FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _________________________
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission file Number 0-14506
Pioneer American Holding Company Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2319931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 North Main Street, Carbondale, PA 18407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 282-2662
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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding as of March 31, 1999 2,920,963 shares
----------------
<PAGE>
INDEX
PIONEER AMERICAN HOLDING COMPANY, CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--March 31, 1999
and December 31, 1998.----------------------------Page 2-3
Consolidated statements of operations--Three
months ended March 31, 1999 and 1998-------------Page 4
Consolidated statements of cash flows--Three months
ended March 31, 1999 and 1998.--------------------Pages 5-6
Notes to consolidated financial statements--
March 31, 1999.-----------------------------------Pages 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.--------------------------Pages 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings-----------------------------------Page 15
Item 2. Changes in Securities-------------------------------Page 15
Item 3. Defaults upon Senior Securities---------------------Page 15
Item 4. Submission of Matters to a Vote of Security Holders-Page 15
Item 5. Other Information-----------------------------------Page 15
Item 6. Exhibits and Reports on form 8-K--------------------Page 15
SIGNATURES---------------------------------------------------Page 16
-1-
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
March 31, December 31,
Assets 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 13,099 $ 13,977
Federal funds sold 0 7,600
Securities available for sale (cost of securities of $122,466 on March 31, 1999
and $100,057 on December 31, 1998)
Federal agency mortgage backed obligations 58,516 34,127
Other obligations of Federal agencies 43,729 47,537
Obligations of states and political subdivisions 13,810 13,289
Other securities 6,126 6,126
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale 122,181 101,079
- ----------------------------------------------------------------------------------------------------------------
Securities held to maturity(approximate market value of $43,210 on March 31,
1999 and $46,729 on December 31, 1998)
Federal agency mortgage backed obligations 32,717 35,838
Obligations of states and political subdivisions 10,085 10,340
- ----------------------------------------------------------------------------------------------------------------
Total securities held to maturity 42,802 46,178
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 237,612 225,735
Allowance for loan losses (2,864) (2,909)
- ----------------------------------------------------------------------------------------------------------------
Net loans 234,748 222,826
- ----------------------------------------------------------------------------------------------------------------
Accrued interest receivable 2,892 2,547
Premises and equipment 6,916 7,067
Other real estate owned 1,248 1,449
Other assets 2,401 1,843
Cost in excess of fair value of net assets acquired
(net of accumulated
amortization of $962 March 31,
1999 and $952 December 31, 1998) 581 591
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 426,868 $ 405,157
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Balance Sheets, Continued (Unaudited)
(Dollars in thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
March 31, December 31,
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 42,821 $ 42,931
NOW and Super NOW 35,806 38,462
Savings 59,262 56,714
Money Market 20,458 22,481
Time 147,060 146,772
- ------------------------------------------------------------------------------------------------------------
Total deposits 305,407 307,360
- ------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,299 2,095
Dividends payable 584 581
Other borrowed money 82,390 58,357
Other liabilities 1,284 1,298
- ------------------------------------------------------------------------------------------------------------
Total liabilities 391,964 369,691
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share, 25,000,000
shares authorized;2,926,067 shares on March 31, 1999
and 2,904,309 on December 31, 1998 issued 2,926 2,904
Additional paid-in capital 11,859 11,768
Retained earnings 20,419 20,120
Accumulated other comprehensive income (188) 674
Less: Treasury stock at cost (5,104 shares)
on March 31, 1999 (112) 0
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,904 35,466
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 426,868 $ 405,157
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statement Operations (Unaudited)
Three Months Ended
(Dollars in thousands)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 4,812 4,684
Interest on Federal funds sold 82 9
Interest on investments:
Taxable 1,974 2,049
Non-taxable 317 282
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 7,185 7,024
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,729 2,631
Interest on Federal funds purchased 0 22
Interest on other borrowed money 968 820
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,697 3,473
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,488 3,551
Provision for loan losses 75 150
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,413 3,401
- ---------------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 376 302
Gain on sale of available for sale securities 0 296
ATM fees 141 104
Other income 126 151
- ---------------------------------------------------------------------------------------------------------------------------------
Total other operating income 643 853
- ---------------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,331 1,352
Net occupancy expense of bank premises 285 270
Furniture and equipment expenses 242 169
Data processing expense 65 63
Other expenses 950 820
- ---------------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,873 2,674
