FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________________ to
_______________________ (Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission file Number 0-14506
Pioneer American Holding Company, Corp. (Exact name of registrant as specified
in its charter) Pennsylvania 23-2319931 (State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification No.)
41 North Main Street, Carbondale, PA 18407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 282-2662
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares
outstanding as of September 30, 1999 2,864,307 shares
<PAGE>
INDEX
PIONEER AMERICAN HOLDING COMPANY, CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--September 30, 1999
and December 31, 1998.----------------------------------Page 2-3
Consolidated Statements of Operations-Three and Nine
months ended September 30, 1999 and 1998----------------Page 4
Consolidated Statements of Cash Flows--Nine months
ended September 30, 1999 and 1998.----------------------Pages 5-6
Notes to Consolidated Financial Statements--
September 30, 1999.-------------------------------------Pages 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.-------------------------------Pages 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings----------------------------------------Page 15
Item 2. Changes in Securities------------------------------------Page 15
Item 3. Defaults upon Senior Securities--------------------------Page 15
Item 4. Submission of Matters to a Vote of Security Holders------Page 15
Item 5. Other Information----------------------------------------Page 15
Item 6. Exhibits and Reports on form 8-K-------------------------Page 15
SIGNATURES--------------------------------------------------------Page 16
1
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Balance Sheets
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
Assets (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 13,419 13,977
Federal funds sold 2,425 7,600
Securities available for sale (cost of securities of $119,558 on September 30,
1999 and $100,057 on December 31, 1998)
Federal agency mortgage backed obligations 47,849 34,127
Other obligations of Federal agencies 46,665 47,537
Obligations of states and political subdivisions 14,894 13,289
Other securities 6,139 6,126
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale 115,547 101,079
- ----------------------------------------------------------------------------------------------------------------
Securities held to maturity (approximate market value of $36,750 on September
30, 1999 and $46,729 on December 31, 1998)
Federal agency mortgage backed obligations 29,131 35,838
Obligations of states and political subdivisions 8,313 10,340
- ----------------------------------------------------------------------------------------------------------------
Total securities held to maturity 37,444 46,178
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 240,566 225,735
Allowance for loan losses (3,000) (2,909)
- ----------------------------------------------------------------------------------------------------------------
Net loans 237,566 222,826
- ----------------------------------------------------------------------------------------------------------------
Accrued interest receivable 2,974 2,547
Premises and equipment 6,483 7,067
Other real estate owned 1,101 1,449
Other assets 4,333 1,843
Cost in excess of fair value of net assets acquired (net of accumulated
amortization of $981 at September 30,
1999 and $952 at December 31, 1998) 562 591
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 421,854 405,157
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Balance Sheets, Continued
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
Liabilities and Stockholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 48,808 42,931
NOW and Super NOW 35,189 38,462
Savings 56,361 56,714
Money Market 22,655 22,481
Time 141,619 146,772
- ------------------------------------------------------------------------------------------------------------
Total deposits 304,632 307,360
- ------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,085 2,095
Dividends payable 573 581
Other borrowed money 80,409 58,357
Other liabilities 2,249 1,298
- ------------------------------------------------------------------------------------------------------------
Total liabilities 389,948 369,691
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share, 25,000,000 shares authorized;
2,935,367 shares at September 30, 1999 and 2,904,309 at December 31, 1998
issued 2,935 2,904
Additional paid-in capital 11,913 11,768
Retained earnings 21,435 20,120
Accumulated other comprehensive (loss)income (2,647) 674
Less: Treasury stock at cost (71,060 shares)
on September 30, 1999 (1,730) 0
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 31,906 35,466
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 421,854 405,157
- ------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statement of Operations (Unaudited)
Three Months Ended Nine Months Ended
(Dollars in thousands) (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,908 4,803 14,642 14,277
Interest on Federal funds sold 47 162 198 253
Interest on investments:
Taxable 2,092 1,842 6,167 5,824
Non-taxable 316 270 943 828
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 7,363 7,077 21,950 21,182
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,562 2,721 7,918 8,002
Interest on Federal funds purchased 0 0 0 23
