UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1995
or
( ) 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 No. 0-13599
Grange National Banc Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2314065
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
198 E Tioga St., Tunkhannock, Pennsylvania 18657
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 836-2100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 345,631
(Title of class) (Number of Shares outstanding
as of March 22, 1996)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) if the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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, [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 22, 1995 was $9,532.380.
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PART I
Item 1: BUSINESS
Investment Considerations
In analyzing whether to make or to continue an investment, investors
should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one factor to
affect the Company's results of operations. However, a continued downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.
Federal and State Government Regulation. The operations of the Company
and the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has
been focused on the regulation and deregulation of the financial services
industry. Non-bank financial institutions, such as securities brokerage firms,
insurance companies and money market funds, have been permitted to engage in
activities which compete directly with traditional bank business.
Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make.
Allowance for Loan Losses. The Company has established an allowance for
loan losses
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which management believes to be adequate to offset potential losses on the
Company's existing loans. However, there is no precise method of predicting loan
losses. There can be no assurances that any future declines in real estate
market conditions, general economic conditions or changes in regulatory policies
will not require the Company to increase its allowance for loan losses.
Dividends. The Board of Directors initiated a shareholder stock dividend
plan in November 1995. Under this plan stockholders are granted additional
shares in the corporation based on the number of shares which could be purchased
at the declared dividend rate. Shareholders who desire cash instead of new
shares are given the option of surrendering these shares to the corporation in
exchange for a cash payment at the rate of the declared dividend. This dividend
policy will be reviewed periodically in light of future needs of the Company. No
assurance can be given that shareholders will be able to surrender shares in
exchange for cash in the future.
Market for Common Stock. There is no established trading market for the
Company's Common Stock and there has been only limited trading in the Common
Stock. It is not expected that a regular and active market for the Common Stock
will develop in the foreseeable future. Investors in the shares of Common Stock
must, therefore, be prepared to assume the risk of their investment for an
indefinite period of time.
"Anti-Takeover" and "Anti-Greenmail" Provisions. The Articles of the
Company presently contain certain provisions which may be deemed to be
"anti-takeover" and "anti-greenmail" in nature in that such provisions may
deter, discourage or make more difficult the assumption of control of the
Company by another corporation or person through a tender offer, merger, proxy
contest or similar transaction or series of transactions. Copies of the
Company's Articles of Incorporation are on file with the Securities and Exchange
Commission and the Pennsylvania Department of State.
Stock Not an Insured Deposit. Investments in the shares of Common Stock
of the Company are not deposits insured against loss by the FDIC or any other
entity.
General
The Company is a Pennsylvania business corporation which is registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended
(the "Holding Company Act"). The Company was incorporated on October 2, 1984 for
the purpose of acquiring The Grange National Bank of Wyoming County (the "Bank")
and thereby enabling the Bank to operate within a bank holding company
structure. The Company became an active bank holding company on April 30, 1985
when it acquired the Bank. The Bank is a wholly-owned subsidiary of the Company.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Bank has its principal banking office in Laceyville, Pennsylvania.
It also presently has three branch offices in Wyoming County, Pennsylvania, one
branch office in Susquehanna County, Pennsylvania and one branch office in
Luzerne County, Pennsylvania. The Bank has one automated teller machine ("ATM"),
located on route 29 south of Tunkhannock at the Wal-Mart store in Eaton
Township, Wyoming County, Pennsylvania. The Company, through the Bank, derives
substantially all of
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its income from the furnishing of banking and banking-related services.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in the distribution of the assets or earnings of
the Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations in respect of federal funds purchased and certain other borrowings,
as well as deposit liabilities.
The Company directs the policies and coordinates the financial resources
of the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.
As of December 31, 1995, the Company, on a consolidated basis, had total
assets of $91,622,000, total deposits of $79,866,000, and total shareholder's
equity of $9,522,000.
The Grange National Bank of Wyoming County
The Bank was incorporated under the laws of the United States of America
as a national bank in 1907 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Wyoming, Susquehanna and Luzerne Counties, Pennsylvania. The Bank is a member of
the Federal Reserve System.
As of December 31, 1995, the Bank had total assets of $91,385,000, total
deposits of $79,866,000 and total shareholders' equity of $9,285,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.
The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at Main and Bee Streets,
Laceyville, Pennsylvania, also provides services to its customers through its
branch network of five full service banks, which include drive-in facilities and
bank-by-mail services. The bank's six full service offices are located in
Wyoming, Susquehanna and Luzerne Counties, Pennsylvania. The Bank also has a
free standing ATM located on route 29 south of Tunkhannock at the Wal-Mart store
in Eaton Township, Wyoming County.
The Bank's services include accepting time, demand and savings deposits,
including NOW accounts, regular savings accounts, money market accounts, fixed
rate certificates of deposit and club accounts. Its services also include making
secured and unsecured commercial and consumer loans, financing commercial
transactions either directly or through regional industrial development
corporations or the Small Business Administration, making construction and
mortgage loans and the renting of safe deposit facilities. Additional services
include making residential mortgage loans, small business loans, new car and
truck loans and student loans and providing discount brokerage services. The
Bank's business loans include seasonal credit, collateral loans and term loans.
In September 1992, the Comptroller of the Currency approved the Bank's
application for the establishment of a Trust Department. In July of 1993, the
Bank began to exercise trust
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powers. The Bank has appointed a trust officer and retained the services of an
attorney with estate planning experience to administer the services provided by
the Trust Department. The Bank has recognized only minimal income from the Trust
Department during 1994 and 1995. Management does not expect the department to
generate net income for the next several years.
The Bank has a relatively stable deposit base and, with the exception of
deposits at December 31, 1995 of $1,144,000 from the State, 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 seasonal fluctuations in the amount of its deposits.
No significant portion of the Bank's loans are concentrated within any
one business industry. Real estate loans however accounted for 66% of the Bank's
loan portfolio at December 31, 1995 and 70% at December 31, 1994. Management
believes this concentration is not serious in its rural agricultural location
where commercial loan demand is minimal. Recognizing the potential adverse
affect these loans could place on interest margins, the Bank has an adjustable
rate mortgage which adjusts annually, as well as continuing to offer a three
year adjustable mortgage. The Bank also continues to offer fixed rate mortgages
for twenty years, but now offers a ten year fixed rate at 1/2% under the twenty
year rate. For the past three years, average mortgage loan balances have
approximated 37% to 39% of the Bank's total average interest earning assets. At
December 31, 1995 mortgage loans were approximately 38% of total interest
earning assets.
The Bank has no deposits or loans directly with foreign entities, and
has a minimal amount of deposits made by persons working in foreign countries.
The Bank's assets are not invested in foreign securities, Eurodollars or foreign
loans.
