<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1998
--------------
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 North Main Street, Carbondale PA 18407
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(717) 282-2662
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by the Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as the latest practical date.
Common Stock, $1.00 Par Value--2,901,484 common shares as of March 31, 1998.
<PAGE>
INDEX
-----
PIONEER AMERICAN HOLDING COMPANY, CORP.
---------------------------------------
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated balance sheets--March 31, 1998
and December 31, 1997.------------------------------------------------------------------Page 2-3
Consolidated statements of income and comprehensive income--Three
months ended March 31, 1998 and 1997----------------------------------------------------Page 4
Consolidated statements of cash flows--Three months
ended March 31, 1998 and 1997.----------------------------------------------------------Pages 5-6
Notes to consolidated financial statements--
March 31, 1998.-------------------------------------------------------------------------Pages 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.----------------------------------------------------------------Pages 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings-------------------------------------------------------------------------Page 15
Item 2. Changes in Securities---------------------------------------------------------------------Page 15
Item 3. Defaults upon Senior Securities-----------------------------------------------------------Page 15
Item 4. Submission of Matters to a Vote of Security Holders---------------------------------------Page 15
Item 5. Other Information-------------------------------------------------------------------------Page 15
Item 6. Exhibits and Reports on form 8-K----------------------------------------------------------Page 15
SIGNATURES-----------------------------------------------------------------------------------------Page 16
</TABLE>
1
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
===================================================================================================
March 31, December 31,
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 13,674 14,918
Federal funds sold 3,070 0
Securities available for sale (cost of securities of
$78,771 on March 31, 1998
and $95,591 on December 31, 1997)
U.S. Treasury securities 2,002 1,999
Federal agency mortgage backed obligations 27,498 31,982
Other obligations of Federal agencies 35,199 50,252
Obligations of states and political subdivisions 8,815 8,828
Other securities 6,126 3,635
- ---------------------------------------------------------------------------------------------------
Total securities available for sale 79,640 96,696
- ---------------------------------------------------------------------------------------------------
Securities held to maturity(approximate market value
of $61,552 on March 31,
1998 and $37,857 on December 31, 1997)
Federal agency mortgage backed obligations 43,343 19,083
Other obligations of Federal agencies 6,000 6,000
Obligations of states and political subdivisions 11,892 12,296
- ---------------------------------------------------------------------------------------------------
Total securities held to maturity 61,235 37,379
- ---------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 223,496 212,342
Allowance for loan losses (2,832) (2,759)
- ---------------------------------------------------------------------------------------------------
Net loans 220,664 209,583
- ---------------------------------------------------------------------------------------------------
Accrued interest receivable 2,761 3,168
Premises and equipment 5,181 5,334
Other real estate owned 1,214 1,045
Other assets 2,061 1,373
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $923 March 31,
1998 and $913 December 31, 1997) 620 630
- ---------------------------------------------------------------------------------------------------
Total assets $ 390,120 370,126
===================================================================================================
</TABLE>
2
<PAGE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Balance Sheets, Continued (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
==============================================================================================
March 31, December 31,
Liabilities and Stockholders' Equity 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 38,089 43,740
NOW and Super NOW 31,254 30,679
Savings 59,554 52,783
Money Market 20,664 22,487
Time 140,681 143,954
- ----------------------------------------------------------------------------------------------
Total deposits 290,242 293,643
- ----------------------------------------------------------------------------------------------
Accrued interest payable 2,306 2,103
Dividends payable 551 544
Federal Funds Purchased -- 2,350
Other borrowed money 61,166 37,073
Other liabilities 1,687 1,015
- ----------------------------------------------------------------------------------------------
Total liabilities 355,952 336,728
- ----------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share,
25,000,000 shares authorized; 2,901,484 shares on
March 31, 1998 and 2,862,874 on December 31, 1997
issued and outstanding 2,901 2,863
Additional paid-in capital 11,771 11,472
Undivided profits 18,922 18,334
Net unrealized holding gains on
available for sale securities, net of taxes 574 729
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 34,168 33,398
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $390,120 370,126
==============================================================================================
</TABLE>
3
<PAGE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands)
=======================================================================================================
March 31, March 31,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 4,684 4,407
Interest on Federal funds sold 9 114
Interest on investments:
