FORM 10-K - ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the transition period from
_____________________ to _____________________________ 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 Securities registered pursuant to
Section 12(b) of the Act:
Title of each class Name of each exchange on which
Registered
Common none
Securities registered pursuant to Section 12(g) of the Act:
Common stock, Par Value $1.00 a Share
(Title of class)
(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 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ ] (Amended by Exch Act Rel No.
28869, eff. 5/1/91.)
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405). $46,567,841
NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO REGISTRANTS 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 REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
The number of shares outstanding as of March 1, 1999 2,920,963 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
<PAGE>
10-K CROSS REFERENCE
Page
PART I
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...........................9-37
8. Financial Statements and Supplementary Data......................38-66
9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure....................... *
PART III
10. Directors and Executive Officers of the Registrant .................70
11. Executive Compensation..............................................70
12. Security Ownership of Certain Beneficial Owners and
Management......................................................70
13. Certain Relationships and Related Transactions......................70
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements Filed:
Pioneer American Holding Company Corp.
Consolidated Balance Sheets, December 31, 1998
and 1997....................................... .38-39
Consolidated Statements of Operations, Years ended
December 31, 1998, 1997 and 1996....................40
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1998, 1997
and 1996 ............................................41
Consolidated Statements of Cash Flows, Years ended
December 31, 1998, 1997 and 1996..................42-43
Financial Schedules Filed:
All schedules applicable to the Registrant are included in
the notes to the Financial Statements.
There were no reports filed on Form 8-K during the fourth
quarter of 1998.
Auditors' Opinion...........................................67
Exhibit:
Consent of Independent Auditors.......................**
- ----------
* Not applicable
** Copies of any exhibits not contained herein may be obtained by writing to
John W. Reuther, President, Pioneer American Company Corp., 41 No. Main
Street, Carbondale, Pa. 18407.
1
<PAGE>
THE PIONEER AMERICAN HOLDING COMPANY CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
Highlights of the Year
1998 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $ 31,263,000 28,968,000 7.92%
Total operating expense 25,706,000 23,460,000 9.57%
Income before income taxes 5,557,000 5,508,000 0.89%
Income tax expense 1,535,000 1,500,000 2.33%
Net income 4,022,000 4,008,000 0.35%
Total cash dividends declared 2,235,000 2,055,000 8.76%
AT YEAR END
Assets 405,157,000 370,126,000 9.46%
Deposits 307,360,000 293,643,000 4.67%
Loans, (net) 222,826,000 209,583,000 6.32%
Securities available for sale 101,079,000 96,696,000 4.53%
Securities held to maturity 46,178,000 37,379,000 23.54%
Stockholders' equity 35,466,000 33,398,000 6.19%
PER SHARE DATA
Net income (diluted) 1.36 1.36
Cash dividends declared 0.77 0.72
Book value * 12.01 11.36
Number of shareholders 1,457 1,430
</TABLE>
- --------------------------------------------------------------------------------
* 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. All stock prices have been adjusted for applicable stock
splits.
Quarterly highs and lows are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
Quarter High Low High Low High Low
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 23.50 21.38 25.00 22.25 21.25 20.00
Second 25.25 22.50 26.00 23.75 21.12 20.12
Third 24.50 22.00 24.75 23.25 22.00 19.50
Fourth 23.50 22.00 23.00 21.25 24.00 21.75
</TABLE>
2
<PAGE>
Company Stock Prices and Dividend Information, (Continued)
On March 1, 1999 the Holding Company had approximately 1,457 shareholders.
The market price of the stock on this date was $20.50 per share. Cash dividends
per share for 1998, 1997 and 1996 appear in the table below:
Quarter 1998 1997 1996
- -----------------------------------------------------------------------------
First $ 0.19 0.17 0.15
Second 0.19 0.17 0.17
Third 0.19 0.19 0.17
Fourth 0.20 0.19 0.17
- -----------------------------------------------------------------------------
$ 0.77 0.72 0.66
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 184 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,
which is managed as a single operating segment. 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 at the branches, there are 24 ATM's at remote locations. These
3
<PAGE>
The Bank (Continued)
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 1998 was approximately 4.5%. In the
counties in which the Company operates the rates were: Lackawanna 4.8%, Luzerne
5.9%, Wayne 5.1%, Monroe 5.9%, and Wyoming 6.0% . 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. FDICIA also
contains a variety of other provisions that affected the operations of the
Company, including 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 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
leased office. The Bank owns properties adjacent to the main office utilized as
parking lots.
The Bank also leases facilities for ten 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; and two
in Weis Markets in Clarks Summit and Hazleton.
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 1998 through the date of filing this report with
the Securities and Exchange Commission.
7
<PAGE>
Selected Financial Data
(In thousands, except per share data and number of shareholders)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Years ended December 31
---------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
for the Year
Interest income $ 28,302 26,507 24,358 23,662 20,626
Interest expense 14,319 12,845 10,874 11,227 8,157
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 13,983 13,662 13,484 12,435 12,469
Provision for loan losses 420 535 500 420 310
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 13,563 13,127 12,984 12,015 12,159
Other operating income 2,961 2,461 2,012 1,913 1,319
Other operating expense 10,967 10,080 9,749 9,075 8,697
Income tax expense 1,535 1,500 1,543 1,370 1,333
- ------------------------------------------------------------------------------------------------------------------------
Net income 4,022 4,008 3,704 3,483 3,448
- ------------------------------------------------------------------------------------------------------------------------
Cash dividends declared $ 2,235 2,055 1,900 1,671 1,610
- ------------------------------------------------------------------------------------------------------------------------
Per Share (1)
Net income (diluted) $ 1.36 1.36 1.26 1.20 1.19
Book value (2) 12.01 11.36 10.32 9.80 8.64
Cash dividends paid 0.77 0.72 0.66 0.60 0.58
- ------------------------------------------------------------------------------------------------------------------------
Financial Condition
At End of Year
Assets $ 405,157 370,126 330,213 320,647 302,408
Deposits 307,360 293,643 295,946 288,252 270,718
Loans, net 222,826 209,583 201,298 194,555 177,173
Securities available for sale 101,079 96,696 76,019 68,328 50,467
Securities held to maturity 46,178 37,379 20,860 26,033 52,915
Stockholders' equity 35,466 33,398 30,263 28,492 24,978
- ------------------------------------------------------------------------------------------------------------------------
Number of Stockholders 1,457 1,430 1,421 1,347 1,334
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Per share data for 1995 and 1994 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.
</FN>
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following financial review and analysis is presented on a
consolidated basis and is intended to assist in understanding and evaluating the
major changes in the financial condition and earnings performance of the Company
(and the Bank) with a primary focus on the analysis of operating results for the
years ended December 31, 1998, 1997, and 1996. 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.
Results of Operations
Highlights of Operating Results
1998 vs. 1997
Net income reached $4,022,000 in 1998, $14,000 or .3% higher than in 1997.
These earnings represent the highest annual earnings in the Company's history.
Earnings per diluted share were $1.36 in 1998 and 1997 respectively.
The Company experienced an increase in interest income driven primarily
by an increase in the volume of interest earning assets. The overall change was
an increase in interest income of $1,795,000 or 6.8% from 1997 to 1998. Total
interest expense also increased $1,474,000, primarily as a result of increases
of other borrowed money, resulting in an increase in net interest income of
$321,000 or 2.3%. Net interest spread went from 3.62% in 1997 to 3.30% in 1998
due to competitive pressures on interest rates on loans which caused the spread
of the loan portfolio to drop from 8.95% in 1997 to 8.76% in 1998. Other
operating income was up $500,000 during 1998 from the prior period due to an
increase in gain on sale of securities available for sale and ATM fees. Other
operating expense also increased during 1998 versus 1997 due to an increase in
ORE expense, an upgrading of our computer system and the opening of a new branch
in November of 1998.
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>
- --------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------- ---------------------
Amount % Amount %
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 1,795,000 6.8 2,149,000 8.8
Interest expense 1,474,000 11.5 1,971,000 18.1
- --------------------------------------------------------------------------------------
Net interest income 321,000 2.3 178,000 1.3
Provision for loan losses (115,000) (21.5) 35,000 7.0
- --------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 436,000 3.3 143,000 1.1
Other operating income 500,000 20.3 449,000 22.3
Other operating expense 887,000 8.8 331,000 3.4
- --------------------------------------------------------------------------------------
Income before income taxes 49,000 0.9 261,000 5.0
Income tax expense 35,000 2.3 (43,000) (2.8)
- --------------------------------------------------------------------------------------
Net income $ 14,000 0.3 304,000 8.2
- --------------------------------------------------------------------------------------
</TABLE>
1997 vs. 1996
Net income reached $4,008,000 in 1997, $304,000 or 8.2 % higher than in
1996. Diluted earnings per share was $1.36 in 1997, compared to $1.26 in 1996,
an increase of 7.9 %.
The increase in net income for 1997 over 1996 was 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.