Interest on other borrowed money 1,136 881 3,246 2,590
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,698 3,602 11,164 10,615
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 3,665 3,475 10,786 10,567
Provision for loan losses 95 150 280 450
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,570 3,325 10,506 10,117
- ------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 400 345 1,148 982
Gain on sale of available for sale securities 0 0 88 296
Gain on call of securities held to maturity 0 2 0 2
ATM fees 173 156 470 375
Other income 139 150 410 435
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 712 653 2,116 2,090
- ------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,317 1,319 4,038 3,989
Net occupancy expense of bank premises 252 250 806 769
Furniture and equipment expenses 242 201 731 563
Data processing expense 55 64 177 188
Other expenses 852 908 2,704 2,621
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,718 2,742 8,456 8,130
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,564 1,236 4,166 4,077
Income tax expense 430 329 1,110 1,109
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,134 907 3,056 2,968
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss)income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during
the period (582) 393 (3,263) 450
Less reclassification adjustment for gains
included in net income 0 (1) (58) (197)
Comprehensive (loss)income 552 1,299 (265) 3,221
- ------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data:
Basic $ 0.39 0.31 1.05 1.03
Diluted 0.39 0.31 1.04 1.01
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
September 30, September 30,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,056 2,968
Adjustments to reconcile net income to net
cash from operating activities:
Net gain on call of securities 0 (2)
Net gain on sale of securities available for sale (88) (296)
Accretion of discount on securities
and money market investments (118) (32)
Amortization of premium on investment
securities 324 263
Provision for loan losses 280 450
Decrease in deferred loan fees (59) (73)
Decrease (increase) in accrued interest receivable (427) 483
Depreciation and amortization of premises
and equipment 790 630
Loss/(gain) on sale of premises and equipment 1 (6)
Loss on sale of other real estate 90 119
Proceeds from the sale of mortgages
and PHEAA loans held for sale 1,299 4,238
Net increase in mortgage and PHEAA loans
held for sale (1,299) (4,238)
Gain on sale of mortgages and PHEAA loans (11) (43)
Increase in other assets (778) (1,784)
Amortization of goodwill 29 29
(Decrease) increase in accrued interest payable (10) 16
Increase in other liabilities 951 1,479
- --------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
from operating activities 974 1,233
- --------------------------------------------------------------------------------------------------------
Net cash from operating activities 4,030 4,201
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 8,571 12,584
Proceeds from maturities and calls of
securities available for sale 15,827 17,098
Proceeds from sales of securities available for sale 4,626 12,012
Purchases of securities held to maturity 0 (25,705)
Purchases of securities available for sale (39,909) (17,980)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (15,297) (13,799)
Acquisition of premises and equipment (207) (1,390)
Proceeds from sale of premises and equipment 0 7
Proceeds from sale of other real estate 605 246
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,784) (16,927)
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statements of Cash Flows, Continued (Unaudited)
Nine Months Ended
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------
September 30, September 30,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase(decrease) in demand, NOW and Super NOW,
savings, money market and time deposits. $ (2,728) 9,657
Dividends paid (1,749) (1,646)
Exercise of stock options 176 337
Purchase of treasury stock (1,730) 0
Federal funds purchased 0 (2,350)
Addition to other borrowed money 25,000 25,000
Repayment of other borrowed money (2,948) (2,765)
- ------------------------------------------------------------------------------------------------------
Net cash from financing activities 16,021 28,233
- ------------------------------------------------------------------------------------------------------
Net increase(decrease) in cash and cash equivalents (5,733) 15,507
Cash and cash equivalents at beginning of period 21,577 14,918
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,844 30,425
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 11,174 10,033
Cash payments for income taxes 989 1,350
Transfer of assets from loans
to other real estate 347 502
Net unrealized loss (gain) on securities
available for sale, gross 5,033 (383)
Tax effect on unrealized loss(gain)
on securities available for sale 1,712 (130)
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
Notes to Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
Business--Pioneer American Holding Company, Corp. (the "Company") and its
wholly owned subsidiary, Pioneer American Bank, National Association ("Pioneer")
provide a wide range of banking services to individual and corporate customers
through its branch banks in Lackawanna, Luzerne, Wayne, Wyoming, Susquehanna and
Monroe counties in Northeastern Pennsylvania. Pioneer is subject to competition
from other financial institutions and other financial services companies.