Taxable 2,049 1,580
Non-taxable 282 221
- -------------------------------------------------------------------------------------------------------
Total interest income 7,024 6,322
- -------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,631 2,690
Interest on Federal funds purchased 22 0
Interest on other borrowed money 820 257
- -------------------------------------------------------------------------------------------------------
Total interest expense 3,473 2,947
- -------------------------------------------------------------------------------------------------------
Net interest income 3,551 3,375
Provision for loan losses 150 135
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,401 3,240
- -------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 302 341
Gain on sale of available for sale securities 296 0
Gain on call of securities held to maturity 0 2
ATM fees 104 82
Other income 151 112
- -------------------------------------------------------------------------------------------------------
Total other operating income 853 537
- -------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,352 1,281
Net occupancy expense of bank premises 270 251
Furniture and equipment expenses 169 167
Data processing expense 63 62
Other expenses 820 825
- -------------------------------------------------------------------------------------------------------
Total other operating expenses 2,674 2,586
- -------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle 1,580 1,191
Income tax expense 440 340
- -------------------------------------------------------------------------------------------------------
Net income $ 1,140 851
=======================================================================================================
Other comprehensive income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during the period 54 (633)
Less reclassification adjustment for gains
included in net income (209) (3)
Comprehensive income 985 215
=======================================================================================================
Earnings Per Share Data (based on net income):
Basic $ 0.40 0.30
Diluted 0.39 0.29
</TABLE>
4
<PAGE>
PIONEER AMERICAN HOLDING COMPANY, CORP
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands)
========================================================================================================
March 31, March 31,
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,140 851
Adjustments to reconcile net income to net
cash from operating activities:
Net gain on call of securities 0 (2)
Net gain on securities available for sale (296) 0
Accretion of discount on securities
and money market investments (10) (20)
Amortization of premium on investment
securities 61 18
Provision for loan losses 150 135
Increase in deferred loan fees (38) (14)
Decrease (increase) in accrued interest receivable 407 (113)
Depreciation and amortization of premises
and equipment 209 208
Gain on sales of premises and equipment 0 (5)
Loss on sale of other real estate 82 11
Proceeds from the sale of mortgages
and PHEAA loans 1,516 567
Net increase in mortgage and PHEAA loans
held for sale, excluding provision for
loans losses and change in deferred
loan fees (2,140) (1,080)
Gain on sale of mortgages and PHEAA loans (13) (6)
Increase in other assets (608) (401)
Amortization of goodwill 10 10
Increase in accrued interest payable 203 437
Increase in other liabilities 672 299
- -------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
from operating activities 205 44
- -------------------------------------------------------------------------------------------------------
Net cash from operating activities 1,345 895
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 1,824 322
Proceeds from maturities and calls of
securities available for sale 7,569 14,344
Proceeds from sales of securities available for sale 12,012 0
Purchases of securities held to maturity (25,705) (10,217)
Purchases of securities available for sale (2,491) (28,534)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (10,819) (1,840)
Acquisition of premises and equipment (56) (202)
Proceeds from sale of premises and equipment 0 7
Proceeds from sale of other real estate 12 57
=======================================================================================================
Net cash used in investing activities (17,654) (26,063)
- -------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statements of Cash Flows, Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands)
==========================================================================================
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, NOW and Super NOW,
savings, money market and time deposits $ (3,401) 6,490
Dividends paid (544) (481)
Exercise of stock options 337 0
Federal funds purchased (2,350) 0
Increase in other borrowed money 24,093 19,717
- -----------------------------------------------------------------------------------------
Net cash from financing activities 18,135 25,726
- -----------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,826 558
Cash and cash equivalents at beginning of period 14,918 21,028
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,744 21,586
- -----------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 3,270 2,510
Cash payments for income taxes 490 400
Transfer of assets from loans
to other real estate 263 281
Net unrealized loss (gain) on securities
available for sale 236 964
Tax effect on unrealized loss (gain)
on securities available for sale 81 328
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(1) Summary of Significant Accounting Policies:
Business--Pioneer American Holding Company Corp. (the "Company") and its
wholly owned subsidiary, Pioneer American Bank, National Association ("Pioneer")
provide a wide range of banking services to individual and corporate customers
through its branch banks in Lackawanna, Luzerne, Wayne, Wyoming, Susquehanna and
Monroe counties in Northeastern Pennsylvania. Pioneer is subject to competition
from other financial institutions and other financial services companies.