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
$331,000 from 1997 to 1998. Tax equivalent net interest income was decreased by
$596,000 for interest rate changes from 1997 to 1998 versus an decrease of
$262,000 from 1996 to 1997. The increase in tax equivalent net interest income
from volume changes from 1997 to 1998 was $927,000 versus $607,000 from 1996 to
1997.
Net interest income increased in 1997 from 1996. 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 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.
11
<PAGE>
Net Interest Income (Taxable-Equivalent Basis),
(Continued)
The improvement in net interest income in 1998 from 1997 was the
result of several factors. The volume of interest earning assets drove the
increase in interest income from 1997 to 1998. The increase in volume resulted
in an increase in interest income of $2,669,000. The increase in volume was the
result of a $13.9 million increase in the average balance of taxable securities
as part of the Bank's leverage strategy. The increase in volume was also the
result of a $7.7 million increase in the average balance of installment loans.
The security portfolio provided $1,086,000 of the increase with 86% of this
coming from the volume increase in taxable securities. During the first quarter
of 1998, the Bank borrowed an additional $25,000,000 from Federal Home Loan Bank
of Pittsburgh which was invested in mortgage backed securities in both available
for sale and held to maturity investment securities. The loan portfolio also
provided $1,406,000 of the increase with 50% of this coming from the volume
increase in installment loans and 38% in commercial loans. Federal funds sold
had an increase of interest income of $177,000 over the prior period.
Net interest income was affected by a decrease in the rates of $420,000 in
securities, $17,000 federal funds sold and $427,000 in loans. These changes are
attributable to the downward trend in interest rates both nationally and
regionally and increasing levels of lending competition.
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 decrease of $521,000 in interest expense from a decrease in the
volume of interest bearing deposit and an increase in interest expense of
$25,000 through interest rate increases on interest bearing deposits resulted in
a decrease in interest expense of $496,000 from 1997 to 1998. The single largest
contributor to the decrease in interest expense on deposits was a decrease in
the volume of Time deposits. The decrease due to volume of $661,000 resulted
from a $12,106,000 decrease in the average balances of Time deposits from
$157,576,000 for 1997 to $145,470,000 for 1998.
The volume increase in interest income was the result of a $34,587,000
increase in the total average of interest earning assets from $332,618,000 in
1997 to $367,205,000 in 1998. The average rate of return on these assets was
down slightly compared to the prior year with 1998 at 7.86% and 1997 at 8.13%.
The volume increase in interest income was primarily driven by an increase in
both our security and loan portfolio. Total securities were up $15,792,000 from
1997 to 1998 and total loans up $15,524,000. The related interest income was up
$666,000 to $9,229,000 in 1998 for securities and up $979,000 to $19,152,000 for
loans in 1998.
The Company had an increase in average interest bearing liabilities of
$29,180,000 from 1997. This was due to an increase in other borrowed money to
$58,964,000 for 1998, a $35,366,000 increase over 1997. Management borrowed an
additional $25,000,000 in January of 1998 from Federal Home Loan Bank of
Pittsburgh.
12
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
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 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 interest rate in low or non-interest
bearing liabilities and in savings and time deposits stayed fairly constant for
both 1998 and 1997. There was a 5 basis point increase in the cost of interest
bearing liabilities in 1998 to 4.56%. 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, 1998 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>
- ------------------------------------------------------------------------------------------------------------------
1998/1997 1997/1996
Increase (Decrease) Increase (Decrease)
due to changes in due to changes in
------------------------ --------------------------
Volume (1) Rate Total Volume (1) Rate Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Securities:
Taxable 936 (384) 552 1,477 441 1,918
Non-taxable (2) 150 (36) 114 611 18 629
- ------------------------------------------------------------------------------------------------------------------
Total securities 1,086 (420) 666 2,088 459 2,547
- ------------------------------------------------------------------------------------------------------------------
Federal funds sold 177 (17) 160 52 (6) 46
- ------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (2) 540 (35) 505 377 (39) 338
Mortgage 166 (134) 32 (691) (45) (736)
Installment 700 (258) 442 218 (98) 120
- ------------------------------------------------------------------------------------------------------------------
Total loans 1,406 (427) 979 (96) (182) (278)
- ------------------------------------------------------------------------------------------------------------------
Total interest income 2,669 (864) 1,805 2,044 271 2,315
- ------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing deposits:
NOW, Super NOW and Money Market 64 (12) 52 145 457 602
Savings 76 26 102 (31) (35) (66)
Time (662) 11 (651) (35) 36 1
- ------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits (522) 25 (497) 79 458 537
Other borrowed money and note payable 2,245 (287) 1,958 1,348 76 1,424
Fed Funds Purchased 19 (6) 13 10 (1) 9
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 1,742 (268) 1,474 1,437 533 1,970
- ------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 927 (596) 331 607 (262) 345
- ------------------------------------------------------------------------------------------------------------------
<FN>
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 31% in 1998, and 32% in 1997 and 1996. The total
taxable equivalent adjustments included above are $559,000, $549,000, and
$382,000 for 1998, 1997 and 1996, respectively.
</FN>
</TABLE>
14
<PAGE>
Table 3
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- -----------------------------
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 $ 119,096 7,615 6.39 105,165 7,063 6.72 81,707 5,145 6.30
Non-taxable (1) 20,389 1,614 7.92 18,528 1,500 8.10 10,890 871 8.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 139,485 9,229 6.62 123,693 8,563 6.92 92,597 6,016 6.50
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 9,172 480 5.23 5,901 320 5.42 4,955 274 5.53
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (1) (5) 85,898 7,537 8.77 79,777 7,032 8.81 75,520 6,694 8.86
Mortgage (5) 74,022 6,291 8.50 72,112 6,259 8.68 80,020 6,995 8.74
Installment (5) 61,564 5,324 8.65 53,842 4,882 9.07 51,490 4,762 9.25
Allowance for possible
loan losses (2,936) - - (2,707) - - (2,794) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 218,548 19,152 8.76 203,024 18,173 8.95 204,236 18,451 9.03
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earnings assets 367,205 28,861 7.86 332,618 27,056 8.13 301,788 24,741 8.20
Non-interest earning assets 27,107 - - 25,990 - - 24,706 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets/interest income $ 394,312 28,861 7.32 358,608 27,056 7.54 326,494 24,741 7.58
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Table 3, (Continued)
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollar in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ------------------------------ -------------------------------
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 $ 51,487 1,670 3.24 49,527 1,618 3.27 43,331 1,016 2.34
Savings 57,447 1,219 2.12 53,774 1,117 2.08 55,219 1,183 2.14
Time 145,470 7,951 5.47 157,576 8,602 5.46 158,213 8,601 5.44
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 254,404 10,840 4.26 260,877 11,337 4.35 256,763 10,800 4.21
- -----------------------------------------------------------------------------------------------------------------------------------
Other borrowed money
and note payable 58,964 3,456 5.86 23,598 1,498 6.35 1,228 74 6.03
Fed Funds Purchased 447 23 4.92 160 10 6.25 15 1 6.67
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 313,815 14,319 4.56 284,635 12,845 4.51 258,006 10,875 4.22
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits and
other liabilities 46,620 - - 42,594 - - 39,471 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 360,435 14,319 3.97 327,229 12,845 3.93 297,477 10,875 3.66
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 33,877 - - 31,379 - - 29,017 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity/interest expense $ 394,312 14,319 3.63 358,608 12,845 3.58 326,494 10,875 3.33
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 14,542 14,211 13,866
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest spread (3) 3.30% 3.62% 3.98%
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest yield (4) 3.96% 4.27% 4.59%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest and average rates are presented on a taxable-equivalent basis
utilizing an effective tax rate of approximately 31% in 1998, and 32% in
1997, and 1996. The total taxable-equivalent adjustments included above are
$559,000, $549,000 and $382,000 for 1998, 1997, and 1996, 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 amortization of deferred net loan
origination fees of $378,000, $260,000, $359,000 in 1998, 1997, and 1996,
respectively.