Competition
All phases of the Bank's business are highly competitive. The Bank's
market area is the primary trade area of portions of Wyoming, Bradford,
Susquehanna and Luzerne Counties, Pennsylvania with concentration in the Wyoming
County area. The Bank competes with local commercial banks as well as other
commercial banks with branches in the Bank's market area. The Bank considers its
major competition to be Mellon Bank, headquartered in Pittsburgh, Pennsylvania,
First Fidelity Bank, Headquartered in Philadelphia, Pennsylvania, Peoples State
Bank, headquartered in Wyalusing, Pennsylvania, Community Bank and Trust,
headquartered in Forest City, Pennsylvania, Franklin First Saving Bank,
headquartered in Wilkes-Barre, Pennsylvania, PNC, headquartered in Pittsburgh,
Pennsylvania, Pioneer Bank, headquartered in Carbondale, Pennsylvania, and First
Valley Bank, headquartered in Bethlehem, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to
its lending activities as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares of money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.
The Bank is generally competitive with all competing financial
institutions in its service
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areas 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 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.
The Company
The Company is registered as a "bank holding company" under the Holding
Company Act, and it, therefore, is subject to regulation by the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board").
Under the Holding Company Act, the Company is required to secure the
prior approval of the Federal Reserve Board before it can merge or consolidate
with any other bank holding company or acquire all or substantially all of the
assets of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank. The Holding Company Act also prohibits the
acquisition, directly or indirectly, by the Company of any voting shares of, or
interests in, or all or substantially all of the assets of, any bank located
outside the Commonwealth of Pennsylvania unless such acquisition is specifically
authorized by the laws of the state in which such bank is located.
The Company is prohibited under the Holding Company Act from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in, non-banking activities unless the Federal Reserve
Board, by order or regulation, has found such activities to be closely related
to banking or managing or controlling banks as to be a proper incident thereto.
In making such determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public which outweigh possible adverse
effects. The Federal Board has by regulation determined that certain activities
are closely related to banking within the meaning of the Holding Company Act.
These activities include, among other, operating a mortgage, finance, credit
card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent or
underwriter for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and certain stock brokerage and
investment advisory services.
Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Pennsylvania
Banking Code of 1965, as amended (the "Banking Code"), the Pennsylvania
Department of Banking has the authority to examine the books, records and
affairs of any Pennsylvania bank holding company or to require any documentation
deemed necessary to insure compliance with the Banking Code.
The Company is under the jurisdiction of the Securities and Exchange
Commission and
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various state securities commissions for matters relating to the offering and
sale of its securities, and is subject to the Securities and Exchange
Commission's rules and regulations relating to periodic reporting, reporting to
shareholders, proxy solicitation and insider trading.
The Company, as an affiliate of the Bank within the meaning of the Bank
within the meaning of the Federal Reserve Act, is subject to certain
restrictions under the Federal Reserve Act regarding extensions to it by the
Bank, investments in the stock or other securities of the Company by the Bank
and the use of the stock or other securities of the Company as collateral for
loans by the Bank to any borrower. Further, under the Federal Reserve Act and
the Federal Reserve Board regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or provisions of
property or services. These so-called "anti-tie-in provisions" generally provide
that a bank may not extend credit, lease or sell property, or furnish any
service, or fix or vary the consideration for any of the foregoing to a customer
on the condition or requirement that the customer provide some additional
credit, property or service to the bank, to the bank's holding company or to any
other subsidiary of the bank's holding company or on the condition or
requirement that the customer not obtain other credit, property or service from
a competitor of the bank, the bank's holding company or any subsidiary of the
bank's holding company.
Pennsylvania law allows bank holding companies located in other states
and the District of Columbia to acquire Pennsylvania banks and bank holding
companies, but only if the state in which the acquiror is located grants
reciprocal acquisition rights to Pennsylvania bank holding companies. All
interstate acquisitions involving Pennsylvania banks or bank holding companies
require the prior approval of the Pennsylvania Department of Banking.
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 Office of
the Comptroller of the Currency of the United States (the "OCC") and is required
to furnish quarterly reports to the OCC. The approval of the OCC is required for
the establishment of additional branch offices by any national bank, subject to
applicable state law restrictions. Under current Pennsylvania law, banking
institutions located in Pennsylvania, such as the Bank, may establish branches
within any county in the Commonwealth, subject to the prior approval of the OCC.
Present law forbids branching across state lines.
As a national bank, the Bank is a member of the FDIC and a member of the
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 and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit, credit practices, the disclosure of
credit terms and discrimination in credit transactions.
The Bank is subject to certain limitations on the amount of cash
dividends that it can pay. See "PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY".
As a consequence of the current increased regulation of commercial
banking and bank
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holding company activities in the United States, the costs of doing business of
the Bank and the Company may be expected to increase due to increased FDIC
insurance assessments and the increased costs and expenses associated with
complying with this increased regulation.
Effect of Governmental Policy
One of the most significant factors affecting the Bank's earnings is the
difference between the interest rates paid by the Bank on its deposits and its
borrowings and the interest rates earned by the Bank on loans to its customers
and securities owned by the Bank. The yields of its assets and the rates paid on
its liabilities are sensitive to changes in prevailing rates of interest. Thus,
the earnings and growth of the Bank will be influenced by general economic
conditions, the monetary and fiscal policies of the federal government, and the
policies of regulatory agencies, particularly the Federal Reserve Board, which
implements national monetary policy. An important function of the Federal
Reserve System is to regulate the money supply and credit conditions in order to
mitigate recessionary and inflationary pressures. Among the techniques used to
implement these objectives are open market operations in U.S. Government
securities and changes in reserve requirements of banks and in the discount rate
on bank borrowings. These techniques influence overall growth and distribution
of credit, bank loans, investments and deposits, and may also affect interest
rates charged on loans or paid on deposits. The nature and impact of any future
changes in monetary policies cannot be predicted.
From time to time, legislation has been enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. Legislative proposals which could affect the Company and
the banking business in general have been proposed and may be introduced before
the United States Congress and other governmental bodies. These proposals may
alter the Company's structure, regulation, disclosure, and reporting
requirements. In addition, various banking regulatory agencies frequently
propose rules and regulations to implement and enforce existing legislation. It
cannot be predicted whether or in what form any such legislation or regulations
will be enacted or the extent to which the business of the Company would be
affected thereby.
On June 21, 1993 legislation referred to as "Truth in Savings" became
effective and is codified for banks in the Federal Reserve Bank's Regulation DD.
"Truth in Savings" in intended to encourage comparative shopping for deposit
products by consumers. Regulation DD applies to all consumer accounts and other
qualifying accounts. Regulation DD regulates computation of interest,
advertising content, notice of change of terms, and requirements of information
to be disclosed when opening an account and in periodic statements. "Truth in
Savings" has been compared to "Truth in Lending" regulations, both for what the
legislation says it is trying to accomplish, and for the compliance burden and
resulting costs for Banks and consumers.
Federal Deposit Insurance Corporation Improvement Act of 1991
On December 19, 1991, the President signed into law the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). Among other things,
FDICIA provides increased funding for the Bank Insurance Fund ("BIF") and
provides for expanded regulation of depository institution and their affiliates,
including bank holding companies.