Pioneer is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation--The accompanying consolidated
financial statements were prepared in accordance with instructions to Form 10-Q,
and therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all normal,
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial statements, have been included. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report for the
period ended December 31, 1998. The results for the nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999. All material intercompany balances and
transactions between the Company and its subsidiary have been eliminated. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Certain prior period
numbers were reclassified to conform with current year presentation.
Impact of Other Recently Issued Accounting Standards -- In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement (as amended by SFAS No. 137 in June, 1999)
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 certain
foreign currency exposures. SFAS No. 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier adoption
is permitted. The Company has not yet determined the impact, if any, of this
statement, including its provisions for the potential reclassifications of
investment securities, on earnings, financial condition or equity.
(2) Securities Portfolio
Securities available for sale at September 30, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
September 30, December 31,
1999 1998
Cost Market Value Cost Market Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage backed
obligations $ 50,049 47,849 33,907 34,127
Other obligations of Federal agencies 47,985 46,665 47,207 47,537
Obligations of State and Political subdivisions 15,385 14,894 12,817 13,289
Other securities 6,139 6,139 6,126 6,126
----------------------------------------------------------------------
Securities available for sale: $ 119,558 115,547 100,057 101,079
----------------------------------------------------------------------
</TABLE>
The adjustment in stockholders' equity for the unrealized loss of the securities
available for sale at September 30, 1999, net of tax, was $(2,647,000). Included
in net deferred tax assets is $1,364,000 for this same unrealized loss.
Securities held to maturity at September 30, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
September 30, December 31,
1999 1998
Cost Market Value Cost Market Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage backed
obligations $ 29,131 28,276 35,838 35,979
Obligations of State and Political subdivisions 8,313 8,474 10,340 10,750
----------------------------------------------------------------------
Securities held to maturity: $ 37,444 36,750 46,178 46,729
----------------------------------------------------------------------
</TABLE>
7
<PAGE>
Notes to Condensed Consolidated Financial Statements
- -------------------------------------------------------
(3) Stockholders' Equity and Per Share Data
The Company currently has one million shares of authorized, but unissued
preferred stock. At September 30, 1999 there were 25,000,000 shares of common
stock at $1 par value authorized with 2,935,367 shares issued and 2,864,307
outstanding.
At September 30, 1999 the Company had issued and outstanding 45,125 options
to purchase shares of the Company, exercisable at between $8.00 to $13.00 per
share. Such options were issued with exercise prices equal to the market value
of the Company's common shares at the time of the grant. In the first quarter of
1999 46,668 options were exercised, in the second quarter 275, and during the
third quarter 10,125 of the previously issued options were exercised.
Basic earnings per share is calculated by dividing net income by the
weighted average shares outstanding during the period. The dilutive effect of
stock options is excluded from basic earnings per share, but included in the
computation of diluted earnings per share.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,134 907 3,056 2,968
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,901 2,901 2,914 2,890
Effect of dilutive securities -
Employee stock options 28 55 28 63
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,929 2,956 2,942 2,953
============ ============ ============ ============
Basic earnings per share $ 0.39 0.31 1.05 1.03
============ ============ ============ ============
Diluted earnings per share $ 0.39 0.31 1.04 1.01
============ ============ ============ ============
</TABLE>
The market value of the common shares of the Company at September 30, 1999 was
$24.00 per share.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation
- --------------------------------------------------------------------------------
Highlights
- ----------
Total assets increased $16,697,000 or by 4.1% to $421,854,000 at September
30, 1999 from $405,157,000 at December 31, 1998. The primary reasons for the
increase were increases in Securities Available for Sale of $14,468,000, Net
Loans of $14,740,000 and Other Assets of $2,490,000 offset by decreases in Cash
And Due From Banks and Federal Funds Sold of $5,733,000 and Securities Held to
Maturity of $8,734,000.
