<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, 1997 Commission file number 0-14506
PIONEER AMERICAN HOLDING COMPANY CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2319931
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 No. Main St., Carbondale, PA 18407
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(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 $1.00 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, 1998:
Common stock, $54,242,136.00 (1)
- ----------------------------------
The number of shares outstanding of the issuer's classes of common stock as of
March 1, 1998:
Common stock, $1.00 par value - 2,864,074 shares
- ------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Annual Report to Shareholders for the Year Ended December 31, 1997,
Part III: 1998 Proxy Statement, Part IV: Annual Report to Shareholders for the
Year Ended December 31, 1997.
(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, 1998. 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
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Page
PART I
<S> <C> <C>
1. Business......................................................................................3-7
2. Properties .....................................................................................7
3. Legal Proceedings...............................................................................7
4. Submission of Matters to a Vote of Security Holders.............................................7
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters.....................................................................2-3
6. Selected Financial Data.........................................................................8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................9-36
8. Financial Statements and Supplementary Data.................................................37-66
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, 1997 and 1996.........................37-38
Consolidated Statements of Income, Years ended
December 31, 1997, 1996 and 1995..............................................39
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1997, 1996 and 1995...........................40
Consolidated Statements of Cash Flows, Years ended
December 31, 1997, 1996 and 1995............................................41-42
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 1997.
Auditors' Opinion.....................................................................68
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** Not applicable
</TABLE>
1
<PAGE>
THE PIONEER AMERICAN HOLDING COMPANY CORP. AND SUBSIDIARY
Highlights of the Year
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1997 1996 % Change
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FOR THE YEAR
Total operating income $ 28,968,000 26,370,000 9.85%
Total operating expense 23,460,000 21,123,000 11.06%
Income before income taxes 5,508,000 5,247,000 4.97%
Income tax expense 1,500,000 1,543,000 (2.79)%
Net income 4,008,000 3,704,000 8.21%
Total cash dividends declared 2,055,000 1,900,000 8.16%
AT YEAR END
Assets 370,126,000 330,213,000 12.09%
Deposits 293,643,000 295,946,000 (0.78)%
Loans, (net) 209,583,000 201,298,000 4.12%
Securities available for sale 96,696,000 76,019,000 27.20%
Securities held to maturity 37,379,000 20,860,000 79.19%
Stockholders' equity 33,398,000 30,263,000 10.36%
PER SHARE DATA
Net income (diluted) 1.36 1.26
Cash dividends declared 0.72 0.66
Book value * 11.36 10.32
Number of shareholders 1,430 1,421
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* Based on weighted average diluted shares outstanding during the year.
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 1995
to reflect the Company's two for one stock split effected in the form of a
stock dividend effective July 15, 1996:
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1997 1996 1995
---------------- ---------------- ---------------
Quarter High Low High Low High Low
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First 25.00 22.25 21.25 20.00 17.75 17.25
Second 26.00 23.75 21.12 20.12 18.50 17.00
Third 24.75 23.25 22.00 19.50 20.25 18.38
Fourth 23.00 21.25 24.00 21.75 22.00 19.00
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2
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Company Stock Prices and Dividend Information, (Continued)
On March 1, 1998 the Holding Company had approximately 1,430
shareholders. The market price of the stock on this date was $23.50 per share.
Cash dividends per share for 1997, 1996 and 1995 appear in the table below:
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Quarter (1) 1997 1996 1995
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First $ 0.17 0.15 0.15
Second 0.17 0.17 0.15
Third 0.19 0.17 0.15
Fourth 0.19 0.17 0.15
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$ 0.72 0.66 0.60
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(1) Per share data for 1995 restated to reflect the Company's two for one
stock split effected in the form of a stock dividend effective July 15,
1996.
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 185 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.
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 nineteen branch offices. Ten 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. In addition to the ATM's located
3
<PAGE>
The Bank (Continued)
at the branches, there are twenty ATM's at remote locations. These locations
include convenience stores, supermarkets, and corporate centers. The Bank,
with its expanding branch network, serves Lackawanna and Luzerne Counties and
parts of Wayne, Wyoming, Susquehanna and Monroe counties in northeastern
Pennsylvania.
The Bank's services include accepting time, demand and savings
deposits, including interest bearing checking 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, overdraft 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 20 locations are throughout Northeastern
Pennsylvania with offices in Lackawanna County (10), Luzerne County (5), Wayne
County (2), Monroe County (2), and Wyoming County (1). The unemployment rate
for Pennsylvania in the fourth quarter of 1997 was approximately 4.6%. In the
counties in which the Company operates the rates were: Lackawanna 5.7%,
Luzerne 6.9%, Wayne 7.8%, Monroe 7.3%, and Wyoming 7.3% . Northeastern
Pennsylvania has maintained average vacancy rates with no expectation of over
capacity 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.
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.
4
<PAGE>
Supervision and Regulation, (Continued)
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.
The Federal Deposit Insurance Corporation Improvement Act (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.
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
could opt out of interstate branching until June 1, 1997, but if so, their
domestic institutions would also be prohibited from branching interstate.
States could also enact laws permitting interstate merger transactions and
interstate de novo branching prior to June 1, 1997. Limited branch purchases
are still subject to state laws.
Bank management anticipates that the Interstate Banking Act will
significantly increase competitive pressures in the Bank's market by
permitting entry of additional competitors.
5
<PAGE>
Supervision and Regulation, (Continued)
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. 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.
6
<PAGE>
Supervision and Regulation, (Continued)
National Monetary Policy, Continued
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. In 1996 the Company also purchased a building
located at 27 North Main Street, Carbondale, Pennsylvania. This property was
acquired to provide needed office space for loan operations and administrative
services. The Bank also owns 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 remote 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).
The Bank purchased a tract of land on Market Street, Kingston, Pennsylvania
for the purpose of constructing a full-service office. This office is expected
to be completed in the fall of 1998 and will replace the existing Kingston
leased office. The Bank owns properties adjacent to the main office utilized
as parking lots.
The Bank also leases facilities for eleven branch offices: four in
the Price Chopper Super Markets in Scranton (2), Dunmore and Wilkes-Barre,
four in the Mr. Z's supermarkets in Mountaintop, Dallas, Stroudsburg, and
Tunkhannock, two in Weis Markets in Clarks Summit and Hazleton, and a
free-standing office in Kingston.
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 1997 through the date of filing this
report with the Securities and Exchange Commission.
7
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Selected Financial Data
(In thousands, except per share data and number of shareholders)
<TABLE>
<CAPTION>
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Years ended December 31
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Results of Operations
For the Year
Interest income $ 26,507 24,358 23,662 20,626 19,855
Interest expense 12,845 10,874 11,227 8,157 7,514
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Net interest income 13,662 13,484 12,435 12,469 12,341
Provision for loan losses 535 500 420 310 837
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Net interest income after provision for
loan losses 13,127 12,984 12,015 12,159 11,504
Other operating income 2,461 2,012 1,913 1,319 1,750
Other operating expense 10,080 9,749 9,075 8,697 8,570
Income tax expense 1,500 1,543 1,370 1,333 1,323
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Income before cumulative effect of change
in accounting principle $ 4,008 3,704 3,483 3,448 3,361
Cumulative effect of change in accounting
principle -- -- -- -- (75)
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Net income 4,008 3,704 3,483 3,448 3,286
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Cash dividends declared $ 2,055 1,900 1,671 1,610 1,374
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Per Share (1)
Net income (diluted) $ 1.36 1.26 1.20 1.19 1.17
Book value (2) 11.36 10.32 9.80 8.64 8.82
Cash dividends paid 0.72 0.66 0.60 0.58 0.50
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Financial Condition
At End of Year
Assets $370,126 330,213 320,647 302,408 264,663
Deposits 293,643 295,946 288,252 270,718 237,556
Loans, net 209,583 201,298 194,555 177,173 156,979
Securities available for sale (3) 96,696 76,019 68,328 50,467 55,208
Securities held to maturity (4) 37,379 20,860 26,033 52,915 25,054
Stockholders' equity 33,398 30,263 28,492 24,978 24,785
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Number of Stockholders 1,430 1,421 1,347 1,334 1,304
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</TABLE>
(1) Per share data for 1995, 1994, and 1993 restated to reflect the Company's
two for one stock split effected in the form of a stock dividend
effective July 15, 1996.
(2) Based on weighted average diluted shares outstanding during the period.
(3) Carried at fair value in 1997, 1996, 1995 and 1994 and the lower of cost
or market in 1993.
(4) Carried at historical cost, net of unamortized premiums and discounts.
8
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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, 1997, 1996, and 1995. 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 1995 has been restated to reflect the Company's two for one
stock split effected in the form of a stock dividend effective July 15, 1996.
Results of Operations
Highlights of Operating Results
1997 vs. 1996
Net income reached $4,008,000 in 1997, $304,000 or 8.2% higher than
in 1996. These earnings represent the highest annual earnings in the Company's
history. Earnings per diluted share were $1.36 in 1997, compared to $1.26 in
1996, an increase of 7.9%.
The increase in net income for 1997 over 1996 is due to the increases
in net interest income and other income, as well as a decline in tax expense,
offset by increases in other operating expenses and the provision for loan
losses. The increase in interest income resulted primarily from the change in
the volume of assets in the securities portfolio. This increase was offset by
an increase in interest expense on other borrowed money, which was used to
fund the larger securities portfolio. Other income was also up during 1997
from the previous period due to increased service charges, gains on sales of
securities, and ATM fees. This increase was partially offset by an increase in
total other operating expense primarily resulting from the expanded branch and
ATM network. The provision for loan losses was higher in 1997 due to a higher
level of charge offs and to continuing portfolio growth.
9
<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>
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1997 vs. 1996 1996 vs. 1995
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Amount % Amount %
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<S> <C> <C> <C> <C>
Interest income $ 2,149,000 8.8 696,000 2.9
Interest expense 1,971,000 18.1 (353,000) (3.1)
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Net interest income 178,000 1.3 1,049,000 8.4
Provision for loan losses 35,000 7.0 80,000 19.0
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Net interest income after provision
for loan losses 143,000 1.1 969,000 8.1
Other operating income 449,000 22.3 99,000 5.2
Other operating expense 331,000 3.4 674,000 7.4
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Income before income taxes 261,000 5.0 394,000 8.1
Income tax expense (43,000) (2.8) 173,000 12.6
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Net income $ 304,000 8.2 221,000 6.3
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</TABLE>
1996 vs 1995
Net income reached $3,704,000 in 1996, $221,000 or 6.3 % higher than
in 1995. Diluted earnings per share was $1.26 in 1996, compared to $1.20 in
1995, an increase of 5.0 %.
