingly, as of December 31, 1995,
dividends in excess of those already declared from the Bank to the
Company are limited to $5,627,000.
The dividends declared to the Company by the Bank were $1,671,000 in
1995.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(13) Continued
Under Federal banking law, the Bank is restricted regarding extensions
of credit to the Company. The limit on extensions of credit was
$1,908,000 as of December 31, 1995.
The Bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank. The amount of those reserve
balances for the reserve computation period which included December 31,
1995, was $1,162,000, which amount was satisfied through the
restriction of vault cash.
The Bank is also required to maintain certain balances at correspondent
banks based upon activity with the correspondent. At December 31, 1995,
the amount of such required balances was $50,000.
The Company and the Bank are also required to maintain minimum amounts
of capital to total risk weighted assets, as defined by the applicable
regulators. At December 31,1995, the Company and the Bank are required
to have minimum tier 1 and total capital ratios of 4% and 8%
respectively. In addition, regulations require a minimum leverage ratio
of between 3% and 5% (the regulators have not advised the Company of
any specific leverage ratio applicable to it or the Bank). At December
31, 1995, both the Company and the Bank met the minimum regulatory
capital ratio requirements.
(14) Income Taxes
As discussed in note 1, the Company adopted SFAS No. 109 as of January
1, 1993. In accordance with this statement, the Company recognized
deferred tax assets primarily reflecting the benefit expected to be
realized from the provision for loan losses, deferred loan fees,
deferred directors fees, and the executive retirement plan. The
cumulative effect of this change was a $75,000 reduction of the net
deferred tax asset as of January 1, 1993.
The components of federal income tax expense (benefit) are as follows:
1995 1994 1993
------------------------------------------------------------------
Current $ 1,513,000 1,391,000 1,406,000
Deferred (143,000) (58,000) (83,000)
------------------------------------------------------------------
$ 1,370,000 1,333,000 1,323,000
------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(14) Continued
A reconciliation of the income tax expense in the accompanying
statements of income with the amount computed by applying the statutory
federal income tax rate to income before income taxes is as follows:
1995 1994 1993
----------------------------------------------------------------------
Tax expense at 34% rate $ 1,650,000 1,626,000 1,593,000
Interest from tax exempt loans
and investments (289,000) (313,000) (286,000)
Other, net 9,000 20,000 16,000
----------------------------------------------------------------------
Income tax expense $ 1,370,000 1,333,000 1,323,000
----------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 in accordance with SFAS No. 109 are
presented below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Executive retirement plan $ 200,000 167,000
Allowance for loan losses 656,000 641,000
Deferred loan fees 320,000 231,000
Deferred directors fees 121,000 109,000
Unrealized loss on securities available for sale 48,000 924,000
Others, net 74,000 73,000
---------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,419,000 2,145,000
Deferred tax liabilities:
Accumulated amortization of discount
on investment securities (252,000) (246,000)
Depreciation (190,000) (185,000)
Other, net -- (4,000)
---------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (442,000) (435,000)
---------------------------------------------------------------------------------------------
Net deferred tax asset $ 977,000 1,710,000
---------------------------------------------------------------------------------------------
</TABLE>
Based upon the Company's current taxable history and the anticipated
level of future taxable income, management of the Company believes the
existing deductible temporary differences will, more likely than not,
reverse in future periods in which the Company generates net taxable
income. Accordingly, the Company does not believe a valuation allowance
is necessary at December 31 1995. There can be no assurance, however,
that the Company will generate any earnings or any specific level of
continued earnings.
At December 31, 1995 and 1994, net deferred tax benefits of $977,000
and $1,710,000 respectively, and income taxes currently recoverable of
$24,000 and $24,000 respectively, are included in other assets.