Total liabilities increased $20,257,000 from December 31, 1998 to September
30, 1999. The primary reason for the increase was an increase in Other Borrowed
Money of $22,052,000 offset by a decrease in Total Deposits of $2,728,000.
Total Stockholders' Equity decreased $3,560,000 primarily as a result of a
decrease in Accumulated Other Comprehensive Income combined with an increase in
Treasury Stock which was partially offset by an increase in Retained Earnings.
Average earning assets were $399,016,000 during the nine months ended
September 30, 1999 and $366,630,000 during the nine months ended September 30,
1998. This is an increase of $32,386,000 or 8.8%. For the third quarter average
earning assets were $400,355,000 for 1999 and $371,023,000 for 1998, an increase
of $29,332,000 or 7.9%.
Average total assets for the nine months ended September 30, 1999 were
$423,585,000 and $390,083,000 for the nine months ended September 30, 1998 and
$425,484,000 and $395,552,000 for the three months ended September 30, 1999 and
1998, respectively. The return on average total assets was 1.0% for nine months
and 1.1% for three months ended September 30, 1999. The return on average total
assets was 1.0% for both the nine months and three months ended September 30,
1998. Return on average equity for the nine and three months ended September 30,
1999 were 11.6% and 13.3%, respectively, and for the same periods in 1998 were
11.7% and 10.6%. Average equity was $34,977,000 for the first nine months and
$34,102,000 for the third quarter of 1999 and $33,689,000 for the first nine
months and $34,125,000 for the third quarter of 1998.
Net income increased $88,000 or 3.0% comparing the first nine months of 1999
to the first nine months of 1998. The increase in 1999 was driven by an increase
in net interest income after provision for loan losses. This increase was
partially offset by a lesser increase in total other operating expense. Net
income for the third quarter of 1999 increased $227,000 or 25.0% compared to the
same period in 1998. This increase was primarily due to increases in net
interest income after provision for loan losses and in other operating income
combined with a slight decrease in operating expenses. These increases were
partially offset by an increase in income taxes.
Net income per diluted share was $1.04 for the first nine months of 1999 and
$1.01 for the first nine months of 1998. Net income per diluted share for three
months ended September 30, 1999 and September 30, 1998 was $0.39 and $0.31,
respectively. Earnings per basic share was $1.05 and $1.03 for the nine months
ended September 30, 1999 and 1998, and $0.39 and $0.31 for the three months
ended September 30, 1999 and 1998, respectively.
Available for Sale and Securities Held to Maturity
- --------------------------------------------------
The Bank's securities portfolio increased $5,734,000 or 3.9% at September
30, 1999 compared to December 31, 1998. There was an increase of $13,722,000 or
40.2% over December 31, 1998 in Federal agency mortgage backed securities
available for sale. Offsetting this increase was a decrease in the Bank's
securities held to maturity of $8,734,000 or 18.9%. The increase in the
securities portfolio in 1999 over 1998 in securities available for sale is a
result of the investment of funds borrowed from the Federal Home Loan Bank of
Pittsburgh to enhance net interest income and to assist the Company in its asset
liability strategies.
Net Loans
- ---------
Net loans increased by $14,740,000 or 6.6% at September 30, 1999 compared to
December 31, 1998. This increase in net loans was primarily driven by a $6.0
million increase in Home Equity loans as a result of a special promotion offered
by the Bank in the first quarter of 1999. Money used to finance these loans was
funded from a portion of the borrowings from the Federal Home Loan Bank of
Pittsburgh during the first quarter of 1999. All other loan categories increased
for the first nine months of 1999, with the mix of loans remaining substantially
unchanged from December, 1998 to September, 1999.
