<PAGE>
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, 1999
[ ] 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). $47,076,377
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, 2000 2,864,307 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
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I
1. Business ....................................................................................... 3-7
2. Properties .........................................................................................7
3. Legal Proceedings...................................................................................7
4. Submission of Matters to a Vote of Security Holders.................................................8
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters.........................................................................2-3
6. Selected Financial Data.............................................................................9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................10-35
8. Financial Statements and Supplementary Data.....................................................36-63
9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure................*
PART III
10. Information Concerning Directors and Executive Officers of the Registrant ....................67-68
11. Executive Compensation and Certain Transactions...............................................69-74
12. Security Ownership of Certain Beneficial Owners and
Management................................................................................74
13. Certain Relationships and Related Transactions...................................................75
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, 1999 and 1998.............................36-37
Consolidated Statements of Operations, Years ended
December 31, 1999, 1998 and 1997..................................................38
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1999, 1998 and 1997...............................39
Consolidated Statements of Cash Flows, Years ended
December 31, 1999, 1998 and 1997................................................40-41
Notes to Consolidated Financial Statements..........................................42-63
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 1999.
Auditors' Opinion.........................................................................64
Exhibit:
Consent of Independent Auditors.....................................................**
</TABLE>
- ----------
* 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
Highlights of the Year
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1999 1998 % Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $ 32,220,000 31,263,000 3.06
Total operating expense 26,650,000 25,706,000 3.67
Income before income taxes 5,570,000 5,557,000 0.23
Income tax expense 1,488,000 1,535,000 (3.06)
Net income 4,082,000 4,022,000 1.49
Total cash dividends declared 2,314,000 2,235,000 3.53
AT YEAR END
Assets 418,775,000 405,157,000 3.36
Deposits 299,473,000 307,360,000 (2.57)
Loans, (net) 241,156,000 222,826,000 8.23
Securities available for sale 112,134,000 101,079,000 10.94
Securities held to maturity 36,612,000 46,178,000 (20.72)
Stockholders' equity 31,598,000 35,466,000 (10.91)
PER SHARE DATA
Net income (diluted) 1.39 1.36
Cash dividends declared 0.80 0.77
Book value * 10.79 12.01
Number of shareholders 1,445 1,457
- -------------------------------------------------------------------------------------------------------
</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>
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------- --------------------- ---------------------
Quarter High Low High Low High Low
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 22.50 19.00 23.50 21.38 25.00 22.25
Second 28.00 19.13 25.25 22.50 26.00 23.75
Third 26.00 20.75 24.50 22.00 24.75 23.25
Fourth 30.00 23.50 23.50 22.00 23.00 21.25
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
Company Stock Prices and Dividend Information, (Continued)
On March 1, 2000 the Holding Company had approximately 1,445
shareholders. The market price of the stock on this date was $19.75 per share.
Cash dividends per share for 1999, 1998 and 1997 appear in the table below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Quarter 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
First $ 0.20 0.19 0.17
Second 0.20 0.19 0.17
Third 0.20 0.19 0.19
Fourth 0.20 0.20 0.19
- -----------------------------------------------------------------------------------------
$ 0.80 0.77 0.72
- -----------------------------------------------------------------------------------------
</TABLE>
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 179 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 eighteen branch offices. Eight of these
branch facilities are located within supermarkets. Many of the Bank's locations
provide 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 21 ATM's at remote locations. These locations
3
<PAGE>
The Bank (Continued)
include convenience stores, supermarkets, and corporate centers. The Bank's
branch network serves Lackawanna and Luzerne Counties and parts of Wayne,
Wyoming, 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, 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 19 locations are throughout Northeastern
Pennsylvania with offices in Lackawanna County (11), Luzerne County (4), Wayne
County (1), Monroe County (2), and Wyoming County (1). The unemployment rate for
Pennsylvania in the fourth quarter of 1999 was approximately 4.5%. In the
counties in which the Company operates the rates were: Lackawanna 5.2%, Luzerne
5.3%, Wayne 4.5%, Monroe 5.6%, and Wyoming 4.9% . 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); 500 Lackawanna Avenue, Mayfield, Pennsylvania (Mayfield
Branch Office); Route 940, Mount Pocono, Pennsylvania (Mount Pocono Branch
Office); and 455 Market Street, Kingston, Pennsylvania, (Kingston Office). The
Bank owns properties adjacent to the main office utilized as parking lots.
The Bank also leases facilities for eight branch offices: four in the
Price Chopper Super Markets in Scranton (2), Dunmore and Wilkes-Barre; two in
the Mr. Z's supermarkets in Stroudsburg, and Tunkhannock; and two in Weis
Markets in Clarks Summit and Hazleton. Also, as part of a collaborative effort
between the Bank and Wikes University, the Bank opened a branch office in the
Student Activities Center at the University in September, 1999.
In September, 1999 the Bank entered into an agreement of sale with
another financial institution for its Mr. Z's supermarket location in
Stroudsburg. The sale of this branch is expected to be finalized during the
first quarter of 2000.
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.
7
<PAGE>
Supervision and Regulation, (Continued)
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 1999 through the date of filing this report with
the Securities and Exchange Commission.
On December 8, 1999, NBT Bancorp, Inc. the parent company of NBT Bank,
N.A. and Pioneer American Holding Company Corp. announced the signing of a
definitive agreement of merger. The merger is subject to the approval of each
Company's shareholders and of banking regulators. The merger is expected to
close in the second quarter of 2000 and is intended to be accounted for as a
pooling-of-interests and to qualify as a tax-free exchange for Pioneer American
shareholders.
Recent Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") became
law, effective March 11, 2000, which will permit qualifying bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature or complementary thereto, as determined by the Federal
Reserve Board. A bank holding company may elect to become a financial holding
company if each of its subsidiary banks (a) is well capitalized under the prompt
corrective action provisions of FDICIA, (b) is well managed, and (c) has at
least a satisfactory rating under the Community Reinvestment Act. The Act
identifies several activities as "financial in nature," including, among others,
insurance underwriting and agency, investment advisory services, and
underwriting, dealing in or making a market in securities. Under the Act,
subject to limitations on investment, a national bank may, through a financial
subsidiary of the bank, engage in activities that are financial in nature, or
incidental thereto, excluding, among others, insurance underwriting, insurance
company portfolio investment, real estate development and real estate investment
if the bank is well capitalized, well managed and has at least a satisfactory
CRA rating. Subsidiary banks of a financial holding company or national banks
with financial subsidiaries must continue to be well capitalized and well
managed in order to continue to engage in activities that are financial in
nature without regulatory actions or restrictions. A bank holding company which
does not elect to become a financial holding company may continue to engage in
activities approved for bank holding companies by the Federal Reserve Board.
The Act does not significantly alter the regulatory regimes under
which, Pioneer American or Pioneer American Bank currently operate. While
certain business combinations not currently permissible will be possible after
March 11, 2000, we cannot predict at this time resulting changes in the
competitive environment or the financial condition of Pioneer American or
Pioneer American Bank. Using the financial holding company structure, insurance
companies and securities firms may acquire bank holding companies, Pioneer
American or the combined company, and may compete more directly with banks or
bank holding companies. Pioneer American has not at this time, made any
decisions with respect to whether they will elect to become a financial holding
company under the Act.
8
<PAGE>
Selected Financial Data
(In thousands, except per share data and number of shareholders)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31
------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
for the Year
Interest income $ 29,389 28,302 26,507 24,358 23,662
Interest expense 14,898 14,319 12,845 10,874 11,227
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 14,491 13,983 13,662 13,484 12,435
Provision for loan losses 370 420 535 500 420
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 14,121 13,563 13,127 12,984 12,015
Other operating income 2,831 2,961 2,461 2,012 1,913
Other operating expense 11,382 10,967 10,080 9,749 9,075
Income tax expense 1,488 1,535 1,500 1,543 1,370
- -----------------------------------------------------------------------------------------------------------------------------
Net income 4,082 4,022 4,008 3,704 3,483
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared $ 2,314 2,235 2,055 1,900 1,671
- -----------------------------------------------------------------------------------------------------------------------------
Per Share (1)
Net income (diluted) $ 1.39 1.36 1.36 1.26 1.20
Book value (2) 10.79 12.01 11.36 10.32 9.80
Cash dividends paid 0.80 0.77 0.72 0.66 0.60
- -----------------------------------------------------------------------------------------------------------------------------
Financial Condition
At End of Year
Assets $ 418,775 405,157 370,126 330,213 320,647
Deposits 299,473 307,360 293,643 295,946 288,252
Loans, net 241,156 222,826 209,583 201,298 194,555
Securities available for sale 112,134 101,079 96,696 76,019 68,328
Securities held to maturity 36,612 46,178 37,379 20,860 26,033
Stockholders' equity 31,598 35,466 33,398 30,263 28,492
- -----------------------------------------------------------------------------------------------------------------------------
Number of Stockholders 1,445 1,457 1,430 1,421 1,347
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data for 1995 restated to reflect the Company's two for one stock
split effected in the form of a stock dividend effective July 15, 1996.
(2) Based on weighted average diluted shares outstanding during the period.
9
<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, 1999, 1998, and 1997. 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
1999 vs. 1998
Net income for the year ended December 31, 1999 totaled $4,082,000
compared to $4,022,000 for the year ended December 31, 1998, an increase of
$60,000 or 1.5%. Diluted earnings per share increased to $1.39 from $1.36 or by
2.2% during the same comparative period.
The increase in net income was the result of an increase in net
interest income after provision for loan losses of $558,000 or 4.1% together
with a decrease in income tax expense of $47,000 or 3.1% offset, in part, by a
decrease in other operating income of $130,000 or 4.4% and an increase in other
operating expenses of $415,000 or 3.8%. The increase in net interest income
after provision for loan losses resulted primarily from a greater increase in
the volume of interest earning assets than the increase in interest bearing
liabilities along with a $50,000 decrease in the provision for loan losses. The
decrease in other operating income resulted primarily from a decrease in gains
on sales of securities of $423,000. The increase in other operating expenses
resulted primarily from increases in salaries and employee benefits of $220,000
and in furniture and equipment expense of $217,000.
10
<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>
- -----------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------- --------------------------
Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 1,087,000 3.8 1,795,000 6.8
Interest expense 579,000 4.0 1,474,000 11.5
- -----------------------------------------------------------------------------------------------------
Net interest income 508,000 3.6 321,000 2.3
Provision for loan losses (50,000) (11.9) (115,000) (21.5)
- -----------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 558,000 4.1 436,000 3.3
Other operating income (130,000) (4.4) 500,000 20.3
Other operating expense 415,000 3.8 887,000 8.8
- -----------------------------------------------------------------------------------------------------
Income before income taxes 13,000 0.2 49,000 0.9
Income tax expense (47,000) (3.1) 35,000 2.3
- -----------------------------------------------------------------------------------------------------
Net income $ 60,000 1.5 14,000 0.3
- ------------------------------------------------------------------------------------------------------
</TABLE>
1998 vs. 1997
Net income reached $4,022,000 in 1998, $14,000 or .3% higher than in
1997. 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.