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- -------------------------------------------------------------------------------
(15) Benefit Plans
The Bank has an employee stock ownership plan which includes
substantially all employees who have at least one year of service. A
qualified determination letter has been received from the Internal
Revenue Service. Contributions at the discretion of the Company's Board
of Directors of $5,000, $269,000 and $275,000 were accrued in 1995,
1994 and 1993, respectively.
The ESOP held 78,030 and 71,938 shares of the Bank's common stock at
December 31, 1995 and 1994, respectively.
The Bank has a savings and investment plan. Employees who have
completed one year of service with 1,000 hours of employment during
that year are eligible to participate. Employees may contribute up to
12% of their total pay in each payroll period up to approximately
$9,000 during any calendar year. The Bank matches the employees'
contribution to the Plan at a rate of 100% for the first 3% contributed
by the employee and at a rate of 50% for the second 3% contributed by
the employee. A qualified determination letter has been received from
the Internal Revenue Service. Expense for this Plan was $107,000 in
1995, $96,000 in 1994, and $92,000 in 1993.
The Company maintains employment contracts with its President, Sr.
Executive Vice President and Executive Vice President. The Company also
maintains insurance contracts for its President and Sr. Executive Vice
President. Pursuant to the insurance agreement, the Company pays the
annual premiums and will receive reimbursement of policy premiums upon
the death or termination of these executives. The employment contracts
provide for a minimum annual salary and certain incentives in the event
of a merger of the Company. The Company has also agreed to provide
enhanced retirement and death benefits for the President and Sr.
Executive Vice President. Costs for those benefits were approximately
$95,000, $42,000 and $124,000 in 1995, 1994 and 1993, respectively.
The Company has a deferred compensation plan for directors' fees under
which nine directors deferred receipt of $6,000 each per year during
the four years ended March 31, 1990. The Company is obligated to pay
the directors an annuity beginning at the later of their attaining age
65 or March 31, 1990. The obligation is funded substantially by life
insurance on the directors.
A total of $32,000 was disbursed to these directors in each year 1995,
1994 and 1993. In 1995, 1994 and 1993, $36,000, $0, and $16,000
respectively, were remitted for the payment of insurance premiums. An
accrual of $170,000 and $170,000 is included in other liabilities
relative to this obligation at December 31, 1995 and 1994,
respectively. Assets held by the insurance company which have reduced
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(15) Continued
the company's accrual were $185,000 and $144,000 at December 31, 1995
and 1994, respectively. Expense under this plan was $64,000, $59,000,
and $40,000 in 1995, 1994 and 1993, respectively.
(16) Disclosures about Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), as amended by SFAS
No. 119, requires the bank to disclose estimated fair value for its
financial instruments.
Limitations
Fair value estimates are based on existing on-and-off balance sheet
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. Significant assets and
liabilities that are not considered financial instruments include
deferred tax assets, property, plant and equipment, and goodwill.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Bank'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 therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimate.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Due from Banks and Federal Funds Sold
For cash and due from banks and Federal funds sold, the carrying amount
is a reasonable estimate of fair value.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(16) Continued
Securities Available for Sale and Investment Securities
The fair values of securities available for sale and investment
securities are estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
Loans
Fair values are estimated for portfolios of loans of similar financial
characteristics. Loans are segregated by type such as commercial,
residential real estate, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms. The fair value
of performing loans is calculated by discounting the expected future
cash flows through expected maturity, considering prepayment
experience, using estimated market discount rates that reflect the
credit and inherent risk in the loan.
Fair value of nonperforming loans is based upon estimated future cash
flows discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest earning demand deposits, savings, NOW and Super
NOW accounts, and money market accounts, is equal to the amount payable
on demand. The fair value of certificates of deposit and other 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.
Short-term Borrowings
For short-term borrowings, the carrying amount is a reasonable estimate
of fair value.
Note Payable
The estimated fair value of the note payable is the carrying value due
to the interest and term of the note being commensurate with the
current market rate.
Commitments to extend credit, and standby letters of credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties.