The BIF funding and reserve restoration provisions could result in
significant increases
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in the assessment rate on deposits of BIF institutions (such as the Bank) over
the next 15 years. Under current law, as amended by FDICIA, the insurance
assessment paid by the BIF-insured institutions shall be as specified in a
schedule required to be issued by the FDIC that would specify, at semi-annual
intervals, target reserve ratios designed to increase the reserve ratio to 1.25%
of estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with statute in 15 years. Beginning with the first semi-annual period
of calendar year 1993 and for each subsequent semi-annual period, banks will pay
semi-annual assessments under a transitional risk-based assessment system which
became effective on November 2, 1992. Under this system, banks will pay a
semi-annual assessment at a rate which is based upon the assessment risk
classification assigned to the bank by the FDIC. In determining the risk
classification, the FDIC will assign each bank to one of three capital groups
and within each capital group to one of three supervisory subgroups. Depending
upon the assessment risk classification assigned to a bank, the semi-annual
assessments to be paid by banks beginning in 1996 will range from 0.00% of an
institution's average assessment base for banks assigned to the highest capital
group and highest supervisory subgroup to 0.27% for banks assigned to the lowest
capital group and lowest supervisory subgroup. Banks will be notified of their
assessment risk classification by the first day of the month preceding each
semi-annual period.
FDICIA further provides authority for special assessments against
insured deposits and for the development of a general risk-based deposit
insurance assessment system under which the premium levels of BIF institutions
will vary in relation to their perceived risk profiles.
FDICIA requires each federal banking agency, including the FRB and OCC,
to revise its risk-based capital standards prior to June 1993, to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and risks of non-traditional activities, as well as reflect the
actual performance and expected risk of loss on multi-family mortgages.
Effective December 1992, FDICIA provides the federal banking agencies
with broad powers to take corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized", "adequately capitalized,
"undercapitalized", "significantly undercapitalized", or "critically
undercapitalized".
The FDIC has issued a rule which sets the capital level for each of the
five capital categories established in FDICIA. Under the rule a bank is deemed
to be "well capitalized" if the bank has a total risk-based capital ratio of 10%
or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a
leverage ratio of 5% or greater, and is not subject to any order or final
capital directive by the FDIC to meet and maintain a specific capital level for
any capital measure. A bank is deemed "adequately capitalized" if the bank has a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage capital ratio of 4% or greater (or 3% or
greater for the most highly rated banks), and does not meet the definition of a
"well capitalized" bank. A bank that has total risk-based capital, Tier 1
risk-based capital and leverage capital that is less than 8%, 4% and 4%,
respectively, is deemed "undercapitalized". Under the regulation, "significantly
undercapitalized" banks are those with total risk-based capital, Tier 1
risk-based capital and leverage capital that is less than 5%, 3% and 3%,
respectively. Finally, "critically undercapitalized" banks are defined as those
banks which have a ratio of tangible equity to total assets that is equal to or
less than 2%. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
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FDICIA provides that an insured depository institution may not pay
management fees to any person, including any holding company, having control of
the institution if, after making the payment, the institution would be within
any three of the undercapitalized categories, nor may an institution, except
under certain circumstances and with prior regulatory approval, make any capital
distribution if, after making the distribution, the institution would be within
any three of the undercapitalized categories. Institutions that are classified
"undercapitalized" are subject to the following mandatory supervisory actions:
increased monitoring by the institution's federal regulator; a requirement to
submit a capital restoration plan; a restriction on growth of the institution's
total assets; and a limitation on the institution's ability to make any
acquisitions, open any new branch offices or engage in any new line of business
with out approval of the institution's federal regulator. Institutions that are
classified "significantly undercapitalized" are subject to the mandatory
supervisory actions applicable to "undercapitalized" institutions and are
required to restrict the payment of bonuses and raises to senior executive
officers of the institution. With certain exceptions, "critically
undercapitalized" institutions are required to be placed in conservatorship or
receivership within 90 days.
FDICIA also provides that the federal regulators may take certain
discretionary actions with respect to any institution that is under capitalized,
if it is determined the action is necessary to resolve the problems of the
institution, at the least possible cost to the deposit insurance fund. These
discretionary supervisory actions include: placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (which may include voting stock) or be acquired; placing
restrictions on transactions with affiliates; restricting the interest rates the
institution may pay on deposits; ordering a new election for the institution's
board of directors; requiring that certain senior executive officers or
directors be dismissed; prohibiting the payment of principal or interest on
subordinate debt; prohibiting the holding company from making capital
distributions without prior regulatory approval; and requiring the holding
company to divest the institution or any other affiliate. If the insured
depository institution is "undercapitalized", the parent bank holding company is
required to guarantee that the institution will comply with any capital
restoration plan submitted to and approved by the appropriate federal banking
agency in an amount equal to the lesser of (i) 5% of the institution's total
assets at the time the institution became undercapitalized, or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
fails to comply with the capital restoration plan. FDICIA also amends current
law with respect to acceptance of brokered deposits by insured depository
institutions to permit only a "well capitalized" depository institution to
accept brokered deposits without regulatory approval.
FDICIA contains a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect to
deposit accounts. FDICIA also requires annual examination of all insured
depository institutions by the appropriate federal banking agency with some
exceptions for small, well-capitalized institutions and state-chartered
institutions examined by state regulators. The federal banking agencies are
required to set compensation standards for insured depository institutions that
would prohibit excessive compensation, fees or benefits to officers, directors,
employees and principal shareholders. FDICIA also expands the range of merger,
purchase and assumption, and deposit transfer transactions involving banks and
savings associations that are exempt from payment of exit and entry fees for
transfers of deposits between the BIF and the Savings Association Insurance
Fund.
The foregoing necessarily is a summary and general description of
certain provisions of
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FDICIA and does not purport to be complete. Many of the provisions of FDICIA
will be implemented through the adoption of regulations by various federal
banking agencies. Moreover, many of the significant provisions of the
legislation have not yet become effective. As of the date hereof, the Company is
continuing to study the legislation and the regulations relating to the
legislation but cannot yet assess its impact on the Company or 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
OCC, the Federal Reserve Board and the FDIC. An important function of the
Federal Reserve Board is to regulate the money supply, credit conditions and
interest rates. Among the instruments used to implement these objectives are
open market in United States Government securities, setting the discount rate
and changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have
had a significant effect on operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.
Employees
As of December 31, 1995, the Company had a total of 40 full-time and 14
part-time employees. The Company provides a variety of employment benefits and
considers its relationship with its employees to be good.