</FN>
</TABLE>
16
<PAGE>
Market Risk
Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
-----------------------------------------------------------------------------------------------
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 $ 32,017,000 6,953,000 8,593,000 28,235,000 25,281,000 101,079,000
Securities held to maturity 420,000 1,678,000 502,000 16,618,000 26,960,000 46,178,000
Loans (net of unearned
discount and deferred fees) 44,927,000 5,269,000 16,046,000 38,529,000 120,964,000 225,735,000
Federal Funds Sold 7,600,000 -- -- -- -- 7,600,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 84,964,000 13,900,000 25,141,000 83,382,000 173,205,000 380,592,000
- -----------------------------------------------------------------------------------------------------------------------------------
-
Interest Bearing Liabilities
Interest bearing DDA (MMA,
NOW, Super NOW) $ 60,943,000 -- -- -- -- 60,943,000
Savings (1) 11,343,000 -- -- -- 45,371,000 56,714,000
Time 23,304,000 20,368,000 35,164,000 26,303,000 -- 105,139,000
Time > $100M 9,967,000 12,005,000 13,056,000 6,605,000 -- 41,633,000
Other borrowed money and
note payable -- -- 20,000,000 38,082,000 275,000 58,357,000
- -----------------------------------------------------------------------------------------------------------------------------------
-----------
Total $ 105,557,000 32,373,000 68,220,000 70,990,000 45,646,000 322,786,000
- -----------------------------------------------------------------------------------------------------------------------------------
-----------
Interest rate sensitivity gap $ (20,593,000) (18,473,000) (43,079,000) 12,392,000 127,559,000 57,806,000
Cumulative interest rate
sensitivity gap $ (20,593,000) (39,066,000) (82,145,000) (69,753,000) 57,806,000 --
Cumulative interest rate
sensitivity ratio (2) (5.08%) (9.64%) (20.27%) (17.22%) 14.27% --
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
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, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------------------------------------------------------------------
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>
+200 841 5.53% (400) (2.72%)
Static - - - -
-200 (1,176) (7.73%) (405) (2.75%)
</TABLE>
A 200 basis point rise in interest rates results in a 5.53% increase in
interest income. A 200 basis point decrease in interest rates results in a
decrease in interest income due to optionality in the Company's securities
portfolio. In a falling rate environment it is assumed that certain of the
Company's securities would be called and the resulting cash flows would be
reinvested at the lower prevailing rates.
Table 5
Other Operating Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,334,000 1,330,000 1,168,000
Net gains on sales of
securities available for sale 509,000 154,000 -
Gains on calls of securities held to maturity 2,000 3,000 -
ATM Fees 523,000 402,000 131,000
Other income 593,000 572,000 713,000
- ----------------------------------------------------------------------------------------------------------------
Total other operating income $ 2,961,000 2,461,000 2,012,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Gains were recognized for the sale of securities available for sale in 1998
of $509,000 and $154,000 in 1997. 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 $20,217,000, $17,799,000 and
$6,327,000 in 1998, 1997, and 1996 respectively.
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 1998, 1997 and 1996 the Company sold newly originated mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation and student
loans to PHEAA.
ATM fees increased by $121,000 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. As of December 31, 1998 the Bank has a total of 40 ATM machines.
Other income and service charges on deposit accounts remained fairly constant
for both 1998 and 1997.
Total operating income increased by $449,000 in 1997 compared to 1996
primarily as the result of service charges on deposits, gains on sales of
securities and ATM fees, partially offset by decreases in other income.
Table 6
Other Operating Expenses
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years ended December 31
----------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 5,071,000 5,040,000 5,061,000
Net occupancy expense of bank premises 1,027,000 1,026,000 857,000
Furniture and equipment expenses 773,000 685,000 622,000
Data processing expense 255,000 242,000 241,000
ORE expense 360,000 121,000 193,000
Other expenses 3,481,000 2,966,000 2,775,000
- -----------------------------------------------------------------------------------------------------------------
Total other operating expenses $ 10,967,000 10,080,000 9,749,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Salaries and employee benefits, which represent the most significant
portion of non-interest expenses, increased by .6% and decreased by .4% in 1998
and 1997, respectively. Salary expense remained constant while employee benefit
expense increased 3.2% in 1998. Employees salaries did increase 4% in 1998. This
increase was offset by an increased level of SFAS 91 deferred costs based on a
higher volume of real estate loans on which no points were collected.
The contribution to the Company's ESOP in 1998 was $2,000 and $54,000 in
1997. No contribution was made in 1996.
Net occupancy expense remained constant for 1998 over 1997, and the
increase of $169,000 or 19.7% in 1997 over 1996 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.
19
<PAGE>
Other Operating Income, (Continued)
The increase in furniture and equipment expense of $88,000 or 12.8% over
1997 was primarily due to an increase in maintenance contracts on our expanded
ATM network. During the second quarter of 1998 we also replaced computer
hardware and software to update for Year 2000 compliance, resulting in increased
depreciation.
ORE expense increased by $239,000 or 50.1% in 1998 due to increased charge
offs of ORE properties based on evaluation of the fair values of individual
properties.
Other expenses increased by 17.4% in 1998 and 6.9% in 1997. The largest
increases were in automated teller and related card holder services, legal fees
and marketing expense. The growth of the Bank resulted in an increase in
automated teller machines and related cardholder service for 1998 over 1997 of
$66,000. The expense for legal fees increased $95,000 due to additional
requirements necessary to service the Bank. Marketing expense was up $185,000 in
1998 due to marketing a larger geographical area and for the relocation of an
existing branch. In 1998 the Bank contracted with an advertising company to
develop a new marketing campaign. The advertising company handles all public
media including television commercials.
The provision for income taxes for 1998, 1997 and 1996 were $1,535,000,
$1,500,000 and $1,543,000, respectively. The effective rate for these periods
were 27.6%, 27.2% and 29.4%. The lower effective rate for 1998 and 1997 was due
to management's strategy in investing in tax free securities.
Total other operating expense increased by $331,000 for 1997 as
compared to 1996 primarily as a result of increases in other expenses relating
to automated teller and related card holder services, courier expense and
telephone communication.
Financial Position
Loan Portfolio
Total loans, net of unearned discount and deferred loan fees, increased
$13,393,000 or 6.3% in 1998 and increased by $8,294,000 or 4.1 % in 1997. In
1998 the Bank sold $3,416,000 in mortgage loans and $1,941,000 in PHEAA loans.
In 1997 the loans sold were $972,000 and $2,384,000, respectively. The increase
in loans after consideration of the previously mentioned loan sales were
$18,750,000 in 1998 and $11,650,000 in 1997. There was growth in two segments of
the Company's portfolio in 1998: residential real estate and commercial loans.
The largest amount of originations were from residential real estate loans.
In 1998 and 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
20
<PAGE>
Loan Portfolio, (Continued)
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.
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
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial business $ 17,264,000 15,534,000 17,256,000 16,684,000 16,200,000
Commercial real estate 71,389,000 69,505,000 61,254,000 58,062,000 52,603,000
Real estate construction 1,120,000 1,002,000 947,000 625,000 1,482,000
Real estate residential 133,521,000 120,604,000 115,791,000 112,493,000 102,708,000
Consumer 17,681,000 17,865,000 20,424,000 19,013,000 14,184,000
- ----------------------------------------------------------------------------------------------------------
Total loans, gross 240,975,000 224,510,000 215,672,000 206,877,000 187,177,000
Unearned discount and
deferred loan fees (15,240,000) (12,168,000) (11,624,000) (9,580,000) (7,305,000)
- ----------------------------------------------------------------------------------------------------------
Total loans, net of
unearned discount
and deferred loan fees $ 225,735,000 212,342,000 204,048,000 197,297,000 179,872,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes commercial, financial, agricultural and real
estate construction loans at December 31, 1998 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 $ 10,481,000 4,650,000 2,133,000 17,264,000
Commercial real estate 17,772,000 6,371,000 47,246,000 71,389,000
Real estate construction 1,120,000 - - 1,120,000
- -------------------------------------------------------------------------------------------------------------------
Total $ 29,373,000 11,021,000 49,379,000 89,773,000
- -------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity:
Loans with predetermined rates 10,497,000 9,522,000 46,248,000 66,267,000
Loans with variable rates 18,876,000 1,499,000 3,131,000 23,506,000
- -------------------------------------------------------------------------------------------------------------------
Total $ 29,373,000 11,021,000 49,379,000 89,773,000
- -------------------------------------------------------------------------------------------------------------------
</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
21
<PAGE>
Loan Portfolio, (Continued)
the interest rate sensitivity of variable rate loans against the interest
rate sensitivity of liabilities, management attempts to reduce the Company's
vulnerability to future interest rate fluctuations. As in previous years,
management continues to seek commercial and residential mortgage loans with
variable interest rates. In 1998, the Company originated $19,074,000 in
residential mortgage and home equity loans of which $3,648,000 were variable
rate loans. The Company originated $9,843,000 and $19,261,000 of such loans in
1997 and 1996, respectively of which $4,283,000 and $10,768,000 respectively
were variable rate loans. In addition, the Bank has the ability to sell fixed
and adjustable rate residential mortgages and student loans it originates into
secondary markets to reduce its exposure to future interest rate increases.
Proceeds from the sale of mortgages and student loans were $5,419,000,
$3,414,000, and $14,439,000 for 1998, 1997, and 1996, 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>
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,684,000 2,596,000 4,404,000 2,161,000 2,315,000
90 days and more past due 838,000 2,026,000 - - -
Restructured loans 1,247,000 890,000 643,000 837,000 1,077,000
- ---------------------------------------------------------------------------------------------------------------
$ 3,769,000 5,512,000 5,047,000 2,998,000 3,392,000
- ---------------------------------------------------------------------------------------------------------------
</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. The Bank experienced a $1,743,000 decrease
in non-performing loans in 1998 over 1997 and a $465,000 increase in 1997 over
1996. During 1996 and through the first half of 1997, the Bank performed an in
depth analysis of the organization structure of the lending department. 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 and a significant drop in 1998. This action also resulted
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.