Other Assets
- ------------
Other assets increased to $4,333,000 at September 30, 1999 from $1,843,000
at December 31, 1998. This increase was primarily due to the increase in the
deferred tax on the Bank's available for sale securities.
Total Deposits
- --------------
Total Deposits were $304,632,000 at September 30, 1999 and $307,360,000 at
December 31, 1998, a decrease of $2,728,000 or .9%. During the first nine months
of 1999 NOW and Super NOW decreased $3,273,000 or 8.5%. Time deposit accounts
also decreased by $5,153,000. Offsetting these decreases was an increase in
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation, continued
- --------------------------------------------------------------------------------
Total Deposits, continued
- -------------------------
demand non-interest bearing deposits of $5,877,000. Savings and money market
deposits remained fairly constant.
Other Borrowed Money
- --------------------
Other borrowed money increased $22,052,000 at September 30, 1999 from
December 31, 1998. Management borrowed $25,000,000 in February of 1999 from
Federal Home Loan Bank of Pittsburgh (which will mature in February, 2009). The
money borrowed was invested in mortgage backed securities and used to fund an
increase in the Bank's loan portfolio.
Net Interest Income
- -------------------
Net interest income before the provision for loan losses increased by
$219,000 to $10,786,000 and by $190,000 to $3,665,000 for the nine and three
month periods ended September 30, 1999 compared to the same periods during the
prior year.
Total interest income increased $768,000 and $286,000 for the nine and
three month periods ended September 30, 1999 compared to the same periods in
1998. Average interest earning assets increased by $32,386,000 and $29,332,000
for the nine and three month periods in 1999 compared to the same periods in
1998. The average yield on interest earning assets decreased approximately 40
and 20 basis points using the same 1999 and 1998 comparative periods.
Total interest expense increased $549,000 and $96,000 for the nine and
three month periods ended September 30, 1999 compared to the same periods in
1998. Average interest bearing liabilities increased by $27,600,000 and
$25,100,000 for the nine and three month periods in 1999 compared to the same
periods in 1998. The average cost of interest bearing liabilities decreased
approximately 15 and 20 basis points using the same 1999 and 1998 comparative
periods.
Market Risk and Interest Rate Risk
- ----------------------------------
Market risk is the risk to a Company's financial position resulting from
changes in market prices or rates. The Company's market risk arises primarily
from interest rate risk inherent in its lending, investment and deposit taking
activities. The Company, through its asset liability management committee, works
to evaluate, monitor and limit its exposure to interest rate risk.
In addition to static gap analysis, 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 the interest rate
risk inherent in its balance sheet. Below are the results of this rate shock
analysis as of September 30, 1999 and 1998.
<TABLE>
September 30, 1999 September 30, 1998
------------------------------------------------------------------------------------------------
Net Interest Percentage Change in Net Interest Percentage Change in
Change in Rates Income Change Net Interest Income Income Change Net Interest Income
<S><C> <C> <C> <C> <C>
+200 108 0.69% 766 5.40%
Static - - - -
-200 (954) (6.15%) (1,737) (12.40%)
</TABLE>
A 200 basis point rise in interest rates results in a .69% increase in
interest income. A 200 basis point decrease in interest rates results in a
decrease in interest income primarily due to optionality in the Company's
securities portfolio. In a falling rate environment it is assumed that certain
of the Company's securities would be called and the resulting cash flows would
be reinvested at the lower prevailing rates.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation, continued
- --------------------------------------------------------------------------------
Provision / Reserve for Loan Losses and Nonperforming Loans
- -----------------------------------------------------------
<TABLE>
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, Sepember 30,
1999 1998 1998
------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,909,000 2,759,000 2,759,000
Recoveries 27,000 38,000 35,000
Less: Charge Offs 216,000 308,000 207,000
Provision for Loan Losses 280,000 420,000 450,000
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,000,000 2,909,000 3,037,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses for the first nine months of 1999 amounted to
$280,000 and $95,000 for the three months ended September 30, 1999. It was
$450,000 for the nine months ended 1998, and $150,000 for the three months ended
1998. Net charge offs for the first nine months of 1999 totaled $189,000 while
net charge offs for the comparable period in 1998 were $172,000. The ratio of
net charge offs to average loans outstanding was .08% for both the first nine
months of 1999 and 1998.