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,183 1,580
Income tax expense 300 440
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 883 1,140
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during the period (862) 40
Less reclassification adjustment for gains
included in net income 0 (195)
Comprehensive income 21 985
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data (based on net income):
Basic $ 0.30 0.40
Diluted 0.30 0.39
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP
Consolidated Statements of Cash Flows (Unaudited) Three Months Ended
(Dollars in thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 883 1,140
Adjustments to reconcile net income to net cash from
operating activities:
Net gain on sale of securities available for sale 0 (296)
Accretion of discount on securities
and money market investments (58) (10)
Amortization of premium on investment
securities 145 61
Provision for loan losses 75 150
Decrease in deferred loan fees (30) (38)
Decrease (increase) in accrued interest receivable (345) 407
Depreciation and amortization of premises
and equipment 263 209
Loss on sale of other real estate 33 82
Proceeds from the sale of mortgages
and PHEAA loans held for sale 216 1,516
Net increase in mortgage and PHEAA loans
held for sale (1,033) (2,140)
Gain on sale of mortgages and PHEAA loans 0 (13)
Increase in other assets (110) (608)
Amortization of goodwill 10 10
Increase in accrued interest payable 204 203
Increase in other liabilities (14) 672
- --------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
from operating activities (644) 205
- --------------------------------------------------------------------------------------------------------
Net cash from operating activities 239 1,345
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 3,299 1,824
Proceeds from maturities and calls of
securities available for sale 11,528 7,569
Proceeds from sales of securities available for sale 0 12,012
Purchases of securities held to maturity 0 (25,705)
Purchases of securities available for sale (33,947) (2,491)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (11,299) (10,819)
Acquisition of premises and equipment (112) (56)
Proceeds from sale of other real estate 317 12
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,214) (17,654)
- --------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statements of Cash Flows, Continued (Unaudited)
Three Months Ended
(Dollars in thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase(decrease) in demand, NOW and Super NOW,
savings, money market and time deposits. $ (1,953) (3,401)
Dividends paid (584) (544)
Exercise of stock options 113 337
Purchase of treasury stock (112) 0
Federal funds purchased 0 (2,350)
Increase in other borrowed money 24,033 24,093
- ------------------------------------------------------------------------------------------------------
Net cash from financing activities 21,497 18,135
- ------------------------------------------------------------------------------------------------------
Net increase(decrease) in cash and cash equivalents (8,478) 1,826
Cash and cash equivalents at beginning of period 21,577 14,918
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,099 16,744
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 3,493 3,270
Cash payments for income taxes 250 490
Transfer of assets from loans
to other real estate 149 263
Net unrealized loss on securities
available for sale 862 236
Tax effect on unrealized loss
on securities available for sale 445 81
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
Notes to Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
Business--Pioneer American Holding Company Corp. (the "Company") and its
wholly owned subsidiary, Pioneer American Bank, National Association ("Pioneer")
provide a wide range of banking services to individual and corporate customers
through its branch banks in Lackawanna, Luzerne, Wayne, Wyoming, Susquehanna and
Monroe counties in Northeastern Pennsylvania. Pioneer is subject to competition
from other financial institutions and other financial services companies.
Pioneer is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation--The accompanying consolidated
financial statements were prepared in accordance with instructions to Form 10-Q,
and therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all normal,
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial statements, have been included. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report for the
period ended December 31, 1998. The results for the three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. All material intercompany balances and
transactions between the Company and its subsidiary have been eliminated. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Impact of Other Recently Issued Accounting Standards--In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposures. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier adoption is
permitted. The Company has not yet determined the impact, if any, of this
Statement, including its provisions for the potential reclassifications of
investment securities, on earnings, financial condition or equity.
(2) Securities Portfolio
Securities available for sale at March 31, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
Cost Market Value Cost Market Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage based
obligations 58,912 58,516 33,907 34,127
Other obligations of Federal agencies 44,017 43,729 47,207 47,537
Obligations of State and Political subdivisions 13,411 13,810 12,817 13,289
Other securities 6,126 6,126 6,126 6,126
-----------------------------------------------------------------------
Securities available for sale: $ 122,466 122,181 100,057 101,079
-----------------------------------------------------------------------
</TABLE>
The adjustment in stockholders' equity for the unrealized loss of the securities
available for sale at March 31, 1999, net of tax, was $(188,000). Included in
net deferred tax assets is $97,000 for this same unrealized loss.