The Company experienced an increase in net interest income driven
primarily by an increase in the volume of interest earning assets. The overall
change was an increase in net interest income of $ 1,049,000 or 8.4 % from
1995 to 1996. The provision for loan losses was up $ 80,000 year-to-year due
to growth within the loan portfolio. Other operating income was up $ 99,000
during 1996 from the prior period due to an increase in total service charges,
maintenance fees, and the sale of mortgages. Other operating expenses
increased during 1996 versus 1995 due to additional salaries and benefits
expense for the newly implemented credit administration department, and other
recurring and non-recurring expenses associated with the new branches and
continued growth of the Bank.
10
<PAGE>
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 to reflect the benefit 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-bearing 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
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 an increase in net interest income on a tax equivalent basis of
$345,000 from 1996 to 1997. Tax equivalent net interest income was decreased
by $262,000 for interest rate changes from 1996 to 1997 versus an increase of
$40,000 from 1995 to 1996. The increase in tax equivalent net interest income
from volume changes from 1996 to 1997 was $607,000 versus $959,000 from 1995
to 1996.
The improvement in net interest income in 1997 from 1996 was the
result of several factors. The volume of interest earning assets drove the
increase in interest income from 1996 to 1997. The increase in volume resulted
in an increase in interest income of $2,044,000. The security portfolio
provided $2,088,000 of the increase with 71% of this coming from the volume
increase in taxable securities. During 1997, the Bank borrowed money from
Federal Home Loan Bank of Pittsburgh which was invested in mortgage backed
securities in both available for sale
11
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
and held to maturity investment securities. The increase in interest income
from the increase in the volume of securities was slightly offset by a
decrease of $96,000 in interest income from the volume of loans. Federal funds
sold had an increase of interest income of $52,000 over the prior period.
Net interest income was enhanced by a $459,000 improvement related to
increased rates on securities, but Federal funds sold and loans had decreases
from 1996 in interest income from rate changes of $6,000 and $182,000
respectively. These changes are attributable to the fluctuating interest rate
environment in which the Bank continued to operate during 1997 as well as the
ongoing and increasing competitive pressures in the lending area.
The growth of interest bearing deposits from the nine branch openings
and other promotions over the past several years was offset by a restructuring
of the Bank's interest rates on deposits. This restructuring was based upon
our expanded presence throughout Northeastern Pennsylvania. Our regional
coverage allows for a pricing structure comparable to the Bank's regional
competitors, not one based upon any local competitive pressures for any
particular branch or branches. The increase of $79,000 in interest expense
from an increase in the volume of interest bearing liabilities and an increase
in interest expense of $458,000 through interest rate increases on interest
bearing liabilities resulted in an increase in interest expense of $537,000
from 1996 to 1997. The single largest contributor to the increase in interest
expense was an increase in both the rate paid on and the volume of NOW, Super
NOW and Money Market accounts. The increase due to volume of $145,000 resulted
from a $6,196,000 increase in the average balances of NOW, Super NOW, and
Money Markets from $43,331,000 for 1996 to $49,527,000 for 1997. The average
rate paid on NOW, Super NOW, and Money Markets went from 2.34% in 1996 to
3.27% in 1997 resulting in an increase due to rate on these accounts of
$457,000.
The volume increase in interest income was the result of a
$30,830,000 increase in the total average of interest earning assets from
$301,788,000 in 1996 to $332,618,000 in 1997. The average rate of return on
these assets was down slightly compared to the prior year with 1997 at 8.13%
and 1996 at 8.20%. The volume increase in interest income was primarily driven
by an increase in our security portfolio. Total securities were up $31,096,000
from 1996 to 1997. The related interest income was up $2,547,000 to $8,563,000
in 1997. The return of 6.92% on total securities was a 42 basis point increase
from the return in 1996.
The Company had an increase in average interest bearing liabilities
of $26,629,000 from 1996. This was due to an increase in other borrowed money
to $23,598,000 for 1997, a $22,370,000 increase over 1996. Management borrowed
$20,000,000 in January of 1997 from Federal Home Loan Bank of Pittsburgh. An
additional $20,000,000 was borrowed in September of 1997. 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 held to maturity investment securities. There was also
a slight increase in the interest bearing checking and money
12
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
market areas. Management actively managed the pricing structure of interest
bearing liabilities to reduce the impact of local competitive pressures by
managing the Bank's portfolio on a regional basis. The result was an increase
in low or non-interest bearing liabilities and a decrease in savings and time
deposits. There was a 29 basis point increase in the cost of interest bearing
liabilities in 1997 to 4.51%. The increase in funds was utilized in funding
the growth in the purchase of investment grade securities.
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, 1997 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.
13
<PAGE>
Table 2
Rate/Volume Analysis of Changes in Net Interest Income
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997/1996 1996/1995
Increase (Decrease) Increase (Decrease)
due to changes in due to changes in
------------------------- --------------------------
Volume (1) Rate Total Volume (1) Rate Total
- -------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Securities:
Taxable 1,477 441 1,918 (451) 53 (398)
Non-taxable (2) 611 18 629 (60) (58) (118)
- -------------------------------------------------------------------------------------------------------------------
Total securities 2,088 459 2,547 (511) (5) (516)
- -------------------------------------------------------------------------------------------------------------------
Federal funds sold 52 (6) 46 (84) (5) (89)
- -------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (2) 377 (39) 338 354 (150) 204
Mortgage (691) (45) (736) 390 (38) 352
Installment 218 (98) 120 902 (206) 696
- -------------------------------------------------------------------------------------------------------------------
Total loans (96) (182) (278) 1,646 (394) 1,252
- -------------------------------------------------------------------------------------------------------------------
Total interest income 2,044 271 2,315 1,051 (404) 647
- -------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing deposits:
NOW, Super NOW and Money Market 145 457 602 121 (44) 77
Savings (31) (35) (66) 9 (219) (210)
Time (35) 36 1 1 (183) (182)
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 79 458 537 131 (446) (315)
Other borrowed money and note payable 1,348 76 1,424 (39) 3 (36)
Fed Funds Purchased 10 (1) 9 0 (1) (1)
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 1,437 533 1,970 92 (444) (352)
- -------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 607 (262) 345 959 40 999
- -------------------------------------------------------------------------------------------------------------------
</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 approximately 32 % in 1997, 1996 and 1995. The total taxable
equivalent adjustments included above are $549,000, $382,000, and
$433,000 for 1997, 1996 and 1995, respectively.
14
<PAGE>
Table 3
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------ -----------------------------
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 105,165 7,063 6.72 81,707 5,145 6.30 88,877 5,543 6.24
Non-taxable (1) 18,528 1,500 8.10 10,890 871 8.00 11,638 989 8.50
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 123,693 8,563 6.92 92,597 6,016 6.50 100,515 6,532 6.50
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 5,901 320 5.42 4,955 274 5.53 6,480 363 5.60
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (1) (5) 79,777 7,032 8.81 75,520 6,694 8.86 71,521 6,490 9.07
Mortgage (5) 72,112 6,259 8.68 80,020 6,995 8.74 75,553 6,643 8.79
Installment (5) 53,842 4,882 9.07 51,490 4,762 9.25 41,742 4,066 9.74
Allowance for possible
loan losses (2,707) - - (2,794) - - (2,702) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 203,024 18,173 8.95 204,236 18,451 9.03 186,114 17,199 9.24
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earnings assets 332,618 27,056 8.13 301,788 24,741 8.20 293,109 24,094 8.22
Non-interest earning assets 25,990 - - 24,706 - - 22,278 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets/interest income $ 358,608 27,056 7.54 326,494 24,741 7.58 315,387 24,094 7.64
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Table 3 (Continued)
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------ -----------------------------
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 $ 49,527 1,618 3.27 43,331 1,016 2.34 38,173 939 2.46
Savings 53,774 1,117 2.08 55,219 1,183 2.14 54,818 1,393 2.54
Time 157,576 8,602 5.46 158,213 8,601 5.44 158,190 8,783 5.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 260,877 11,337 4.35 256,763 10,800 4.21 251,181 11,115 4.43
- -----------------------------------------------------------------------------------------------------------------------------------
Other borrowed money
and note payable 23,598 1,498 6.35 1,228 74 6.03 1,872 110 5.88
Fed Funds Purchased 160 10 6.25 15 1 6.67 20 2 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liability 284,635 12,845 4.51 258,006 10,875 4.22 253,073 11,227 4.44
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits and
other liabilities 42,594 - - 39,471 - - 35,290 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 327,229 12,845 3.93 297,477 10,875 3.66 288,363 11,227 3.89
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 31,379 - - 29,017 - - 27,024 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity/interest expense $ 358,608 12,845 3.58 326,494 10,875 3.33 315,387 11,227 3.56
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 14,211 13,866 12,867
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest spread (3) 3.62% 3.98% 3.78%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest yield (4) 4.27% 4.59% 4.39%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest and average rates are presented on a taxable-equivalent basis
utilizing an effective tax rate of approximately 32% in 1997, 1996, and
1995. The total taxable-equivalent adjustments included above are
$549,000, $382,000 and $433,000 for 1997, 1996, and 1995, 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 $260,000, $359,000, $324,000 in
1997, 1996, and 1995, respectively.
16
<PAGE>
Market Risk
Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
------------------------------------------------------------------------------------------------
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 $ 9,942,000 980,000 29,110,000 38,653,000 18,011,000 96,696,000
Securities held to maturity 1,605,000 4,404,000 2,800,000 6,321,000 22,249,000 37,379,000
Loans (net of unearned
discount and deferred fees) 43,054,000 9,578,000 26,443,000 56,859,000 76,408,000 212,342,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 54,601,000 14,962,000 58,353,000 101,833,000 116,668,000 346,417,000
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest bearing DDA (MMA,
NOW, Super NOW) $ 53,166,000 - - - - 53,166,000
Savings (1) 10,557,000 - - - 42,226,000 52,783,000
Time 20,198,000 22,199,000 36,340,000 25,483,000 - 104,220,000
Time > $100M 11,359,000 10,128,000 12,395,000 5,852,000 - 39,734,000
Other borrowed money and
note payable - - - 36,798,000 275,000 37,073,000
Federal Funds Borrowed 2,350,000 - - - - 2,350,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 97,630,000 32,327,000 48,735,000 68,133,000 42,501,000 289,326,000
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (43,029,000) (17,365,000) 9,618,000 33,700,000 74,167,000 57,091,000
Cumulative interest rate
sensitivity gap $ (43,029,000) (60,394,000) (50,776,000) (17,076,000) 57,091,000 -
Cumulative interest rate
sensitivity ratio (2) (11.6%) (16.3%) (13.7%) (4.6%) 15.4% -
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
17
<PAGE>
Market Risk, (Continued)
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 December 31, 1997.