The allowance for loan losses at September 30, 1999 totaled $3,000,000,
increasing $91,000 or 3.13% from $2,909,000 at December 31, 1998. The Company's
ratio of allowance for loan losses to total loans outstanding was 1.25% at
September 30, 1999, and the same ratio as of December 31, 1998 was 1.29%. The
decline in this ratio reflects the growth in the Bank's loan portfolio and a
slight decrease in non-performing loans.
Non-performing loans are listed as follows:
<TABLE>
09/30/1999 12/31/1998
------------- -------------
<S> <C> <C>
Non Accrual $ 1,533,000 $ 1,684,000
90 Days and More Past Due 986,000 838,000
Restructured 1,213,000 1,247,000
------------- -------------
$ 3,732,000 $ 3,769,000
</TABLE>
The Company generally places a loan on a non-accrual status when, in the
opinion of management the borrower does not have the ability to meet the
original terms of the loan. The Company reserves the accrued interest on all
commercial loans over ninety days past due and these loans are included in the
non-accrual totals. Mortgages past due 90 days or more are placed in non-accrual
status unless the Bank considers the loan to be well secured and in the process
of collection. Consumer loans that are not secured by real estate are generally
charged off after 120 days past due.
There are no impaired loans under SFAS No. 114 which are not included in
the above table.
The loan loss reserve as of September 30, 1999 has been deemed adequate by
management. This amount is sufficient to cover inherent losses in the loan
portfolio given the present past due, nonperforming and classified loan levels.
Determination of loan loss reserve adequacy follows the guidelines in the
Comptroller's Banking Circular No.201(revised), including risk loss analysis,
specific allocations for problematic credits and provision for class loans, and
the requirements of SFAS No. 114, as amended.
Other Operating Income
- ----------------------
Other operating income increased $26,000 or 1.2% and $59,000 or 9.0% for the
nine and three month periods ended September 30, 1999 compared to the same
periods in 1998. The increase for the nine month period was due primarily to
increases in service fee and ATM fee income resulting from increased volume and
an increase in service fees instituted during the first quarter of 1999. The
increases for the nine month comparative period was partially offset by a
decrease of $208,000 on gains from the sale of available for sale securities
during the same period. The increase for the three month comparative period was
due primarily to increases in service fee and ATM fee income.
Other Operating Expenses
- ------------------------
Other operating expenses increased $326,000 or 4.0% and decreased
$24,000 or 0.9% for the nine and three month periods ended September 30, 1999
compared to the same periods in 1998.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation, continued
- --------------------------------------------------------------------------------
Other Operating Expenses, continued
- -----------------------------------
Together with slight increases in salaries and employee benefits and
occupancy expenses, the increase in other operating expenses for the nine month
period was due primarily to a $168,000 increase in furniture and equipment
expense combined with an $83,000 increase in other expenses. The increase in
furniture and equipment expense resulted from increased depreciation expense
during 1999 from the addition of computer equipment during the second quarter of
1998 along with the addition of a new branch office during the fourth quarter of
1998. The increase in other expenses resulted from severance expenses related to
the retirement of the Company's former President and Chief Executive Officer and
the Retirement Agreement and Mutual Release resulting therefrom which was signed
March 16, 1999.
The decrease in other operating expenses for the three month comparative
period was due primarily to a $41,000 increase in furniture and equipment
expenses resulting from increased depreciation expense which was more than
offset by a decrease in other expenses of $56,000. The decrease in other
expenses resulted primarily from decreases in marketing and other real estate
expenses during the 1999 period.