Securities held to maturity at March 31, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
<CAPTION>
<PAGE>
March 31, December 31,
1999 1998
Cost Market Value Cost Market Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage based
obligations $ 32,717 32,752 35,838 35,979
Obligations of State and Political subdivisions 10,085 10,458 10,340 10,750
-----------------------------------------------------------------------
Securities held to maturity: $ 42,802 43,210 46,178 46,729
-----------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
Notes to Condensed Consolidated Financial Statements
(3) Stockholders' Equity and Per Share Data
The Company currently has one million shares of authorized, but unissued
preferred stock. At March 31, 1999 there were 25,000,000 shares of common stock
at $1 par value authorized with 2,926,067 shares issued and 2,920,963
outstanding.
Through March 31, 1999 the Company has issued and outstanding 55,525 options
to purchase shares of the Company, exercisable at between $8.00 to $13.00 per
share. Such options were issued with exercise prices equal to the market value
of the Company's common shares at the time of the grant. In the first quarter
46,668 options were exercised.
Basic earnings per share is calculated by dividing net income by the
weighted average shares outstanding during the period. The dilutive effect of
stock options is excluded from basic earnings per share, but included in the
computation of diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Numerator:
Net income $ 883 1,140
============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,921 2,867
Effect of dilutive securities:
Employee stock options 26 79
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,947 2,946
============ ============
Basic earnings per share $ 0.30 0.40
============ ============
Diluted earnings per share $ 0.30 0.39
============ ============
</TABLE>
The market value of the common shares of the Company at
March 31, 1999 was $19.50.
-8-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial Condition
and Results of Operation
Highlights
Total Assets were $426,868,000 at March 31, 1999 and $405,157,000 at
December 31, 1998 which is an increase of $21,711,000 or 5.4 %. Deposits
decreased by $1,953,000 from $307,360,000 at December 31, 1998 which is a
decrease of .6 % at March 31, 1999. Total net loans as of December 31, 1998
stood at $222,826,000, increasing by $11,922,000 or 5.4 % to $234,748,000 at
March 31, 1999.
The average earning assets were $391,749,000 during the three months ended
March 31, 1999 and $361,758,000 during the three months ended March 31, 1998.
This is an increase of $29,991,000 or 8.3%.
Average total assets during the three months ended March 31, 1999 were
$415,913,000 and $384,015,000 for the three months ended March 31, 1998. The
return on average total assets was 1.0% for the three months ended March 31,
1999 and 1.2% for March 31, 1998. Return on average equity for the first three
months of 1999 and 1998 were 9.9% and 13.7% respectively. Average equity for
both periods was $35,738,000 for the first three months of 1999 and $33,376,000
for the first three months of 1998.
Net income decreased $257,000 or 22.5% comparing the first three months of
1999 to the first three months of 1998. The decrease in 1999 was driven by a
decrease in total other operating income. During the first quarter of 1998 a
$296,000 gain was recognized on sale of available for sale securities and no
gain was recognized in 1999.
Net income per diluted share was $.30 for the first three months of 1999 and
$0.39 for the first three months of 1998. Earnings per basic share was $.30 and
$.40 for the three months ended March 31, 1999 and 1998.
Available for Sale and Securities Held to Maturity
A major factor in the increase of total assets at March 31, 1999 is the
increase in the Bank's securities portfolio of $17,726,000 or 12.0%. There was
an increase of $24,389,000 or 71.5% over December 31, 1998 in Federal agency
mortgage backed obligation securities available for sale. Offsetting this
increase was a decrease in the Bank's securities held to maturity of $3,376,000
or 7.3%. The increase in the securities portfolio in 1999 over 1998 in
securities available for sale is a result of the investment of funds borrowed
from the Federal Home Loan Bank of Pittsburgh. In the first quarter of 1999 the
bank increased securities available for sale as part of asset/liability strategy
to enhance net interest income.