Pioneer is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation--The accompanying consolidated
financial statements were prepared in accordance with instructions to Form 10-Q,
and therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all normal,
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial statements, have been included. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report for the
period ended December 31, 1997. The results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. 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
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 loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent appraisals
for significant properties to the extent considered practical.
Mortgage Loans Held for Sale--The Company has identified certain loans as
held for sale. These loans consist primarily of fixed rate residential mortgages
and are recorded at the lower of cost or estimated market value.
Securities Available for Sale--Securities available for sale are accounted
for at fair value and the unrealized gains and losses are accounted for as a
separate component of stockholders equity, net of tax.
Securities Held to Maturity--Securities held to maturity are carried at
cost, adjusted for the amortization of the related premiums or the accretion of
the related discounts into interest income using a method which approximates
level-yield over the estimated remaining period until maturity. The Company
believes it has the intent and ability to hold to maturity its portfolio of
securities held to maturity as part of its portfolio of long-term interest
earning assets.
Interest Revenue and Expenses--Interest revenue and expenses 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.
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.
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.
Allowance for Loan Losses--The provision for loan losses charged to
operating expenses reflects the amount deemed appropriate by management to
produce a reserve adequate to meet the present risk characteristics of Pioneer'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.
Management believes that the allowance for 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
7
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
- ---------------------------------------------------------------
(1) Summary of Significant Accounting Policies, continued:
from the assumptions used in making the evaluations. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Pioneer's allowance for loan losses. Such agencies may
require Pioneer to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
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:
building 20-33 years; building and land improvements 5-10 years; equipment 3-12
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, or cost. Allowances for declines in value
subsequent to acquisition were not necessary at March 31, 1998 and December 31,
1997. 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 assumption used
in making the evaluation.
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--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.
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.
Impaired Loans--As of March 31, 1998, the Company had impaired loans with a
total recorded investment of $1,942,000 and $1,922,000 on December 31, 1997. The
average recorded investment for the three month period ended March 31, 1998 was
$1,867,000 and $1,914,000 on December 31, 1997. As of March 31, 1998, the amount
of recorded investment in impaired loans for which there is a related allowance
for credit losses and amount of the allowance is $1,091,000 and $260,000
respectively and $815,000 and $185,000 for December 31, 1997. The amount of the
recorded investment in impaired loans for which there was no related allowance
for credit losses at March 31, 1998 was $851,000 and $1,107,000 on December 31,
1997. 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 a creditor will be unable to collect all assets 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 (described previously). Cash receipts on impaired loans are not recognized
as income, but are applied to principal. 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.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company has
included this new reporting information in its 1998 consolidated financial
statements as required.
8
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
- ---------------------------------------------------------------
(1) Continued:
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Company's future disclosures.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures
about Pensions and other Post Retirement Benefits. This statement revises
employer's disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when FASB Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, were
issued. This statement requires changes in disclosures and would not effect the
financial condition, operating results, or equity of the Corporation. This
Statement is effective for fiscal years beginning after December 15, 1997.
(2) Securities Portfolio
Securities available for sale at March 31, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
Cost Market Value Cost Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,999 2,002 1,998 1,999
Federal agency mortgage based
obligations 27,231 27,498 31,650 31,982
Other obligations of Federal agencies 34,941 35,199 49,835 50,252
Obligations of State and Political subdivisions 8,474 8,815 8,473 8,828
Other securities 6,126 6,126 3,635 3,635
----------------------------------------------------
Securities available for sale: $78,771 79,640 95,591 96,696
----------------------------------------------------
</TABLE>
The adjustment in stockholders' equity for the unrealized gain of the
securities available for sale at March 31, 1998, net of tax, was $574,000.
Included in net deferred tax assets is $(295,000) for this same unrealized gain.
Securities held to maturity at March 31, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
Cost Market Value Cost Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage based
obligations $43,343 43,382 19,083 19,294
Other obligations of Federal agencies 6,000 5,990 6,000 5,977
Obligations of State and Political subdivisions 11,892 12,180 12,296 12,586
----------------------------------------------------
Securities held to maturity: $61,235 61,552 37,379 37,857
----------------------------------------------------
</TABLE>
9
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
- ---------------------------------------------------------------
(3) Stockholders' Equity and Per Share Data
At March 31, 1998 there were 25,000,000 shares of common stock at $1 par
value authorized with 2,901,484 shares issued and outstanding.