Net Interest Percentage Change in
Change in Rates Income Change Net Interest Income
--------------- ------------- -------------------
+200 (400) (2.72%)
Static - -
-200 (405) (2.75%)
A 200 basis point rise in interest rates results in a decrease of
interest income as a result of the Company being liability sensitive as
reflected in Table 4 with a cumulative negative one year GAP of $50,776,000. A
200 basis point decrease in interest rates also 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.
Table 5
Other Operating Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,330,000 1,168,000 849,000
Net gains on sales of
securities available for sale 154,000 - 457,000
Gains on calls of securities held to maturity 3,000 - 8,000
ATM Fees 402,000 131,000 71,000
Other income 572,000 713,000 528,000
- -------------------------------------------------------------------------------------------
Total other operating income $ 2,461,000 2,012,000 1,913,000
- -------------------------------------------------------------------------------------------
</TABLE>
Service charge income on deposit accounts increased in 1996 and 1997
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
October 1996, pricing of service charges and maintenance fees were increased
based upon a cost analysis completed by the Bank. The increases in service
charge income reflected in the last quarter of 1996 and 1997 are a direct
result of this price change.
18
<PAGE>
Other Operating Income, (Continued)
Management is 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. These
changes in risk and strategy call for management to sell both securities and
loans from time to time. In 1997, 1996 and 1995 the Company sold newly
originated mortgage loans (primarily fixed rate) to the Federal Home Loan
Mortgage Corporation.
Gains were recognized for the sale of securities available for sale
in 1997 of $154,000 and $457,000 in 1995. The Company did not recognize any
gains or losses on the sale of securities available for sale in 1996. The
proceeds from the sale of securities available for sale were $17,799,000,
$6,327,000 and $29,497,000 in 1997, 1996, and 1995 respectively.
ATM fees increased by $271,000 over the prior period. The increase
was due to an additional 35 ATM machines placed in service during the fourth
quarter of 1996 and throughout 1997, on which a surcharge per foreign
transaction has been collected. Other income decreased by $141,000, which was
due to a decrease in gain on mortgages sold for 1997. The Company recognized
$20,000, $220,000, and $18,000 on the sale of mortgage loans in 1997, 1996,
and 1995, respectively. Also recognized were gains of $38,000, $29,000 and
$31,000 in 1997, 1996, and 1995 respectively, on the sale of PHEAA loans. The
proceeds from the sale of mortgage and PHEAA loans were $3,758,000 in 1997,
$14,439,000 in 1996 and $3,043,000 in 1995, respectively. The sale of these
loans, contractual or otherwise, was deemed necessary and beneficial based
upon ongoing asset/liability management. These sales allowed management to
alter the composition of these portfolios to address interest rate,
pre-payment and credit risk inherent in the loan portfolio.
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.
19
<PAGE>
Other Operating Income, (Continued)
Table 6
Other Operating Expenses
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years ended December 31
----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 5,040,000 5,061,000 4,385,000
Net occupancy expense of bank premises 1,026,000 857,000 761,000
Furniture and equipment expenses 685,000 622,000 565,000
Data processing expense 242,000 241,000 332,000
FDIC Insurance 37,000 1,000 319,000
Other expenses 3,050,000 2,967,000 2,713,000
- -------------------------------------------------------------------------------------
Total other operating expenses $ 10,080,000 9,749,000 9,075,000
- -------------------------------------------------------------------------------------
</TABLE>
Salaries and employee benefits, which represent the most significant
portion of non-interest expenses, decreased by .4% and increased by 15.4% in
1997 and 1996, respectively. Salary expense increased .8% and employee benefit
expense decreased 4.7% in 1997. The 1997 decrease in salaries and employee
benefits was partially attributed to the departure of an executive officer
which vacancy has not been filled. Officers salaries in 1997 also remained
constant while non-exempt employees did receive a 4% increase in salaries. The
1996 increase was attributed to normal salary increases, the addition of a
commercial lender, an administrative assistant to the commercial lenders, a
credit administrator and two credit analysts in the loan operations
department. The increase was also attributable to an increase in full-time
equivalents from the new branches opened in 1996, which include Tunkhannock
and Hazleton. Also, 1996 represented the first full year of salary and benefit
expense for our Mount Pocono, Stroudsburg, O'Neill and Clarks Summit Offices,
which opened in November, December, June and October of 1995, respectively.
Salary expense increased 16.6% and employee benefit expense increased 11.5 %
in 1996 over 1995.
The contribution to the Company's ESOP in 1997 was $54,000 and
$5,000 in 1995. No contribution was made in 1996 because the plan had
unallocated shares purchased in previous periods negating the need for more
funds to purchase additional shares in 1996.
The increase in net occupancy and furniture and equipment expense of
$169,000 or 19.7% over 1996 and the increase of $96,000 or 12.6% in 1996 over
1995 reflected the increased costs from the nine new branch facilities opened
from 1994 through 1996. The increase was also attributable to inflation
adjustments in lease agreements maintained by the Bank.
Data processing expense remained constant for 1997 and decreased by
$91,000 or 27.4% in 1996 over 1995. The Bank replaced its computer hardware
and software in 1996. The upgrades significantly reduced the supplies and
maintenance expense for data processing. This was partially offset by an
increase in depreciation expense for additions placed in service over the past
several years.
20
<PAGE>
Other Operating Income, (Continued)
FDIC Insurance expense for 1997 leveled off to approximately $9,000
per quarter. The decreased level of insurance premiums for FDIC Insurance was
substantial in 1996 resulting in expense of $1,000 versus $319,000 for 1995.
This decrease was due to the bank insurance fund recapitalization refund
calculation due on assessments paid for the second and third quarter of 1995
and for the year of 1996.
Other expenses increased by 2.8% in 1997 and 9.4% in 1996. Total
other operating expense for 1997 remained fairly constant with a slight
increase or decrease in each of the categories as compared to the same period
of 1996. The largest increases were in automated teller and related card
holder services, courier expense and telephone communication. The growth of
the Bank resulted in an increase in automated teller machines and related
cardholder service for 1997 over 1996 of $87,000. The expense for courier
service increased $24,000 due to the additional requirements necessary to
service the Bank's expanded network. Other areas with increase over 1996 were
telephone communications up $42,000. Offsetting these increases was a decrease
of $82,000 in Marketing expense. Marketing expense was up in 1996 due to
marketing a larger geographical area for the two new branch locations and our
35 additional automated teller machines placed in service in 1996.
The provision for income taxes for 1997, 1996 and 1995 were
$1,500,000, $1,543,000 and $1,370,000, respectively. The effective rate for
these periods were 27.2%, 29.4% and 28.2%. This change in the effective rate
was due to management's strategy in investing in tax free securities for 1997.
Financial Position
Loan Portfolio
Total loans, net of unearned discount and deferred loan fees,
increased $8,294,000 or 4.1% in 1997 and increased by $6,751,000 or 3.4 % in
1996. In 1997 the Bank sold $972,000 in mortgage loans and $2,384,000 in PHEAA
loans. In 1996 the loans sold were $12,160,000 and $2,030,000, respectively.
The increase in loans after consideration of the previously mentioned loan
sales were $11,994,000 in 1997 and $20,941,000 in 1996.. There was growth in
two segments of the Company's portfolio in 1997: residential real estate and
commercial loans. The largest amount of originations were from commercial real
estate loans.
In 1997 the Bank sold fewer loans to keep its loan and deposit ratio
in the same position as in the past years. Unlike 1996, loan growth had
increased at a rate greater than deposit growth. This resulted in an increase
in the Bank's loan to deposit ratio in 1996. The Bank sold $12,160,000 of
residential mortgage loans in 1996 consisting of $8,265,000 of fixed rate
loans and $3,895,000 of adjustable rate mortgages. The objectives were to
reduce the loan to deposit ratio, address interest rate and prepayment risks
in the fixed rate section of the portfolio, as well as improve the liquidity
and quality characteristics of one year adjustable rate mortgages.
21
<PAGE>
Loan Portfolio, (Continued)
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
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial business $ 15,534,000 17,256,000 16,684,000 16,200,000 13,248,000
Commercial real estate 69,505,000 61,254,000 58,062,000 52,603,000 50,202,000
Real estate construction 1,002,000 947,000 625,000 1,482,000 1,594,000
Real estate residential 120,604,000 115,791,000 112,493,000 102,708,000 88,857,000
Consumer 17,865,000 20,424,000 19,013,000 14,184,000 11,609,000
- -----------------------------------------------------------------------------------------------------------
Total loans, gross 224,510,000 215,672,000 206,877,000 187,177,000 165,510,000
Unearned discount and
deferred loan fees (12,168,000) (11,624,000) (9,580,000) (7,305,000) (5,927,000)
- -----------------------------------------------------------------------------------------------------------
Total loans, net of
unearned discount
and deferred loan fees $ 212,342,000 204,048,000 197,297,000 179,872,000 159,583,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes commercial, financial, agricultural and real
estate construction loans at December 31, 1997 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 Business $ 7,863,000 5,403,000 2,268,000 15,534,000
Commercial real estate 18,797,000 6,355,000 44,353,000 69,505,000
Real estate construction 1,002,000 - - 1,002,000
- --------------------------------------------------------------------------------------------------------------------
Total $ 27,662,000 11,758,000 46,621,000 86,041,000
- --------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity:
Loans with predetermined rates 10,593,000 9,343,000 41,673,000 61,609,000
Loans with variable rates 17,069,000 2,415,000 4,948,000 24,432,000
- --------------------------------------------------------------------------------------------------------------------
Total $ 27,662,000 11,758,000 46,621,000 86,041,000
- --------------------------------------------------------------------------------------------------------------------
</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
22
<PAGE>
Loan Portfolio, (Continued)
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. In 1997, the
Company originated $9,843,000 in residential mortgage and home equity loans of
which $4,283,000 were variable rate loans. The Company originated $19,261,000
and $11,200,000 of such loans in 1996 and 1995, respectively of which
$10,768,000 and $7,100,000 respectively were variable rate loans. In addition,
the Bank has the ability to sell fixed and adjustable rate residential
mortgages and student loans it does originate into secondary markets to reduce
its exposure to future interest rate increases. Proceeds from the sale of
mortgages and student loans were $3,414,000, $14,439,000, and $3,043,000 for
1997, 1996, and 1995, respectively.