Income Taxes
- ------------
The provision for income taxes for the first nine months of 1999 was
$1,110,000 and $1,109,000 for the first nine months of 1998. The effective rate
for the first nine months of 1999 was 26.6% and 27.2% for the same period of
1998. The effective rate for the third quarter was 27.5% for 1999 and 26.6% for
1998. The fluctuation in the Company's tax expense and effective tax rate is
primarily due to management's strategy of investing in tax free securities and
to the level of pre-tax income.
Liquidity and Capital Adequacy
- ------------------------------
The objectives of the Corporation's capital management policy place an
emphasis on both current financial positioning and future capital needs based on
anticipated growth. These objectives are maintained by management which monitors
its liquidity requirements through its asset/liability management program. This
program, together with other management analysis, enables the bank to meet its
cash flow requirements and adapt to the changing needs of the Company's
customers and the requirements of regulatory agencies. As of September 30, 1999,
the most recent notification from the Office of the Comptroller of the Currency
categorized the Bank as well capitalized under its regulatory guidelines. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios of greater than or equal to 10%,
6%, and 5%, respectively.
The Corporation's principal source of liquidity has been short-term U.S.
Government and U.S. Agency obligations, and various corporate notes. Money
market investments and portfolio investments are kept liquid in order to
effectively match our current deposit structure. The Corporation is affected by
changes in the level of rates of interest. Earnings will be sensitive to
interest rate changes to the degree that the average yield on assets responds
differently to a change in interest rates than does average cost of funds.
Adequate liquidity affords the Corporation flexibility in meeting consumer loan
demand and deposit fluctuations.
Effects of Inflation
- --------------------
Economic conditions are reviewed by management in a continuing effort to
adjust to the changing economic environment. The effects of these changes on the
banking industry as a whole 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 a sound management policy.
Increases in the rate of inflation can increase longer term interest rates,
which can reduce the value of securities held to maturity, mortgage loans and
other fixed rate and term assets. Inflationary periods also may tend to increase
the borrowing needs of consumers, leading to requests for additional funds,
which can expand total loans above expected levels and therefore require
increased efforts to ensure the maintenance of adequate capital.
The banking industry is affected by inflation in a different manner than
other industries, although certain changes have similar effects on both banks
and other business enterprises. Current economic indicators are moving in the
direction of possible inflationary changes. Interest rates have been fluctuating
in response to economic changes, which will affect the asset/liability policy of
the bank. Rates on deposits and loans are changed as necessary with
consideration of economic and market conditions. Our continuing efforts to
monitor all phases of the financial condition of all assets which can be
affected by inflation include the pricing of collateral on a regular basis, as
necessary.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation, continued
- --------------------------------------------------------------------------------
Year 2000
- ---------
Year 2000 Compliance
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operations including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
Company State of Readiness
The Company has completed an assessment and testing 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 which
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 has fully
tested that software.
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 the testing of our
core applications for critical dates has been completed. The Company performed
significant Year 2000 testing prior to December 31, 1998 and through June 30,
1999. All core applications tested were Year 2000 compliant and it is therefore
anticipated that all core applications are fully compliant.
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 has reevaluated identification of mission-critical resources and
developed and documented 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 has assigned probability and prioritized and
allocated contingency planning resources based on the level of probability. The
bulk of evaluation of contingency needs was completed by June, 1999. The Company
has shifted to monitoring its contingency requirements in order to remain aware
of any emerging issues. No new significant Year 2000 related issues have been
detected.
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 $301,000. The Bank had expenditures of $260,000 in 1998 for
Y2K related matters, of which $10,000 was expensed in 1998 and $250,000 was
capitalized and will be amortized over the next five years. Additionally, during
1999 the bank has spent another $25,000 on Year 2000 related issues and
anticipates spending approximately $16,000 more through the end of 1999. This
cost is primarily associated with purchasing new equipment and software.