Through March 31, 1998 the Company has issued and outstanding 106,518
options to purchase shares of the Company, exercisable at between $8.00 to
$13.00 per share. Such options were issued with exercise prices equal to the
market value of the Company's common shares at the time of the grant. In the
first quarter 38,610 options were exercised.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which is
required to be adopted in both interim and annual financial statements for
periods ending after December 15, 1997. Accordingly, the Company has changed its
methodology for computing earnings per share and restated all prior period
amounts. SFAS 128 replaced primary and fully diluted earnings per share with
basic and diluted earnings per share. Under the new requirements for calculating
earnings per share, the dilutive effect of stock options will be excluded from
basic earnings per share but included in the computation of diluted earnings per
share.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
March 31,
1998 1997
---- ----
Numerator:
Net income $ 1,140 851
======= ======
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,867 2,829
Effect of dilutive securities:
Employee stock options 79 103
------- ------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,946 2,932
======= ======
Basic earnings per share $ 0.40 0.30
======= ======
Diluted earnings per share $ 0.39 0.29
======= ======
The market value of the common shares of the Company at March 31, 1998 was
$24.00. The weighted average number of basic shares outstanding at March 31,
1998 was 2,867,007 shares and 2,828,912 at March 31, 1997. The weighted average
number of diluted shares outstanding at March 31, 1998 was 2,946,143 shares and
2,932,277 at March 31, 1997. The Company currently has one million shares of
authorized, but unissued perferred stock.
(4) Other Matters
The Company is currently working to resolve the potential impact of the year
2000 on the processing of data-sensitive information by the Corporation's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are estimated to
be $550,000. This cost is primarily associated with purchasing new equipment and
software which will be capitalized over a 5 year period. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner.
10
<PAGE>
Financial Review Management's Discussion and Analysis of Financial Condition
- ----------------------------------------------------------------------------
and Results of Operation
- ------------------------
Highlights
- ----------
Total Assets were $390,120,000 at March 31, 1998 and $370,126,000 at
December 31, 1997 which is an increase of $19,994,000 or 5.4%. Deposits
decreased by $3,401,000 from $293,643,000 at December 31, 1997 which is a
decrease of 1.2% at March 31, 1998. Total net loans as of December 31, 1997
stood at $209,583,000, increasing by $11,081,000 or 5.3% to $220,664,000 at
March 31, 1998.
The average earning assets were $361,758,000 during the three months ended
March 31, 1998 and $325,624,000 during the three months ended March 31, 1997.
This is an increase of $36,134,000 or 11.1%.
Average total assets during the three months ended March 31, 1998 were
$384,015,000 and $347,650,000 for the three months ended March 31, 1997. The
return on average total assets was 1.2% for the three months ended March 31,
1998 and 1.0% for March 31, 1997. Return on average equity for the first three
months of 1998 and 1997 were 13.7% and 11.2%, respectively. Average equity for
both periods was $33,376,000 for the first three months of 1998 and $30,436,000
for the first three months of 1997.
Net income increased $289,000 or 34.0% comparing the first three months of
1998 to the first three months of 1997. The increase in 1998 was driven by an
increase in total other operating income as well as an increase in net interest
income. These increases were offset by a lesser increase in total other
operating expense.
Net income per diluted share was $0.39 for the first three months of 1998
and $0.29 for the first three months of 1997. Earnings per basic share were
$0.40 and $0.30 for the three months ended March 31, 1998 and 1997.
Available for Sale and Securities Held to Maturity
- --------------------------------------------------
At March 31, 1998 total assets increased $19,994,000 or 5.4% over December
31, 1997. A major factor in the increase of total assets is the increase in the
Bank's securities portfolio of $6,799,000 or 5.1%. There was an increase of
$24,260,000 or 127.1% over December 31, 1997 in Federal agency mortgage backed
obligation securities held to maturity. Money used to purchase these securities
was borrowed from Federal Home Loan Bank of Pittsburgh. Offsetting this increase
was a decrease in the Bank's securities available for sale of $17,056,000 or
17.6%. Management believed it was necessary to sell securities as part of its
program of constantly monitoring the securities and loan portfolios in response
to changes in the various risks that are applicable to these assets and changes
in the Company's asset/liability strategy. This also put the Bank in a position
to sell Federal funds of $3,070,000 at March 31, 1998 as compared to December
31, 1997 when the Bank purchased Federal funds of $2,350,000.