Item 2: Properties
The Company's main executive offices and financial operations center,
which also serve as a branch bank, are located at 198 E. Tioga Street,
Tunkhannock, Pennsylvania, which the Company owns. The Bank's main banking
office is located at Main and Bee Streets in the borough of Laceyville, Wyoming
County, Pennsylvania, which building is owned by the Company. In addition, the
Company owns four additional properties where its other branches are located, at
Route 267, Lawton, Pennsylvania, at the corner of U.S. Route 6 and Bridge
Street, in the Borough of Meshoppen, Pennsylvania, and at the intersection of
U.S. Routes 309 and 29 in Monroe Township, Pennsylvania. The fourth office,
which opened March 25, 1996, was purchased from Meridian Bank, along with the
deposit liabilities, in an agreement signed during the fourth quarter of 1995.
During 1993 the Company purchased a property along U.S. Route 309 in Dallas
Township, Luzerne County, Pennsylvania, for a future branch office. The Bank has
an operating lease with PNC to rent a former First Eastern Bank office as a
branch office in Edwardsville, Pennsylvania. During 1995, the Bank entered into
a lease agreement to rent space for a branch office in a yet to be constructed
shopping plaza in Trucksville, Luzerne County, subject to regulatory approval.
During 1993 the Company purchased a property along U.S. Route 309 in Dallas
Township for a branch office. The Company intends to place this parcel on the
market for sale, as the Trucksville site is near this parcel and is a superior
location for a branch office. The Company does not anticipate any loss on the
sale.
10
<PAGE>
Item 3: 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 the management of the Company, there are no
proceedings pending to which the Company is a party or to which its property is
subject, which, if determined adversely to the Company, would be material in
relation to the Company's shareholders' equity or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
None
11
<PAGE>
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters
Incorporated by reference from the section entitled "Common Stock Market
Price, Book Value and Dividends" in the Company's Annual Report to Shareholders
for the year ended December 31, 1995.
Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated by reference from the section entitled "Selected Financial
Data" in the Company's Annual Report to shareholders for the year ended December
31, 1995.
Incorporated by reference from the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report to Shareholders for the year ended December 31, 1995.
Item 7: Financial Statements and Supplementary Data
Incorporated by reference from the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements thereto included in
the Company's Annual Report to Shareholders for the year ended December 31,
1995.
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
12
<PAGE>
PART III
Item 9: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 10: Executive Compensation
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 11: Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 12: Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
13
<PAGE>
PART IV
Item 13: Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. The following consolidated financial
statements and the notes thereto of the Company, which are included in the
Company's Annual Report to Shareholders for the year ended December 31, 1995,
and the report of independent public accountants which is also included in such
Annual Report, are incorporated herein by reference in to Item 8 of this Report:
Consolidated Balance Sheets -
December 31, 1995 and 1994
Consolidated Statements of Income -
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows Years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Shareholders' Equity Years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2) Management Contracts and Compensatory Plans, Contracts or
Arrangements
Set forth below is a list of (i) any management contract or compensatory
plan, contract or arrangement, including but not limited to plans relating to
options, warrants or rights, pension, retirement or deferred compensation or
bonus, incentive or profit-sharing, or if such plan is not set forth in any
formal document, a written description thereof, in which any director or any
executive officer named in the Summary Compensation Table in the Company's Proxy
Statement relating to the 1996 Annual Meeting of Shareholders participates, and
(ii) any other management contracts or any other compensatory plan, contract or
arrangement in which any other executive officer of the registrant participates
except those immaterial in amount or significance:
Number Title
------ -----
10.1 Employee Stock Option Plan (Filed as Exhibit 10.1 to
Grange National Banc Corp.'s Registration Statement on
Form SB-2 (Registration No. 33-76838) filed with the
Commission on March 24, 1994).
10.2 Non-employee Director Stock Option Plan (Filed as
Exhibit 10.2 to Grange National Banc Corp.'s
Registration Statement on Form
14
<PAGE>
SB-2 (Registration No. 33-76838) filed with the
Commission on March 24, 1994).
10.3 Deferred Compensation Agreement with Thomas A.
McCullough Filed as Exhibit 10.3 to Grange National Banc
Corp.'s Registration Statement on Form SB-2
(Registration No. 33-76838) filed with the Commission on
March 24, 1994).
Exhibits filed pursuant to Item 601 of Regulation S-K.
Number Title
------ -----
3.1 Amended and Restated Articles of Incorporation of Grange
National Banc Corp. (Incorporated by reference from
Exhibit 3.1 to Grange National Banc Corp.'s Registration
Statement on Form SB-2 (Registration No. 33-76838) filed
with the Commission on March 24, 1994).
3.2 Bylaws of the Company, as amended (Incorporated by
reference from Exhibit 3.2 to Grange National Banc
Corp.'s Registration Statement on Form SB-2
(Registration No. 33-76838) filed with the Commission on
March 24, 1994).
4.1 Grange National Banc Corp. Specimen Stock Certificate
(Incorporated by reference from Exhibit 4.1 to Grange
National Banc Corp.'s Registration Statement on Form
SB-2 (Registration No. 33-76838) filed with the
Commission on March 24, 1994).
13.1 Annual Report to Shareholders for the year ended
December 31, 1995 (such report, except for those
portions expressly incorporated by reference in this
Annual Report on Form 10-K, is furnished for the
information of the Commission and is not to be deemed
filed as part of this Report).
21.1 Subsidiaries of the Company (incorporated by reference
from exhibit 21.1 to Grange National Banc Corp.'s
Registration Statement on Form SB-2 (Registration
Statement No. 33-76838) filed with the Commission on
March 24, 1994).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1995.
15
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified
under applicable items herein)
Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 1995 are incorporated by reference in Parts II and IV of
this Report.
With the exception of the information incorporated by reference in Parts
II and IV of this Report, the Company's Annual Report to Shareholders for the
year ended December 31, 1995 in not deemed "filed" with the Securities and
Exchange Commission for any purpose.
Certain portions of the Company's Proxy Statement filed in connection
with its Annual Meeting of Shareholders are incorporated by reference in Part II
of this Report.
Other documents incorporated by reference are listed in the Exhibit
Index.
16
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRANGE NATIONAL BANC CORP.
(Registrant)
Date: March 26, 1996 /s/ Robert C. Wheeler
-------------------------
Robert C. Wheeler
(Chairman of the Board)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report to be signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Robert C. Wheeler 3/26/96 /s/ Cyrus J. Cornell 3/26/96
- ------------------------------ ------------------------------
Robert C. Wheeler (Date) Cyrus J. Cornell (Date)
Chairman of the Board Vice-Chairman and Director
Director
/s/ Sally A. Steele 3/26/96 /s/ Brian R. Ace 3/26/96
- ------------------------------ ------------------------------
Sally A. Steele (Date) Brian R. Ace (Date)
Secretary and Director Director
/s/ Thomas C. Burns 3/26/96 /s/ R. Levi Tyler 3/26/96
- ------------------------------ ------------------------------
Thomas C. Burns (Date) R. Levi Tyler (Date)
Director Director
/s/ W. Kenneth Price 3/26/96 /s/ John W. Purtell 3/26/96
- ------------------------------ ------------------------------
W. Kenneth Price (Date) John W. Purtell (Date)
Director Director
/s/ Thomas A. McCullough 3/26/96 /s/ Philip O. Farr 3/26/96
- ------------------------------ ------------------------------
Thomas A. McCullough (Date) Philip O. Farr (Date)
President and Director Comptroller
Chief Executive Officer Chief Accounting Officer
Chief Financial Officer
17
<PAGE>
Dear Shareholder,
The year 1995 has been an exciting and profitable year for Grange National
Bank. Some of the highlights were a 13 percent increase in net profits over the
previous year, a 20 percent increase in total assets and a 15 percent increase
in shareholders' equity. Some of the factors responsible for these increases and
corresponding beneficial effect on the Bank's net interest margin, were a
dramatic reduction in FDIC insurance premiums and constant deposit and loan
growth. This growth has been experienced in all six of the Bank's offices but
none more dramatically than in the Edwardsville branch in Luzerne County, which
seems to verify management's belief the public continues to prefer friendly,
personalized service.