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.
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.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operation, continued
- --------------------------------------------------------------------------------
Forward Looking Statements
- --------------------------
Within this quarterly report 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 this
report. We have used "forward looking statements" to describe the future plans
and strategies including our expectations of the Corporation's future financial
results and Year 2000 issues. Management's ability to predict results or the
effect of future plans and strategy is inherently uncertain. Factors that could
affect results include interest rate trends, competition, the general economic
climate in Pennsylvania, and the country as a whole, loan delinquency rates, and
changes in federal and state regulation. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
14
<PAGE>
Part II.
- -------
Item 1. Legal Proceedings
- --------------------------
The nature of the business of Pioneer American Holding Company Corp. and its
subsidiary, Pioneer American Bank, N.A., generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of management, there are no proceedings pending to which
Pioneer American or its subsidiary are parties or to which their property is
subject, which, if determined adversely, would be material in relation to
Pioneer American's results of operation, stockholder's equity, or financial
condition. In addition, no material proceedings are pending or are known to be
threatened or contemplated against Pioneer American or its subsidiary by
governmental authorities or other parties.
Item 2. Changes in Securities
- ------------------------------
None
Item 3. Default Upon Senior Securities
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Pursuant to the proxy rules under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act"), the Company's stockholders are notified that the
deadline for providing the Company timely notice of any stockholder proposal to
be submitted outside of the Rule 14a-8 process for consideration at the
Company's 2000 Annual Meeting of Stockholders (the "Annual Meeting") will be
March 27, 2000. As to all such matters which the company does not have notice on
or prior to March 27, 2000, discretionary authority shall be granted to the
persons designated in the Company's proxy related to the Meeting. A stockholder
proposal regarding the Meeting must be submitted to the Company at its office
located at 41 N. Main Street, Carbondale, Pennsylvania by January12, 2000, to
receive consideration for inclusion in the Company's 1999 proxy materials. Any
such proposal must also comply with the proxy rules under the Exchange Act,
including Rule 14a-8.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None
15
<PAGE>
SIGNATURES *
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER AMERICAN HOLDING COMPANY, CORP.
Date: November 7, 1999 By /s/ John W. Reuther
John W. Reuther
President & C.E.O.
Date: November 7, 1999 By /s/ Richard J. Lapera
Richard J. Lapera
Vice President & Comptroller
Date: November 7, 1999 By /s/ Allan A. Muto
Allan A. Muto
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000760731
<NAME> PIONEER AMERICAN HOLDING CO.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 13,419
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,425
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,547
<INVESTMENTS-CARRYING> 37,444
<INVESTMENTS-MARKET> 36,750
<LOANS> 240,566
<ALLOWANCE> 3,000
<TOTAL-ASSETS> 421,854
<DEPOSITS> 304,632
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,907
<LONG-TERM> 80,409
0
0
<COMMON> 2,935
<OTHER-SE> 28,971
<TOTAL-LIABILITIES-AND-EQUITY> 421,854
<INTEREST-LOAN> 14,642
<INTEREST-INVEST> 7,110
<INTEREST-OTHER> 198
<INTEREST-TOTAL> 21,950
<INTEREST-DEPOSIT> 7,918
<INTEREST-EXPENSE> 11,164
<INTEREST-INCOME-NET> 10,786
<LOAN-LOSSES> 280
<SECURITIES-GAINS> 88
<EXPENSE-OTHER> 8,456
<INCOME-PRETAX> 4,166
<INCOME-PRE-EXTRAORDINARY> 3,056
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,056
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.63
<LOANS-NON> 1,533
<LOANS-PAST> 986
<LOANS-TROUBLED> 1,213
<LOANS-PROBLEM> 561
<ALLOWANCE-OPEN> 2,909
<CHARGE-OFFS> 216
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 3,000
<ALLOWANCE-DOMESTIC> 2,531
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 469
</TABLE>