The increase in non-performing loans in 1996 from 1995 consisted primarily
of thirteen (13) borrowers representing $1,921,000 of the increase. The Bank had
specific loan loss reserves of $106,000 allocated and non-performing loans and
the remaining problem loan balances are substantially collateralized.
22
<PAGE>
Risk Elements of Loan Portfolio, (Continued)
The amount of interest income on non-accruing loans which was recorded in
income was $13,000 in 1998, $12,000 in 1997, and -0- in 1996. 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 $98,000, $149,000 and $160,000 in 1998, 1997, and 1996,
respectively.
The amount of interest on restructured loans which was recorded in
income was $98,000 in 1998, $59,000 in 1997, and $54,000 in 1996. 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 $24,000, $33,000, and $48,000 in 1998, 1997, and 1996,
respectively.
As of December 31,1998, the Company had impaired loans with a total
recorded investment of $1,530,000, $1,922,000, and $1,603,000 on December 31,
1998, 1997, and 1996, respectively. The average recorded investment for the
twelve month periods ended December 31, 1998, 1997, and 1996 was $1,837,000,
$1,914,000, and $1,145,000, respectively. Interest income recognized during each
of these periods was nominal. As of December 31,1998, 1997, and 1996 the amount
of recorded investment in impaired loans for which there is a related allowance
for credit losses and amount of the allowance is $425,000 and $106,000,
respectively, $815,000 and $185,000, respectively, and $819,000 and $350,000,
respectively. The amount of the recorded investment in impaired loans for which
there was no related allowance for credit losses at December 31, 1998, 1997, and
1996 was $1,105,000, $1,107,000, and $784,000, 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, 1998 and 1997, there were no other
concentrations of loans exceeding 10% of total loans. Loan concentrations are
considered to exist when there are amounts loaned to related borrowers or to a
multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic conditions.
23
<PAGE>
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 $420,000 in 1998, $535,000 in 1997,
and $500,000 in 1996. The current year provision has enabled the allowance for
loan losses to increase by 5.4% to $2,909,000 as of December 31, 1998, while
there was a 6.3% increase in total loans, net of unearned discount and unearned
loan fees. The increase in the loan portfolio in 1998 is primarily attributable
to residential real estate loans (including home equity loans). Based on the
nature of the collateral supporting these real estate loans it is not
anticipated that potential future problems with these credits would have as
significant an impact on the allowance for loan losses as loans originated in
previous years. This, in combination with a reduction in non-performing loans,
permitted a decrease to the provision in 1998 as compared to 1997. 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.
24
<PAGE>
Provision and Allowance for Loan Losses, (Continued)
The following table presents an analysis of the allowance for loan losses for
each of the last five years:
Table 10
Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Years ended December 31
------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $ 2,759,000 2,750,000 2,742,000 2,699,000 2,604,000
Loans charged off:
Commercial business (76,000) (225,000) (203,000) (99,000) (8,000)
Commercial real estate (68,000) (34,000) (55,000) (132,000) (58,000)
Real estate residential (88,000) (149,000) (196,000) (85,000) (179,000)
Consumer (76,000) (191,000) (64,000) (124,000) (69,000)
- -------------------------------------------------------------------------------------------------------------
Total loans charged off (308,000) (599,000) (518,000) (440,000) (314,000)
- -------------------------------------------------------------------------------------------------------------
Recoveries on charged off loans:
Commercial business 9,000 14,000 12,000 33,000 39,000
Commercial real estate 8,000 - - 16,000 31,000
Real estate residential 4,000 2,000 - - -
Consumer 17,000 57,000 14,000 14,000 29,000
- -------------------------------------------------------------------------------------------------------------
Total recoveries 38,000 73,000 26,000 63,000 99,000
- -------------------------------------------------------------------------------------------------------------
Net loans charged off (270,000) (526,000) (492,000) (377,000) (215,000)
Provision for loan losses 420,000 535,000 500,000 420,000 310,000
- -------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,909,000 2,759,000 2,750,000 2,742,000 2,699,000
- -------------------------------------------------------------------------------------------------------------
Net charge-offs during the period as
a percentage of average loans
outstanding during the period 0.12% 0.26% 0.24% 0.20% 0.13%
Allowance for loan losses
as a percentage of loans net of
unearned discount and loan fees
at end of period 1.29% 1.30% 1.35% 1.39% 1.50%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
25
<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>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -------------------
% 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 $ 770,000 7.2% $ 439,000 6.9% $ 666,000 8.0% $ 161,000 8.1% $ 386,000 8.7%
Commercial
real estate 403,000 29.6 201,000 31.0 292,000 28.4 97,000 28.0 145,000 28.1
Real estate
construction - 0.5 - 0.4 - 0.4 - 0.3 - 0.8
Real estate
residential 135,000 55.4 120,000 53.7 153,000 53.7 135,000 54.4 376,000 54.9
Consumer 361,000 7.3 225,000 8.0 182,000 9.5 106,000 9.2 166,000 7.5
Unallocated 1,240,000 - 1,774,000 - 1,457,000 - 2,243,000 - 1,626,000 -
- ----------------------------------------------------------------------------------------------------------------
Total $2,909,000 100 % $2,759,000 100 % $2,750,000 100 % $2,742,000 100 % $2,699,000 100 %
- ----------------------------------------------------------------------------------------------------------------
</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.
26
<PAGE>
Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
----------------------------------------------------------------------------------------------
After One After Five
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasuries & Other
U.S. Government agencies:
Fair value $ 17,144,000 23,281,000 7,112,000 34,127,000 81,664,000
Yield 5.78 5.62 6.29 6.53 6.09
- ------------------------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
Fair value $ - 2,932,000 9,857,000 500,000 13,289,000
Yield(1) - 8.26 7.96 7.35 8.01
- ------------------------------------------------------------------------------------------------------------------------------------
Other securities:
Fair value - - - 6,126,000 6,126,000
Yield - - - 6.32 6.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fair Value $ 17,144,000 26,213,000 16,969,000 40,753,000 101,079,000
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average yield(2) 5.78 6.00 7.26 6.51 6.36
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries & other
U.S. government agencies:
Carrying Value $ - - - 35,838,000 35,838,000
Yield - - - 6.87 6.87
- ------------------------------------------------------------------------------------------------------------------------------------
States & Municipal securities
Carrying Value 2,600,000 4,185,000 3,085,000 470,000 10,340,000
Yield(1) 8.25 8.42 8.37 8.33 8.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total carrying value $ 2,600,000 4,185,000 3,085,000 36,308,000 46,178,000
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average yield 8.25 8.42 8.37 6.89 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Yields are presented on a taxable equivalent basis utilizing an effective
tax rate of approximately 31% for all maturities.
(2) Yields on securities available for sale are computed using historical
amortized cost.
</FN>
</TABLE>
27
<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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
December 31
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US Treasury securities $ - 1,999,000 2,504,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 9,397,000 2,744,000 1,705,000
Federal Home Loan Mortgage Corporation 5,429,000 4,809,000 4,951,000
Government National Mortgage Association 19,301,000 24,429,000 1,166,000
Other obligations of Federal agencies 47,537,000 50,252,000 58,852,000
State and Municipal 13,289,000 8,828,000 4,755,000
Other 6,126,000 3,635,000 2,086,000
- -------------------------------------------------------------------------------------------------
Total $ 101,079,000 96,696,000 76,019,000
- -------------------------------------------------------------------------------------------------
Securities held to maturity
- -------------------------------------------------------------------------------------------------
Federal agencies mortgage backed $ 35,838,000 19,083,000 -
Obligations of Federal agencies - 6,000,000 9,669,000
State and Municipal 10,340,000 12,296,000 11,191,000
- -------------------------------------------------------------------------------------------------
Total $ 46,178,000 37,379,000 20,860,000
- -------------------------------------------------------------------------------------------------
</TABLE>
Approximately $70 million, or 48% 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 1998 and 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.
28
<PAGE>
Securities Portfolio, (Continued)
There has been a consistent trend of increasing the balance of securities
available for sale. In 1998 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 1998 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, 1998 increased by
4.7% over total deposits at December 31, 1997, which had a .8% decrease over
total deposits at December 31, 1996. 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
-------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand non-interest bearing $ 42,931,000 43,740,000 37,643,000
Demand interest bearing 38,462,000 30,679,000 23,410,000
Savings 56,714,000 52,783,000 53,175,000
Money Market 22,481,000 22,487,000 25,020,000
Time 146,772,000 143,954,000 156,698,000
- -------------------------------------------------------------------------------------------------------------
Total $ 307,360,000 293,643,000 295,946,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Table 15
Remaining Maturities of Time Deposits
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
December 31
------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 33,271,000 31,557,000 33,732,000
Over three through six months 32,373,000 32,327,000 36,191,000
Over six through twelve months 48,220,000 48,735,000 50,476,000
Over twelve months 32,908,000 31,335,000 36,299,000
- ------------------------------------------------------------------------------------------------------------
Total $ 146,772,000 143,954,000 156,698,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Table 16
Remaining Maturities of Time Deposits of
$100,000 or Greater
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 31
-----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 9,967,000 11,359,000 9,586,000
Over three through six months 12,005,000 10,128,000 14,662,000
Over six through twelve months 13,056,000 12,395,000 11,069,000
Over twelve months 6,605,000 5,852,000 7,257,000
- -----------------------------------------------------------------------------------------------------------------
Total $ 41,633,000 39,734,000 42,574,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Federal Fund rates, which are a driving factor in the pricing of
liabilities, have continued to remained stable in 1998. 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.