11
<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 and borrowed funds 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 and borrowings. 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
$583,000 from 1998 to 1999. Tax equivalent net interest income was decreased by
$454,000 for interest rate changes from 1998 to 1999 versus a decrease of
$596,000 from 1997 to 1998. The increase in tax equivalent net interest income
from volume changes from 1998 to 1999 was $1,037,000 versus $927,000 from 1997
to 1998.
Net interest income increased in 1998 from 1997. 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
security portfolio provided $1,086,000 of the increase with 86% of this coming
from the volume increase in taxable securities. During 1998, the Bank borrowed
money from the 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 loans was $1,406,000. Federal funds sold contributed a volume related
increase in interest income of $177,000 over the prior period.
12
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
The improvement in net interest income in 1999 from 1998 was the result
of several factors. The volume of interest earning assets drove the increase in
interest income from 1998 to 1999. The increase in volume resulted in an
increase in interest income of $2,295,000. The increase in volume was the result
of a $15,897,000 increase in the average balance of securities as part of the
Bank's leverage strategy. The increase in volume was also the result of a
$16,710,000 increase in the average balance of loans. The security portfolio
provided $1,065,000 of the increase in interest income with 76% of this coming
from the volume increase in taxable securities. During the first quarter of
1999, the Bank borrowed an additional $25,000,000 from the 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 $1,455,000 of the increase with 59% of this coming from
the volume increase in commercial loans. Offsetting these increases was a
decrease in Federal funds sold interest income of $225,000 from the prior
period.
Net interest income was affected by a decrease in the rates of $231,000
in securities, $18,000 in federal funds sold and $884,000 in loans. These
changes are attributable to the downward trend in interest rates both locally
and regionally as a result of increasing levels of lending competition.
The growth of interest bearing deposits from 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 only on local competitive pressures for a particular branch or
branches. The increase of $159,000 in interest expense from an increase in the
volume of interest bearing deposit and the decrease in interest expense of
$480,000 through interest rate decreases on interest bearing deposits resulted
in a decrease in interest expense of $321,000 from 1998 to 1999. The single
largest contributor to the decrease in interest expense on deposits was a
decrease in the rate on Time deposits. The decrease due to rate of $514,000
resulted from a decrease in the average rate for Time deposits from 5.47% for
1998 to 5.11% for 1999.
The volume increase in interest income was the result of a $28,308,000
increase in the total average of interest earning assets from $367,205,000 in
1998 to $395,513,000 in 1999. The average rate of return on these assets was
down slightly compared to the prior year with 1999 at 7.59% and 1998 at 7.86%.
The volume increase in interest income was primarily driven by an increase in
both the Company's security and loan portfolios. Total securities were up
$15,897,000 from 1998 to 1999 and total loans up $16,710,000. The related
interest income was up $834,000 to $10,063,000 in 1999 for securities and up
$571,000 to $19,723,000 for loans in 1999.
The Company had an increase in average interest bearing liabilities of
$24,582,000 from 1998. This was due to an increase in other borrowed money to
$77,958,000 for 1999, a $18,994,000 increase over 1998. Management borrowed an
additional $25,000,000 in February of 1999 from Federal Home Loan Bank of
Pittsburgh. The money borrowed was invested in mortgage backed securities. Bank
management believes that it
13
<PAGE>
Net Interest Income (Taxable-Equivalent Basis), (Continued)
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 1999 and 1998. There was a 16 basis point decrease in the cost of interest
bearing liabilities in 1999 to 4.40%.
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 and held to
maturity in the securities categories.
Table 4 presents the Company's interest earning assets and interest
bearing liabilities as of December 31, 1999 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.
14
<PAGE>
Table 2
Rate/Volume Analysis of Changes in Net Interest Income
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1999/1998 1998/1997
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 812 (203) 609 936 (384) 552
Non-taxable (2) 253 (28) 225 150 (36) 114
- --------------------------------------------------------------------------------------------------------------------------------
Total securities 1,065 (231) 834 1,086 (420) 666
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold (225) (18) (243) 177 (17) 160
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (2) 855 (273) 582 540 (35) 505
Mortgage 310 (294) 16 166 (134) 32
Installment 290 (317) (27) 700 (258) 442
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 1,455 (884) 571 1,406 (427) 979
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,295 (1,133) 1,162 2,669 (864) 1,805
- --------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest bearing deposits:
NOW, Super NOW and Money Market 185 43 228 64 (12) 52
Savings 22 (9) 13 76 26 102
Time (48) (514) (562) (662) 11 (651)
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 159 (480) (321) (522) 25 (497)
Other borrowed money and note payable 1,113 (199) 914 2,245 (287) 1,958
Fed Funds Purchased (14) 0 (14) 19 (6) 13
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,258 (679) 579 1,742 (268) 1,474
- --------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,037 (454) 583 927 (596) 331
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1) The rate/volume variance is allocated entirely to change in volume.
2) Amounts are presented on a tax-equivalent basis utilizing an effective tax
rate of approximately 31% in 1999 and 1998, and 32% in 1997. The total
taxable equivalent adjustments included above are $634,000, 559,000, and
$549,000 for 1999, 1998 and 1997, respectively.
15
<PAGE>
Table 3
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ----------------------------- -------------------------------
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 $ 131,796 8,224 6.24 119,096 7,615 6.39 105,165 7,063 6.72
Non-taxable (1) 23,586 1,839 7.80 20,389 1,614 7.92 18,528 1,500 8.10
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 155,382 10,063 6.48 139,485 9,229 6.62 123,693 8,563 6.92
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 4,873 237 4.86 9,172 480 5.23 5,901 320 5.42
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Commercial (1) (5) 95,643 8,119 8.49 85,898 7,537 8.77 79,777 7,032 8.81
Mortgage (5) 77,674 6,307 8.12 74,022 6,291 8.50 72,112 6,259 8.68
Installment (5) 64,921 5,297 8.16 61,564 5,324 8.65 53,842 4,882 9.07
Allowance for loan losses (2,980) - - (2,936) - - (2,707) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 235,258 19,723 8.38 218,548 19,152 8.76 203,024 18,173 8.95
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earnings assets 395,513 30,023 7.59 367,205 28,861 7.86 332,618 27,056 8.13
Non-interest earning assets 27,974 - - 27,107 - - 25,990 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets/interest income $ 423,487 30,023 7.09 394,312 28,861 7.32 358,608 27,056 7.54
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Table 3, (Continued)
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollar in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
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 $ 57,206 1,898 3.32 51,487 1,670 3.24 49,527 1,618 3.27
Savings 58,490 1,232 2.11 57,447 1,219 2.12 53,774 1,117 2.08
Time 144,587 7,389 5.11 145,470 7,951 5.47 157,576 8,602 5.46
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 260,283 10,519 4.04 254,404 10,840 4.26 260,877 11,337 4.35
- ------------------------------------------------------------------------------------------------------------------------------------
Other borrowed money
and note payable 77,958 4,370 5.60 58,964 3,456 5.86 23,598 1,498 6.35
Fed Funds Purchased 156 9 5.77 447 23 4.92 160 10 6.25
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 338,397 14,898 4.40 313,815 14,319 4.56 284,635 12,845 4.51
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits and
other liabilities 50,654 - - 46,620 - - 42,594 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 389,051 14,898 3.83 360,435 14,319 3.97 327,229 12,845 3.93
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 34,436 - - 33,877 - - 31,379 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity/interest expense $ 423,487 14,898 3.52 394,312 14,319 3.63 358,608 12,845 3.58
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,125 14,542 14,211
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest spread (3) 3.19% 3.30% 3.62%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest yield (4) 3.82% 3.96% 4.27%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest and average rates are presented on a taxable-equivalent basis
utilizing an effective tax rate of approximately 31% in 1999 and 1998, and
32% in 1997. The total taxable-equivalent adjustments included above are
$634,000, $559,000 and $549,000 for 1999, 1998, and 1997, 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 $233,000, $378,000, $260,000 in 1999, 1998, and 1997,
respectively.
17
<PAGE>
MARKET RISK
Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
-----------------------------------------------------------------------------------------------
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 $ 14,369,000 4,792,000 10,583,000 22,521,000 59,869,000 112,134,000
Securities held to maturity 130,000 124,000 933,000 6,699,000 28,726,000 36,612,000
Loans (net of unearned
discount and deferred fees) 46,389,000 3,724,000 12,937,000 40,883,000 140,280,000 244,213,000
Federal Funds Sold - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 60,888,000 8,640,000 24,453,000 70,103,000 228,875,000 392,959,000
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest bearing DDA (MMA,
NOW, Super NOW) $ 61,283,000 - - - - 61,283,000
Savings (1) 11,261,000 - - - 45,044,000 56,305,000
Time 20,981,000 18,464,000 33,099,000 23,525,000 - 96,069,000
Time > $100M 12,222,000 9,055,000 13,125,000 6,662,000 - 41,064,000
Other borrowed money and
note payable 4,700,000 - - 79,120,000 275,000 84,095,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 110,447,000 27,519,000 46,224,000 109,307,000 45,319,000 338,816,000
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (49,559,000) (18,879,000) (21,771,000) (39,204,000) 183,556,000 54,143,000
Cumulative interest rate
sensitivity gap $ (49,559,000) (68,438,000) (90,209,000) (129,413,000) 54,143,000 -
Cumulative interest rate
sensitivity ratio (2) (11.83)% (16.34)% (21.54)% (30.90)% 12.93% -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount shown as repricing within 1 to 90 days is that portion which,
based upon average balances, is considered sensitive to changes in interest
rates. The Company's historical experience has been that total savings
account balances exhibit minimal movement with changes in interest rates.
Accordingly, a large percentage of the Company's savings account balances
are not as rate sensitive and are classified in the "Beyond Five Years"
category.
(2) Represents the cumulative interest rate sensitivity gap as a percentage of
total assets.
18
<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, 1999, 1998 and 1997.
Market Risk
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------------------------ ----------------------------------- -----------------------------------
Net Interest Percentage Change in Net Interest Percentage Change in Net Interest Percentage in
Change in Rates Income Change Net Interest Income Income Change Net Interest Income Income Change Net Interest Income
--------------- -------------- --------------------- ------------- --------------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
+200 53 0.35% 841 5.53% (400) (2.72%)
Static - - - - - -
-200 (848) (5.68%) (1,176) (7.73%) (405) (2.75%)
</TABLE>
At December 31, 1999, a 200 basis point rise in interest rates results
in a .35% increase in net interest income. At December 31, 1999 a 200 basis
point decrease in interest rates results in a decrease in net 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
-------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 1,568,000 1,334,000 1,330,000
Net gains on sales of
securities available for sale 88,000 509,000 154,000
Gains on calls of securities held to maturity - 2,000 3,000
ATM Fees 621,000 523,000 402,000
Other income 554,000 593,000 572,000
- -----------------------------------------------------------------------------------------------------------
Total other operating income $ 2,831,000 2,961,000 2,461,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Total other operating income decreased $130,000 in 1999 compared to
1998. The primary reason for the decrease was a decrease in net gains from the
sales of securities during 1999 of $423,000 compared to 1998. The increase in
total operating income from 1997 to 1998 of $500,000 was primarily attributable
to increases in net gains on the sales and calls of securities of $354,000 and
ATM fees of $121,000.