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>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 2,596,000 4,404,000 2,161,000 2,315,000 3,613,000
90 days and more past due 2,026,000 - - - -
Restructured loans 890,000 643,000 837,000 1,077,000 496,000
- ----------------------------------------------------------------------------------------------------------------
$ 5,512,000 5,047,000 2,998,000 3,392,000 4,109,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Prior to 1997, the Company had established a policy for disclosure purposes
that all loans past due ninety or more days by defination were non-accruing
due to interest being fully reserved in accordance with the Bank's lending
policy. In 1997, other loans, principally residential mortgages and home
equity loans, past due ninety or more days as to interest or principal having
interest which is not reserved are disclosed separately from non-accrual
loans.
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 by real
estate are generally charged off after 120 days past due. During 1996 and
through the first half of 1997, the Bank performed an in depth analysis of the
organization structure of the lending department. The Bank experienced a
$465,000 increase in non-performing loans in 1997 over 1996 and a $2,049,000
increase in 1996 over 1995. In 1997, the Bank hired a Special Assets Officer
and increased the collection department staff. This action resulted in a
leveling off of overall delinquencies in the last quarter of 1997. This action
is also expected to result in improvement in the non-performing loan levels of
the Bank through expanded effort and more expeditious resolution of problem
loans on a loan-by-loan basis.
23
<PAGE>
Risk Elements of Loan Portfolio, (Continued)
The increase in 1996 from 1995 consisted primarily of thirteen (13)
borrowers representing $1,921,000 of the increase. The Bank has specific loan
loss reserves of $185,000 allocated and non-performing loans and the remaining
problem loan balances are substantially collateralized.
The amount of interest income on non-accruing loans which was
recorded in income was $12,000 in 1997 and -0- in 1996 and 1995. 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 $149,000, $160,000 and $111,000 in 1997, 1996, and 1995,
respectively.
The amount of interest on restructured loans which was recorded in
income was $59,000 in 1997, $54,000 in 1996, and $73,000 in 1995. 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 $33,000, $48,000, and $12,000 in 1997, 1996, and 1995,
respectively.
As of December 31,1997, the Company had impaired loans with a total
recorded investment of $1,922,000, $1,603,000, and $1,722,000 on December 31,
1997, 1996, and 1995, respectively. The average recorded investment for the
twelve month periods ended December 31,1997, 1996, and 1995 was $1,914,000,
$1,145,000, and $1,528,000, respectively. As of December 31,1997, 1996, and
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 $815,000
and $185,000, respectively, $819,000 and $350,000, respectively, and $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
31,1997, 1996, and 1995 was $1,107,000, $784,000, and $1,434,000,
respectively. For purposes of applying the measurement criteria for impaired
loans the Company excludes large groups of smaller-balance homogeneous loans,
primarily consisting of residential real estate loans and consumer loans, as
well as commercial business and commercial real estate 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, 1997 and 1996,
there were no other concentrations of loans exceeding 10% of total loans. Loan
concentrations are considered to exist
24
<PAGE>
Risk Elements of Loan Portfolio, (Continued)
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 Loan Losses
The allowance for 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 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.
The provision for loan losses was $535,000 in 1997, $500,000 in 1996, and
$420,000 in 1995. The current year provision has enabled the allowance for
loan losses to increase by .3% to $2,759,00 as of December 31, 1997, while
there was a 4.1% increase in total loans, net of unearned discount and
unearned loan fees. The increase in the loan portfolio in 1997 is attributable
to residential real estate loans (including home equity loans) and commercial
real estate loans. Based on the nature of the collateral supporting these real
estate loans it is not anticipated that any potential future problems with
these credits would have a significant impact on the allowance for loan
losses, thus negating the need for additional increases to the provision in
1997 over 1996. The increased amount of loan loss provision for 1996 over 1995
was primarily to address the additional specifically allocated reserves for
the increase in non-accrual loans and for the increased level of charge-offs.
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 $80,000 in 1996 over 1995.
25
<PAGE>
Provision and Allowance for 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 Loan Losses
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Years ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $ 2,750,000 2,742,000 2,699,000 2,604,000 2,360,000
Loans charged off:
Commercial business (225,000) (203,000) (99,000) (8,000) (18,000)
Commercial real estate (34,000) (55,000) (132,000) (58,000) (423,000)
Real estate residential (149,000) (196,000) (85,000) (179,000) (123,000)
Consumer (191,000) (64,000) (124,000) (69,000) (108,000)
- --------------------------------------------------------------------------------------------------------------
Total loans charged off (599,000) (518,000) (440,000) (314,000) (672,000)
- --------------------------------------------------------------------------------------------------------------
Recoveries on charged off loans:
Commercial business 14,000 12,000 33,000 39,000 26,000
Commercial real estate - - 16,000 31,000 7,000
Real estate residential 2,000 - - - 19,000
Consumer 57,000 14,000 14,000 29,000 27,000
- --------------------------------------------------------------------------------------------------------------
Total recoveries 73,000 26,000 63,000 99,000 79,000
- --------------------------------------------------------------------------------------------------------------
Net loans charged off (526,000) (492,000) (377,000) (215,000) (593,000)
Provision for loan losses 535,000 500,000 420,000 310,000 837,000
- --------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,759,000 2,750,000 2,742,000 2,699,000 2,604,000
- --------------------------------------------------------------------------------------------------------------
Net charge-offs during the period as
a percentage of average loans
outstanding during the period 0.26% 0.24% 0.20% 0.13% 0.36%
Allowance for possible loan losses
as a percentage of loans net of
unearned discount and loan fees
at end of period 1.30% 1.35% 1.39% 1.50% 1.63%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Provision and Allowance for Loan Losses, (Continued)
The following table presents an allocation of the allowance for 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 Loan Losses
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------
% 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
business $ 439,000 6.9 666,000 8.0 161,000 8.1 386,000 8.7 190,000 8.0
Commercial
real estate 201,000 31.0 292,000 28.4 97,000 28.0 145,000 28.1 241,000 30.3
Real estate
construction - 0.4 - 0.4 - 0.3 - 0.8 - 1.0
Real estate
residential 120,000 53.7 153,000 53.7 135,000 54.4 376,000 54.9 448,000 53.7
Consumer 225,000 8.0 182,000 9.5 106,000 9.2 166,000 7.5 685,000 7.0
Unallocated 1,774,000 - 1,457,000 - 2,243,000 - 1,626,000 - 1,040,000 -
- ----------------------------------------------------------------------------------------------------------------
$ 2,759,000 100 2,750,000 100 2,742,000 100 2,699,000 100 2,604,000 100
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Allocations for commercial business and commercial real estate 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 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. Shifts in specific
allocations for 1995 resulted from continuing refinement of loan officer risk
ratings and reductions in certain delinquency percentages. This process was
further enhanced in 1996 and, in conjunction with increased delinquencies in
certain loan categories, resulted in further shifts in specific allocations.
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 securities held to maturity.
27
<PAGE>
Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>
====================================================================================================================
December 31, 1997
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
After One After Five
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
- --------------------------------------------------------------------------------------------------------------------
Securities Available for Sale
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government agencies:
Fair value $ 12,612,000 37,251,000 6,141,000 28,229,000 84,233,000
Yield 6.48 6.48 6.71 7.26 6.76
- --------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
Fair Value $ - 2,390,000 6,438,000 - 8,828,000
Yield(1) - 8.41 8.14 - 8.31
- --------------------------------------------------------------------------------------------------------------------
Other securities:
Fair value - - - 3,635,000 3,635,000
Yield - - - 4.42 4.42
- --------------------------------------------------------------------------------------------------------------------
Total Fair Value $ 12,612,000 39,641,000 12,579,000 31,864,000 96,696,000
- --------------------------------------------------------------------------------------------------------------------
Weighted average yield (2) 6.48 6.51 7.44 6.94 6.81
- --------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
- --------------------------------------------------------------------------------------------------------------------
U. S. Treasuries & other
U.S. government agencies:
Carrying Value $ 6,000,000 - - 19,083,000 25,083,000
Yield 6.03 - - 7.55 7.18
- --------------------------------------------------------------------------------------------------------------------
States & Municipal
securities:
Carrying value 2,809,000 6,321,000 3,121,000 45,000 12,296,000
Yield (1) 8.28 8.59 8.47 12.12 8.50
- --------------------------------------------------------------------------------------------------------------------
Other securities:
Carrying value - - - - -
Yield - - - - -
- --------------------------------------------------------------------------------------------------------------------
Total carrying value $ 8,809,000 6,321,000 3,121,000 19,128,000 37,379,000
- --------------------------------------------------------------------------------------------------------------------
Weighted average yield 6.75 8.59 8.47 7.56 7.61
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields are presented on a taxable equivalent basis utilizing an effective
tax rate of approximately 32% for all maturities.
(2) Yields on securities available for sale are computed using historical
amortized cost.
28
<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 securities held to maturity, as of the dates indicated:
Table 13
Securities Portfolio
Securities available for sale
- --------------------------------------------------------------------------------
December 31
1997 1996 1995
- --------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government Agencies $84,233,000 69,178,000 66,268,000
State and Municipal 8,828,000 4,755,000 101,000
Other 3,635,000 2,086,000 1,959,000
- --------------------------------------------------------------------------------
Total $96,696,000 76,019,000 68,328,000
- --------------------------------------------------------------------------------
Securities held to maturity
- --------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government Agencies $25,083,000 9,669,000 17,697,000
State & Municipal 12,296,000 11,191,000 8,126,000
Other - - 210,000
- --------------------------------------------------------------------------------
Total $37,379,000 20,860,000 26,033,000
- --------------------------------------------------------------------------------
Approximately $51 million, or 38% 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. The increase in the securities portfolio in 1997, in
both the securities available for sale and investment securities, is a result
of the investment of funds borrowed from the Federal Home Loan Bank of
Pittsburgh. The money borrowed was invested in mortgage backed securities to
take advantage of borrowing at a rate lower than the rate received in
investing in federal mortgage backed obligations for sale and investment
securities.