Because of the Bank's continued transition to a regional financial
institution in Northeastern, Pennsyl-vania, management altered the Bank's
pricing strategy on interest bearing liabilities. Management actively manages
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 a continuing decrease of $2,818,000 in 1998. This had a positive impact
on the Bank's interest margin by lowering the cost of time deposits in 1997 and
allowing the Bank to maintain that lower level of cost in 1998. Offsetting the
decrease in time deposits was an increase in low and non-interest bearing
deposits (demand interest bearing and savings) which increased $11,714,000 in
1998. The result was a decrease in the Bank's overall cost of deposits in 1998.
Taxation
Income tax expense was $1,535,000, $1,500,000, and $1,543,000 for 1998,
1997, and 1996, respectively. The Company's effective tax rate for these periods
was 27.6%, 27.2 %, and 29.4%, 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. 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.
30
<PAGE>
Liquidity, (Continued)
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 $125,256,000 at December 31, 1998. 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 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
31
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
in that financial statement. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company has included this new reporting
information in its 1998 consolidated financial statements as required.
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. The Company's 1998 annual financial statements include the
required disclosures for a business that is managed as one operating segment.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures
about Pensions and other 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 is effective for fiscal years beginning after December
15, 1997. This Statement requires changes in disclosures and did not effect the
financial condition, operations, or equity of the Corporation.
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.
32
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This Statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This statement is efective for the first fiscal quarter
beginning after December 15, 1998 with earlier adoption permitted. This
statement provides a one-time opportunity for an enterprise to reclassify, based
on the ability and intent on the date of adoption of this statement,
mortgage-backed securities and other beneficial interest retained after
securitization of mortgage loans held for sale from the trading category, except
for those with commitments in place. The Company has not yet determined the
impact, if any, of this Statement on earnings, financial condition or equity.
Other Matters
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
33
<PAGE>
Other Matters, (Continued)
on schedule with the testing of our core applications for critical dates. The
Company has tested past the Year 2000 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 $550,000. 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 $125,000,
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.
34
<PAGE>
Other Matters, (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.
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 9.7% between 1997 and 1998 and 11.9% between 1996
and 1997. 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 Company's ability to pay dividends to its' shareholders rests on the
ability of the Bank to pay dividends to the Company. 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,
1998, dividends in excess of those already declared from the Bank to the Company
are limited to $5,801,000. The dividends declared to the Company by the Bank
were $2,235,000 in 1998.
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, 1998, of which 4% must be
Tier I capital. The Company's total risk-based capital ratio was 16.6% at
December 31, 1998 and 17.1% at December 31, 1997. The Company's Tier I
risk-based capital ratio was 15.4 % at December 31, 1998 and 15.8% at December
31, 1997.
35
<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 8.4% at December 31, 1998 and
8.6 % at December 31, 1997.
At December 31, 1998, 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 were 16.2%, 14.9%, and 8.3%, 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
------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 1.02% 1.12% 1.13%
Return on equity (net income divided by average equity) 11.87% 12.77% 12.76%
Dividend payout ratio (cash dividends declared divided
by net income) 55.57% 51.27% 51.30%
Equity to asset ratio (average equity divided by average
total assets) 8.6 % 8.8 % 8.9 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Quarterly Financial Data (unaudited)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net Interest Income $ 3,551 3,541 3,475 3,416
Provision for Loan Losses 150 150 150 (30)
Other Operating Income 853 584 653 871
Other Operating Expense 2,674 2,714 2,742 2,837
Net Income 1,140 921 907 1,054
- -----------------------------------------------------------------------------------------------------
Earnings Per Share
Basic (1) $ 0.40 0.32 0.31 0.36
Diluted 0.39 0.31 0.31 0.36
- -----------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
37
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 13,977,000 14,918,000
Federal funds sold 7,600,000 -
Securities available for sale (cost
of $100,057,000 in 1998 and
$95,591,000 in 1997)
U.S. Treasury securities - 1,999,000
Federal agency mortgage based obligations 34,127,000 31,982,000
Other obligations of Federal agencies 47,537,000 50,252,000
Obligations of states and political subdivisions 13,289,000 8,828,000
Other securities 6,126,000 3,635,000
- --------------------------------------------------------------------------------------------------------
Total securities available for sale 101,079,000 96,696,000
- --------------------------------------------------------------------------------------------------------
Securities held to maturity (approximate fair value
of $46,729,000 in 1998 and
$37,857,000 in 1997):
Federal agency mortgage based obligations 35,838,000 19,083,000
Other obligations of Federal agencies - 6,000,000
Obligations of states and political subdivisions 10,340,000 12,296,000
- --------------------------------------------------------------------------------------------------------
Total securities held to maturity 46,178,000 37,379,000
- --------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 225,735,000 212,342,000
Allowance for loan losses (2,909,000) (2,759,000)
- --------------------------------------------------------------------------------------------------------
Net loans 222,826,000 209,583,000
- --------------------------------------------------------------------------------------------------------
Accrued interest receivable 2,547,000 3,168,000
Premises and equipment, net 7,067,000 5,334,000
Other real estate owned 1,449,000 1,045,000
Other assets 1,843,000 1,373,000
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $952,000 in 1998
and $913,000 in 1997) 591,000 630,000
- --------------------------------------------------------------------------------------------------------
Total assets $ 405,157,000 370,126,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets, (Continued)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 42,931,000 43,740,000
NOW and Super NOW 38,462,000 30,679,000
Savings 56,714,000 52,783,000
Money Market 22,481,000 22,487,000
Time 146,772,000 143,954,000
- ------------------------------------------------------------------------------------------------------------------
Total deposits 307,360,000 293,643,000
- ------------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,095,000 2,103,000
Dividends payable 581,000 544,000
Federal funds purchased - 2,350,000
Other borrowed money 58,357,000 37,073,000
Other liabilities 1,298,000 1,015,000
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 369,691,000 336,728,000
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share, 25,000,000 shares authorized;
2,904,309 shares in 1998; 2,862,874
in 1997 issued and outstanding 2,904,000 2,863,000
Additional paid-in capital 11,767,000 11,472,000
Retained earnings 20,121,000 18,334,000
Accumulated other comprehensive income 674,000 729,000
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 35,466,000 33,398,000
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 405,157,000 370,126,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP Condolidated Statements Of Operations
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 19,093,000 18,101,000 18,345,000
Interest on Federal funds sold 480,000 320,000 274,000
Interest on investments:
Taxable 7,615,000 7,063,000 5,144,000
Non-taxable 1,114,000 1,023,000 595,000
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 28,302,000 26,507,000 24,358,000
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 10,840,000 11,337,000 10,799,000
Interest on Federal funds purchased 23,000 10,000 1,000
Interest on other borrowed money 3,456,000 1,498,000 74,000
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 14,319,000 12,845,000 10,874,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 13,983,000 13,662,000 13,484,000
Provision for loan loss 420,000 535,000 500,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,563,000 13,127,000 12,984,000
- -----------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 1,334,000 1,330,000 1,168,000
Gains on sales of securities available for sale 509,000 154,000 -
Gains on calls of securities held to maturity 2,000 3,000 -
ATM fees 523,000 402,000 131,000
Other income 593,000 572,000 713,000
- -----------------------------------------------------------------------------------------------------------------------
Total other operating income 2,961,000 2,461,000 2,012,000
- -----------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 5,071,000 5,040,000 5,061,000
Net occupancy expense of bank premises 1,027,000 1,026,000 857,000
Furniture and equipment expenses 773,000 685,000 622,000
Data Processing expense 255,000 242,000 241,000
ORE Expense 360,000 121,000 193,000
Other expenses 3,481,000 2,966,000 2,775,000
- -----------------------------------------------------------------------------------------------------------------------
Total other operating expenses 10,967,000 10,080,000 9,749,000
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,557,000 5,508,000 5,247,000
Income tax expense 1,535,000 1,500,000 1,543,000
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,022,000 4,008,000 3,704,000
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during the period 282,000 1,013,000 (87,000)
Less reclassification adjustment for gains
included in net income (337,000) (104,000) -
Comprehensive income 3,967,000 4,917,000 3,617,000
- -----------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data: (Based on net income)
Basic $ 1.39 1.41 1.32
Diluted 1.36 1.36 1.26
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Changes in Stockholders' Equity Years ended
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumlated
Other
Additional Compre- Total
Common Paid-in Retained hensive Treasury Stockholders'
Stock Capital Earnings Income Stock Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 declared - $0.66 per share - - (1,900,000) - - (1,900,000)
Changes in net unrealized loss on
securities available for sale, net of tax - - - (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 declared - $0.72 per share - - (2,055,000) - - (2,055,000)
Changes in net unrealized gain on
securities available for sale, net of tax - - - 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
Net Income - - 4,022,000 - - 4,022,000
Cash dividends declared - $0.77 per share - - (2,235,000) - - (2,235,000)
Changes in net unrealized gain on