19
<PAGE>
Other Operating Income, (Continued)
Gains were recognized for the sale of securities available for sale in
1999 of $88,000, $509,000 in 1998 and $154,000 in 1997. The proceeds from the
sale of securities available for sale were $4,626,000, $20,217,000 and
$17,799,000 in 1999, 1998, and 1997 respectively.
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 and 1997 the Company sold newly originated mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation and student
loans to PHEAA. In 1999 the Company did not sell any mortgage loans.
ATM fees increased $98,000 during 1999 compared to 1998 as a result of
increased volume. ATM fees increased by $121,000 in 1998 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. As of December 31, 1999 the Bank
has a total of 37 ATM machines. Other income and service charges on deposit
accounts remained fairly constant for both 1998 and 1997. In 1999 Service Charge
income was up $234,000, resulting from increased volume and an increase in
service fees instituted during the first quarter of 1999.
Table 6
Other Operating Expenses
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Years ended December 31
------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 5,291,000 5,071,000 5,040,000
Net occupancy expense of bank premises 1,062,000 1,027,000 1,026,000
Furniture and equipment expenses 990,000 773,000 685,000
Data processing expense 225,000 255,000 242,000
ORE expense 500,000 360,000 121,000
Other expenses 3,314,000 3,481,000 2,966,000
- -----------------------------------------------------------------------------------------------------
Total other operating expenses $ 11,382,000 10,967,000 10,080,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
Total other operating expenses increased $415,000 in 1999 compared to
1998 and by $887,000 in 1998 compared to 1997. The increase in 1999 was
primarily the result of increases in salaries and employee benefits and
Furniture and Equipment expenses. The 1998 increase was primarily the result of
increases in Furniture and Equipment expense, ORE expense and other expenses.
Salaries and employee benefits, which represent the most significant
portion of non-interest expenses, increased by 4.3% and .6% in 1999 and 1998,
respectively. Salary expense increased by 2.8% while employee benefit expense
increased 9.6% in 1999. Employees salaries did increase 4.0% in 1998 over 1997.
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.
20
<PAGE>
Other Operating Income, (Continued)
The increase in Furniture and Equipment expense in 1999 of $217,000
resulted from increased depreciation due to the addition of computer equipment
upgrades during the second quarter of 1998 in preparation for the Year 2000
along with the addition of a new branch office during the fourth quarter of
1998. The increase in furniture and equipment expense of $88,000 in 1998 over
1997 was primarily due to an increase in maintenance contracts on our expanded
ATM network.
ORE expense increased by $239,000 or 197.5% in 1998 over 1997 due to
increased charge offs of ORE properties based on an evaluation of the fair
values of individual properties.
Other expenses increased by 17.4% in 1998. 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 in 1998 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 opening of a new branch. In
1998 the Bank contracted with an advertising company for one year to develop a
new marketing campaign. The advertising company handled all public media
including television commercials.
The provision for income taxes for 1999, 1998 and 1997 was $1,488,000,
$1,535,000 and $1,500,000, respectively. The effective rate for these periods
were 26.7%, 27.6% and 27.2%. The lower effective rate for 1999, 1998 and 1997
was due in part to management's strategy of investing in tax free securities.
Financial Position
Loan Portfolio
Total loans, net of unearned discount and deferred loan fees, increased
$18,478,000 or 8.2% in 1999 and increased by $13,393,000 or 6.3 % in 1998. In
1999 the Bank sold no mortgage loans and $1,687,000 in PHEAA loans. In 1998 the
loans sold were $3,416,000 and $1,941,000, respectively. The increase in loans
after consideration of the previously mentioned loan sales were $20,165,000 in
1999 and $18,750,000 in 1998. There was growth in two segments of the Company's
portfolio in 1999: residential real estate and commercial loans. The largest
amount of originations were from commercial business and real estate loans.
21
<PAGE>
Loan Portfolio, (Continued)
The following table summarizes loans held for portfolio by type at December 31
for each of the last five years:
Table 7
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial business $ 23,063,000 17,264,000 15,534,000 17,256,000 16,684,000
Commercial real estate 78,405,000 71,389,000 69,505,000 61,254,000 58,062,000
Real estate construction 1,034,000 1,120,000 1,002,000 947,000 625,000
Real estate residential 138,140,000 133,521,000 120,604,000 115,791,000 112,493,000
Consumer 18,452,000 17,681,000 17,865,000 20,424,000 19,013,000
- -----------------------------------------------------------------------------------------------------------
Total loans, gross 259,094,000 240,975,000 224,510,000 215,672,000 206,877,000
Unearned discount and
deferred loan fees (14,881,000) (15,240,000) (12,168,000) (11,624,000) (9,580,000)
- -----------------------------------------------------------------------------------------------------------
Total loans, net of
unearned discount
and deferred loan fees $ 244,213,000 225,735,000 212,342,000 204,048,000 197,297,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes commercial, financial, agricultural and real
estate construction loans at December 31, 1999 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 $ 12,617,000 7,409,000 3,037,000 23,063,000
Commercial real estate 15,889,000 6,427,000 56,089,000 78,405,000
Real estate construction 1,034,000 - 1,034,000
- -----------------------------------------------------------------------------------------------------------
Total $ 29,540,000 13,836,000 59,126,000 102,502,000
- -----------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity:
Loans with predetermined rates 6,567,000 12,408,000 56,218,000 75,193,000
Loans with variable rates 22,973,000 1,428,000 2,908,000 27,309,000
- -----------------------------------------------------------------------------------------------------------
Total $ 29,540,000 13,836,000 59,126,000 102,502,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Variable interest rate loans and shorter maturities provide for
interest rate changes from time to time based upon changes in the Company's base
lending rate or some other barometer of market interest rates. By matching the
interest rate sensitivity of variable rate loans against the interest rate
sensitivity of liabilities, management 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 1999, the Company originated $26,504,000 in
residential mortgage and home equity loans of which $2,639,000 were variable
22
<PAGE>
Loan Portfolio, (Continued)
rate loans. The Company originated $19,074,000 and $9,843,000 of such loans in
1998 and 1997, respectively of which $3,648,000 and $4,283,000 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 student loans were $1,704,000 in 1999 and from
mortgages and student loans proceeds were $5,419,000, and $3,414,000 for 1998,
and 1997, 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>
- --------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,444,000 1,684,000 2,596,000 4,404,000 2,161,000
90 days and more past due 1,076,000 838,000 2,026,000 - -
Restructured loans 1,014,000 1,247,000 890,000 643,000 837,000
- --------------------------------------------------------------------------------------------------------
$ 3,534,000 3,769,000 5,512,000 5,047,000 2,998,000
- --------------------------------------------------------------------------------------------------------
</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 $235,000 decrease in
non-performing loans in 1999 from 1998 and a $1,743,000 decrease in 1998 from
1997. 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 amount of interest income on non-accruing loans which was recorded
in income was $21,000 in 1999, $13,000 in 1998, and $12,000 in 1997. If the
non-accruing loans had been current in accordance with their original
23
<PAGE>
Risk Elements of Loan Portfolio, (Continued)
terms and had been outstanding throughout the period, interest income would have
been increased by $77,000, $98,000 and $149,000 in 1999, 1998, and 1997,
respectively.
The amount of interest on restructured loans which was recorded in
income was $89,000 in 1999, $98,000 in 1998, and $59,000 in 1997. 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 $26,000, $24,000, and $33,000 in 1999, 1998, and 1997,
respectively.
As of December 31, 1999, 1998, and 1997 the Company had impaired loans
with a total recorded balance of $1,629,000, $1,530,000, and $1,922,000,
respectively. The average recorded balance for the twelve month periods ended
December 31, 1999, 1998, and 1997 was $1,631,000, $1,837,000, and $1,914,000,
respectively. Interest income recognized on impaired loans during each of these
periods was nominal. As of December 31,1999, 1998, and 1997 the amount of
recorded balance in impaired loans for which there is a related allowance for
credit losses and amount of the allowance is $822,000 and $205,000,
respectively, $425,000 and $106,000, respectively, and $815,000 and $185,000,
respectively. The amount of the recorded balance in impaired loans for which
there was no related allowance for credit losses at December 31, 1999, 1998, and
1997 was $807,000, $1,105,000, and $1,107,000, 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, 1999 and 1998, 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.
24
<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.
The provision for loan losses was $370,000 in 1999, $420,000 in 1998,
and $535,000 in 1997. The current year provision has enabled the allowance for
loan losses to increase by 5.1% to $3,057,000 as of December 31, 1999, while
there was an 8.2% increase in total loans, net of unearned discount and unearned
loan fees. The increase in the loan portfolio in 1999 is primarily attributable
to real estate loans, both commercial and residential. Based on the Company's
underwriting standards and 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, also 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.
25
<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
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $ 2,909,000 2,759,000 2,750,000 2,742,000 2,699,000
Loans charged off:
Commercial business (17,000) (76,000) (225,000) (203,000) (99,000)
Commercial real estate (63,000) (68,000) (34,000) (55,000) (132,000)
Real estate residential (83,000) (88,000) (149,000) (196,000) (85,000)
Consumer (101,000) (76,000) (191,000) (64,000) (124,000)
- --------------------------------------------------------------------------------------------------------------
Total loans charged off (264,000) (308,000) (599,000) (518,000) (440,000)
- --------------------------------------------------------------------------------------------------------------
Recoveries on charged off loans:
Commercial business 3,000 9,000 14,000 12,000 33,000
Commercial real estate - 8,000 - - 16,000
Real estate residential 1,000 4,000 2,000 - -
Consumer 38,000 17,000 57,000 14,000 14,000
- --------------------------------------------------------------------------------------------------------------
Total recoveries 42,000 38,000 73,000 26,000 63,000
- --------------------------------------------------------------------------------------------------------------
Net loans charged off (222,000) (270,000) (526,000) (492,000) (377,000)
Provision for loan losses 370,000 420,000 535,000 500,000 420,000
- --------------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,057,000 2,909,000 2,759,000 2,750,000 2,742,000
- --------------------------------------------------------------------------------------------------------------
Net charge-offs during the period as
a percentage of average loans
outstanding during the period 0.09% 0.12% 0.26% 0.24% 0.20%
Allowance for loan losses
as a percentage of loans net of
unearned discount and loan fees
at end of period 1.25% 1.29% 1.30% 1.35% 1.39%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Provision and Allowance for Loan Losses, (Continued)
The following table presents an allocation of the allowance for loan
losses by major category and percentage of loans in each category to total loans
for each of the last five years. It should be noted that allocations are no more
than estimates and are subject to revision as conditions change.
Table 11
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ----------------- ----------------- ----------------
% 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 $ 389,000 8.9% 770,000 7.2% 439,000 6.9% 666,000 8.0% $ 161,000 8.1%
Commercial
real estate 1,122,000 30.3 403,000 29.6 201,000 31.0 292,000 28.4 97,000 28.0
Real estate
construction - 0.4 - 0.5 - 0.4 - 0.4 - 0.3
Real estate
residential 152,000 53.3 135,000 55.4 120,000 53.7 153,000 53.7 135,000 54.4
Consumer 286,000 7.1 361,000 7.3 225,000 8.0 182,000 9.5 106,000 9.2
Unallocated 1,108,000 - 1,240,000 - 1,774,000 - 1,457,000 - 2,243,000 -
- ---------------------------------------------------------------------------------------------------------------
Total $ 3,057,000 100% 2,909,000 100% 2,759,000 100% 2,750,000 100% $ 2,742,000 100%
- ---------------------------------------------------------------------------------------------------------------
</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 delinquency 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 react to
changing interest rates without impairing earnings, and to provide a stable
source of interest revenue. The following table presents the yield by securities
type and contractual maturity for the Bank's securities portfolio, consisting of
securities available for sale and securities held to maturity.