29
<PAGE>
Securities Portfolio, (Continued)
There has been a consistent trend of increasing the balance of
securities available for sale. In 1997 the bank increased securities held to
maturity as part of asset/liability strategy to enhance net interest income.
This trend is based on managements intention to provide flexibility within the
securities portfolio to adapt to the changing risk environment. Also, the Bank
increased its investment in state and municipal securities. The tax equivalent
interest rates available in 1996 and 1997 have made these securities an
attractive investment.
Deposits
One of the primary components of sound growth and profitability is
deposit accumulation and retention. Total deposits at December 31, 1997
decreased by .8% over total deposits at December 31, 1996, which had a 2.7%
increase over total deposits at December 31, 1995. 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
---------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand non-interest bearing $ 43,740,000 37,643,000 32,915,000
Demand interest bearing 30,679,000 23,410,000 15,392,000
Savings 52,783,000 53,175,000 54,062,000
Money Market 22,487,000 25,020,000 22,510,000
Time 143,954,000 156,698,000 163,373,000
- -------------------------------------------------------------------------------------------
Total $ 293,643,000 295,946,000 288,252,000
- -------------------------------------------------------------------------------------------
</TABLE>
Table 15
Remaining Maturities of Time Deposits
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31
-----------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 31,557,000 33,732,000 29,828,000
Over three through six months 32,327,000 36,191,000 39,355,000
Over six through twelve months 48,735,000 50,476,000 59,366,000
Over twelve months 31,335,000 36,299,000 34,824,000
- -----------------------------------------------------------------------------------------
Total $143,954,000 156,698,000 163,373,000
- -----------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Table 16
Remaining Maturities of Time Deposits of
$100,000 or Greater
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31
----------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 11,359,000 9,586,000 8,407,000
Over three through six months 10,128,000 14,662,000 8,210,000
Over six through twelve months 12,395,000 11,069,000 11,427,000
Over twelve months 5,852,000 7,257,000 6,233,000
- ---------------------------------------------------------------------------------------------------------
Total $ 39,734,000 42,574,000 34,277,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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. Although
interest rates stabilized in 1996 and the yield curve fluctuated in late 1997,
this shift to short and immediate term instruments continued.
Because of the Bank's continued transition to a regional financial
institution in Northeastern, Pennsylvania, management altered the Bank's
pricing strategy on interest bearing liabilities. Management actively managed
the pricing structure of interest bearing liabilities to reduce the impact of
local competitive pressures by managing the portfolio on a regional basis. The
result of this strategy was a decrease in the time deposits of $12,744,000 in
1997 and $6,675,000 in 1996. This had a positive impact on the Bank's interest
margin by lowering the cost of time deposits in 1996 and allowing the Bank to
maintain that lower level of cost in 1997. Offsetting the decrease in time
deposits was an increase in low and non interest bearing deposits (demand
non-interest bearing, demand interest bearing, and money market) which
increased $10,833,000 in 1997 and $15,256,000 in 1996. The result was a
decrease in the Bank's overall cost of deposits in 1996 and a slight increase
in overall cost of deposits in 1997.
Taxation
Income tax expense was $1,500,000, $1,543,000, and $1,370,000 for
1997, 1996, and 1995, respectively. The Company's effective tax rate for these
periods was 27.2%, 29.4 %, and 28.2%, respectively. The fluctuation in the
Company's tax expense and effective tax rate is primarily due to management's
strategy in investing in tax free securities.
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.
31
<PAGE>
Liquidity, (Continued)
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 less than one year was $120,423,000 at December 31, 1997. 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 12 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 June 1996, the FASB issued No. 125, Accounting for Transfers and
Servicing of Financial Assets and
32
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
Extinguishments of Liabilities. This Statement provides accounting and
reporting standards for transfer and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 was adopted by the company in 1997. The adoption of this
statement did not materially effect the Company's results of operation,
financial condition, or stockholders equity.
In February 1997, the FASB issued SFAS No. 128, Earning Per Share.
This statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. This Statement simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings per Share,
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. This Statement is effective
for financial statements issued for periods ending after December 15, 1997,
and has been adopted for the accompanying financial statements. In accordance
with the requirements of this statement all prior-period EPS data presented
herein have been restated using the new methodology.
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 will include this new reporting information in its 1998
consolidated financial statements as required.
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
33
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
Postretirement Benefits. This Statement revises employers' 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 Benefits
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
of the Corporation. This Statement is effective for fiscal years beginning
after December 15, 1997.
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. 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.
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 11.9% between 1996 and 1997 and 12.1% between 1995
and 1996. 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, 1997, of which 4% must
be Tier I capital. The Company's total risk-based capital ratio was 17.1% at
December 31, 1997 and 16.5% at December 31, 1996. The Company's Tier I
risk-based capital ratio was 15.8% at December 31, 1997 and 15.3% at December
31, 1996.
34
<PAGE>
Capital Adequacy, (Continued)
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 the maintenance of 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 8.6% at December 31,
1997 and 9.0 % at December 31, 1996.
At December 31, 1997, the Bank's total risk-based capital, Tier I
risk-based capital and Tier I leverage ratios as defined by the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) were 16.7%, 15.5%, and
8.5%, 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
-------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 1.12% 1.13% 1.10%
Return on equity (net income divided by average equity) 12.77% 12.76% 12.89%
Dividend payout ratio (cash dividends declared divided
by net income) 51.27% 51.30% 47.98%
Equity to asset ratio (average equity divided by average
total assets) 8.8 % 8.9 % 8.6 %
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Quarterly Financial Data (unaudited)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>
===================================================================================================
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
1997
Net Interest Income $ 3,375 3,304 3,468 3,515
Provision for Loan Losses 135 140 140 120
Other Operating Income 537 627 738 559
Other Operating Expense 2,586 2,471 2,577 2,446
Net Income 851 965 1,070 1,122
- ---------------------------------------------------------------------------------------------------
Earnings Per Share
Basic (1) $ 0.30 0.34 0.37 0.39
Diluted 0.29 0.33 0.36 0.38
- ---------------------------------------------------------------------------------------------------
1996
Net Interest Income $ 3,181 3,479 3,468 3,356
Provision for Loan Losses 120 115 80 185
Other Operating Income 379 423 455 755
Other Operating Expense 2,300 2,476 2,492 2,481
Net Income 813 901 948 1,042
- ---------------------------------------------------------------------------------------------------
Earnings Per Share
Basic (1) $ 0.29 0.32 0.34 0.37
Diluted 0.28 0.31 0.32 0.36
===================================================================================================
(1) Per share data restated to reflect the Company's two for one stock split effected in the form
of a stock dividend effective July 15, 1996.
</TABLE>
36
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Assets 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 14,918,000 14,573,000
Federal funds sold - 6,455,000
Securities available for sale (cost
of $95,591,000 in 1997 and
$76,292,000 in 1996)
U.S. Treasury securities 1,999,000 2,504,000
Federal agency mortgage based obligations 31,982,000 7,822,000
Other obligations of Federal agencies 50,252,000 58,852,000
Obligations of states and political subdivisions 8,828,000 4,755,000
Other securities 3,635,000 2,086,000
- ---------------------------------------------------------------------------------------------------------
Total securities available for sale 96,696,000 76,019,000
- ---------------------------------------------------------------------------------------------------------
Securities held to maturity (approximate fair value
of $37,857,000 in 1997 and
$20,960,000 in 1996):
Federal agency mortgage based obligations 19,083,000 -
Other obligations of Federal agencies 6,000,000 9,669,000
Obligations of states and political subdivisions 12,296,000 11,191,000
- ---------------------------------------------------------------------------------------------------------
Total securities held to maturity 37,379,000 20,860,000
- ---------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 212,342,000 204,048,000
Allowance for loan losses (2,759,000) (2,750,000)
- ---------------------------------------------------------------------------------------------------------
Net loans 209,583,000 201,298,000
- ---------------------------------------------------------------------------------------------------------
Accrued interest receivable 3,168,000 2,592,000
Premises and equipment, net 5,334,000 5,076,000
Other real estate owned 1,045,000 776,000
Other assets 1,373,000 1,896,000
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $913,000 in 1997
and $875,000 in 1996) 630,000 668,000
- ---------------------------------------------------------------------------------------------------------
Total assets $ 370,126,000 330,213,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets (Continued)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 43,740,000 37,643,000
NOW and Super NOW 30,679,000 23,410,000
Savings 52,783,000 53,175,000
Money Market 22,487,000 25,020,000
Time 143,954,000 156,698,000
- -------------------------------------------------------------------------------------------------------------------
Total deposits 293,643,000 295,946,000
- -------------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,103,000 2,201,000
Dividends payable 544,000 481,000
Federal funds purchased 2,350,000 -
Other borrowed money 37,073,000 275,000
Other liabilities 1,015,000 1,047,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 336,728,000 299,950,000
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share, 25,000,000 shares authorized;
2,862,874 shares in 1997; 2,828,912
in 1996 issued and outstanding 2,863,000 2,829,000
Additional paid-in capital 11,472,000 11,233,000
Undivided profits 18,334,000 16,381,000
Net unrealized gain/loss on securities available for sale, net of taxes 729,000 (180,000)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 33,398,000 30,263,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 370,126,000 330,213,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP
Condolidated Statements Of Income
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 18,101,000 18,345,000 17,087,000
Interest on Federal funds sold 320,000 274,000 363,000
Interest on investments:
Taxable 7,063,000 5,144,000 5,543,000
Non-taxable 1,023,000 595,000 669,000
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 26,507,000 24,358,000 23,662,000
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 11,337,000 10,799,000 11,115,000
Interest on Federal funds purchased 10,000 1,000 2,000
Interest on other borrowed money 1,498,000 74,000 110,000
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,845,000 10,874,000 11,227,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 13,662,000 13,484,000 12,435,000
Provision for loan loss 535,000 500,000 420,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,127,000 12,984,000 12,015,000
- ------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 1,330,000 1,168,000 849,000
Gains on sales of securities available for sale 154,000 - 483,000
Gains on calls of securities held to maturity 3,000 - 8,000
Losses on sales of securities available for sale - - (26,000)
ATM fees 402,000 131,000 71,000
Other income 572,000 713,000 528,000
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 2,461,000 2,012,000 1,913,000
- ------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 5,040,000 5,061,000 4,385,000
Net occupancy expense of bank premises 1,026,000 857,000 761,000
Furniture and equipment expenses 685,000 622,000 565,000
Data Processing expense 242,000 241,000 332,000
FDIC Insurance 37,000 1,000 319,000
Other expenses 3,050,000 2,967,000 2,713,000
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 10,080,000 9,749,000 9,075,000
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle 5,508,000 5,247,000 4,853,000
Income tax expense 1,500,000 1,543,000 1,370,000
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,008,000 3,704,000 3,483,000
- ------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data:
Basic $ 1.41 1.32 1.25
Diluted 1.36 1.26 1.20
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Condolidated Statements Of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net