Net Loans
- ---------
Net loans increased by $11,081,000 or 5.3% over December 31, 1997. This was
the second major factor in the increase of total assets. During the first
quarter of 1998 the Bank offered a special promotion on Home Equity loans. The
promotion was held in all 20 branch offices. Money used to finance these loans
was funded from a portion of the securities available for sell sold in the first
quarter of 1998. All other loan areas stayed fairly constant for the first three
months of 1998.
Other Borrowed Money
- --------------------
Total liabilities were $355,952,000 at March 31, 1998 and $336,728,000 at
December 31, 1997 which is an increase of $19,224,000 or 5.7%. The increase in
total liabilities was the result of an increase in Other borrowed money of
$24,093,000 over December 31, 1997. Management had borrowed $25,000,000 in
January of 1998 from Federal Home Loan Bank of Pittsburgh (which will mature in
January 2008). The money borrowed was invested in mortgage backed securities.
Bank management believes that it was appropriate to take advantage of borrowing
at a rate lower than the rate received in investing in Federal agency mortgage
backed obligation in both available for sale and securities held to maturity.
Net Interest Income
- -------------------
Net interest income for the first three months of 1998 increased $176,000 or
5.2% compared with the same period of 1997. While total interest income
increased $702,000 or 11.1%, interest paid increased by $526,000 or 17.8%
resulting in
11
<PAGE>
Financial Review Management's Discussion and Analysis of Financial Condition
- ----------------------------------------------------------------------------
and Results of Operation, continued
- -----------------------------------
Net Interest Income, (continued)
- --------------------------------
a net effect of an increase of $176,000 or 5.2% in net interest income. The
increase in net interest income was the result of an increase in the total
average of interest earning assets. Interest earning assets were up $36,134,000
for the first three months of 1998 compared to the same periods in 1997. The
increase in volume resulted in an increase in interest income of $702,000. The
security portfolio provided $530,000 of the increase and the loan portfolio
provided $277,000. During 1997 and the first quarter of 1998 the Bank borrowed
$65,000,000 from Federal Home Loan Bank of Pittsburgh. The money borrowed was
invested in mortgage backed securities and also used to increase our loan
portfolio. Offsetting the increase of interest income for the three month ended
March 31, 1998 was interest expense on other borrowed money which was up
$563,000 for the three months ended March 31, 1998.
In addition to gap management, the Company also uses simulation analysis to
help monitor and manage interest rate risk. In this analysis the Company
examines the result of a 200 basis point change in market interest rates and the
effect on net interest income. It is assumed that the change is instantaneous
and that all rates move in a parallel manner. Assumptions are also made
concerning prepayment speeds on mortgage loans and mortgage securities as well
as growth rates of deposit and loan portfolios. The results of this rate shock
are a useful tool to assist the Company in assessing interest rate risk inherent
in their balance sheet. Below are the results of this ratio shock analysis as of
March 31, 1998.
Net Interest Rate Percentage Change in
Change in Rates Income Change Net Interest Income
--------------- ------------- -------------------
+200 221 1.70%
Static - -
-200 (974) (7.30%)
A 200 basis point rise in interest rates results in a 1.7% increase in
interest income. A 200 basis point decrease in interest rates results in a
decrease in interest income due to optionality in the Company's securities
portfolio. In a falling rate environment it is assumed that certain of the
Company's securities would be called and the resulting cash flows would be
reinvested at the lower prevailing rates.
Provision / Reserve for Loan Losses and Nonperforming Loans
- -----------------------------------------------------------
Quarter Ended Year Ended
March 31, December 31,
1998 1997
------------------------------------
Balance at beginning of period $ 2,759,000 2,750,000
Recoveries 7,000 73,000
Less: Charge Offs 84,000 599,000
Provision for Loan Losses 150,000 535,000
- -----------------------------------------------------------------------------
Balance at end of period $ 2,832,000 2,759,000
- -----------------------------------------------------------------------------
The provision for loan losses for the first three months of 1998 amounted to
$150,000. It was $535,000 at December 31, 1997 and $135,000 for the three months
ended 1997. Net charge offs for the first three months of 1998 totaled $77,000
while net charge offs for December 31, 1997 were $526,000. The ratio of net
charge offs during the first three months of 1998 to average loans outstanding
during the same period was .04% and for the twelve months ended 1997 was .26%.