27
<PAGE>
Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
--------------------------------------------------------------------------------------------
After One After Five
One Year Through Through After Ten
or Less Five Years Ten Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries & Other
U.S. Government agencies:
Fair value $ 1,979,000 27,150,000 15,108,000 46,028,000 90,265,000
Yield 5.10 5.61 6.31 6.82 6.45
- ---------------------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
Fair value $ - 3,226,000 11,620,000 747,000 15,593,000
Yield(1) 8.17 7.98 7.89 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
Other securities:
Fair value 6,276,000 6,276,000
Yield 6.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fair Value $ 1,979,000 30,376,000 26,728,000 53,051,000 112,134,000
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average yield(2) 5.10 5.88 7.04 6.79 6.67
- ---------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries & other
U.S. government agencies:
Carrying Value $ - - - 28,296,000 28,296,000
Yield 6.99 6.99
- ---------------------------------------------------------------------------------------------------------------------------------
States & Municipal securities
Carrying Value 388,000 3,305,000 3,316,000 1,307,000 8,316,000
Yield(1) 7.58 8.40 8.19 8.40 8.28
- ---------------------------------------------------------------------------------------------------------------------------------
Total carrying value $ 388,000 3,305,000 3,316,000 29,603,000 36,612,000
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average yield(2) 7.58 8.40 8.19 7.05 7.28
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
28
<PAGE>
Securities Portfolio, (Continued)
The following table sets forth the composition and carrying value of
the Company's securities portfolio, analyzed by securities available for sale
and securities held to maturity, as of the dates indicated:
Table 13
Securities Portfolio
Securities available for sale
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US Treasury securities $ - 1,999,000
Federal agency mortgage-backed obligations:
Federal National Mortgage Association 9,845,000 9,397,000 2,744,000
Federal Home Loan Mortgage Corporation 3,912,000 5,429,000 4,809,000
Government National Mortgage Association 32,271,000 19,301,000 24,429,000
Other obligations of Federal agencies 44,237,000 47,537,000 50,252,000
State and Municipal 15,593,000 13,289,000 8,828,000
Other 6,276,000 6,126,000 3,635,000
- --------------------------------------------------------------------------------------------------
Total $ 112,134,000 101,079,000 96,696,000
- --------------------------------------------------------------------------------------------------
Securities held to maturity
- --------------------------------------------------------------------------------------------------
Federal agencies mortgage backed $ 28,296,000 35,838,000 19,083,000
Obligations of Federal agencies - - 6,000,000
State and Municipal 8,316,000 10,340,000 12,296,000
- --------------------------------------------------------------------------------------------------
Total $ 36,612,000 46,178,000 37,379,000
- --------------------------------------------------------------------------------------------------
</TABLE>
Approximately $74 million, or 50% 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 1999, 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.
29
<PAGE>
Securities Portfolio, (Continued)
Deposits
One of the primary components of sound growth and profitability is
deposit accumulation and retention. Total deposits at December 31, 1999
decreased by 2.6% from total deposits at December 31, 1998, which had increased
4.7% over total deposits at December 31, 1997. 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
-----------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand non-interest bearing $ 44,752,000 42,931,000 43,740,000
Demand interest bearing 37,491,000 38,462,000 30,679,000
Savings 56,305,000 56,714,000 52,783,000
Money Market 23,792,000 22,481,000 22,487,000
Time 137,133,000 146,772,000 143,954,000
- ---------------------------------------------------------------------------------------------------
Total $ 299,473,000 307,360,000 293,643,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
Table 15
Remaining Maturities of Time Deposits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
December 31
-----------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 33,203,000 33,271,000 31,557,000
Over three through six months 27,519,000 32,373,000 32,327,000
Over six through twelve months 46,224,000 48,220,000 48,735,000
Over twelve months 30,187,000 32,908,000 31,335,000
- ---------------------------------------------------------------------------------------------------
Total $ 137,133,000 146,772,000 143,954,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Table 16
Remaining Maturities of Time Deposits of
$100,000 or Greater
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31
------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 12,222,000 9,967,000 11,359,000
Over three through six months 9,055,000 12,005,000 10,128,000
Over six through twelve months 13,125,000 13,056,000 12,395,000
Over twelve months 6,662,000 6,605,000 5,852,000
- ----------------------------------------------------------------------------------------------------
Total $ 41,064,000 41,633,000 39,734,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
Interest rates, which had remained relatively stable during 1998 were
subject to upward pressures during 1999. The Federal Funds rate along with the
Bank's prime rate at the national and regional levels increased between 50 to 75
basis points during 1999. The price of deposits in the Bank's market area
experienced similar pressures as a result of these national rate trends combined
with the substantial degree of competitiveness among financial and non-financial
competitors in the Bank's market area for consumer deposits. Management actively
manages the pricing of interest bearing deposits to reduce the impact of
regional competitive pressures. The result of the Bank's pricing strategy during
1999 was a decrease in the average rate for total deposits to 4.04% from 4.26%
in 1998. Consumer deposit trends continue to exhibit a reluctance to commit
funds for extended periods of time opting instead for intermediate and
short-term deposits.
Taxation
Income tax expense was $1,488,000, $1,535,000, and $1,500,000 for 1999,
1998, and 1997, respectively. The Company's effective tax rate for these periods
was 26.7%, 27.6 %, and 27.2%, respectively. 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.
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.
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, securities
available for sale
31
<PAGE>
Liquidity, (Continued)
and investment securities with maturities of less than one year was $127,720,000
at December 31, 1999. 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 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
32
<PAGE>
Impact of Other Recently Issued Accounting Standards, (Continued)
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.
Other Matters
Year 2000 Compliance
Year 2000 issues could have resulted 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 core financial and
operational software systems and has taken the necessary steps to bring them
into compliance. The transition to the Year 2000 took place with no disruption
of normal business operations. The Company will continue to monitor its
financial and operational software systems for signs of Year 2000 related
irregularities, although none are expected. The Bank had expenditures of
$300,000 for Year 2000 matters through December 31, 1999 primarily related to
equipment costs and expects no significant future expense in the year 2000.
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.
33
<PAGE>
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 8.8% between 1998 and 1999 and 9.7% between 1997 and
1998. 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, 1999, dividends in excess of those already declared from the Bank to the
Company are limited to $4,193,000. The dividends declared to the Company by the
Bank were $3,932,000 in 1999.
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, 1999, of which 4% must be
Tier I capital. The Company's total risk-based capital ratio was 15.8% at
December 31, 1999 and 16.6% at December 31, 1998. The Company's Tier I
risk-based capital ratio was 14.6% at December 31, 1999 and 15.4% at December
31, 1998.
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 8.1% at December 31, 1999 and
8.4 % at December 31, 1998.
At December 31, 1999, 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 15.8%, 14.5%, and 8.1%, respectively.
34
<PAGE>
Capital Adequacy, (Continued)
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
------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets) 0.96% 1.02% 1.12%
Return on equity (net income divided by average equity) 11.85% 11.87% 12.77%
Dividend payout ratio (cash dividends declared divided
by net income) 56.69% 55.57% 51.27%
Equity to asset ratio (average equity divided by average
total assets) 8.1% 8.6% 8.8%
- --------------------------------------------------------------------------------------------------------
</TABLE>
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>
1999
Net Interest Income $ 3,488 3,633 3,665 3,705
Provision for Loan Losses 75 110 95 90
Other Operating Income 643 761 712 715
Other Operating Expense 2,873 2,865 2,718 2,926
Net Income 883 1,039 1,134 1,026
- -------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $ 0.30 0.36 0.39 0.36
Diluted 0.30 0.35 0.39 0.36
- -------------------------------------------------------------------------------------------------
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 $ 0.40 0.32 0.31 0.36
Diluted 0.39 0.31 0.31 0.36
- -------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Assets 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 15,198,000 13,977,000
Federal funds sold - 7,600,000
Securities available for sale (cost
of $117,374,000 in 1999 and
$100,057,000 in 1998)
Federal agency mortgage backed obligations 46,028,000 34,127,000
Other obligations of Federal agencies 44,237,000 47,537,000
Obligations of states and political subdivisions 15,593,000 13,289,000
Other securities 6,276,000 6,126,000
- ---------------------------------------------------------------------------------------------------
Total securities available for sale 112,134,000 101,079,000
- ---------------------------------------------------------------------------------------------------
Securities held to maturity (approximate fair value
of $35,499,000 in 1999 and
$46,729,000 in 1998):
Federal agency mortgage backed obligations 28,296,000 35,838,000
Obligations of states and political subdivisions 8,316,000 10,340,000
- ---------------------------------------------------------------------------------------------------
Total securities held to maturity 36,612,000 46,178,000
- ---------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 244,213,000 225,735,000
Allowance for loan losses (3,057,000) (2,909,000)
- ---------------------------------------------------------------------------------------------------
Net loans 241,156,000 222,826,000
- ---------------------------------------------------------------------------------------------------
Accrued interest receivable 2,667,000 2,547,000
Premises and equipment, net 6,267,000 7,067,000
Other real estate owned 576,000 1,449,000
Other assets 3,612,000 1,843,000
Cost in excess of fair value of net assets acquired
(net of accumulated amortization of $990,000 in 1999
and $952,000 in 1998) 553,000 591,000
- ---------------------------------------------------------------------------------------------------
Total assets $ 418,775,000 405,157,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets, (Continued)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 44,752,000 42,931,000
NOW and Super NOW 37,491,000 38,462,000
Savings 56,305,000 56,714,000
Money Market 23,792,000 22,481,000
Time 137,133,000 146,772,000
- --------------------------------------------------------------------------------------------------------------
Total deposits 299,473,000 307,360,000
- --------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,029,000 2,095,000
Dividends payable 573,000 581,000
Other borrowed money 84,095,000 58,357,000
Other liabilities 1,007,000 1,298,000
- --------------------------------------------------------------------------------------------------------------
Total liabilities 387,177,000 369,691,000
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share,
25,000,000 shares authorized;
2,935,367 shares in 1999; 2,904,309
in 1998 issued 2,935,000 2,904,000
Additional paid-in capital 11,962,000 11,767,000
Retained earnings 21,889,000 20,121,000
Accumulated other comprehensive income (3,458,000) 674,000
Less: Treasury stock at cost (71,060 shares) on December 31, 1999 (1,730,000) -
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 31,598,000 35,466,000
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 418,775,000 405,157,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP
Condolidated Statements Of Operations
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 19,661,000 19,093,000 18,101,000
Interest on Federal funds sold 237,000 480,000 320,000
Interest on investments:
Taxable 8,223,000 7,615,000 7,063,000
Non-taxable 1,268,000 1,114,000 1,023,000
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 29,389,000 28,302,000 26,507,000
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 10,519,000 10,840,000 11,337,000
Interest on Federal funds purchased 9,000 23,000 10,000
Interest on other borrowed money 4,370,000 3,456,000 1,498,000
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,898,000 14,319,000 12,845,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 14,491,000 13,983,000 13,662,000
Provision for loan loss 370,000 420,000 535,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 14,121,000 13,563,000 13,127,000
- ------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 1,568,000 1,334,000 1,330,000
Gains on sales of securities available for sale 88,000 509,000 154,000
Gains on calls of securities held to maturity - 2,000 3,000