Unrealized
Gain/Loss on
Additional Securities Total
Common Paid-in Undivided Available Stockholders
Stock Capital Profits for Sale Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 2,774,000 11,193,000 12,806,000 (1,795,000) 24,978,000
Net income - - 3,483,000 - 3,483,000
Cash dividends declared -$0.60 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 12,000 (12,000) - - -
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 2,786,000 11,181,000 14,618,000 (93,000) 28,492,000
Net income - - 3,704,000 - 3,704,000
Cash dividends - $0.66 per share - - (1,900,000) - (1,900,000)
Change in net unrealized loss on
available for sale, net of taxes securities - - - (87,000) (87,000)
Exercise of stock options 43,000 52,000 (41,000) - 54,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,829,000 11,233,000 16,381,000 (180,000) 30,263,000
Net income - - 4,008,000 - 4,008,000
Cash dividends - $.72 per share - - (2,055,000) - (2,055,000)
Change in net unrealized gain on
available for sale, net of taxes
securities - - - 909,000 909,000
Exercise of stock options 34,000 239,000 - - 273,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 2,863,000 11,472,000 18,334,000 729,000 33,398,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP
Condolidated Statements Of Cash Flows
Years ended December 31, 1779, 1996 and 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,008,000 3,704,000 3,483,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sales of securities available
for sale (154,000) - (457,000)
Net gain on calls on investments securities (3,000) - (8,000)
Accretion of discount on securities
and money market investments (63,000) (94,000) (87,000)
Amortization of premium on investment
securities 91,000 97,000 159,000
Provision for loan losses 535,000 500,000 420,000
Increase (decrease) in deferred loan fees (6,000) (116,000) 70,000
Increase in deferred tax benefit (2,000) (30,000) (143,000)
Decrease (increase) in accrued interest receivable (576,000) 41,000 390,000
Depreciation and amortization of premises
and equipment 844,000 770,000 787,000
Gain on sales of premises and equipment (5,000) (6,000) (2,000)
Loss on sale of other real estate 13,000 177,000 100,000
Proceeds from the sale of mortgage
and PHEAA loans 3,414,000 14,439,000 3,043,000
Net increase in mortgage & PHEAA
loans held for sale, excluding provision
for loans losses and change in deferred loan fees (3,160,000) (2,584,000) (3,343,000)
Gain on sale of mortgages and PHEAA loans (58,000) (249,000) (49,000)
(Decrease) increase in other assets 57,000 (322,000) 78,000
Amortization of goodwill 38,000 39,000 38,000
Increase (decrease) in accrued interest payable (98,000) 99,000 386,000
Decrease in other liabilities (32,000) (61,000) (48,000)
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
provided by operating activities 835,000 12,700,000 1,334,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,843,000 16,404,000 4,817,000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 6,638,000 6,745,000 28,918,000
Proceeds from maturities and calls of securities
available for sale 38,459,000 35,908,000 7,799,000
Proceeds from sales of securities available for sale 17,799,000 6,327,000 29,497,000
Purchases of securities held to maturity (44,593,000) (4,445,000) (9,399,000)
Purchase of securities available for sale (53,992,000) (47,188,000) (44,823,000)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (9,764,000) (18,923,000) (17,960,000)
Acquisition of premises and equipment (1,132,000) (1,071,000) (2,142,000)
Proceeds from sales of premises and equipment 35,000 14,000 36,000
Proceeds from sale of other real estate 471,000 169,000 230,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,079,000) (22,464,000) (7,844,000)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP
Condolidated Statements Of Cash Flows (Continued)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease)increase in demand, NOW and Super
NOW, savings, money market and time deposits. $ (2,303,000) 7,694,000 17,534,000
Dividends paid (1,992,000) (1,837,000) (1,669,000)
Other borrowed money 36,798,000 - (3,150,000)
Federal funds purchased 2,350,000 - -
Exercise of stock options 273,000 54,000 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,126,000 5,911,000 12,715,000
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,110,000) (149,000) 9,688,000
Cash and cash equivalents at beginning of year 21,028,000 21,177,000 11,489,000
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,918,000 21,028,000 21,177,000
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 12,943,000 10,775,000 10,841,000
Cash payments for income taxes 1,491,000 1,543,000 1,355,000
Transfer of assets from loans
to other real estate 753,000 190,000 438,000
Change in net unrealized loss(gain) on securities
available for sale (1,378,000) 132,000 2,578,000
Tax effect on change in unrealized loss
on securities available for sale (469,000) 45,000 876,000
Reclassification of investment
securities to available for sale - - 11,825,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<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, Wayne, and Wyoming
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 (10 offices), traditional branch banking (8
offices), and personal banking (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.
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.
43
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(1) Continued
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. 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, 1997, was
$3,041,000, 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, 1997,
the amount of such required balances was $50,000.
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
Securities 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.
Gains and losses on sales of securities 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. 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".
44
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(1) Continued
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 portfolio. 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 to the held to maturity category 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. Commercial
loans over ninety days past due 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. 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 Loan Losses
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to maintain the allowance for
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.
45
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(1) Continued
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 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 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.
Impaired loans are 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. For purposes of applying the measurement criteria
for impaired loans, 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
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.
46
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(1) Continued
Other Real Estate Owned
Other real estate owned consists of real estate acquired through or in
lieu of foreclosure and is stated at the lower of cost or estimated
fair value, less estimated disposal costs. Allowances for declines in
value subsequent to acquisition were not necessary at both December 31,
1997 and 1996. 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
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 Company and the Bank file a consolidated tax
return.
47
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(2) Securities Available for Sale
Securities available for sale at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------
Cost Unrealized Carrying Value
- ----------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury securities $ 1,998,000 1,000 - 1,999,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 2,707,000 37,000 - 2,744,000
Federal Home Loan Mortgage Corporation 4,831,000 - (22,000) 4,809,000
Government National Mortgage Association 24,112,000 317,000 - 24,429,000
Other obligations of Federal agencies 49,835,000 468,000 (51,000) 50,252,000
State and municipals 8,473,000 355,000 - 8,828,000
Other securities 3,635,000 - - 3,635,000
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 95,591,000 1,178,000 (73,000) 96,696,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
1996
-------------------------------------------------------
Cost Unrealized Carrying Value
- ----------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ----------------------------------------------------------------------------------------------------------------
US Treasury securities $ 2,501,000 3,000 - 2,504,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 1,696,000 9,000 - 1,705,000
Federal Home Loan Mortgage Corporation 5,020,000 - (69,000) 4,951,000
Government National Mortgage Association 1,164,000 2,000 - 1,166,000
Other obligations of Federal agencies 59,194,000 - (342,000) 58,852,000
State and municipals 4,631,000 124,000 - 4,755,000
Other securities 2,086,000 - - 2,086,000
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 76,292,000 138,000 (411,000) 76,019,000
- ----------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities available for sale at December 31, 1997 are
due as follows:
- -------------------------------------------------------------------------------------------------
December 31, 1997
----------------------------------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------------------
Securities Available for Sale
- -------------------------------------------------------------------------------------------------
Due in one year or less $ 12,612,000 12,612,000
Due after one year through five years 39,279,000 39,641,000
Due after five years through ten years 12,136,000 12,579,000
Due after ten years 31,564,000 31,864,000
- -------------------------------------------------------------------------------------------------
Total securities available for sale $ 95,591,000 96,696,000
- -------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(3) Securities Held to Maturity
Securities held to maturity at December 31, 1997 and 1996 are
summarized as follows:
- --------------------------------------------------------------------------------------------------------------
1997
--------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agencies mortgage backed $ 19,083,000 211,000 - 19,294,000
Obligations of Federal agencies 6,000,000 1,000 (24,000) 5,977,000
Obligations of state and politcal subdivisions 12,296,000 304,000 (14,000) 12,586,000
- --------------------------------------------------------------------------------------------------------------
Securities held for investment $ 37,379,000 516,000 (38,000) 37,857,000
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
1996
--------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- --------------------------------------------------------------------------------------------------------------
Obligations of Federal agencies 9,669,000 - (100,000) 9,569,000
Obligations of states and political subdivisions 11,191,000 200,000 - 11,391,000
- --------------------------------------------------------------------------------------------------------------
Securities held for investment $ 20,860,000 200,000 (100,000) 20,960,000
- --------------------------------------------------------------------------------------------------------------
The amortized cost and market value of investment securities
at December 31, 1997 are due as follows:
- --------------------------------------------------------------------------------------------------------------
Investment Securities
- --------------------------------------------------------------------------------------------------------------
Due in one year or less $ 8,809,000 8,799,000
Due after one year through five years 6,321,000 6,427,000
Due after five years through ten years 3,121,000 3,291,000
Due after ten years 19,128,000 19,340,000
- --------------------------------------------------------------------------------------------------------------
Total investment securities $ 37,379,000 37,857,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, securities with an aggregate book value of
$29,654,000 and $22,480,000 respectively, were pledged to secure public
deposits.
There were no sales of securities held to maturity during the periods presented
herein.
49
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(4) Loans
Loans at December 31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial business $ 15,534,000 17,256,000
Commercial real estate 69,505,000 61,254,000
Real estate construction 1,002,000 947,000
Real estate residential (mortgage and installment) 120,604,000 115,791,000
Consumer 17,865,000 20,424,000
- --------------------------------------------------------------------------------------------------------
Total loans, gross 224,510,000 215,672,000
Unearned discount (11,199,000) (10,649,000)
Deferred loan fees (969,000) (975,000)
- --------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount
and deferred loan fees $ 212,342,000 204,048,000
- --------------------------------------------------------------------------------------------------------
</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, 1997 and 1996. 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 $2,596,000 as of December 31, 1997 and $4,404,000 as of
December 31, 1996. 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
$149,000, $160,000, and $111,000 for the years ended December 31,
1997, 1996, and 1995 respectively. The amount of interest income on
non-accruing loans which were recorded in income was $12,000 in 1997,
and -0- for 1996 and 1995, respectively. The total amount of
restructured loans were $890,000, $643,000, and $837,000 as of
December 31,1997, 1996, and 1995, respectively. The amount of
interest on restructured loans which was recorded in income was
$59,000, $54,000, and $73,000 during 1997, 1996, and 1995,
respectively. If the restructured loans had been current in
accordance with their original terms and had been outstanding
throughout the period, interest income would have increased by
$33,000, $48,000, and $12,000 for the years ended December 31,1997,
1996, and 1995.