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(16) Continued
The following represents the carrying value and estimated fair value:
<TABLE>
<CAPTION>
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 12,677,000 12,677,000 11,489,000 11,489,000
Federal funds sold 8,500,000 8,500,000 -- --
Securities available for sale 68,328,000 68,328,000 50,467,000 50,467,000
Investment securities 26,033,000 25,993,000 52,915,000 50,479,000
Loans 194,555,000 195,606,000 177,173,000 173,356,000
Financial liabilities:
Deposits $288,252,000 289,169,000 270,718,000 270,285,000
Short-term borrowings -- -- 3,150,000 3,150,000
Note payable 275,000 275,000 275,000 275,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The contract amount and estimated fair value for commitments to extend
credit and standby letters of credit are as follows:
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994
------------------------------- --------------------------
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $15,757,000 236,000 12,780,000 192,000
Standby letters of credit 1,302,000 26,000 1,931,000 39,000
---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(17) Pioneer American Holding Company Corp. (Parent Company Only)
Condensed 1995, 1994 and 1993 financial information is as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
Assets 1995 1994
------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 187,000 237,000
Short term investment -- 415,000
Investment in subsidiary 28,253,000 24,690,000
Receivable from subsidiary 470,000 52,000
------------------------------------------------------------------------------
Total assets $28,910,000 25,394,000
------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Dividends payable 418,000 416,000
Stockholders' equity 28,492,000 24,978,000
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $28,910,000 25,394,000
------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(17) Pioneer American Holding Company Corp. (Parent Company Only), Continued
Condensed Statements of Income
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses:
Administrative and other $ 49,000 55,000 63,000
------------------------------------------------------------------------------------------
Loss before earnings of subsidiary (49,000) (55,000) (63,000)
Earnings of subsidiary:
Received as dividends 1,671,000 1,650,000 1,436,000
Undistributed 1,861,000 1,853,000 1,913,000
------------------------------------------------------------------------------------------
Net income $ 3,483,000 3,448,000 3,286,000
------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(17) Pioneer American Holding Company Corp. (Parent Company Only), Continued
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,483,000 3,448,000 3,286,000
Adjustments to reconcile net income to net
cash from operating activities:
Undistributed earnings of subsidiary (1,861,000) (1,853,000) (1,913,000)
Other (3,000) (37,000) 100,000
----------------------------------------------------------------------------------------------------
Net cash from operating activities 1,619,000 1,558,000 1,473,000
----------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Dividend paid (1,669,000) (1,571,000) (1,475,000)
Exercise of stock options -- 150,000 96,000
----------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,669,000) (1,421,000) (1,379,000)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (50,000) 137,000 94,000
Cash at beginning of year 237,000 100,000 6,000
----------------------------------------------------------------------------------------------------
Cash at end of year $ 187,000 237,000 100,000
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia, PA 19103-7212
Independent Auditors' Report
The Board of Directors
Pioneer American Holding Company Corp.:
We have audited the accompanying consolidated balance sheets of Pioneer
American Holding Company Corp. and subsidiary (the "Company") as of December
31, 1995 and 1994, 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, 1995. 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 Pioneer American
Holding Company Corp. and subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, effective January 1, 1994. As described in notes
1 and 14 to the consolidated financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, effective January
1, 1993.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 26, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
/S/ GENE E. GOLDENZIEL, ESQ.
--------------------------------
GENE E. GOLDENZIEL, ESQ.
Director
PIONEER AMERICAN HOLDING COMPANY CORP.
Date: March 27, 1996 /S/ JOHN S. GUZEY
----------------------------- --------------------------------
JOHN S. GUZEY
Director
By /S/ Donald A. Hoyle, Jr. /S/ DONALD A. HOYLE, JR.
- ------------------------------------- --------------------------------
Donald A. Hoyle, Jr. DONALD A. HOYLE, JR.