Other less obvious internal changes and improvements have been made in the
benefits offered to the officers and employees of the Bank. In years previous,
only one health plan was available to all employees and they had no opportunity
to "customize" their coverage to their own individual or family needs. In
addition, term life and long term disability insurance are also provided
An Employee Stock Ownership Plan (with 401(k) provisions) referred to as a
KSOP, is now available to all eligible employees. This plan enables participants
to acquire ownership in the Bank through stock purchases and is a tax-advantaged
means of contributing to their own retirement. In addition to employee
contributions to this plan, the Bank may match these contributions by
contributing a certain percentage of every dollar contributed by the employee.
An Officer Incentive Program has also been initiated. This
incentive-driven program allocates benefits to officers based upon Bank
profitability and the achievement of individual goals. These benefits can
include stock option arrangements and cash bonuses. It is management's strong
belief that in order to attract and keep dedicated employees and directors, it
is essential to provide them with adequate benefits, incentives and opportunity
to better themselves.
Looking ahead to 1996, the Bank will be expanding with its second office
in Susquehanna County. This office is in Little Meadows in a building formerly
owned by County National Bank (now Meridian) and which was scheduled by them to
be closed. This office is about $3 million in deposits and, in management's
opinion, with expanded hours, represents an opportunity for growth and service
near Binghamton and the triple cities area.
The Directors of the Grange National Bank and the Grange National Banc
Corp. want to thank the Shareholders for their faith and support during the past
year and have pledged to keep your interests uppermost as we enter the year
1996.
Sincerely,
Chairman
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
(In thousands except per share data) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Gross interest income ............ $ 6,599 $ 5,296 $ 4,955 $ 4,766 $ 4,499
Gross interest expense ........... 2,858 2,093 2,105 2,281 2,648
------------------------------------------------------
Net interest income .............. 3,741 3,203 2,850 2,485 1,851
Loan loss provision .............. 115 87 120 97 60
------------------------------------------------------
Net interest income after
loan loss provision ........... $ 3,626 $ 3,116 $ 2,730 $ 2,388 $ 1,791
======================================================
Income before income taxes ....... $ 1,697 $ 1,531 $ 1,252 $ 1,117 $ 782
Provision for income taxes ...... 518 485 387 340 235
------------------------------------------------------
Net income ....................... $ 1,179 $ 1,046 $ 865 $ 777 $ 547
======================================================
PER SHARE DATA:
Net income ....................... $ 3.41 $ 3.42 $ 3.30 $ 2.96 $ 2.09
Cash dividends ................... $ 0.20 $ 0.42 $ 0.33 $ 0.33 $ 0.33
Stock dividend ................... $ 0.27
AVERAGE SHARES OUTSTANDING ......... 346 306 262 262 262
FINANCIAL CONDITION AT
YEAR END:
Total assets ................... $91,622 $76,305 $69,860 $62,223 $49,504
Total loans .................... 52,538 46,733 41,002 37,740 28,002
Total deposits ................. 79,866 67,014 62,832 55,909 44,535
Stockholders' equity ........... 9,522 8,243 5,544 4,766 4,076
RATIOS:
Based on Average Balances:
Return on assets ............... 1.40% 1.41% 1.29% 1.40% 1.14%
Return on equity ............... 13.32 15.08 16.61 17.46 13.93
Equity to assets ............... 10.51 9.36 7.74 8.01 8.00
Primary capital to assets ...... 11.09 9.96 8.31 8.54 8.49
Internal capital generation rate 12.43 13.05 14.93 15.49 12.02
At Year End:
Equity to assets ............... 10.39 10.80 7.94 7.66 8.23
Primary capital to assets ...... 10.97 11.43 8.53 8.21 8.75
Dividend payout ratio .......... 13.78% 13.43% 10.10% 11.25% 15.98%
BOOK VALUE/SHARE ................... $ 27.30 $ 23.85 $ 21.14 $ 18.17 $ 15.54
</TABLE>
Note: share and per share amounts have been restated to give effect to a 3 for 1
stock split as of April 1, 1994.
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
Grange National Banc Corp. (Company) is a Pennsylvania bank holding
company, headquartered in Laceyville, Pennsylvania, with Grange National Bank of
Wyoming County (Bank) as its only subsidiary. Established in 1907, the Bank
provides friendly, old fashioned banking and trust services to communities in
Wyoming, Susquehanna, Bradford and Luzerne counties.
Grange National Bank's deposit services include checking, savings and
money market accounts, certificates of deposit, Individual Retirement Accounts
and MAC automated teller machine cards. Loan services include personal, business
and municipal loans, residential, commercial and municipal mortgages, Small
Business Administration loans, personal and commercial lines of credit and
letters of credit. Grange's other services include a discount brokerage service,
safe deposit facilities and payroll processing.
The Trust department, which began operations in 1993, offers personal and
investment trusts, trusts under will, estate administration services, living
trusts and Individual Retirement Accounts.
HIGHLIGHTS
The Company reported record net income of $1,179,000 in 1995 compared to
$1,046,000 in 1994, an increase of 13%. The returns on assets and equity were
1.40% and 13.31%, respectively, in 1995 compared to 1.41% and 15.08% in 1994.
The infusion of $2,000,000 into the Company's equity as a result of 1994's
successful stock offering, along with 1994's record profit, depressed the return
on equity during 1995. This equity is reflected in the average equity to average
assets ratio which was 10.39% for 1995, compared to 9.36% for 1994. This high
equity to assets ratio, along with very high quality investment and loan
portfolios makes Grange National Bank one of the strongest banks in our area.
At year end 1995, Grange had total assets of $91,622,000, total
shareholders' equity of $9,522,000, and total deposits of $79,866,000, compared
to $76,305,000 in total assets, $8,243,000 in total shareholder equity and
$67,014,000 in deposits at year end 1994, increases of 20%, 16% and 19%,
respectively. At year end the Company had approximately 700 shareholders and
fifty-four full and part-time employees. During 1995 Grange paid over $1,000,000
in salaries and benefits to its employees and paid over $500,000 in taxes.