securities available for sale, net of tax - - - (55,000) - (55,000)
Purchase of Treasury stock (2,000) - - - (33,000) (35,000)
Exercise of stock options 43,000 295,000 - - 33,000 371,000
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 2,904,000 11,767,000 20,121,000 674,000 - 35,466,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,022,000 4,008,000 3,704,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net gain on sales of securities available
for sale (509,000) (154,000) -
Net gain on calls on investments securities (2,000) (3,000) -
Accretion of discount on securities
and money market investments (48,000) (63,000) (94,000)
Amortization of premium on investment
securities 394,000 91,000 97,000
Provision for loan losses 420,000 535,000 500,000
Decrease in deferred loan fees (260,000) (6,000) (116,000)
(Increase) decrease in deferred tax benefit 54,000 (2,000) (30,000)
Decrease (increase) in accrued interest receivable 621,000 (576,000) 41,000
Depreciation and amortization of premises
and equipment 859,000 844,000 770,000
Gain on sales of premises and equipment (23,000) (5,000) (6,000)
Loss on sale of other real estate 220,000 13,000 177,000
Proceeds from the sale of mortgage
and PHEAA loans held for sale 5,419,000 3,414,000 14,439,000
Net increase in mortgage & PHEAA
loans held for sale (5,712,000) (3,160,000) (2,584,000)
Gain on sale of mortgages and PHEAA loans (62,000) (58,000) (249,000)
(Decrease) increase in other assets (497,000) 57,000 (322,000)
Amortization of goodwill 39,000 38,000 39,000
Increase (decrease) in accrued interest payable (8,000) (98,000) 99,000
(Decrease) increase in other liabilities 283,000 (32,000) (61,000)
- ---------------------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
provided by operating activities 1,188,000 835,000 12,700,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,210,000 4,843,000 16,404,000
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 16,866,000 6,638,000 6,745,000
Proceeds from maturities and calls of securities
available for sale 31,788,000 38,459,000 35,908,000
Proceeds from sales of securities available for sale 20,217,000 17,799,000 6,327,000
Purchases of securities held to maturity (25,804,000) (44,593,000) (4,445,000)
Purchase of securities available for sale (56,167,000) (53,992,000) (47,188,000)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (14,130,000) (9,764,000) (18,923,000)
Acquisition of premises and equipment (2,635,000) (1,132,000) (1,071,000)
Proceeds from sales of premises and equipment 66,000 35,000 14,000
Proceeds from sale of other real estate 459,000 471,000 169,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,340,000) (46,079,000) (22,464,000)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows, (Continued)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease)increase in demand, NOW and Super
NOW, savings, money market and time deposits. $ 13,717,000 (2,303,000) 7,694,000
Dividends paid (2,198,000) (1,992,000) (1,837,000)
Other borrowed money 21,284,000 36,798,000 -
Increase (decrease) Federal funds purchased (2,350,000) 2,350,000 -
Exercise of stock options 336,000 273,000 54,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,789,000 35,126,000 5,911,000
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,659,000 (6,110,000) (149,000)
Cash and cash equivalents at beginning of year 14,918,000 21,028,000 21,177,000
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 21,577,000 14,918,000 21,028,000
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 14,327,000 12,943,000 10,775,000
Cash payments for income taxes 1,753,000 1,491,000 1,543,000
Transfer of assets from loans
to other real estate 1,083,000 753,000 190,000
Change in net unrealized loss(gain) on securities
available for sale 83,000 (1,378,000) 132,000
Tax effect on change in unrealized loss(gain)
on securities available for sale 28,000 (469,000) 45,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<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 entire business of the
Company is managed as one operating segment.
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 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 loan losses
and real estate owned, management obtains independent appraisals for
significant properties to the extent considered practical.
44
<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, 1998, was
$4,078,000, 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, 1998,
the amount of such required balances was $22,000.
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.
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.
45
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(1) Continued
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.
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
46
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(1) Continued
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.
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,
1998 and 1997. While management uses the best information available to
make its evaluations, future adjustments to the valuation of other real
estate may be necessary if economic conditions differ significantly
from the 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
47
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(1) Continued
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.
(2) Securities Available for Sale
Securities available for sale at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------
Cost Unrealized Carrying Value
- ---------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage-backed obligations:
Federal National Mortgage Association $ 9,365,000 42,000 (10,000) 9,397,000
Federal Home Loan Mortgage Corporation 5,464,000 - (35,000) 5,429,000
Government National Mortgage Association 19,078,000 239,000 (16,000) 19,301,000
Other obligations of Federal agencies 47,207,000 391,000 (61,000) 47,537,000
State and municipals 12,817,000 502,000 (30,000) 13,289,000
Other securities 6,126,000 - - 6,126,000
- ---------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 100,057,000 1,174,000 (152,000) 101,079,000
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------
Cost Unrealized Carrying Value
- ---------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ---------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(2) Continued
The amortized cost and fair value of securities available for sale at
December 31, 1998 are due as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1998
---------------------------------------------------
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------------------------
Securities Available for Sale
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 17,117,000 17,144,000
Due after one year through five years 25,934,000 26,213,000
Due after five years through ten years 16,471,000 16,969,000
Due after ten years 40,535,000 40,753,000
- ------------------------------------------------------------------------------------------------
Total securities available for sale $ 100,057,000 101,079,000
- ------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale during 1998 were
$20,217,000. Gross gains of $509,000 and gross losses of $-0- were
realized on these sales. Proceeds from sales of securities available
for sale during 1997 were $17,799,000. Gross gains of $170,000 and
gross losses of $16,000 were realized on these sales. Proceeds from
sales of securities available for sale during 1996 were $6,327,000.
There were no gains or losses realized on these sales.
(3) Securities Held to Maturity
Securities held to maturity at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agencies mortgage backed $ 35,838,000 184,000 (43,000) 35,979,000
Obligations of state and politcal subdivisions 10,340,000 413,000 (3,000) 10,750,000
- -------------------------------------------------------------------------------------------------------------
Securities held for investment $ 46,178,000 597,000 (46,000) 46,729,000
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- -------------------------------------------------------------------------------------------------------------
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 states and political 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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(3) Continued
The amortized cost and market value of investment securities at
December 31, 1998 are due as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, 1998
----------------------------------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Securities
- -------------------------------------------------------------------------------------------------------------
Due in one year or less $ 2,600,000 2,628,000
Due after one year through five years 4,185,000 4,363,000
Due after five years through ten years 3,085,000 3,273,000
Due after ten years 36,308,000 36,465,000
- -------------------------------------------------------------------------------------------------------------
Total investment securities $ 46,178,000 46,729,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, securities with an aggregate book value
of $40,407,000 and $29,654,000 respectively, were pledged to secure
public deposits.
There were no sales of securities held to maturity during the periods
presented herein.
(4) Loans
Loans at December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial business $ 17,264,000 15,534,000
Commercial real estate 71,389,000 69,505,000
Real estate construction 1,120,000 1,002,000
Real estate residential (mortgage and installment) 133,521,000 120,604,000
Consumer 17,681,000 17,865,000
- -------------------------------------------------------------------------------------------------------
Total loans, gross 240,975,000 224,510,000
Unearned discount (14,531,000) (11,199,000)
Deferred loan fees (709,000) (969,000)
- -------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount
and deferred loan fees $ 225,735,000 212,342,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(4) Loans
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, 1998 and 1997. 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 $1,684,000 as of December 31, 1998 and $2,596,000 as of
December 31, 1997. 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 $98,000,
$149,000, and $160,000 for the years ended December 31, 1998, 1997, and
1996 respectively. The amount of interest income on non-accruing loans
which were recorded in income was $13,000 in 1998, and $12,000 in 1997
and -0- for 1996, respectively. The total amount of restructured loans
were $1,247,000, $890,000, and $643,000 as of December 31, 1998, 1997,
and 1996, respectively. The amount of interest on restructured loans
which was recorded in income was $98,000, $59,000, and $54,000 during
1998, 1997, and 1996, 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 $24,000, $33,000, and $48,000 for the years ended December 31, 1998,
1997, and 1996.
As of December 31, 1998, the Company had impaired loans with a total
recorded investment of $1,530,000 and $1,922,000 on December 31, 1997.
The average recorded investment for the twelve month period ended
December 31, 1998, 1997, and 1996 was $1,837,000, $1,914,000, and
$1,145,000, respectively. Interest income recognized during each of
these periods was nominal. As of December 31, 1998, the amount of
recorded investment in impaired loans for which there is a related
allowance for credit losses and amount of the allowance is $425,000 and
$106,000, respectively and $815,000 and $185,000 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, 1998 is
$1,105,000 and $1,107,000 for December 31, 1997. 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 $2,580,000 and $2,715,000 at December 31, 1998 and 1997,
respectively. These loans were made in the ordinary course of business
at substantially the same terms and conditions as those with other
borrowers.