The reserve for loan losses at March 31, 1998 totaled $2,832,000, increasing
$73,000, 2.6% from $2,759,000 at December 31, 1997. The Company ratio of reserve
for loan losses to total loans outstanding was 1.3% at March 31, 1998, and the
same ratio as of December 31, 1997 was 1.3%.
12
<PAGE>
Financial Review Management's Discussion and Analysis of Financial Condition
- ----------------------------------------------------------------------------
and Results of Operation, continued
- -----------------------------------
Provision / Reserve for Loan Losses and Nonperforming Loans, (continued)
- ------------------------------------------------------------------------
Non-performing loans are listed as follows:
03/31/98 12/31/97
----------- -----------
Non Accrual $ 2,694,000 $ 2,596,000
90 Days and More Past Due 1,480,000 2,026,000
Restructured 1,080,000 890,000
----------- -----------
$ 5,254,000 $ 5,512,000
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 reserves the accrued interest on all
commercial loans over ninety days past due and these loans are included in the
non-accrual totals. Mortgages past due 90 days or more are placed in non-accrual
status unless the Bank considers the loan to be well secured and in the process
of collection. Consumer loans that are not secured be real estate are generally
charged off after 120 days past due.
There are no impaired loans under SFAS No. 114 which are not included in
the above table.
The loan loss reserve as of March 31, 1998 has been deemed adequate by
management. This amount is sufficient to cover inherent losses given the
moderate past due, nonperforming and classified levels. Determination for loan
loss reserve adequacy follows the guidelines in the Comptroller's Banking
Circular No.201(revised), including risk loss analysis, specific allocations for
problematic credits and provision for class loans, and the requirements of SFAS
No. 114.
Other Operating Income
- ----------------------
Other operating income for the first three months of 1997 was $537,000
increasing 58.8% to $853,000 reported for the first three months of 1998. There
were gains recognized for the sale of securities available for sale in 1998 for
the first quarter of $296,000. The Company did not recognize any gain or loss on
the sale of securities available for sale in 1997. ATM fees were slightly up for
1998. Ten additional ATM machines were placed in service after the first quarter
of 1997, on which a surcharge per transaction has been collected. As of March
1998 the Bank has a total of 44 ATM machines. Offsetting the increase of total
other operating income was a decrease in service charges on deposit accounts due
to a decrease in volume for returned items. This resulted in an increase in
total other operating income for the first three months of 1998.
Other Operating Expenses
- ------------------------
Total other operating expenses were $2,586,000 in the first three months of
1997 while other operating expenses were $2,674,000 in the first three months of
1998; reflecting an increase of $88,000 or 3.4% for the first three months of
1998. The 1998 increase is attributable to normal salary increases, an increase
in full time equivalent employees, and an increase in net occupancy expense of
bank premises. Salary and employee benefit expense increased by 5.5% as well as
an increase of 7.6% for net occupancy expense of bank premises. Furniture and
equipment, data processing and other expenses for the three months ended March
31, 1998 remained fairly constant with a slight increase or decrease in each of
the categories as compared to the same period of 1997.
Income Taxes
- ------------
The provision for income taxes for the first three months of 1998 was
$440,000 and $340,000 for the first three months of 1997. The effective rate for
the first three months of 1998 was 27.8% and 28.5% for the same period of 1997.
The fluctuaion in the Company's tax expense and effective tax rate is primarily
due to management's strategy in investing in tax free securities during the
middle and latter part of 1997.
13
<PAGE>
Financial Review Management's Discussion and Analysis of Financial Condition
- ----------------------------------------------------------------------------
and Results of Operation, continued
- -----------------------------------
Capital Management and Liquidity and Rate Sensitivity
- -----------------------------------------------------
The objectives of the Corporation's capital management policy place an
emphasis on both current financial positioning and future capital needs based on
anticipated growth. These objectives are maintained by management which monitors
its liquidity requirements through its asset/liability management program. This
program, with other management analysis, enables the bank to meet its cash flow
requirements and adapt to the changing needs of the Corporation's customers and
the requirements of regulatory agencies. As of March 31, 1998, the most recent
notification from the Office of the Comptroller of the Currency categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of greater than
or equal to 10%, 6%, and 5%, respectively.