The Bank opened its sixth office in Edwardsville during 1995 and found the
Wyoming Valley very receptive to our low fees and friendly service. Deposits at
Edwardsville exceeded $6,000,000 at December 31, 1995. A seventh office will
open in Little Meadows, Susquehanna County, on March 25, 1996 as a result of an
agreement signed in 1995, to purchase the office and deposits from Meridian
Bank, and a lease agreement was signed for an office in Trucksville, Luzerne
County, expected to open in early 1997, subject to regulatory approval.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements and selected financial data
presented elsewhere in this report should be read to obtain an understanding of
the following discussion and analysis.
FINANCIAL CONDITION
The Company's primary source of profits is its activities as a financial
intermediary, using funds from customers' deposits, other borrowing sources and
shareholders' equity, to invest in loans, bonds and interest bearing deposits in
other banks. The difference between the cost of acquiring funds and the return
on investments in loans, securities and interest bearing deposits is the
Company's net interest yield. During the last three years ended December 31,
1995, net interest yields increased from 4.63% in 1992 to 4.85% in 1995.
The volatility of interest rates requires management to maintain an
appropriate balance between interest sensitive assets and interest sensitive
liabilities, liquidity to meet loan demand, depositor's withdrawals, and
operating expenses, and to provide an adequate capital base for expansion and
unforeseen losses. A discussion of each of the factors relating to the financial
condition of the Company follows.
LIQUIDITY AND RATE SENSITIVITY
The objective of liquidity management is to maintain adequate cash
resources to meet the short and long term operating needs of the Company. These
needs include funding for loans to customers, funding to take advantage of
prudent investment strategies, and funding for bank operations expansion.
Grange's primary assets to meet cash flow requirements have been interest
bearing deposits in other banks and investment securities maturing within one
year. Investments maturing or expected to be called in 1996 include $738,000 in
time deposits in other banks and $9,661,000 of investments classified as held to
maturity. The Company also has an active line of credit at the Federal Home Loan
Bank of Pittsburgh with a limit of $2,630,000, which had a December 31, 1995
balance of $1,100,000. The Federal Home Loan Bank has notified the Company that
it has a total borrowing capacity of $26,307,000 at the Federal Home Loan Bank.
An additional $10,163,000 of securities classified as available for sale can be
used to meet liquidity needs. Liquidity is also provided by a stable growth of
core deposits. Management considers its sources of liquidity adequate to meet
anticipated needs.
The Company's earnings are dependent on the maintenance of an adequate net
interest yield or spread between rates earned on assets and the cost of interest
bearing liabilities. To maintain an adequate spread, interest rate sensitivity
must be managed so that the Company is positioned to respond, within a
reasonable period of time, to changing interest rates and, or changing balances
in interest earning assets as compared to interest bearing liabilities.
Management of the investment portfolio requires decisions between investing in
short-term
3
<PAGE>
investments which enhance rate sensitivity or long-term investments which
inhibit rate sensitivity, but provide higher yields. Management will invest in
longer term investments (i.e. 5 - 7 year maturities) when their yields are high
enough to compensate for their greater interest rate risk. While spreads on
investments are determined by the financial markets, management has flexibility
in managing spreads in its core banking business which are influenced by
competition and economic conditions. It is management's objective to have an
asset/liability structure which will maintain earnings within a range of plus or
minus 10% when interest rates fluctuate plus or minus 300 basis points.
A low-risk rate sensitivity position is achieved by having a similar
amount of assets repricing, or maturing, at or about the same time as the Bank's
liabilities re-price or mature. Management measures its assets and liability
positions by use of a rate sensitivity report which categorizes the Bank's
assets and liabilities on the basis of re-pricing opportunities and maturity
dates. Rate sensitive balances are defined as those balances that mature or can
be repriced within one year. However, management recognizes certain trends and
historical experiences with respect to particular or similar products. For
example, the Bank has a number of deposit accounts, including savings, NOW
accounts and money market accounts which may be withdrawn at any time.
Management knows that while all customers in these account categories could
withdraw their funds on any given day, they will not do so, even with interest
rate changes. These accounts are core deposits and not subject to the same
pressures from interest rates as time deposits. Demand and savings deposits tend
to fluctuate based primarily on the cash flow and transaction needs of the
customer, as well as other non-interest rate factors such as account fees and
customer service. Management makes the assumption that these deposits will not
fluctuate more than 10% within three months, not more than an additional 15%
during the following three to twelve month period and not more than an
additional 30% during the following one to five years. The following table
illustrates the Bank's interest rate sensitivity positions as of December 31,
1995. The time periods used refer to the earliest possible repricing period
(with the exception of "Other deposits"), not maturity. Management believes the
Bank has an adequately balanced position in all categories.
4
<PAGE>
Repricing
Less than Three to One to After
three twelve five five
months months years years
-----------------------------------------------
(In thousands)
Assets:
Interest bearing deposits .. $ 1,283 $ 738 $ 693
Investment securities:
Available for sale ........ 1,601 2,201 6,353 $ 0
Held to maturity .......... 4,854 6,222 9,339 740
Loans ...................... 13,334 6,662 7,960 25,165
-----------------------------------------------
Total ................. 21,072 15,823 24,345 25,905
-----------------------------------------------
Liabilities:
Time deposits .............. 11,953 15,931 13,334 18
Other deposits ............. 3,763 5,645 11,289 16,924
Borrowed funds ............. 1,219 94 399
-----------------------------------------------
Total ................. 16,935 21,576 24,717 17,341
-----------------------------------------------
Gap:
By period .................. $ 4,137 ($ 5,753) ($ 372) $ 8,564
===============================================
By cumulative .............. $ 4,137 ($ 1,616) ($ 1,988) $ 6,576
===============================================
Cumulative Gap as
Percentage of total assets 4.52% -1.76% -2.17% 7.18%
Interest rates are expected to remain fairly stable for most of 1996, with
occasional volatility from market reactions to economic and political events.
Stable interest rates and a well matched asset/liability structure reduce
interest rate risks. Management will strive to take advantage of periodic
volatility to enhance the investment portfolio's yield.
The Bank continues to offer adjustable rate loans and mortgages as part of
its product mix in order to keep balanced GAP positions. Purchases of investment
securities with primarily one to five year maturities provide adequate cash flow
to respond to changing interest rates and liquidity needs. Management constantly
monitors the Bank's gap position in order to adjust loan pricing or deposit
pricing when conditions change.
LOAN PORTFOLIO
Total loans outstanding at December 31, 1995 increased by $5,805,000 or
12% from December 31, 1994. This compares to a 14% rise in 1994 and a 9% rise in
1993. During the three years ended December 31, 1995 loans increased by
$14,798,000 which accounted for 52% of the increase in interest earning assets.