ATM fees 621,000 523,000 402,000
Other income 554,000 593,000 572,000
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 2,831,000 2,961,000 2,461,000
- ------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 5,291,000 5,071,000 5,040,000
Net occupancy expense of bank premises 1,062,000 1,027,000 1,026,000
Furniture and equipment expenses 990,000 773,000 685,000
Data processing expense 225,000 255,000 242,000
ORE expense 500,000 360,000 121,000
Other expenses 3,314,000 3,481,000 2,966,000
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 11,382,000 10,967,000 10,080,000
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,570,000 5,557,000 5,508,000
Income tax expense 1,488,000 1,535,000 1,500,000
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,082,000 4,022,000 4,008,000
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during the period (4,074,000) 282,000 1,013,000
Less reclassification adjustment for gains
included in net income (58,000) (337,000) (104,000)
Comprehensive income (50,000) 3,967,000 4,917,000
- ------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data: (Based on net income)
Basic $ 1.41 1.39 1.41
Diluted 1.39 1.36 1.36
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Changes in Stockholders' Equity Years ended December
31, 1999, 1998 and 1997
<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, 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
Net Income - - 4,082,000 - - 4,082,000
Cash dividends declared - $0.80 per share - - (2,314,000) - - (2,314,000)
Changes in net unrealized loss on
securities available for sale, net of tax - - - (4,132,000) - (4,132,000)
Purchase of Treasury stock (26,000) - - - (2,279,000) (2,305,000)
Exercise of stock options 57,000 195,000 - - 549,000 801,000
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 2,935,000 11,962,000 21,889,000 (3,458,000) (1,730,000) 31,598,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flow
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,082,000 4,022,000 4,008,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Net gain on sales of securities available
for sale (88,000) (509,000) (154,000)
Net gain on calls on investments securities - (2,000) (3,000)
Accretion of discount on securities
and money market investments (132,000) (48,000) (63,000)
Amortization of premium on investment
securities 370,000 394,000 91,000
Provision for loan losses 370,000 420,000 535,000
Decrease in deferred loan fees (52,000) (260,000) (6,000)
(Increase) decrease in deferred tax benefit (110,000) 54,000 (2,000)
Decrease (increase) in accrued interest receivable (120,000) 621,000 (576,000)
Depreciation and amortization of premises
and equipment 1,042,000 859,000 844,000
(Gain)loss on sales of premises and equipment 66,000 (23,000) (5,000)
Loss on sale of other real estate 408,000 220,000 13,000
Proceeds from the sale of mortgage
and PHEAA loans held for sale 1,704,000 5,419,000 3,414,000
Net increase in mortgage & PHEAA
loans held for sale (2,548,000) (5,712,000) (3,160,000)
Gain on sale of mortgages and PHEAA loans (17,000) (62,000) (58,000)
(Decrease) increase in other assets 472,000 (497,000) 57,000
Amortization of goodwill 38,000 39,000 38,000
Decrease in accrued interest payable (66,000) (8,000) (98,000)
(Decrease) increase in other liabilities (291,000) 283,000 (32,000)
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
provided by operating activities 1,046,000 1,188,000 835,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,128,000 5,210,000 4,843,000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 9,384,000 16,866,000 6,638,000
Proceeds from maturities and calls of securities
available for sale 19,234,000 31,788,000 38,459,000
Proceeds from sales of securities available for sale 4,626,000 20,217,000 17,799,000
Purchases of securities held to maturity - (25,804,000) (44,593,000)
Purchase of securities available for sale (41,145,000) (56,167,000) (53,992,000)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (18,190,000) (14,130,000) (9,764,000)
Acquisition of premises and equipment (337,000) (2,635,000) (1,132,000)
Proceeds from sales of premises and equipment 29,000 66,000 35,000
Proceeds from sale of other real estate 867,000 459,000 471,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,532,000) (29,340,000) (46,079,000)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows, (Continued)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease)increase in demand, NOW and Super
NOW, savings, money market and time deposits. $ (7,887,000) 13,717,000 (2,303,000)
Dividends paid (2,322,000) (2,198,000) (1,992,000)
Other borrowed money 29,700,000 25,000,000 40,000,000
Repayment of other borrowed money (3,962,000) (3,716,000) (3,202,000)
Increase (decrease) Federal funds purchased - (2,350,000) 2,350,000
Exercise of stock options 801,000 371,000 273,000
Purchase of treasury stock (2,305,000) (35,000) -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,025,000 30,789,000 35,126,000
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,379,000) 6,659,000 (6,110,000)
Cash and cash equivalents at beginning of year 21,577,000 14,918,000 21,028,000
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,198,000 21,577,000 14,918,000
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 14,964,000 14,327,000 12,943,000
Cash payments for income taxes 1,663,000 1,753,000 1,491,000
Transfer of assets from loans
to other real estate 402,000 1,083,000 753,000
Change in net unrealized loss(gain) on securities
available for sale 6,262,000 83,000 (1,378,000)
Tax effect on change in unrealized loss(gain)
on securities available for sale 2,130,000 28,000 (469,000)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<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 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 two distinct manners:
supermarket banking (8 offices), traditional branch banking (11
offices). The Bank also maintains a full service branch in the student
center of a local University. 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 in conformity with generally accepted accounting principles,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
balance sheet and revenues and expenses for the reporting period.
Actual results could differ from those estimates.
42
<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, 1999, was
$4,873,000, 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, 1999,
the amount of such required balances was $21,000.
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 using 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.
43
<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
44
<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.
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,
1999 and 1998. While management uses the best information available to
make its evaluations, future adjustments to the valuation of other real
estate may be necessary if economic conditions differ significantly
from the assumptions used in making the evaluations.
Cost in Excess of Fair Value of Net Assets Acquired
Cost in excess of fair value of net assets acquired arose from an
acquisition in 1976 and is being amortized on a straight-line basis
over a period of 40 years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
periods in which those temporary differences are expected to be
recovered or settled. The Company and the Bank file a consolidated tax
return.
45
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(2) Securities Available for Sale
Securities available for sale at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999
-------------------------------------------------------
Cost Unrealized Carrying Value
- ----------------------------------------------------------------------------------------------------------------
Gain Loss (Fair)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage-backed obligations:
Federal National Mortgage Association $ 10,279,000 7,000 (441,000) 9,845,000
Federal Home Loan Mortgage Corporation 4,058,000 - (146,000) 3,912,000
Government National Mortgage Association 34,296,000 - (2,025,000) 32,271,000
Other obligations of Federal agencies 45,980,000 - (1,743,000) 44,237,000
State and municipals 16,485,000 15,000 (907,000) 15,593,000
Other securities 6,276,000 - - 6,276,000
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 117,374,000 22,000 (5,262,000) 112,134,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available for sale at
December 31, 1999 are due as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, 1999
----------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities Available for Sale
- --------------------------------------------------------------------------------------------------
Due in one year or less $ 2,000,000 1,979,000
Due after one year through five years 31,431,000 30,376,000
Due after five years through ten years 28,238,000 26,728,000
Due after ten years 55,705,000 53,051,000
- --------------------------------------------------------------------------------------------------
Total securities available for sale $117,374,000 112,134,000
- --------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(2) Continued
Proceeds from sales of securities available for sale during 1999 were
$4,626,000. Gross gains of $88,000 were realized on these sales.
Proceeds from sales of securities available for sale during 1998 were
$20,217,000. Gross gains of $509,000 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.
(3) Securities Held to Maturity
Securities held to maturity at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999
-------------------------------------------------------
Carrying Value Unrealized Fair Value
(Cost) Gain Loss
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agencies mortgage backed $ 28,296,000 - (1,098,000) 27,198,000
Obligations of state and politcal subdivisions 8,316,000 43,000 (58,000) 8,301,000
- --------------------------------------------------------------------------------------------------------------
Securities held for investment $ 36,612,000 43,000 (1,156,000) 35,499,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<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 states and political 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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of investment securities at
December 31, 1999 are due as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31, 1999
----------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Securities
- --------------------------------------------------------------------------------------------------------------
Due in one year or less $ 388,000 387,000
Due after one year through five years 3,305,000 3,303,000
Due after five years through ten years 3,316,000 3,312,000
Due after ten years 29,603,000 28,497,000
- --------------------------------------------------------------------------------------------------------------
Total investment securities $ 36,612,000 35,499,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, securities with an aggregate book value
of $73,664,000 and $40,407,000 respectively, were pledged to secure
public deposits.
There were no sales of securities held to maturity during the periods
presented herein.
47
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(4) Loans
Loans at December 31, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial business $ 23,063,000 17,264,000
Commercial real estate 78,405,000 71,389,000
Real estate construction 1,034,000 1,120,000
Real estate residential (mortgage and installment) 138,140,000 133,521,000
Consumer 18,452,000 17,681,000
- ---------------------------------------------------------------------------------------------------------
Total loans, gross 259,094,000 240,975,000
Unearned discount (14,224,000) (14,531,000)
Deferred loan fees (657,000) (709,000)
- ---------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount
and deferred loan fees $ 244,213,000 225,735,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Substantially all of the Bank's loans are secured by residential and/or
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, 1999 and 1998. 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 $1,444,000, $1,684,000, and $2,596,000 as of December 31,
1999, 1998, and 1997, respectively. 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 $77,000, $98,000, and $149,000 for the years ended December 31,
1999, 1998, and 1997 respectively. The amount of interest income on
non-accruing loans which was recorded in income was $21,000 in 1999,
$13,000 in 1998 and $12,000 for 1997, respectively. The total amount of
restructured loans were $1,014,000, $1,247,000, and $890,000 as of
December 31, 1999, 1998, and 1997, respectively. The amount of interest
on restructured loans which was recorded in income was $89,000,
$98,000, and $59,000 during 1999, 1998, and 1997, 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 $26,000, $24,000, and $33,000 for the years
ended December 31, 1999, 1998, and 1997.
48
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(4) Continued
As of December 31, 1999, 1998, and 1997 the Company had impaired loans
with a total recorded balance of $1,629,000, $1,530,000, and
$1,922,000, respectively. The average recorded balance for the twelve
month periods ended December 31, 1999, 1998, and 1997 was $1,631,000,
$1,837,000, and $1,914,000, respectively. Interest income recognized on
impaired loans during each of these periods was nominal. As of December
31,1999, 1998, and 1997 the amount of recorded balance in impaired
loans for which there is a related allowance for credit losses and the
amount of the allowance is $822,000 and $205,000, respectively,
$425,000 and $106,000, respectively, and $815,000 and $185,000,
respectively. The amount of the recorded balance in impaired loans for
which there was no related allowance for credit losses at December 31,
1999, 1998, and 1997 was $807,000, $1,105,000, and $1,107,000,
respectively. 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 $4,579,000 and $2,580,000 at December 31, 1999 and 1998,
respectively. These loans were made in the ordinary course of business
at substantially the same terms and conditions as those with other
borrowers. Included in new loans is $1,606,000 due to the appointment
of new directors with previously outstanding loans.