50
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(4) Continued
As of December 31,1997, the Company had impaired loans with a total
recorded investment of $1,922,000 and $1,603,000 on December 31,1996.
The average recorded investment for the twelve month period ended
December 31,1997 was $1,914,000 and $1,145,000 on December 31,1996. As
of December 31,1997, the amount of recorded investment in impaired
loans for which there is a related allowance for credit losses and
amount of the allowance is $815,000 and $185,000, respectively and
$819,000 and $350,000 for the prior year. The amount of the recorded
investment in impaired loans for which there was no related allowance
for credit losses at December 31,1997 is $1,107,000 and $784,000 for
December 31,1996. 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 $2,715,000 and $2,300,000 at December 31, 1997 and 1996,
respectively. These loans were made in the ordinary course of business
at substantially the same terms and conditions as those with other
borrowers.
<TABLE>
<CAPTION>
An analysis of the activity of these loans follows:
- ----------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------
<S> <C>
Balance January 1 $ 2,300,000
New loans 729,000
Repayments 314,000
- ----------------------------------------------------------------------------------------------
Balance December 31 $ 2,715,000
- ----------------------------------------------------------------------------------------------
</TABLE>
In 1997, 1996 and 1995 the Company sold newly originated mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation. In
1996, the Company also sold both fixed rate and adjustable mortgage loans
to a financial intermediary. The proceeds from the sale of these loans
were $992,000, $12,380,000, and $1,255,000 respectively. The Company
recognized a gain of $20,000 in 1997 and a gain of $220,000 and $18,000 in
1996 and 1995, respectively, from these transactions. The proceeds from
the sale of PHEAA loans by the Company were $2,422,000, $2,059,000 and
$1,788,000 in 1997, 1996, and 1995, resulting in gains of $38,000,
$29,000, and $31,000, respectively. Loans serviced for the benefit of
others approximated $19,299,000 and $20,632,000 as of December 31,1997 and
1996, respectively.
51
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(5) Allowance for Possible Loan Losses
Activity in the allowance for loan losses for the years ended December
31, 1997, 1996 and 1995 is summarized as follows:
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,750,000 2,742,000 2,699,000
Additions and (deductions):
Loans charged-off (599,000) (518,000) (440,000)
Recoveries 73,000 26,000 63,000
- ----------------------------------------------------------------------------------------------------------
Net loans charged-off (526,000) (492,000) (377,000)
- ----------------------------------------------------------------------------------------------------------
Provision for loan losses 535,000 500,000 420,000
- ----------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,759,000 2,750,000 2,742,000
- ----------------------------------------------------------------------------------------------------------
(6) Premises and Equipment
Premises and equipment are comprised of the following at December 31,
1997 and 1996:
- -----------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------
Premises owned $ 4,675,000 4,378,000
Furniture and equipment 7,331,000 6,859,000
Leasehold improvements 1,336,000 1,056,000
- -----------------------------------------------------------------------------------------------------------
13,342,000 12,293,000
Accumulated depreciation and amortization (8,008,000) (7,217,000)
- -----------------------------------------------------------------------------------------------------------
$ 5,334,000 5,076,000
- -----------------------------------------------------------------------------------------------------------
.
</TABLE>
Occupancy expenses are reduced by rental income from premises owned of
$31,000 in 1997, $73,000 in 1996 and $27,000 in 1995.
52
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(7) 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, 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Maturity 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Less than one year $ 112,619,000 120,399,000
Greater than one year 31,335,000 36,299,000
- ---------------------------------------------------------------------------
$ 143,954,000 156,698,000
- ---------------------------------------------------------------------------
</TABLE>
The aggregate amount of certificates of deposit, each $100,000 or more,
was $39,734,000 and $42,574,000 at December 31, 1997 and 1996,
respectively. Interest expense associated with certificates of deposit,
each $100,000 or more, was approximately $2,782,000, $1,951,000, and
$1,863,000, respectively, for the years ended December 31, 1997, 1996
and 1995.
(8) Other Borrowed Money
The Bank maintains a collateralized maximum borrowing capacity of
$138,292,000 with the Federal Home Loan Bank of Pittsburgh (FHLB).
Inclusive in this figure is an available line of credit of $11,251,000.
The line is collateralized by eligible securities. At December 31, 1997
and 1996 there were no borrowing outstanding against the Bank's line of
credit. The balance of other borrowed money as of December 31, 1997
consists of $36,798,000 in advances from the FHLB and a $275,000 note
payable relating to the purchase of the main office. The year to date
average for the Bank's other borrowed money is $23,598,000. Two FHLB
advances of $10,000,000 each were issued on January 21, 1997 and will
mature on January 22, 2002 with a fixed rate of 6.44% and 6.45%,
respectively. The Bank's third FHLB advance of $20,000,000 was made on
September 11, 1997. This was a five year/two year convertible program
with a fixed rate of 5.98% for two years.
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 5.98% to 6.45% at December 31, 1997 are due as
follows :
Weighted
Average
Amount Rate
--------------- ----------------
1998 $ 3,397,000 6.45%
1999 3,941,000 6.45
2000 4,203,000 6.45
2001 4,482,000 6.45
2002 20,775,000 6.00
---------------
$ 36,798,000
===============
53
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(9) Commitments, Contingent Liabilities, Off Balance Sheet Risk
In the ordinary course of business, the Company, Bank and its
subsidiaries are subject to legal actions which involve claims for
monetary relief. Based upon information presently available to
management and its counsel, it is management's opinion that any legal
and financial responsibility arising from such claims will not have a
material adverse effect on the Company's results of operations.
The Company leases four branch offices under year-to-year operating
leases. The Company is currently obligated for six non-cancelable,
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 $304,000, $233,000 and
$191,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following is a schedule by years for future minimum rental payments
required for operating leases as of December 31, 1997:
1998 $ 287,000
1999 279,000
2000 226,000
2001 136,000
2002 74,000
2003 thereafter 214,000
----------------
Total minimum
payments required $ 1,216,000
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 significant losses as a
result of these commitments. 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 evaluates 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.
54
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(9) Continued
The Company had outstanding standby letters of credit in the amount of
approximately $1,929,000 and $1,419,000 and unfunded loan and line of
credit commitments in the amount of approximately $14,374,000 and
$12,815,000 at December 31, 1997 and 1996, 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 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.
(10) Stockholders' Equity and Per Share Data
In the second quarter of 1996 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 July 15, 1996. The shareholders in June of 1996
approved a decrease in the par value of authorized shares of common
stock from 25,000,000 ($10 par value) to 25,000,000 ($1 par value).
These financial statements have been adjusted to reflect both the stock
split and the change in par value.
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.
55
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(10) Continued
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 4,008 3,704 3,483
=========== ============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,850 2,812 2,783
Effect of dilutive securites:
Employee stock options 89 120 123
----------- ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,939 2,932 2,906
=========== ============ ============
Basic earnings per share $ 1.41 1.32 1.25
=========== ============ ============
Diluted earnings per share $ 1.36 1.26 1.20
=========== ============ ============
</TABLE>
The weighted average number of basic shares outstanding in 1997, 1996
and 1995 were 2,849,723, 2,812,269, and 2,783,484 shares, respectively. The
weighted average number of diluted shares outstanding in 1997, 1996, and 1995
were 2,939,090, 2,932,161 and 2,906,382 shares, respectively. The Company
currently has one million shares of authorized, but unissued preferred stock.
(11) Employee Stock Option Plan
In 1990, the Company's Board of Directors adopted an employee stock
option plan (the Plan) which reserved 300,000 shares of authorized but
unissued stock, as adjusted for the stock splits, effective February 7,
1994 and a stock split July 15, 1996. 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.
56
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(11) Continued
Changes in total options outstanding during 1997, 1996, and 1995, were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Weighted
Number of Exercice Price Average
Options Per Option (1) Exercice Price
- -------------------------------------------------------------------------------------------
Balance at December 31, 1994 269,258 $8.00 - $13.00 9.57
ISOs Exercised (20,980) $8.00 8.00
- -------------------------------------------------------------------------------------------
Balance at December 31, 1995 248,278 $8.00 - $13.00 9.70
ISOs Exercised (65,553) $8.00 8.00
- -------------------------------------------------------------------------------------------
Balance at December 31, 1996 182,725 $8.00 - $13.00 10.31
ISOs Exercised (37,597) $8.00 - $13.00 9.68
- -------------------------------------------------------------------------------------------
Balance at December 31, 1997 145,128 $8.00 - $$13.00 10.48
- -------------------------------------------------------------------------------------------
</TABLE>
The amounts have been restated to reflect the Company's two for one split
effected in the form of a stock dividend, effective July 15, 1996.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Exercisable
--------------------------------------------------------
Exercise Average
Price Range Shares Average Life 1 Exercise Price
- ---------------------------------------------------------------------------------------------------
$ 8.00 15,250 3.50 8.00
8.00 9,878 4.58 8.00
9.00 60,000 5.33 9.00
$ 13.00 60,000 6.17 13.00
- ---------------------------------------------------------------------------------------------------
Total 145,128 4.90 10.48
- ---------------------------------------------------------------------------------------------------
</TABLE>
1 Average contractual life remaining in years.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation", became effective January 1,
1996. SFAS No. 123 provides an alternative method of accounting for
stock-based compensation arrangements. This method is based on fair
value of the stock-based compensation determined by an option pricing
model utilizing various assumptions regarding the underlying attributes
of the options and stock, rather than the existing method of accounting
for stock-based compensation which is provided in Accounting Principles
Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to
Employees". The Financial Accounting Standards Board encourages
entities to adopt the fair value based method, but does not require the
adoption of this method.
The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS No. 123, and has instead continued to
apply APB No. 25 and related interpretations in accounting for stock
based compensation and provide the required proforma disclosure of SFAS
No. 123. The Company did not grant any options in 1997, 1996 or 1995.