51
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(4) Continued
An analysis of the activity of these loans follows:
- -------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------
Balance January 1 $ 2,715,000
New loans 925,000
Repayments 1,060,000
- -------------------------------------------------------------------------------
Balance December 31 $ 2,580,000
- -------------------------------------------------------------------------------
In 1998, 1997 and 1996 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 $3,452,000, $992,000, and $12,380,000 respectively. The
Company recognized a gain of $36,000 in 1998 and a gain of $20,000 and
$220,000 in 1997 and 1996, respectively, from these transactions. The
proceeds from the sale of PHEAA loans by the Company were $1,967,000,
$2,422,000 and $2,059,000 in 1998, 1997, and 1996, resulting in gains
of $26,000, $38,000, and $29,000, respectively. Loans serviced for the
benefit of others approximated $18,231,000 and $19,299,000 as of
December 31, 1998 and 1997, respectively.
(5) Allowance for Loan Losses
Activity in the allowance for loan losses for the years ended December
31, 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,759,000 2,750,000 2,742,000
Additions and (deductions):
Loans charged-off (308,000) (599,000) (518,000)
Recoveries 38,000 73,000 26,000
- ---------------------------------------------------------------------------------------------------------
Net loans charged-off (270,000) (526,000) (492,000)
- ---------------------------------------------------------------------------------------------------------
Provision for loan losses 420,000 535,000 500,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,909,000 2,759,000 2,750,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(6) Premises and Equipment
Premises and equipment are comprised of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premises owned $ 5,801,000 4,675,000
Furniture and equipment 8,700,000 7,331,000
Leasehold improvements 1,334,000 1,336,000
- ----------------------------------------------------------------------------------------------------------
15,835,000 13,342,000
Accumulated depreciation and amortization (8,768,000) (8,008,000)
- ----------------------------------------------------------------------------------------------------------
$ 7,067,000 5,334,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Occupancy expenses are reduced by rental income from premises owned of
$30,000 in 1998, $31,000 in 1997 and $73,000 in 1996.
(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, 1998 and 1997:
- --------------------------------------------------------------------------------
Maturity 1998 1997
- --------------------------------------------------------------------------------
Less than one year $ 113,864,000 112,619,000
Greater than one year 32,908,000 31,335,000
- --------------------------------------------------------------------------------
$ 146,772,000 143,954,000
- --------------------------------------------------------------------------------
The aggregate amount of certificates of deposit, each $100,000 or more,
was $41,633,000 and $39,734,000 at December 31, 1998 and 1997,
respectively. Interest expense associated with certificates of deposit,
each $100,000 or more, was approximately $2,510,000, $2,782,000, and
$1,951,000, respectively, for the years ended December 31, 1998, 1997
and 1996.
(8) Other Borrowed Money
The Bank maintains a collateralized maximum borrowing capacity of
$129,602,000 with the Federal Home Loan Bank of Pittsburgh (FHLB).
Inclusive in this figure is an available line of credit of $13,000,000.
The line is collateralized by eligible securities. At December 31, 1998
and 1997 there were no borrowing outstanding against the Bank's line of
credit. 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,
adjustable quarterly thereafter
53
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(8) Continued
at the option of the FHLB. On January 22, 1998 the Bank also borrowed
$25,000,000 at a ten year/five year putable program with a fixed rate
of 5.38%.
The balance of other borrowed money and Federal funds purchased as of
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1998
FHLB Advances $ 58,082,000 6.15% $ 61,497,000 $ 58,689,000 5.86%
Note Payable 275,000 6.50 275,000 275,000 6.50
Federal funds purchased - - 3,000,000 447,000 4.92
1997
FHLB Advances $ 36,798,000 6.36% $ 37,984,000 $ 23,323,000 6.35%
Note Payable 275,000 6.50 275,000 275,000 6.50
Federal funds purchased 2,350,000 8.00 2,350,000 160,000 6.25
1996
FHLB Advances $ - - % $ - $ - - %
Note Payable 275,000 6.50 275,000 275,000 6.50
Federal funds purchased - - - - -
</TABLE>
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 5.38% to 6.45% at December 31, 1998 are due as
follows :
Weighted
Average
Amount Rate
-------------- ---------------
1999 3,962,000 6.45%
2000 4,226,000 6.45
2001 4,506,000 6.45
2002 20,388,000 5.99
2008 25,000,000 5.38
--------------
$ 58,082,000
==============
54
<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 financial condition and
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 $310,000, $304,000 and
$233,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following is a schedule by years for future minimum rental payments
required for operating leases as of December 31, 1998:
Years ending December 31:
1999 282,000
2000 228,000
2001 138,000
2002 77,000
2003 75,000
2004 thereafter 139,000
----------------
Total minimum
payments required $ 939,000
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.
The Company had outstanding standby letters of credit in the amount of
approximately $2,131,000 and $1,929,000 and unfunded loan and line of
credit commitments in the amount of approximately $14,846,000 and
$14,374,000 at December 31, 1998 and 1997, respectively. These
instruments involve, to
55
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(9) Continued
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.
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>
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Net income $ 4,022 4,008 3,704
============ ============ ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,894 2,850 2,812
Effect of dilutive securities:
Employee stock options 59 89 120
------------ ------------ -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,953 2,939 2,932
============ ============ ===========
Basic earnings per share $ 1.39 1.41 1.32
============ ============ ===========
Diluted earnings per share $ 1.36 1.36 1.26
============ ============ ===========
</TABLE>
56
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(10) Continued
The weighted average number of basic shares outstanding in 1998, 1997
and 1996 were, 2,893,570, 2,849,723, and 2,812,269 shares,
respectively. The weighted average number of diluted shares outstanding
in 1998, 1997, and 1996 were 2,953,325, 2,939,090 and 2,932,161 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.
Changes in total options outstanding during 1998, 1997, and 1996, were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Weighted
Number of Exercise Price Average
Options Per Option (1) Exercise Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
ISOs Exercised (42,935) $8.00 - $ 9.00 8.64
- -------------------------------------------------------------------------------------------
Balance at December 31, 1998 102,193 $8.00 - $13.00 11.26
- -------------------------------------------------------------------------------------------
</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, 1998:
- --------------------------------------------------------------------------------
Exercisable
-------------------------------------------------------
Exercise Average
Price Range Shares Average Life (1) Exercise Price
- -------------------------------------------------------------------------------
$ 8.00 9,525 2.50 $ 8.00
9.00 32,668 4.33 9.00
$ 13.00 60,000 5.17 $ 13.00
- --------------------------------------------------------------------------------
Total 102,193 4.00 11.26
- --------------------------------------------------------------------------------
(1) Average contractual life remaining in years.
57
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(11) Continued
The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", and has instead continued to apply the existing
intrinsic value method in accounting for stock based compensation and
provide the required proforma disclosure of SFAS No. 123. The Company
did not grant any options in 1998, 1997 or 1996. 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.
(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, 1998,
dividends in excess of those already declared from the Bank to the
Company are limited to $5,801,000. The dividends declared to the
Company by the Bank were $2,235,000 in 1998.
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, 1998.
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, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To
58
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(12) Continued
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.
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
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $36,359,000 16.22% > $ 17,935,840 > 8.00% > $ 22,419,800 > 10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $33,555,000 14.97% > $ 8,967,920 > 4.00% > $ 13,451,880 > 6.00%
- - - -
Tier I Capital
(to Average Assets) $33,555,000 8.25% > $ 16,260,840 > 4.00% > $20,326,050 > 5.00%
- - - -
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%
- - - -
</TABLE>
(13) Income Taxes
The components of federal income tax expense (benefit) are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Current $ 1,481,000 1,502,000 1,573,000
Deferred 54,000 (2,000) (30,000)
- --------------------------------------------------------------------------------
$ 1,535,000 1,500,000 1,543,000
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Tax expense at 34% rate $ 1,889,000 1,873,000 1,784,000
Interest from tax exempt loans
and investments (368,000) (361,000) (251,000)
Other, net 14,000 (12,000) 10,000
- --------------------------------------------------------------------------------
Income tax expense $ 1,535,000 1,500,000 1,543,000
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Executive retirement plan $ 251,000 243,000
Allowance for loan losses 713,000 662,000
Deferred loan fees 185,000 266,000
Deferred directors fees 116,000 116,000
Non-accrual interest 45,000 64,000
Others, net 39,000 39,000
- -----------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,349,000 1,390,000
Deferred tax liabilities:
Accumulated amortization of discount
on investment securities (118,000) (194,000)
Depreciation (325,000) (236,000)
Unrealized gain on securities available for sale (347,000) (376,000)
- -----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (790,000) (806,000)
- -----------------------------------------------------------------------------------------------------
Net deferred tax asset $ 559,000 584,000
- -----------------------------------------------------------------------------------------------------
</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, 1998 and 1997. 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, 1998 and 1997, net deferred tax benefits of $559,000
and $584,000 respectively, are included in other assets, and income
taxes currently recoverable of $257,000 and -0-, respectively are
included in other assets. At December 31, 1997, $15,000 of income taxes
currently payable was 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 $2,000, $54,000 and $-0- were accrued in 1998, 1997 and
1996, respectively.