This growth in the core banking business is attributed to management's
monitoring of competitor's rates, and general expansion of banking services into
new market areas. Residential real estate mortgages accounted for 53% of the
overall
5
<PAGE>
increase in loans during the three years ended December 31, 1995. Factors
contributing to the increase were favorable interest rates and a stable economic
climate. In addition, the Bank has experienced an increase in loan volume due to
the opening of its branch office in Bowman's Creek, its office in Tunkhannock in
1992 and the office in Edwardsville in 1995. Management expects continued loan
growth to occur in these offices during 1996.
Commercial and consumer loans account for the balance of the loan increase
during the past three years with increases of approximately $6,047,000 and
$2,621,000, respectively. During the last two year period average interest rates
earned on loans increased from 9.36% in the year ended December 31, 1994 to
9.88% in the year ended December 31, 1995.
Major classifications of loans at December 31, 1995 are as follows:
1995 1994
---- ----
(In thousands)
Real estate mortgages:
Agricultural ................................... $ 972 $ 1,119
Residential, 1 - 4 family ...................... 25,827 23,591
Residential, multi-family ...................... 480 526
Nonfarm, nonresidential properties ............. 7,295 7,248
------------------------------
Total real estate mortgages ............... 34,574 32,484
Agricultural loans ............................... 245 240
Commercial loans ................................. 10,182 7,778
Municipal loans .................................. 301 539
Consumer loans ................................... 7,819 6,148
------------------------------
Total ................................ 53,121 47,189
Unearned income .................................. 583 456
------------------------------
Total ................................ $52,538 $46,733
==============================
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1995 are as follows (in thousands):
Within One - After
(In thousands) One Year Five Years Five Years Total
----------------------------------------------
Real estate mortgages .......... $ 699 $ 2,781 $31,094 $34,574
Agricultural loans ............. 5 78 162 245
Commercial loans ............... 2,799 2,818 4,565 10,182
Municipal loans ................ 197 104 301
Consumer loans ................. 706 5,473 1,640 7,819
----------------------------------------------
Total ................ $ 4,406 $11,254 $37,461 $53,121
==============================================
Loans at fixed
interest rates ............... $ 2,950 $ 6,342 $24,534 $33,826
Loans at variable
interest rates ............... 1,456 4,912 12,927 19,295
----------------------------------------------
Total ................ $ 4,406 $11,254 $37,461 $53,121
==============================================
6
<PAGE>
Nonaccrual loans at December 31, 1995 were $156,000 in 1995 and $126,000
on 1994. Accrual of interest is discontinued on a loan when management believes
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection is doubtful. Interest
that would have been accrued if the loans were not classified as nonaccrual was
approximately $15,000 in 1995 and $12,000 in 1994.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses and related allowance for loan losses are
based upon management's continued evaluation of the current loan portfolio
considering factors including general economic conditions, adequacy of
collateral on past due loans, past and expected loan loss experience,
composition of loan portfolio, unusual risk concentrations, allowance as a
percentage of total loans and other pertinent factors. No portion of the reserve
is specifically allocated to any individual loan or loan classification. The
total allowance balance is available to absorb losses from all loans included in
the portfolio.
For the two year period ending December 31, 1995, net charge-offs totaled
$82,000. During the same period loans outstanding increased from $41,002,000 at
December 31, 1993 to $52,538,000 at December 31, 1995 or $11,536,000. Management
is of the opinion that the quality of the loan portfolio remains strong, but
anticipates that losses over the next year may increase somewhat due to an
increase in loan volume in recent years and a projected loss of $20,000 in
connection with the sale of a parcel of real estate acquired through
foreclosure. Provisions for loan losses have increased in the last two years due
to management's efforts to maintain the reserve at a level adequate for the
increasing size of the loan portfolio and to cover other potential losses which
have been identified by management and the Board of Directors.
The following sets forth loans past due 90 days or more on which interest
has continued to be accrued:
December 31
1995 1994
---- ----
(In thousands)
Real estate mortgages ................................ $194 $174
Demand ............................................... 27 5
Installment .......................................... 0 1
--------------------------
TOTAL ................... $221 $180
==========================
This table summarizes the Company's loan loss experience for the years
ended December 31:
7
<PAGE>
1995 1994
---- ----
(In thousands)
Balance at beginning of period ................... $ 479 $ 412
------------------------------
Charge-offs:
Commercial, consumer and agriculutral .......... 16 10
Real estate mortgages .......................... 49 20
Installment .................................... 14 2
------------------------------
TOTAL ............... 79 32
------------------------------
Recoveries:
Commercial, consumer and agriculutral .......... 5 5
Real estate mortgages .......................... 8 4
Installment .................................... 4 3
------------------------------
TOTAL ............... 17 12
------------------------------
Net charge-offs .................................. 62 20
------------------------------
Provision charged to operations .................. 115 87
------------------------------
Balance at end of period ......................... $ 532 $ 479
==============================
Average loans outstanding ........................ $49,868 $43,457
Loans outstanding, December 31 ................... $52,538 $46,733
Loan reserve ratios:
Net loan charge-offs - average loans ........... 0.12% 0.05%
Reserve - loans, December 31 ................... 1.01% 1.02%
INVESTMENT PORTFOLIO
The Company's investment portfolio increased by $11,634,000 or 58% during
the year ended December 31, 1995 to $31,667,000. This increase was due to strong
deposit growth, particularly at the new office in Edwardsville and a resurgence
of deposit growth at the Bowman's Creek office. A depressed economy during 1995
kept the loan portfolio from growing quite as fast as it might have, resulting
in the need to invest excess funds in securities. Relatively low rates on
treasury securities during 1995 deterred management from investing in that
segment for most of the year, and as a result securities available for sale only
increased $1,891,000 or 22%, compared to $9,743,000 or 85% for securities held
to maturity. Management primarily purchased federal agency bonds, which
increased by $9,208,000 or 123%, to $16,701,000.
During the last half of 1995 interest rate spreads on tax exempt bonds
increased, as compared to treasury and agency issues, and management took
advantage of the opportunity to replenish the portfolio with these bonds.
Generally management purchases only "AAA" and "AA" rated tax exempt municipal
bonds. If the issuer is a local municipality and management is confident about
the issuer's ability to repay the bond, then management will consider "A"
8
<PAGE>
ratings of "non-rated" bonds. Management seeks to maintain a portfolio
substantially free of "credit risk".
The Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" requires the Company to
classify its debt and equity securities in to three categories: held to
maturity, available for sale, or trading. The Company has classified all U.S.
Treasury instruments and equity securities as available for sale, and all other
investments as held to maturity. Available for sale securities are evaluated
quarterly, and their carrying values adjusted to reflect their market values,
with the resulting adjustment being reflected as an adjustment, net of tax, to
the Company's equity. The market value of investments available for sale as of
December 31, 1995, reflect a gain of $98,000 over their historical cost basis,
compared to investments available for sale as of December 31, 1994, reflected a
loss of $160,000 from their historical cost basis.