Therefore had compensation cost for the Company's stock options been
determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been unaffected.
57
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(12) 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, 1997,
dividends in excess of those already declared from the Bank to the
Company are limited to $5,737,000.
The dividends declared to the Company by the Bank were $2,055,000 in
1997.
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, 1997.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory- and possibly
additional discretionary- actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off- balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
58
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(12) Continued
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
====================================================================================================================================
To Be Well Capitalized
Actual For Capital Adequacy Under Prompt Corrective
Purposes Action
Provisions
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) $34,150,000 16.70% $16,360,800* 8.00%* $20,451,000* 10.00%*
Tier I Capital
(to Risk Weighted Assets) $31,591,000 15.45% $ 8,180,400* 4.00%* $12,270,600* 6.00%*
Tier I Capital
(to Average Assets) $31,591,000 8.45% $14,946,880* 4.00%* $18,683,600* 5.00%*
As of December 31, 1996
Total Capital
(to Risk Weighted Assets) $32,012,000 16.28% $15,730,713* 8.00%* $19,663,391* 10.00%*
Tier I Capital
(to Risk Weighted Assets) $29,550,000 15.03% $ 7,864,271* 4.00%* $11,796,407* 6.00%*
Tier I Capital
(to Average Assets) $29,550,000 8.89% $13,295,838* 4.00%* $16,619,798* 5.00%*
- -----------------
* Greater than or equal to
</TABLE>
(13) Income Taxes
The components of federal income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,502,000 1,573,000 1,513,000
Deferred (2,000) (30,000) (143,000)
- --------------------------------------------------------------------------------------------
$ 1,500,000 1,543,000 1,370,000
- --------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -------------------------------------------------------------------------------
(13) 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at 34% rate $ 1,873,000 1,784,000 1,650,000
Interest from tax exempt loans
and investments (361,000) (251,000) (289,000)
Other, net (12,000) 10,000 9,000
- ---------------------------------------------------------------------------------------
Income tax expense $ 1,500,000 1,543,000 1,370,000
- ---------------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 in accordance with SFAS No. 109 are
presented below:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Executive retirement plan $ 243,000 228,000
Allowance for loan losses 662,000 659,000
Deferred loan fees 266,000 257,000
Deferred directors fees 116,000 115,000
Unrealized loss on securities available for sale - 93,000
Non-accrual interest 64,000 56,000
Others, net 39,000 49,000
- ------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,390,000 1,457,000
Deferred tax liabilities:
Accumulated amortization of discount
on investment securities (194,000) (213,000)
Depreciation (236,000) (192,000)
Unrealized gain on securities available for sale (376,000) -
- ------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (806,000) (405,000)
- ------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 584,000 1,052,000
- ------------------------------------------------------------------------------------------------------
</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,
1997 and 1996. There can be no assurance, however, that the Company will
generate any earnings or any specific level of continued earnings in the
future.
60
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(13) Continued
At December 31, 1997 and 1996, net deferred tax benefits of $584,000
and $1,052,000 respectively, are included in other assets, and income
taxes currently payable of $15,000 and $6,000 respectively, are
included in other liabilities.
(14) 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 $54,000, $-0- and $5,000 were accrued in 1997, 1996 and
1995, respectively.
The ESOP held 148,770 and 156,168 shares of the Bank's common stock at
December 31, 1997 and 1996, 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 $115,000 in
1997, $105,000 in 1996, and $107,000 in 1995.
The Company maintains employment contracts with its President and Sr.
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 $44,000, $84,000
and $95,000 in 1997, 1996 and 1995, 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.
61
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- ------------------------------------------------------------------------------
(14) Continued
A total of $32,000 was disbursed to these directors in each year 1997,
1996 and 1995. In 1997, 1996 and 1995, $36,000, was remitted for the
payment of insurance premiums. Assets held by the insurance company
which have reduced the company's accrual were $452,000 and $404,000 at
December 31, 1997 and 1996, respectively. Expense under this plan was
$24,000, $6,000, and $64,000 in 1997, 1996 and 1995, respectively.
(15) 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.
62
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- ------------------------------------------------------------------------------
(15) Continued
Securities Available for Sale and Securities Held to Maturity
The fair values of securities available for sale and securities held to
maturity 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.
Federal Funds Purchased
For federal funds purchased, the carrying amount is a reasonable
estimate of fair value.
Other Borrowed Money
The estimated fair value of other borrowed money is the carrying value
due to the interest and term of other borrowed money being commensurate
with the current market rate.
63
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- ------------------------------------------------------------------------------
(15) Continued
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.
The following represents the carrying value and estimated fair value:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 14,918,000 14,918,000 14,573,000 14,573,000
Federal funds sold - - 6,455,000 6,455,000
Securities available for sale 96,696,000 96,696,000 76,019,000 76,019,000
Securities held to maturity 37,379,000 37,857,000 20,860,000 20,960,000
Loans 209,583,000 213,705,000 201,298,000 204,323,000
Financial liabilities:
Deposits $ 293,643,000 293,686,000 295,946,000 295,719,000
Federal funds purchased 2,350,000 2,350,000 - -
Other borrowed money 37,073,000 37,073,000 275,000 275,000
- -----------------------------------------------------------------------------------------------------
The contract amount and estimated fair value for commitments to extend
credit and standby letters of credit are as follows:
- ------------------------------------------------------------------------------------------------------
At December 31, 1997 At December 31, 1996
-------------------------------- --------------------------------
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $ 14,374,000 216,000 12,815,000 192,000
Standby letters of credit 1,929,000 39,000 1,419,000 28,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(16) Pioneer American Holding Company Corp. (Parent Company Only)
Condensed 1997, 1996 and 1995 financial information is as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------
Assets 1997 1996
- --------------------------------------------------------------------------------------
Cash $ 396,000 172,000
Short term investment - -
Investment in subsidiary 32,950,000 30,039,000
Receivable from subsidiary 596,000 533,000
- --------------------------------------------------------------------------------------
Total assets $33,942,000 30,744,000
- --------------------------------------------------------------------------------------
Liabilities and Stockholders Equity
Dividends payable 544,000 481,000
Stockholders' equity 33,398,000 30,263,000
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $33,942,000 30,744,000
- --------------------------------------------------------------------------------------
Condensed Statements of Income
- --------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
Expenses:
Administrative and other $ 50,000 69,000 49,000
- --------------------------------------------------------------------------------------
Loss before earnings of subsidiary (50,000) (69,000) (49,000)
Earnings of subsidiary:
Received as dividends 2,055,000 1,900,000 1,671,000
Undistributed 2,003,000 1,873,000 1,861,000
- --------------------------------------------------------------------------------------
Net income $4,008,000 3,704,000 3,483,000
- --------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
(16) Pioneer American Holding Company Corp. (Parent Company Only),
(Continued)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,008,000 3,704,000 3,483,000
Adjustments to reconcile net income to net
cash from operating activities:
Undistributed earnings of subsidiary (2,003,000) (1,873,000) (1,861,000)
Other (62,000) (63,000) (3,000)
- --------------------------------------------------------------------------------------
Net cash from operating activities 1,943,000 1,768,000 1,619,000
- --------------------------------------------------------------------------------------
Cash flows used in financing activities:
Dividend paid (1,992,000) (1,837,000) (1,669,000)
Exercise of stock options 273,000 54,000 -
- --------------------------------------------------------------------------------------
Net cash used in financing activities (1,719,000) (1,783,000) (1,669,000)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash 224,000 (15,000) (50,000)
Cash at beginning of year 172,000 187,000 237,000
- --------------------------------------------------------------------------------------
Cash at end of year $ 396,000 172,000 187,000
- --------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 /S/ GENE E. GOLDENZIEL, ESQ.
be signed on its behalf by the undersigned, thereunto duly authorized. -------------------------------------
GENE E. GOLDENZIEL, ESQ.
PIONEER AMERICAN HOLDING COMPANY CORP. Director
Date: March 20, 1998
-------------- /S/ JOHN S. GUZEY
------------------------------------
JOHN S. GUZEY
Director
By /S/ Donald A. Hoyle, Jr.
- ------------------------------------- /S/ DONALD A. HOYLE, JR.
Donald A. Hoyle, Jr. ------------------------------------
President & Chief Executive Officer DONALD A. HOYLE, JR.
Director
By /S/ John W. Reuther /S/ WILLIAM K. NASSER
- ------------------------------------- ------------------------------------
John W. Reuther WILLIAM K. NASSER
Sr. Executive Vice President & Chief Director
Financial Officer
/S/ RICHARD CHOJNOWSKI
-------------------------------------
RICHARD CHOJNOWSKI
By /S/ Richard J. Lapera Director
- -------------------------------------
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
</TABLE>
67
<PAGE>
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia, PA 19103-7212
Independent Auditor's Report
To 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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997 in conformity with the generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 29 1998
68
<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 1997, 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.
69
<PAGE>
Directors and Executive Officers
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference
70
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,918
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,696
<INVESTMENTS-CARRYING> 37,379
<INVESTMENTS-MARKET> 37,857
<LOANS> 212,342
<ALLOWANCE> 2,759
<TOTAL-ASSETS> 370,126
<DEPOSITS> 293,643
<SHORT-TERM> 2,350
<LIABILITIES-OTHER> 3,662
<LONG-TERM> 37,073
0
0
<COMMON> 2,863
<OTHER-SE> 30,535
<TOTAL-LIABILITIES-AND-EQUITY> 370,126
<INTEREST-LOAN> 18,101
<INTEREST-INVEST> 8,086
<INTEREST-OTHER> 320
<INTEREST-TOTAL> 26,507
<INTEREST-DEPOSIT> 11,337
<INTEREST-EXPENSE> 12,845
<INTEREST-INCOME-NET> 13,662
<LOAN-LOSSES> 535
<SECURITIES-GAINS> 157
<EXPENSE-OTHER> 10,080
<INCOME-PRETAX> 5,508
<INCOME-PRE-EXTRAORDINARY> 4,008
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,008
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.78
<LOANS-NON> 2,596
<LOANS-PAST> 2,026
<LOANS-TROUBLED> 890
<LOANS-PROBLEM> 143
<ALLOWANCE-OPEN> 2,750
<CHARGE-OFFS> 599
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 2,759
<ALLOWANCE-DOMESTIC> 985
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,774
</TABLE>