Net Loans
Net loans increased by $11,922,000 or 5.4% over December 31, 1998. This was
the second major factor in the increase of total assets. This increase in net
loans was primarily driven by a $6.0 million increase in Home Equity loans as a
result of a special promotion offered by the Bank in the first quarter of 1999.
Money used to finance these loans was funded from a portion of the borrowings
from the Federal Home Loan Bank of Pittsburgh in the first quarter of 1999. All
other loan areas increased slightly for the first three months of 1999.
Total Deposits
Total Deposits were $305,407,000 at March 31, 1999 and $307,360,000 at
December 31, 1998 which is a decrease of $1,953,000 or .6%. During the first
three month of 1999 NOW and Super NOW decreased $2,565,000 or 6.9%. Money market
accounts also decreased by $2,023,000. Offsetting these decreases was an
increase in savings of $2,548,000. Time deposits continue to remain fairly
constant. Federal fund rates, which are a driving factor in the pricing of
liabilities, have continued to remain stable in the first quarter of 1999. These
interest rates have 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.
Other Borrowed Money
Total liabilities were $391,964,000 at March 31, 1999 and $369,691,000 at
December 31, 1998 which is an increase of $22,273,000 or 6.0%. The largest
increase in total liabilities was the result of an increase in Other borrowed
money of $24,033,000 over December 31, 1998. Management borrowed $25,000,000 in
February of 1999 from Federal Home Loan Bank of Pittsburgh (which will mature in
February, 2009). 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 available for sale securities.
Net Interest Income
Net interest income for the first three months of 1999 decreased $63,000 or
1.8% compared with the same period of 1998. Total
-9-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Net Interest Income, continued
interest income increased $161,000 or 2.3%. The increase in interest income was
the result of an increase in the total average of interest earning assets.
Interest earning assets were up $29,991,000 for the first three months of 1999
compared to the same period in 1998. The loan portfolio provided $128,000 of the
increase in interest income and the interest on federal funds sold provided
$73,000 for the first quarter of 1999. Total security interest remained fairly
constant. Total interest expense also increased $224,000 resulting in a net
decrease of $63,000 or 1.8% in net interest income. During the first quarter of
1999 the Bank borrowed an additional $25,000,000 from Federal Home Loan Bank of
Pittsburgh. The money borrowed was invested in mortgage backed securities and
also used to increase our loan portfolio. Total interest expense on deposits
increased $98,000 or 3.7%. This was attributable to an increase in average
interest bearing deposits for March 31, 1999 of $14,888 or 6.0% compared to the
same period in 1998.
In addition to gap management, the Company also uses simulation analysis to
help monitor and manage interest rate risk. In this analysis the Company
examines the result of a 200 basis point change in market interest rates and the
effect on net interest income. It is assumed that the change is instantaneous
and that all rates move in a parallel manner. Assumptions are also made
concerning prepayment speeds on mortgage loans and mortgage securities as well
as growth rates of deposit and loan portfolios. The results of this rate shock
are a useful tool to assist the Company in assessing interest rate risk inherent
in their balance sheet. Below are the results of this ratio shock analysis as of
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------------------------------------------------------------------------------------
Net Interest Percentage Change in Net Interest Percentage Change in
Change in Rates Income Change Net Interest Income Income Change Net Interest Income
<S> <C> <C> <C> <C>
+200 692 4.49% 221 1.70%
Static - - - -
-200 (1,685) (10.93%) (974) (7.30%)
</TABLE>
A 200 basis point rise in interest rates results in a 4.49% increase in interest
income. A 200 basis point decrease in interest rates results in a decrease in
interest income primarily 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>
Provision / Reserve for Loan Losses and Nonperforming Loans
<CAPTION>
Quarter Ended Year Ended Quarter Ended
March 31, December 31, March 31,
1999 1998 1998
---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,909,000 2,759,000 2,759,000
Recoveries 3,000 38,000 7,000
Less: Charge Offs 123,000 308,000 84,000
Provision for Loan Losses 75,000 420,000 150,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,864,000 2,909,000 2,832,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses for the first three months of 1999 amounted to
$75,000. It was $420,000 at Decemberr 31, 1998 and $150,000 for the three months
ended 1998. Net charge offs for the first three months of 1999 totaled $120,000
while net charge offs for the three months ended March 31, 1998 were $77,000.