President & Chief Executive Director
Officer
/S/ WILLIAM K. NASSER
By /S/ John W. Reuther --------------------------------
- -------------------------------------- WILLIAM K. NASSER
John W. Reuther Director
Sr. Executive Vice President &
Chief Financial Officer
/S/ RICHARD CHOJNOWSKI
-------------------------------
RICHARD CHOJNOWSKI
Director
By /S/ Richard J. Lapera
- --------------------------------------
Richard J. Lapera
Comptroller of Pioneer American
Bank, National Association /S/ JOHN W. REUTHER
-------------------------------
JOHN W. REUTHER
Director
/S/ ELDORE SEBASTIANELLI
--------------------------------
ELDORE SEBASTIANELLI
Director
/S/ MARGARET O'CONNOR, R.N.
--------------------------------
MARGARET O'CONNOR, R.N.
Director
/S/ JOHN W. WALSKI
--------------------------------
JOHN W. WALSKI
Director
<PAGE>
Management Statement of Responsibility
The consolidated financial statements and related financial information
presented in this Annual Report were prepared by the management of the Company
which is responsible for the fairness, objectivity, and integrity of the
information presented herein. Management believes that the financial statements
have been prepared in conformity with generally accepted accounting principles.
This information is based on recorded financial transactions which include
amounts that are based on management's best estimate and judgment.
Management's responsibility for the financial information in the report
rests on the Company's internal accounting control structure. The internal
accounting control structure consists of written policies and procedures which
include segregation of responsibilities and safeguarding against unauthorized
use or disposition of assets. During 1995, the internal audit staff, which
reports to the Audit Committee of the Board of Directors, had the responsibility
of following audit procedures and maintaining close observation of such
controls. The internal accounting control structure is designed to provide
reasonable assurance that financial records are reliable for financial reporting
purposes and that assets are properly safeguarded.
The Audit Committee of the Board of Directors meets on a regular basis
in order to review and oversee the Company's internal control structure and
financial reporting. The Audit Committee reviews the Company's audit and
financial reporting matters with management, the internal auditors and the
independent auditors, KPMG Peat Marwick LLP.
The consolidated financial statements in this Annual Report have been
audited by the independent auditors. Management believes their audit was
conducted in accordance with generally accepted auditing standards and included
consideration of the Company's internal accounting control structure to the
extent they deemed necessary to determine the nature, timing and extent of their
audit testing for the purpose of expressing an opinion on the Company's
consolidated financial statements.
<PAGE>
Directors and Executive Officers
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1995 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Executive Compensation
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1995 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Security Ownership of Certain Beneficial Owners and Management
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1995 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Certain Relationships and Related Transactions
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1995 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1,000
<CASH> 12,677
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,328
<INVESTMENTS-CARRYING> 26,033
<INVESTMENTS-MARKET> 25,993
<LOANS> 197,297
<ALLOWANCE> 2,742
<TOTAL-ASSETS> 320,647
<DEPOSITS> 288,252
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,628
<LONG-TERM> 275
0
0
<COMMON> 13,932
<OTHER-SE> 14,560
<TOTAL-LIABILITIES-AND-EQUITY> 320,647
<INTEREST-LOAN> 17,087
<INTEREST-INVEST> 6,212
<INTEREST-OTHER> 363
<INTEREST-TOTAL> 23,662
<INTEREST-DEPOSIT> 11,115
<INTEREST-EXPENSE> 11,227
<INTEREST-INCOME-NET> 12,435
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 465
<EXPENSE-OTHER> 9,075
<INCOME-PRETAX> 4,853
<INCOME-PRE-EXTRAORDINARY> 3,483
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,483
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 3.98
<LOANS-NON> 2,161
<LOANS-PAST> 0
<LOANS-TROUBLED> 837
<LOANS-PROBLEM> 1,010
<ALLOWANCE-OPEN> 2,699
<CHARGE-OFFS> 440
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 2,742
<ALLOWANCE-DOMESTIC> 499
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,243
</TABLE>