The ESOP held 143,579 and 148,770 shares of the Bank's common stock at
December 31, 1998 and 1997, 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 $121,000 in
1998, $115,000 in 1997, and $105,000 in 1996.
During 1996, 1997 and through and until October 1998, the Company
maintained employment contracts with its President and Senior Executive
Vice President. The employment contracts provided for a minimum annual
salary and certain incentives in the event of a merger of the Company.
During this period, the Company also paid premiums on split dollar life
insurance policies on the lives of these executives and expects
reimbursement of policy premiums upon the death or termination of these
executives. The Company has also agreed to provide enhanced retirement
benefits for these executives. Costs for these benefits were
approximately $24,000, $44,000 and $84,000 in 1998, 1997 and 1996,
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 1998,
1997 and 1996. In 1998, 1997 and 1996, $36,000, was remitted for the
payment of insurance premiums. Assets held by the insurance company
which have reduced the company's accrual were $502,000 and $452,000 at
December 31, 1998 and 1997, respectively. Expense under this plan was
$12,000, $24,000, and $6,000 in 1998, 1997 and 1996, 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
inherent credit 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
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>
- ----------------------------------------------------------------------------------------------------
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 13,977,000 13,977,000 14,918,000 14,918,000
Federal funds sold 7,600,000 7,600,000 - -
Securities available for sale 101,079,000 101,079,000 96,696,000 96,696,000
Securities held to maturity 46,178,000 46,729,000 37,379,000 37,857,000
Loans 222,826,000 229,198,000 209,583,000 213,705,000
Financial liabilities:
Deposits $ 307,360,000 307,732,000 293,643,000 293,686,000
Federal funds purchased - - 2,350,000 2,350,000
Other borrowed money 58,357,000 58,357,000 37,073,000 37,073,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
The contract amount and estimated fair value for commitments to extend
credit and standby letters of credit are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
At December 31, 1998 At December 31, 1997
------------------------------- -------------------------------
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $ 14,846,000 223,000 14,374,000 216,000
Standby letters of credit 2,131,000 43,000 1,929,000 39,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(16) Pioneer American Holding Company Corp. (Parent Company Only)
Condensed 1998, 1997 and 1996 financial information is as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Assets 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 594,000 396,000
Investment in subsidiary 34,820,000 32,950,000
Receivable from subsidiary 633,000 596,000
- -------------------------------------------------------------------------------------
Total assets $ 36,047,000 33,942,000
- -------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Dividends payable 581,000 544,000
Stockholders' equity 35,466,000 33,398,000
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 36,047,000 33,942,000
- -------------------------------------------------------------------------------------
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses:
Administrative and other $ 138,000 50,000 69,000
- -------------------------------------------------------------------------------------
Loss before earnings of subsidiary (138,000) (50,000) (69,000)
Earnings of subsidiary:
Received as dividends 2,235,000 2,055,000 1,900,000
Undistributed 1,925,000 2,003,000 1,873,000
- -------------------------------------------------------------------------------------
Net income $ 4,022,000 4,008,000 3,704,000
- -------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
(16) Pioneer American Holding Company Corp. (Parent Company Only),
(Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,022,000 4,008,000 3,704,000
Adjustments to reconcile net income to net
cash from operating activities:
Undistributed earnings of subsidiary (1,925,000) (2,003,000) (1,873,000)
Other (37,000) (62,000) (63,000)
- -------------------------------------------------------------------------------------
Net cash from operating activities 2,060,000 1,943,000 1,768,000
- -------------------------------------------------------------------------------------
Cash flows used in financing activities:
Dividend paid (2,198,000) (1,992,000) (1,837,000)
Exercise of stock options 336,000 273,000 54,000
- -------------------------------------------------------------------------------------
Net cash used in financing activities (1,862,000) (1,719,000) (1,783,000)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash 198,000 224,000 (15,000)
Cash at beginning of year 396,000 172,000 187,000
- -------------------------------------------------------------------------------------
Cash at end of year $ 594,000 396,000 172,000
- -------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pioneer American Holding Company Corp.:
We have audited the accompanying consolidated balance sheets of Pioneer
American Holding Company Corp. and subsidiary (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly. In all material respects, the financial position of Pioneer
American Holding Company Corp. and subsidiary as of December 31, 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Janaury 25, 1999
Philadelphia, Pennsylvania
67
<PAGE>
SIGNATURES
<TABLE>
<CAPTION>
<S> <C>
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.
Director
PIONEER AMERICAN HOLDING COMPANY CORP.
Date: March 26, 1999 /S/WILLIAM K. NASSER
WILLIAM K. NASSER
Director
By/S/John W. Reuther /S/RICHARD CHOJNOWSKI
John W. Reuther RICHARD CHOJNOWSKI
President, Chief Executive Officer, Director
& Chief Financial Officer
By/S/Richard J. Lapera /S/JOHN W. REUTHER
Richard J. Lapera JOHN W. REUTHER
Comptroller of Pioneer American Director
Bank, National Association
/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>
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 1998, 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, 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>
Item 10
Directors and Executive Officers
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Item 11
Executive Compensation
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Item 12
Security Ownership of Certain Beneficial Owners and Management
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.
Item 13
Certain Relationships and Related Transactions
The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference
70
<PAGE>
Consent of Independent Auditors
The Board of Directors
Pioneer American Holding Company Corp.:
We consent to incorporation by reference in the Registration Statement (No.
33-70784) on Form S-8 of Pioneer American Holding Company Corp. of our report
dated January 25, 1999, relating to the consolidated balance sheets of Pioneer
American Holding Company Corp. and subsidiaries as of December 31, 1998, and
1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of Pioneer American Holding Company Corp.
KPMG LLP
Philadelphia, PA
March 26, 1999
71
<PAGE>
Consent of Independent Auditors
The Board of Directors
Pioneer American Holding Company Corp.:
We consent to incorporation by reference in the registration Statement ( No.
33-70784) on Form S-8 of Pioneer American Holding Company Corp. of our report
dated January 29, 1998, relating to the consolidated balance sheet of Pioneer
American Holding Company Corp. and subsidiaries 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, which report appears in the December 31, 1997
annual report on Form 10-K of Pioneer American Holding Company Corp.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 23, 1998
72
<PAGE>
Consent of Independent Auditors
The Board of Directors
Pioneer American Holding Company Corp.:
We consent to incorporation by reference in the Registration Statement (No.
33-70784) on Form S-8 of Pioneer American Holding Company Corp. of our report
dated January 23, 1997, relating to the consolidated balance sheet of Pioneer
American Holding Company Corp. and subsidiaries as of December 31, 1996, and
1995, 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, 1996, which report appears in the December 31, 1996
annual report on Form 10-K of Pioneer American Holding Company Corp.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 31, 1997
73
<PAGE>
Consent of Independent Auditors
The Board of Directors
Pioneer American Holding Company Corp.
We consent to incorporation by reference in the registration statement (No.
33-70784) on Form S-8 of Pioneer American Holding Company Corp. of our report
dated January 26, 1996, relating to the consolidated balance sheet of Pioneer
American Holding Company Corp. and subsidiaries as of December 31, 1995, and
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995, which report appears in the December 31, 1995
annual report on Form 10-K of Pioneer American Holding Company Corp.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 27, 1996
74
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000760731
<NAME> Pioneer American Holding Co.
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 13,977
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,079
<INVESTMENTS-CARRYING> 46,178
<INVESTMENTS-MARKET> 46,729
<LOANS> 225,735
<ALLOWANCE> 2,909
<TOTAL-ASSETS> 405,157
<DEPOSITS> 307,360
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,974
<LONG-TERM> 58,357
0
0
<COMMON> 2,904
<OTHER-SE> 32,562
<TOTAL-LIABILITIES-AND-EQUITY> 405,157
<INTEREST-LOAN> 19,093
<INTEREST-INVEST> 8,729
<INTEREST-OTHER> 480
<INTEREST-TOTAL> 28,302
<INTEREST-DEPOSIT> 10,840
<INTEREST-EXPENSE> 14,319
<INTEREST-INCOME-NET> 13,983
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 511
<EXPENSE-OTHER> 10,967
<INCOME-PRETAX> 5,557
<INCOME-PRE-EXTRAORDINARY> 4,022
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,022
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.54
<LOANS-NON> 1,684
<LOANS-PAST> 838
<LOANS-TROUBLED> 1,247
<LOANS-PROBLEM> 488
<ALLOWANCE-OPEN> 2,759
<CHARGE-OFFS> 308
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 2,909
<ALLOWANCE-DOMESTIC> 1,669
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,240
</TABLE>