The increases in charge offs in 1999 was due primarily to one consumer and two
commercial loans that were not fully collateralized. The ratio of net charge
offs during the first three months of 1999 to average loans outstanding during
the same period was .05% and for the twelve months ended 1998 was .12%.
The reserve for loan losses at March 31, 1999 totaled $2,864,000, decreasing
$45,000, 1.5 % from $2,909,000 at December 31, 1998. The Company ratio of
reserve for loan losses to total loans outstanding was 1.2% at March 31, 1999,
and the same ratio as of December 31, 1998 was 1.3%.
-10-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Provision / Reserve for Loan Losses and Nonperforming Loans, continued
<TABLE>
<CAPTION>
Non-performing loans are listed as follows:
3/31/99 12/31/98
------------- -------------
<S> <C> <C>
Non Accrual $ 1,497,000 $ 1,684,000
90 Days and More Past Due 993,000 838,000
Restructured 1,043,000 1,247,000
------------- -------------
$ 3,533,000 $ 3,769,000
</TABLE>
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.
There are no impaired loans under SFAS No. 114 which are not included in
the above table.
The loan loss reserve as of March 31, 1999 has been deemed adequate by
management. This amount is sufficient to cover inherent losses in the loan
portfolio given the present past due, nonperforming and classified levels.
Determination of loan loss reserve adequacy follows the guidelines in the
Comptroller's Banking Circular No.201(revised), including risk loss analysis,
specific allocations for problematic credits and provision for class loans, and
the requirements of SFAS No. 114, as amended.
Other Operating Income
Other operating income for the first three months of 1998 was $853,000
decreasing 24.6% to $643,000 reported for the first three months of 1999. There
was a gain recognized for the sale of securities available for sale in 1998
during the first quarter of $296,000. The Company did not recognize any gain or
loss on the sale of securities available for sale during the first quarter of
1999. Offsetting this decrease was a slight increase in service charge on
deposit accounts and ATM fees.
Service charge income on deposit accounts increased in 1999 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 the first
quarter of 1999 pricing of service charges and maintenance fees were increased
based upon an earnings improvement study completed by management of the Bank.
ATM fees also increased $37,000 or 35.6% for the first three months ended March
31, 1999 compared to the same period last year. This increase was attributable
to a volume increase.
Other Operating Expenses
Total other operating expenses were $2,873,000 in the first three months of
1999 while other operating expenses were $2,674,000 in the first three months of
1998 reflecting an increase of $199,000 or 7.4% for the first quarter of 1999.
The increase in furniture and equipment expense of $73,000 or 43.2% over the
same period in 1998 was primarily due to an increase in maintenance contracts on
our expanded ATM network. During the second quarter of 1998 we replaced computer
hardware and software to update for Year 2000 compliance. The Bank purchased a
tract of land on 455 Market Street, Kingston, Pennsylvania for the purpose of
constructing a full service office. This office was completed in November of
1998 and replaced the existing Kingston lease office.
These changes to the Bank resulted in increased depreciation.
Other expenses increased by $130,000 for the first quarter of 1999 or 15.9%
compared with the same period of 1998. A significant portion of the increase was
in marketing expense which was up $69,000. In April of 1998 the Bank contracted
with an advertising company for one year to develop a new marketing campaign.
This also includes marketing the relocation of an existing branch during the
fourth quarter of 1998.
Other expenses also increased as a result of the following: Effective
October 12, 1998, Donald A. Hoyle, Jr., the former President and Chief Executive
Officer of the Company, retired from his positions with the Company and the
Bank. In connection with such retirement, the Company and Mr. Hoyle entered into
a Retirement Agreement and Mutual release, dated March 16, 1999 (collectively,
the "Agreements"). Mr. Hoyle also resigned his position as a director of the
Company as of such date. The Agreements provide for
-11-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Other Operating Expenses, continued
severance benefits to be paid to Mr. Hoyle in the form of a lump sum payment of
$216,190 (less applicable federal, state and local withholding taxes). Such
payment includes among other things, payment for all accrued but unused vacation
pay. The Company also agreed to continue any fringe benefits payable to Mr.