An analysis of the activity of these loans follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------
<S> <C>
Balance January 1 $ 2,580,000
New loans 2,820,000
Repayments 821,000
- --------------------------------------------------------------------------------------------
Balance December 31 $ 4,579,000
- --------------------------------------------------------------------------------------------
</TABLE>
The Company did not sell any mortgages in 1999. In 1998 and 1997 the
Company sold newly originated mortgage loans (primarily fixed rate) to
the Federal Home Loan Mortgage Corporation. The proceeds from the sale
of these loans were $-0-, $3,452,000, and $992,000 in 1999, 1998, and
1997, respectively. The Company recognized a gain of $-0- in 1999 and a
gain of $36,000 and $20,000 in 1998 and 1997, respectively, from these
transactions. The proceeds from the sale of PHEAA loans by the Company
were $1,704,000, $1,967,000 and $2,422,000 in 1999, 1998, and 1997,
resulting in gains of $17,000, $26,000, and $38,000, respectively.
Loans serviced for the benefit of others approximated $15,057,000 and
$18,231,000 as of December 31, 1999 and 1998, respectively.
49
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(5) Allowance for Loan Losses
Activity in the allowance for loan losses for the years ended December
31, 1999, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,909,000 2,759,000 2,750,000
Additions and (deductions):
Loans charged-off (264,000) (308,000) (599,000)
Recoveries 42,000 38,000 73,000
- ----------------------------------------------------------------------------------------------------------
Net loans charged-off (222,000) (270,000) (526,000)
- ----------------------------------------------------------------------------------------------------------
Provision for loan losses 370,000 420,000 535,000
- ----------------------------------------------------------------------------------------------------------
Balance at end of period $ 3,057,000 2,909,000 2,759,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(6) Premises and Equipment
Premises and equipment were comprised of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premises owned $ 5,849,000 5,801,000
Furniture and equipment 9,001,000 8,700,000
Leasehold improvements 1,175,000 1,334,000
- ------------------------------------------------------------------------------------------------------------
16,025,000 15,835,000
Accumulated depreciation and amortization (9,758,000) (8,768,000)
- ------------------------------------------------------------------------------------------------------------
Premises and Equipment, net $ 6,267,000 7,067,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Occupancy expenses were reduced by rental income from premises owned of
$30,000 in 1999, $30,000 in 1998 and $31,000 in 1997.
(7) Deposits
Included in time deposits are certificates of deposit. Although such
certificates are often renewed, the following is a summary by maturity
dates of these certificates at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Maturity 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $ 106,946,000 113,864,000
Greater than one year 30,187,000 32,908,000
- ---------------------------------------------------------------------------------------
$ 137,133,000 146,772,000
- ---------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(7) Continued
The aggregate amount of certificates of deposit, each $100,000 or more,
was $41,064,000 and $41,633,000 at December 31, 1999 and 1998,
respectively. Interest expense associated with certificates of deposit,
each $100,000 or more, was approximately $2,226,000, $2,510,000, and
$2,782,000, respectively, for the years ended December 31, 1999, 1998
and 1997.
(8) Other Borrowed Money
The Bank maintains a collateralized maximum borrowing capacity of
$137,143,000 with the Federal Home Loan Bank of Pittsburgh (FHLB).
Inclusive in this figure is an available line of credit of $10,000,000.
The line is collateralized by eligible securities. At December 31, 1999
other borrowed money short term was $4,700,000 and $-0- for 1998
against the Bank's line of credit. Two FHLB advances of $10,000,000
each were borrowed 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 borrowed 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 at the option of
the FHLB. On January 22, 1998 and February 22, 1999 the Bank also
borrowed $25,000,000 at a ten year/five year putable program with a
fixed rate of 5.38% and 4.97%, respectively.
The balance of other borrowed money and Federal funds purchased as of
December 31, 1999, 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>
1999
----
FHLB Advances $ 79,120,000 5.84% $ 82,439,000 $ 77,621,000 5.60%
Note Payable 275,000 6.50 275,000 275,000 6.50
Federal funds purchased - - - 156,000 5.80
Short term borrowing 4,700,000 4.05 4,700,000 62,000 4.80
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
</TABLE>
51
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(8) Continued
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 4.97% to 6.45% at December 31, 1999 are due as
follows:
Weighted
Average
Amount Rate
--------------- ---------------
2000 4,225,000 6.45
2001 4,506,000 6.45
2002 20,389,000 5.99
2008 25,000,000 5.38
2009 25,000,000 4.97
---------------
$ 79,120,000
===============
(9) Commitments, Contingent Liabilities, Off Balance Sheet Risk
In the ordinary course of business, the Company and its subsidiary 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 is currently obligated for eight non-cancelable, long-term
commitments under operating leases for eight branch offices. Total
rental expense, which consists primarily of the rent for the branch
offices and computer equipment was $285,000, $310,000 and $304,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The following is a schedule by years for future minimum rental payments
required for operating leases as of December 31, 1999:
Years ending December 31:
2000 $ 235,000
2001 145,000
2002 83,000
2003 81,000
2004 78,000
2005 thereafter 64,000
----------------
Total minimum
payments required $ 686,000
================
52
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(9) Continued
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 $1,488,000 and $2,131,000 and unfunded loan and line of
credit commitments in the amount of approximately $16,537,000 and
$14,846,000 at December 31, 1999 and 1998, respectively. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The exposure to credit loss in the event of non-performance by
the counter party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Bank holds various collateral to support these
commitments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
(10) Stockholders' Equity and Per Share Data
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.
53
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(10) Continued
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 4,082 4,022 4,008
=========== =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,902 2,894 2,850
Effect of dilutive securities:
Employee stock options 27 59 89
----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,929 2,953 2,939
=========== =========== ===========
Basic earnings per share $ 1.41 1.39 1.41
=========== =========== ===========
Diluted earnings per share $ 1.39 1.36 1.36
=========== =========== ===========
</TABLE>
The weighted average number of basic shares outstanding in 1999, 1998
and 1997 were 2,901,944, 2,893,570, and 2,849,723 shares, respectively.
The weighted average number of diluted shares outstanding in 1999,
1998, and 1997 were 2,929,078, 2,953,325 and 2,939,090 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 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.
54
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(11) Continued
Changes in total options outstanding during 1999, 1998, and 1997, were
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Weighted
Number of Exercise Price Average
Options Per Option (1) Exercise Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
ISOs Exercised (57,068) $8.00 - $13.00 11.18
- --------------------------------------------------------------------------------------------
Balance at December 31, 1999 45,125 $8.00 - $13.00 11.35
- --------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Exercisable
--------------------------------------------------------
Exercise Average
Price Range Shares Average Life(1) Exercise Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.00 6,125 1.50 $ 8.00
9.00 11,000 3.33 9.00
$ 13.00 28,000 4.17 $ 13.00
- ---------------------------------------------------------------------------------------------------
Total 45,125 3.00 11.35
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Average contractual life remaining in years.
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 1999, 1998 or 1997. 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, 1999,
dividends in excess of those already declared from the Bank to the
Company are limited to $4,193,000. The dividends declared to the
Company by the Bank were $3,932,000 in 1999.
Under Federal banking law, the Bank is restricted regarding extensions
of credit to the Company. The limit on extensions of credit was
$2,001,000 as of December 31, 1999.
55
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(12) Continued
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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
institution's category.
56
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(12) Continued
The Bank's actual capital amounts and ratios are also presented in the
table below.
<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, 1999
Total Capital
(to Risk Weighted Assets) $37,279,000 15.76% > $18,922,640 > 8.00% > $23,653,300 > 10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $34,321,000 14.51% > $9,461,320 > 4.00% > $14,191,980 > 6.00%
- - - -
Tier I Capital
(to Average Assets) $34,321,000 8.07% > $17,010,960 > 4.00% > $21,263,700 > 5.00%
- - - -
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%
- - - -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(13) Income Taxes
The components of federal income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,378,000 1,481,000 1,502,000
Deferred 110,000 54,000 (2,000)
- ---------------------------------------------------------------------------------------------
$ 1,488,000 1,535,000 1,500,000
- ---------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- -----------------------------------------------------------------------------
(13) Continued
A reconciliation of the income tax expense in the accompanying
statements of income with the amount computed by applying the statutory
federal income tax rate to income before income taxes is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at 34% rate $ 1,894,000 1,889,000 1,873,000
Interest from tax exempt loans
and investments (414,000) (368,000) (361,000)
Other, net 8,000 14,000 (12,000)
- ---------------------------------------------------------------------------------------
Income tax expense $ 1,488,000 1,535,000 1,500,000
- ---------------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Executive retirement plan $ 264,000 251,000
Allowance for loan losses 757,000 713,000
Deferred loan fees 176,000 185,000
Deferred directors fees 117,000 116,000
Non-accrual interest 29,000 45,000
Unrealized loss on securities available for sale 1,783,000 -
Others, net 2,000 39,000
- ------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 3,128,000 1,349,000
Deferred tax liabilities:
Accumulated amortization of discount
on investment securities (74,000) (118,000)
Depreciation (256,000) (325,000)
Unrealized gain on securities available for sale - (347,000)
- ------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (330,000) (790,000)
- ------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,798,000 559,000
- ------------------------------------------------------------------------------------------------------
</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, 1999 or 1998. There can be no assurance,
however, that the Company will generate any earnings or any specific
level of continued earnings in the future.
At December 31, 1999 and 1998, net deferred tax benefits of $2,798,000
and $559,000 respectively, are included in other assets, and income
taxes currently recoverable of $177,000 and $257,000, respectively are
included in other assets.
58
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(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 $-0-, $2,000 and $54,000 were accrued in 1999, 1998 and
1997, respectively.
The ESOP held 132,648 and 143,579 shares of the Bank's common stock at
December 31, 1999 and 1998, 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 $122,000 in
1999, $121,000 in 1998, and $115,000 in 1997.
During 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 also agreed to provide enhanced retirement
benefits for these executives. During 1999 the Company maintained an
employment contract only with its President. Costs for these benefits
were approximately $37,000, $24,000 and $44,000 in 1999, 1998 and 1997,
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.
A total of $26,000 was disbursed to these directors in 1999, and
$32,000 in 1998 and 1997. In 1999, 1998 and 1997, $36,000, was remitted
for the payment of insurance premiums. Assets held by the insurance
company which have reduced the company's accrual were $491,000 and
$502,000 at December 31, 1999 and 1998, respectively. Expense under
this plan was $21,000, $12,000, and $24,000 in 1999, 1998 and 1997,
respectively.
59
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- ------------------------------------------------------------------------------
(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.
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 segregate by type such as commercial,
residential real estate, and consumer. Each loan category is further
segmented
60
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- --------------------------------------------------------------------------------
(15) Continued
Loans, continued
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.
Accrued Interest Receivable
For accrued interest receivable the carrying amount is a reasonable
estimate of fair value.
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.