The Corporation's principal source of liquidity has been short-term U.S.
Government and U.S. Agency obligations, and various corporate notes. Money
market investments and portfolio investments are kept liquid in order to
effectively match our current deposit structure. The Corporation is affected by
changes in the level of rates of interest. Earnings will be sensitive to
interest rate changes to the degree that the average yield on assets responds
differently to a change in interest rates than does average cost of funds.
Adequate liquidity affords the Corporation flexibility in meeting consumer loan
demand and deposit fluctuations.
The Corporation actively manages the interest rate sensitivity
characteristics of its assets and liabilities to control the effects of changes
in the general level of interest rates upon net interest revenue. This is
accomplished by the asset/liability committee which consists of senior
management and the board of directors, who are responsible for management
decisions as to the asset/liability maturity mix.
Effects of Inflation
- --------------------
Economic conditions are reviewed by management in a continuing effort to
adjust to the changing economic environment. The effects of these changes on the
banking industry as a whole 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.
Increases in the rate of inflation can increase longer term interest rates,
which can reduce the value of securities held to maturity, mortgage loans and
other fixed rate and term assets. Inflationary periods also may tend to increase
the borrowing needs of consumers, leading to requests for additional funds,
which can expand total loans above expected levels and therefore require
increased efforts to ensure the maintenance of adequate capital.
The banking industry is affected by inflation in a different manner than
other industries, although certain changes have similar effects on both banks
and other business enterprises. Current economic indicators are moving in the
direction of possible inflationary changes. Interest rates have been increasing
in response to economic changes and which will affect the asset/liability policy
of the bank. Rates on deposits and loans are changed as necessary with
consideration of economic and market conditions. Our continuing efforts to
monitor all phases of the financial condition of all assets which can be
affected by inflation includes the pricing of collateral on a regular basis. The
coming months will reveal the effect of inflationary fluctuations on the
economy.
14
<PAGE>
Part II.
- --------
Item 1. Legal Proceedings
- --------------------------
The nature of the business of Pioneer American Holding Company Corp. and its
subsidiary, Pioneer American Bank, N.A., 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
Pioneer American or its subsidiary are parties or to which their property is
subject, which, if determined adversely, would be material in relation to
Pioneer American's results of operation, stockholder's equity, or financial
condition. In addition, no material proceedings are pending or are known to be
threatened or contemplated against Pioneer American or its subsidiary by
governmental authorities or other parties.
Item 2. Changes in Securities
- ------------------------------
None
Item 3. Default Upon Senior Executives
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None
15
<PAGE>
SIGNATURES *
Pursuant to the requirements 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.
PIONEER AMERICAN HOLDING COMPANY, CORP.
Date: May 7, 1998 By /s/ Donald A. Hoyle, Jr
-------------------------------
Donald A. Hoyle, Jr
President & C.E.O.
Date: May 7, 1998
By /s/ John W. Reuther
-------------------------------
John W. Reuther
Senior Executive Vice President &
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 13,674
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,640
<INVESTMENTS-CARRYING> 61,235
<INVESTMENTS-MARKET> 61,552
<LOANS> 223,496
<ALLOWANCE> 2,832
<TOTAL-ASSETS> 390,120
<DEPOSITS> 290,242
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,544
<LONG-TERM> 61,166
0
0
<COMMON> 2,901
<OTHER-SE> 31,267
<TOTAL-LIABILITIES-AND-EQUITY> 390,120
<INTEREST-LOAN> 4,684
<INTEREST-INVEST> 2,331
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 7,024
<INTEREST-DEPOSIT> 2,631
<INTEREST-EXPENSE> 3,473
<INTEREST-INCOME-NET> 3,551
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 296
<EXPENSE-OTHER> 2,674
<INCOME-PRETAX> 1,580
<INCOME-PRE-EXTRAORDINARY> 1,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
<YIELD-ACTUAL> 3.87
<LOANS-NON> 2,694
<LOANS-PAST> 1,480
<LOANS-TROUBLED> 1,080
<LOANS-PROBLEM> 187
<ALLOWANCE-OPEN> 2,759
<CHARGE-OFFS> 84
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,832
<ALLOWANCE-DOMESTIC> 947
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,885
</TABLE>