Hoyle after October 12, 1998, only to the extent that such continuance is
required by law. The Retirement Agreement also provides that after October 12,
1998, no further premiums shall be paid by the Bank on a life insurance policy
on the life of Mr. Hoyle issued by Principal Mutual Life Insurance Company. Mr.
Hoyle also acknowledged that he owed the Bank $289,560 pursuant to his
obligation to reimburse the Bank for premiums advanced by the Bank pursuant to
such policy. Mr. Hoyle agreed to repay the Bank the sum of $252,875 for life
insurance premiums paid by the Bank pursuant to this policy and the bank agreed
to forgo the balance of the life insurance premiums paid. In exchange for this
payment, Mr. Hoyle agreed that he will receive no other wages, bonuses,
severance or other similar payments or benefits from the Company except as
provided in the Retirement Agreement. In consideration for this retirement
benefit, Mr. Hoyle agreed to release the Company and its affiliates from any and
all claims that he has against the Company. $175,000 of the expense incurred as
a result of this Agreement were accrued for in 1998, the remaining amount was
expensed in the first quarter of 1999, for an additional first quarter expense
of approximately $78,000.
Salaries and employee benefits, net occupancy expense of bank premises and
data processing expense for three months ended March 31, 1999 remained fairly
constant with a slight increase or decrease in each of the categories as
compared to the same period of 1998.
Income Taxes
The provision for income taxes for the first three months of 1999 was
$300,000 and $440,000 for the first three months of 1998. The effective rate for
the first three months of 1999 was 25.4% and 27.8% for the same period of 1998.
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.
Capital Management and Liquidity and Rate Sensitivity
The objectives of the Corporation's capital management policy place an
emphasis on both current financial positioning and future capital needs based on
anticipated growth. These objectives are maintained by management which monitors
its liquidity requirements through its asset/liability management program. This
program, with other management analysis, enables the bank to meet its cash flow
requirements and adapt to the changing needs of the Corporation's customers and
the requirements of regulatory agencies. As of March 31, 1999, the most recent
notification from the Office of the Comptroller of the Currency categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of greater than
or equal to 10%, 6%, and 5%, respectively.
The Corporation's principal source of liquidity has been short-term U.S.
Government and U.S. Agency obligations, and various corporate notes. Money
market investments and portfolio investments are kept liquid in order to
effectively match our current deposit structure. The Corporation is affected by
changes in the level of rates of interest. Earnings will be sensitive to
interest rate changes to the degree that the average yield on assets responds
differently to a change in interest rates than does average cost of funds.
Adequate liquidity affords the Corporation flexibility in meeting consumer loan
demand and deposit fluctuations.
The Corporation actively manages the interest rate sensitivity
characteristics of its assets and liabilities to control the effects of changes
in the general level of interest rates upon net interest revenue. This is
accomplished by the asset/liability committee which consists of senior
management and the board of directors, who are responsible for management
decisions as to the asset/liability maturity mix.
Effects of Inflation
Economic conditions are reviewed by management in a continuing effort to
adjust to the changing economic environment. The effects of these changes on the
banking industry as a whole in the Company's market area are reviewed by
management in order to compete at a level consistent with the goals of
profitability and sound management policy.
Increases in the rate of inflation can increase longer term interest rates,
which can reduce the value of securities held to maturity, mortgage loans and
other fixed rate and term assets. Inflationary periods also may tend to increase
the borrowing needs of consumers, leading to requests for additional funds,
which can expand total loans above expected levels and therefore require
increased efforts to ensure the maintenance of adequate capital.
The banking industry is affected by inflation in a different manner than
other industries, although certain changes have similar effects on both banks
and other business enterprises. Current economic indicators are moving in the
direction of possible inflationary changes.
-12-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Effects of Inflation, continued
Interest rates have been fluctuating in response to economic changes, which will
affect the asset/liability policy of the bank. Rates on deposits and loans are
changed as necessary with consideration of economic and market conditions. Our
continuing efforts to monitor all phases of the financial condition of all
assets which can be affected by inflation include the pricing of collateral on a
regular basis.