Accrued Interest Payable
For accrued interest payable the carrying amount is a reasonable
estimate of fair value.
Other Borrowed Money
The fair value of other borrowed money is based on the discounted value
of contractual cash flows. The discount rate was estimated using rates
currently asked for similar borrowings.
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.
61
<PAGE>
Notes to Consolidated Financial Statement, (Continued)
- --------------------------------------------------------------------------------
(15) Continued
Commitments to extend credit, and standby letters of credit
The following represents the carrying value and estimated fair value:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 15,198,000 15,198,000 13,977,000 13,977,000
Federal funds sold - - 7,600,000 7,600,000
Securities available for sale 112,134,000 112,134,000 101,079,000 101,079,000
Securities held to maturity 36,612,000 35,499,000 46,178,000 46,729,000
Loans 241,156,000 241,987,000 222,826,000 229,198,000
Accrued interest receivable 2,667,000 2,667,000 2,547,000 2,547,000
Financial liabilities:
Deposits $ 299,473,000 298,707,000 307,360,000 307,732,000
Accrued interest payable 2,029,000 2,029,000 2,095,000 2,095,000
Other borrowed money 84,095,000 81,901,000 58,357,000 59,291,000
- ------------------------------------------------------------------------------------------------------
</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, 1999 At December 31, 1998
------------------------------- -------------------------------
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $ 16,537,000 248,000 14,846,000 223,000
Standby letters of credit 1,488,000 30,000 2,131,000 43,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
(16) Pioneer American Holding Company Corp. (Parent Company Only)
Condensed 1999, 1998 and 1997 financial information is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets
- --------------------------------------------------------------------------------------
Assets 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 130,000 594,000
Investment in subsidiary 31,416,000 34,820,000
Receivable from subsidiary 625,000 633,000
- --------------------------------------------------------------------------------------
Total assets $ 32,171,000 36,047,000
- --------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Dividends payable 573,000 581,000
Stockholders' equity 31,598,000 35,466,000
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 32,171,000 36,047,000
- --------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
Notes to Consolidated Financial Statements, (Continued)
- --------------------------------------------------------------------------------
(16) Continued
Condensed Statements of Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses:
Administrative and other $ 115,000 138,000 50,000
- --------------------------------------------------------------------------------------
Loss before earnings of subsidiary (115,000) (138,000) (50,000)
Earnings of subsidiary:
Received as dividends 3,932,000 2,235,000 2,055,000
Undistributed 265,000 1,925,000 2,003,000
- --------------------------------------------------------------------------------------
Net income $ 4,082,000 4,022,000 4,008,000
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,082,000 4,022,000 4,008,000
Adjustments to reconcile net income to net
cash from operating activities:
Undistributed earnings of subsidiary (265,000) (1,925,000) (2,003,000)
Other 8,000 (37,000) (62,000)
- ----------------------------------------------------------------------------------------------------
Net cash from operating activities 3,825,000 2,060,000 1,943,000
- ----------------------------------------------------------------------------------------------------
Payments for investments in advances
to subsidiaries 300,000 - -
- ----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (300,000) - -
- ----------------------------------------------------------------------------------------------------
Cash flows used in financing activities:
Dividend paid (2,322,000) (2,198,000) (1,992,000)
Exercise of stock options 638,000 371,000 273,000
Payments to repurchase common stock (2,305,000) (35,000) -
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,989,000) (1,862,000) (1,719,000)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (464,000) 198,000 224,000
Cash at beginning of year 594,000 396,000 172,000
- ----------------------------------------------------------------------------------------------------
Cash at end of year $ 130,000 594,000 396,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
KPMG
1800 Market Street
Philadelphia, PA 19103-7212
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, 1999 and
1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
January 21, 2000
64
<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 /S/ GENE E. GOLDENZIEL, ESQ
duly caused this report to be signed on its behalf by the --------------------------------------
undersigned, thereunto duly authorized. GENE E. GOLDENZIEL, ESQ.
Director
PIONEER AMERICAN HOLDING COMPANY CORP.
/S/ JOSEPH NASSER
--------------------------------------
Date: March 9, 2000 JOSEPH NASSER
------------- Director
/S/ RICHARD CHOJNOWSKI
--------------------------------------
By /S/John W. Reuther RICHARD CHOJNOWSKI
----------------------------- Director
John W. Reuther
President, Chief Executive Officer
By /S/Allan A. Muto
----------------------------- /S/ JOHN W. REUTHER
Allan A. Muto --------------------------------------
Chief Financial Officer JOHN W. REUTHER
Director
By /S/Richard J. Lapera
----------------------------- /S/ ELDORE SEBASTIANELLI
Richard J. Lapera --------------------------------------
Comptroller of Pioneer American ELDORE SEBASTIANELLI
Bank, National Association Director
/S/ MARGARET O'CONNOR FLETCHER, R.N.
--------------------------------------
MARGARET O'CONNOR FLETCHER, R.N.
Director
/S/ JOHN W. WALSKI
--------------------------------------
JOHN W. WALSKI
Director
/S/ MICHAEL MURPHY
--------------------------------------
MICHAEL MURPHY
Director
</TABLE>
65
<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 1999, 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.
66
<PAGE>
Item 10
Information Concerning Directors and Executive Officers
The following table contains certain information with respect to the
Directors whose terms of office expire in 2000, 2001, 2002 and 2003. Michael
Murphy and Joseph Nasser were first appointed to the Board of Directors of the
Company in 1999. Margaret L. O'Connor was first elected to the Board of
Directors of the Company in 1995. Richard Chojnowski and John W. Reuther were
first appointed to the Board of Directors of the Company in 1994 and 1988,
respectively. All other Directors were first elected upon formation of the
Company in 1984.
<TABLE>
<CAPTION>
Name Age Year First Elected or Principal Occupation
Appointed Director for Past Five Years
of the Bank
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class 1 - Term to Expire in 2000
Richard Chojnowski 57 1994 Electrical Contractor
Michael Murphy 38 1999 Owner - Red Line Towing
Class 2 - Term to Expire 2003
Gene E. Goldenziel 51 1985 Attorney - Needle,
Goldenziel & Pascale
Joseph G. Nasser 43 1999 Accountant - Nasser & Co.
John W. Walski 78 1982 Retired - Giant Markets
Class 3 - Term to Expire 2002
Margaret L. O'Connor Fletcher 69 1995 Former Mayor, Clarks Summit
Class 4 - Term to Expire 2001
John W. Reuther 50 1988 President of Company
and Bank
Eldore Sebastianelli 79 1980 Retired - former co-Owner -
C & S Excav. Co.
</TABLE>
67
<PAGE>
Item 10, Continued
The following table sets forth selected information about the Officers
of the Bank, each of whom is elected by the Board of Directors and each of whom
holds office at the discretion of the Board of Directors. Each of the Officers
of the Bank has been principally employed as an officer or employee of the Bank
for more than the past five years, except for Allan A. Muto who was hired as
Chief Financial Officer in 1999.
<TABLE>
<CAPTION>
Name Age Position with Bank Held Since
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eldore Sebastianelli 79 Chairman 1998
Director 1980
John W. Reuther 50 President/Chief Executive Officer 1998
Director 1998
Patricia A., Cobb, Esquire 41 Executive Vice President 1998
James E. Jackson 56 Executive Vice President 1998
Allan A. Muto (a) 39 Senior Vice President/Chief Financial Officer 1999
</TABLE>
(a) Prior to joining the Bank in 1999, he was employed as Director/Business
Planning of Blue Cross of Northeastern Pennsylvania; and Senior Vice
President/Chief Financial Officer of Franklin First Savings Bank.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act (ASection 16(a)@) requires the
Company's directors, executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, if any, to file with the
SEC initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with.
68
<PAGE>
Item 11
Executive Compensation and Certain Transactions
Executive Compensation
The following table sets forth all cash compensation paid by the
Company and the Bank for services rendered in all capacities to the Company and
its subsidiaries during the fiscal year ended December 31, 1999 to the Chief
Executive Officer of the Company and the Bank and the Executive Vice
President/Senior Lending Officer of the Bank. No other executive officers of the
Company or the Bank had salary and bonus of more than $100,000 during the year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Long Term All Other
Principal Position Annual Compensation Compensation Compensation (a)
- ------------------ ----------------------- ------------- ----------------
Year Salary (b) Bonus Stock Options
---- ---------- ----- -------------
<S> <C> <C> <C> <C> <C>
John W. Reuther 1999 $247,800 $13,500 - 0 - $44,987
President and Director of the Bank
and the Company 1998 163,489 15,000 - 0 - 44,739
1997 141,250 16,807 - 0 - 41,478
James E. Jackson 1999 $94,525 $5,670 - 0 - $8,133
Executive Vice President of the Bank
1998 84,525 10,900 - 0 - 7,940
1997 80,500 10,062 - 0 - 3,273
</TABLE>
(a) For Mr. Reuther includes $7,500 contributed to the Savings and Investment
Plan, a car allowance of $2,752, life insurance premiums paid by the Bank of
$2,980 and split-dollar insurance premiums paid by the Bank of $31,755 in 1999.
For Mr. Jackson includes $4,579, $4,456 and $4,305 contributed to the Savings
and Investment Plan, a car allowance of $2,301, $2,364 and $2,377 and life
insurance premiums paid by the Bank of $1,253, $1,120 and $900 for 1999, 1998
and 1997, respectively.
(b) Includes Directors fees of $22,800 paid to Mr. Reuther during fiscal 1999.
69
<PAGE>
Item 11, continued
The following table sets forth certain information concerning the
shares acquired upon exercise of options, the number of unexercised options and
the value of unexercised options at December 31, 1999 held by the Executive
Officers listed in the Summary Table. No options were granted during the year
ended December 31, 1999.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregate Option Exercises In Last Fiscal Year and Option
Value at December 31, 1999
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1999 at December 31, 1999(a)
---------------------- -----------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Reuther 7,000 $108,500 39,000/0 $531,500/0
James E. Jackson - 0 - - 0 - - 0 - - 0 -
</TABLE>
(a) Based upon the difference between the market value of $25.50 per share on
December 31, 1999 and the exercise price of the option (as adjusted for the two
to one stock split effective June 5, 1996).
Employment Agreement
On October 27, 1999, the Company and Bank entered into a new employment
agreement with Mr. Reuther providing for a base salary of $225,000. The
agreement provides for such higher base salary as may be negotiated from time to
time during the term of the agreement as well as certain additional employment
benefits. The base term of the agreement is three years, with the term
automatically extended at the end of each year for one (1) additional year,
therefore there is a constant three-year term in effect. The agreement may be
terminated by the Bank for cause, upon the death or disability of the employee,
and subject to the following provision concerning change of control, upon the
termination of the employee's employment by resignation or otherwise. In the
event that employee's employment with the Bank is terminated by the employee or
the Bank upon a change in control of the Bank, the Bank will pay to the employee
a lump-sum termination benefit equal to at least two years base annual salary.