Year 2000
Year 2000 Compliance
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operations including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
Company State of Readiness
The Company has completed an assessment of its financial and operational
software systems in accordance with the various regulatory agency guidance
documents. The Company is maintaining an inventory of hardware and software
systems, which ranges from mission critical software systems and personal
computers to security and video equipment, and general office equipment. The
Company has prioritized its hardware and software systems to focus on the most
critical systems first. In connection with the Company's assessment, a number of
the less significant third party vendors advised the Company that their software
is Year 2000 compliant, and the Company intends to fully test that software by
June 30, 1999.
The Company has completed an assessment of its core financial and
operational software systems and has taken the necessary steps to bring them
into compliance. Our Year 2000 project plan is in place and is progressing on
schedule with the testing of our core applications for critical dates. The
Company performed significant Year 2000 testing prior to December 31, 1998 and
plans to be fully compliant by June 30, 1999.
Contingency Plan
The Board of Directors and Management of the Company recognize that, despite
efforts to renovate or replace mission-critical systems, the risk of disruption
remains due to the failure of a resource which supports critical business
activities. To provide for business continuity in the event of such disruptions,
the Board has directed management to coordinate the development of contingency
plans for each line of business designated as a core business process.
Management will reevaluate identification of mission-critical resources and
develop and document Y2K scenarios which could result in the loss of one or more
resources. Because of the number of critical resources and different
combinations of failure scenarios, it is impossible to prepare for every
conceivable event. Management will assign a probability and prioritize and
allocate contingency planning resources based on the level of probability. The
bulk of evaluation of contingency needs will be completed by June, 1999, when
the Company will shift to a monitoring mode, which will include an early warning
system to identify suppliers who may be experiencing date related failures.
Cost of Year 2000
Over the past several years, the Company's Technology Plan has called for an
aggressive schedule for installing new systems or upgrading old systems in order
to build a technology infrastructure which will allow the Company to offer
competitive products while providing for internal efficiencies and customer
service improvement. The Technology Plan has resulted in positioning the Company
to continue its technology improvements while avoiding specific costly Year 2000
issues. Based on preliminary information, costs of addressing potential problems
are estimated to be $400,000. The Bank had expenditures of $260,000 in 1998 for
Y2K related matters, of which $10,000 was expensed in 1998 and $250,000 will be
capitalized and amortized over the next five years. Additionally, during 1999
the bank anticipates further expenditures of $140,000, all of which will be
capitalized over the next five years, with $20,000 expensed in 1999. This cost
is primarily associated with purchasing new equipment and software which will be
capitalized and amortized over a 5 year period.
Risks of Year 2000
Systems outside of the direct control of the Company, such as ATM networks,
credit card processors, and the Fed Wire System, pose a more problematic issue.
A theoretical problem scenario would involve a temporary inability of customers
to access their funds through automated teller machines, point of service
terminals at retailer locations, or other shared networks. For this reason
alone, banks and their governing agencies are closely scrutinizing the progress
of our major industry service providers.
-13-
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Year 2000, continued
Risks of Year 2000, continued
Successful and timely completion of the Year 2000 project is based on
management's best estimates, which were derived from numerous assumptions of
future events, which are inherently uncertain, including the availability of
certain resources, third party modification plans and other factors.
Forward Looking Statements
Within these financial statements we have included certain "forward
looking statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our
financial statements. We have used "forward looking statements" to describe the
future plans and strategies including our expectations of the Corporation's
future financial results. Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Pennsylvania, and the country as a whole, loan delinquency rates, and changes
in federal and state regulation. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
-14-
<PAGE>
Part II.
Item 1. Legal Proceedings
The nature of the business of Pioneer American Holding Company Corp. and its
subsidiary, Pioneer American Bank, N.A., generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of management, there are no proceedings pending to which
Pioneer American or its subsidiary are parties or to which their property is
subject, which, if determined adversely, would be material in relation to
Pioneer American's results of operation, stockholder's equity, or financial
condition. In addition, no material proceedings are pending or are known to be
threatened or contemplated against Pioneer American or its subsidiary by
governmental authorities or other parties.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
None
-15-
<PAGE>
SIGNATURES *
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER AMERICAN HOLDING COMPANY, CORP.
Date: May 7, 1999 By /s/ John W. Reuther
John W. Reuther
President & C.E.O.
Date: May 7, 1999 By /s/ Patricia Cobb Esq.
Patricia Cobb Esq.
Executive Senior Vice President/
In-House Counsel
-16-
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