Executive Retirement Plan
On October 25, 1988, the Bank adopted an executive retirement plan (the
"Executive Retirement Plan") for the benefit of eligible employees. The
Executive Retirement Plan is administered by a committee of the Board which
designates the members who are eligible to participate in the Plan. The purpose
of the Executive Retirement
70
<PAGE>
Item 11, continued
Plan is to assist the Bank and the Company in retaining the service of certain
key employees until their retirement, to induce these key employees to utilize
their best efforts to maintain and enhance the business of the Bank and the
Company and to provide certain benefits to the key employees. Under the
Executive Retirement Plan, the Bank allocates each year an amount on behalf of
the member necessary to provide an annual income at the member's normal
retirement date payable for ten years equal to 35% of the member's average
compensation for his three most highly compensated years of employment. While
benefits under the Executive Retirement Plan are intended to be unfunded
obligations of the Bank, the Bank has elected to purchase insurance policies to
fund the obligations. The account of each member is credited with interest at
the rate of seven percent and compounded annually. A member shall have a 100%
vested interest in his account upon eligibility for retirement, death,
termination of his employment or in the event of a merger or acquisition of the
Bank of another entity. Upon retirement, the member is entitled to the value of
the account distributed in equal installments over a period of five, ten or
fifteen years at the election of the member. Prior to a member's retirement, a
member's beneficiary is entitled to the greater of the value of the member's
account at the time of death, or $200,000 or $250,000 as determined by the Board
of Directors. These benefits are not subject to offset for social security
benefits payable. Currently, John W. Reuther is eligible to participate in the
Executive Retirement Plan. At the retirement age of 65, Mr. Reuther would be
entitled to receive an annual estimated retirement benefit equal to $148,613 per
year for 10 years.
Split Dollar Life Insurance
The Bank purchased a split-dollar life insurance policy on the life of
John W. Reuther and will further pay the annual premium due on such policy
unless Mr. Reuther's employment with the Bank is terminated, voluntarily or
involuntarily, or any other termination event described in the Bank's agreement
with Mr. Reuther were to occur. Mr. Reuther executed a split-dollar agreement
granting a collateral interest to the bank for all premiums paid by the Bank.
Pursuant to such agreement, Mr. Reuther is required to repay the Bank for all
premiums paid on the life insurance policy upon the earlier of his death,
termination of service or other events described in such agreement. Upon the
death of the insured, Mr. Reuther's beneficiary shall receive the aggregate
death benefit of $1,050,753 payable under such policy less the aggregate
premiums paid by the Bank.
Committee Report On Executive Compensation
Pioneer American Bank, N.A., through its Board of Directors, had
determined that all matters dealing with executive compensation shall be
analyzed by the Planning Committee. The Board had mandated the exclusion of the
management director in the analysis process. The independent directors of the
Planning Committee have forwarded the following report on executive
compensation. Said report shall be included in the Pioneer American Holding
Company Corp.'s 1999 Form 10-K.
71
<PAGE>
Item 11, continued
Pioneer American Bank, N.A. through its salary administration plan has
implemented compensation policies that compensate all personnel on a fair and
equitable basis, while recognizing demonstrated performance and contribution to
the successful operation of the organization. More explicitly, a determination
has been made through the salary administration process that the relative worth
of the President/Chief Executive Officer to the Company is high, with extensive
diversification, executive management skills for the entire organization,
effective internal and external communication skills, problem-solving skills
based on analysis of long-range impact and the ability to make administrative
and policy-making decisions required. The relative worth of the other executive
officers of the Company is also high with the job requirements identified above
also essential. This relative worth of the President/Chief Executive Officer and
all executive officers has been translated into salary levels. The salary levels
have been initially determined be reviewing labor market salary data from
surveys of salaries paid in the external labor market positions comparable to
the executive positions in Pioneer American Bank, N.A. The Human Resources
department procures this salary data for use by the Planning Committee from a
third party independent salary administration firm. The survey sources, whenever
possible, include organizations of comparable size for characteristics, such as
number of employees and asset size, as well as larger financial institutions
with comparable positions.
The Committee annually evaluates and recommends base compensation,
bonus compensation and annual and longer-term incentive compensation for the
President/Chief Executive Officer, and other executive officers. Annual
increases to the base salary of the President/Chief Executive Officer, and other
executive officers are determined by industry and peer group standards, national
and regional economic conditions, and by the past and expected future
contributions of the individual executive officers. The base salary of the
President/Chief Executive Officer and Executive Vice President/Senior Lending
Officer for 1999, 1998 and 1997 will be presented in the Company's Form 10-K.
Bonus compensation is determined on an annual basis by analyzing the
achievement of financial goals, including, but not limited to, growth, earnings,
return on assets and return on equity. Financial statistics for 1999, as will be
presented in the 1999 annual report, reflect success in the attainment of
corporate goals. The bonus of the President/Chief Executive Officer for 1999 was
based upon corporate performance. All other executive officers were
independently analyzed in their individual performance in contributing to the
corporate success in determining each bonus.
In summary, the 1999 compensation of the President/Chief Executive
Officer was fixed separately and was based, among other factors, on a review of
competitive compensation data from surveys and peer companies. Bonus
compensation was paid to the President/Chief Executive Officer on the same terms
as all other officers based on corporate performance in 1999.
The foregoing report has been furnished by Gene E. Goldenziel, Esquire,
Richard Chojnowski and Margaret L. O'Connor-Fletcher.
72
<PAGE>
Item 11, continued
Compensation Committee Interlocks and Insider Participation
The Bank's Planning Committee, which acts as the compensation
committee, is comprised of Directors Chojnowski, Goldenziel and
O'Connor-Fletcher. Gene Goldenziel, a member of such committee, is a partner
with the law firm of Needle, Goldenziel & Pascale which performs legal services
for the Company and the Bank. During fiscal 1999, $80,563 in legal fees were
paid to Mr. Goldenziel's firm by or on behalf of the Company and the Bank.
Stock Performance Graph
The following graph shows a comparison of the five-year cumulative
return for the Company's Common Stock, the S&P SmallCap Bank Index (the "Bank
Composite") and the S&P SmallCap 600 Index assuming an investment in each of
$100 on December 31, 1994 and the reinvestment of all dividends.
<TABLE>
<CAPTION>
TOTAL SHAREHOLDER RETURNS
<S> <C> <C> <C> <C> <C> <C> <C>
375
350
# 347.35
325 # 325.81
D
300 # 302.11
O
275
L
250
L
225
A # 225.56 + 219.66
200 + 198.01
R + 195.42
175
S # 159.35 + 157.67 o 170.01
150
+ 129.96 o 134.65 o 134.20 o 141.64
125
o 107.32
100 o 100 + 100 # 100
75
50
25
0
Dec94 Dec95 Dec96 Dec97 Dec98 Dec99
Years Ending
- ----------------------------------------------------------------------------------------------------------------------
o PIONEER AMERICAN HOLDING COMPANY + S&P SMALLCAP 600 INDEX # BANKS COMPOSITE
- ----------------------------------------------------------------------------------------------------------------------
Total Return To Shareholder's
(Dividends reinvested monthly)
ANNUAL RETURN PERCENTAGE
Years Ending
Company/Index Dec95 Dec96 Dec97 Dec98 Dec99
- --------------------------------------------------------------------------------------------------------
PIONEER AMERICAN HOLDING COMPANY 7.32 25.47 -0.34 5.55 20.03
S&P SMALLCAP 600 INDEX 29.96 21.32 25.58 -1.31 12.40
BANKS COMPOSITE 59.35 41.55 44.45 6.61 -13.02
INDEXED RETURNS
Base
Company/Index Period Years Ending
- ---------------------------------------------------------------------------------------------------------------------------
Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PIONEER AMERICAN HOLDING COMPANY $100 $107.32 $134.65 $134.20 $141.64 $170.01
S&P SMALLCAP 600 INDEX 100 129.96 157.67 198.01 195.42 219.66
BANK COMPOSITE 100 159.35 225.56 325.81 347.35 302.11
</TABLE>
Compensation of Directors
Members of the Board of Directors are compensated at a rate of $300 per
meeting attended of the Company and $750 per meeting of the Bank attended ($850
per meeting for Chairman) and $375 per meeting ($425
73
<PAGE>
Item 11, continued
Compensation of Directors, continued
for Chairman) for meetings not attended up to a maximum of five absences.
Non-management directors of the Bank also received a bonus of $10,000 in 1999.
Item 12
Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
Shares of Common
Name Position Stock Beneficially Owned(a) Percent of Class(b)
- --------------------------------------- --------------------- -------------------------------- ---------------------
<S> <C> <C> <C>
Richard Chojnowski Director 146,456(c) 5.11%
3900 Robert Drive
Olyphant, PA
Gene E. Goldenziel Director 55,996(d) 1.95%
Michael Murphy Director 17,374(e) 0.61%
Joseph Nasser Director 21,587(f) 0.75%
Margaret L. O'Connor-Fletcher Director 44,816(g) 1.56%
John W. Reuther President/Director 86,037(h) 3.00%
Eldore Sebastianelli Treasurer/Director 47,020(i) 1.64%
John W. Walski Director 101,144(j) 3.53%
All Directors and Executive Officers
of the Company as a group (11 Persons) 533,580 18.63%
</TABLE>
- ------------------------------------------
(a) The securities "benefically owned" by an individual are determined in
accordance with the defination of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission and, accordingly, may
include securities owned by or for, among others, the wife and/or minor children
of the individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or shares
voting or investment power or has the right to acquire within 60 days after
March 1, 2000. Beneficial ownership may be disclaimed as to certain of the
securities. Except as indicated in the footnotes of this table, the persons
named in this table have sole voting and investment power with respect to all
shares of Common Stock indicated.
(b) Does not include shares held by the ESOP except as specifically set forth
herein. As of March 1, 2000, the ESOP held 132,648 shares, all of which have
been allocated to individual accounts.
(c) All shares are owned jointly with his mother.
(d) Includes 21,736 shares owned jointly with his spouse and 4,000 shares held
in an IRA account.
(e) Includes 100 shares owned jointly with daughter and 17,274 owned jointly
with spouse.
(f) Includes 6,343 shares owned jointly with spouse and 14,688 held in trust for
children.
(g) Includes 200 shares owned by the estate of such director's husband and
44,616 held as trustee for family trust.
(h) Includes 39,000 shares which may be acquired upon the exercise of stock
options. Also includes 16 shares held by him as co-trustee for his son, 80
shares held jointly with his son, Michael, and 9,387 shares held by the ESOP
which have been allocated to his individual account.
(i) Includes 1,748 shares held as trustee for his grandchildren and 45,272
shares held jointly with his spouse.
(j) Includes 34,648 shares owned jointly with his spouse.
74
<PAGE>
Item 13
Certain Relationships and Related Transactions
The Bank has had and expects to have in the future, loan and other
banking transactions in the ordinary course of business with many of its
Directors, officers, and their associates. All extensions of credit to such
persons have been made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and in the opinion of the
management of the Bank, do not involve more than a normal risk of collectibility
or present other unfavorable features.
The law firm of Needle Goldenziel & Pascale was paid legal fees of
approximately $80,560 by or on behalf of the Company or its subsidiaries for
legal services rendered during 1999. Gene E. Goldenziel, who is a Director of
the Bank and the Company, is a partner in Needle, Goldenziel & Pascale. Needle,
Goldenziel & Pascale has been retained by the Bank and the Company to perform
legal services in 2000.
75
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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0
0
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</TABLE>