The carrying value of investment securities both available for sale, and
held to maturity at December 31, are summarized as follows:
1995 1994
---- ----
(In thousands)
Available for sale:
U.S. Treasury securities ........................... $10,154 $ 8,358
Other securities ................................... 357 262
------- -------
Total ................................. $10,511 $ 8,620
======= =======
Held to maturity:
U.S. Treasury securities
U.S. government agencies and corporations .......... $16,701 $ 7,493
State and municipal securities ..................... 3,681 2,781
Other securities ................................... 774 1,139
------- -------
Total ................................. $21,156 $11,413
======= =======
The following table sets forth the maturities of investment and debt
securities at December 31, 1995 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of such securities:
9
<PAGE>
<TABLE>
<CAPTION>
Maturing Maturing Maturing Maturing
within one to five five to ten after ten
one year years years years
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury
securities ...... $3,802 5.12% $6,353 5.81%
Other securities .. $ 357
------ ------ ------
Total ............. $3,802 5.12% $6,353 5.81% $ 357
====== ====== ======
Held to maturity:
U.S. government
agencies and
corporations .... $7,741 6.55% $7,876 6.52% $ 190 7.42% $ 894 7.55%
State and municipal
securities ...... 1,535 5.65% 1,596 7.38% 550 6.77%
Other securities .. 385 6.93% 389 6.37%
------ ------ ------ ------
Total ............. $9,661 6.42% $9,861 6.65% $ 740 6.93% $ 894 7.04%
====== ====== ====== ======
</TABLE>
DEPOSITS
Deposits have increased by $23,957,000 over the last three years from
$55,909,000 at December 31, 1992 to $79,866,000 at December 31, 1995, for an
increase of 43%. Of this increase $3,217,000 was in non-interest bearing
deposits, for an increase of 57%, and $20,740,000 was in interest bearing
deposits, for an increase of 41%, over three years. The percentage of average
non-interest bearing deposits to average total deposits has remained fairly
stable during the last three years, ranging only from 10% to 13%. This
proportion of non-interest bearing deposits to total deposits is important to
maintain because it decreases the bank's overall interest expense.
Average time deposits increased during 1995 to $36,529,000 or 49% of
average total deposit, as compared to $29,735,00 or 45% of average total assets
in 1994, and $25,765,000 or 42% of average total assets in 1993. Consumers
moving deposits from savings and money market accounts to time deposits as a
result of higher rates being paid on these accounts account for part of the
increase. Part of the increase during 1995 is attributable to the Bank's "Golden
CD" promotion, as part of its effort to promote the new Edwardsville office. The
promotion offered a gold coin to customers that brought at least $10,000 of new
money into the Bank and deposited it into certificates of deposits. While the
Bank raised approximately $1,900,000 in new money from this promotion, the
opportunity to offer the Bank's other services to new customers was the
promotion's primary purpose. Management believes the benefits from this
promotion will continue for the next couple of years.
The average balance of deposits and average rates paid on such deposits
during the years ended December 31 are set forth in the following table:
10
<PAGE>
<TABLE>
<CAPTION>
1995 1994
Average Average Average Average
(In thousands) Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C>
Demand deposits:
Noninterest bearing ........... $ 8,412 $ 8,509
Interest bearing .............. 7,669 2.02% 6,785 2.06%
Savings and money market deposits 21,375 2.85% 20,994 2.63%
Time deposits ................... 36,529 5.63% 29,735 4.58%
------- ----------
TOTAL ....... $73,985 $ 66,023
======= ==========
</TABLE>
Maturities of certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1995 are as follows:
Certificates Other
of Time
(In thousands) Deposits Deposits Total
-------- -------- -----
3 months or less .................. $2,385 $2,385
3 to 6 months ..................... 811 811
6 to 12 months .................... 1,275 1,275
Over 12 months .................... 1,505 1,505
No set maturity, state deposit .... $ 200 200
---------------------------------------------
TOTAL .............. $5,976 $ 200 $6,176
=============================================
CAPITAL
An adequate capital base is necessary for future asset growth and to
absorb any unforeseen losses. During the three years ended December 31, 1995,
stockholders' equity increased by $4,756,000 or 100%, from $4,766,000 to
$9,522,000. Total assets during this three year period increased by $29,399,000
or 47%, from $62,223,000 to $91,622,000. Net income retained in the business,
along with a successful $2,000,000 community stock offering which was
accomplished in 1994, accounted for the increase in equity. The internal capital
generation rate for the three years ended December 31, 1995, 1994, 1993 were
12.43%, 13.05% and 14.93%, respectively. Management expects strong earnings to
continue, and believes the Company is sufficiently capitalized to proceed with
an orderly expansion of the Bank.
On November 29, 1995 the Board of Directors approved the implementation of
a shareholder stock dividend program. Shareholders were granted additional
shares in the corporation based on the number of shares which could be purchased
at the declared dividend rate. Shareholders who desired cash instead of new
shares were given the option of surrendering these shares to the corporation in
exchange for a cash payment at the rate of the declared dividend. Management
expects to achieve three goals as a result of this program. First, many
shareholders have expressed a desire to increase their holdings in the Company
by purchasing additional shares. A limited amount of stock transfers do occur
but these transactions do not appear to be sufficient to adequately satisfy
present demand for additional shares. Secondly, the
11
<PAGE>
Company established a 401(k) Employee Stock Ownership Plan on November 22, 1995.
All employees who are employed in a position requiring at least 20 hours of work
per week will be eligible for the plan. The 401(k) Stock Ownership Plan will
replace the Bank's former plan which was a Simplified Employee Pension - IRA
plan. The primary benefit of the new plan is that it permits the employee to
make a voluntary salary reduction contribution to their retirement fund. These
funds along with a matching contribution and optional contribution from the Bank
will be invested primarily in Company stock, which will be purchased from
shareholders who prefer a cash dividend instead of a stock dividend, as
previously described. Finally, although present capital levels are more than
adequate to promote continual growth of the Bank's core business at current
growth rates, it is anticipated that the Bank will experience a significantly
higher growth rate during the next three years as a result of the opening of the
Little Meadows office in 1996 and the Trucksville office in 1997. The issuance
of a stock dividend as opposed to a cash dividend will therefore result in an
increased capital growth rate which will support the Bank's expansion plans.
The ratio of equity to assets at December 31, 1995 and 1994 was 10.39% and
10.80%, respectively. Primary capital which includes the allowance for loan
losses along with stockholders' equity, was 10.97% and 11.43%, respectively, at
December 31, 1995 and 1994.
In 1989 the Federal Reserve Board issued risk-based capital guidelines,
which require banking organizations to maintain certain ratios of "qualifying
capital" to "risk-weighted assets". "Qualifying capital" is classified into two
tiers, referred to as Tier 1 and Tier 2 capital. Tier 1 capital consists of
common equity, qualifying perpetual preferred equity and minority interests in
the accounts of unconsolidated subsidiaries, less goodwill. Tier 2 capital
consists of perpetual preferred equity not qualifying for Tier 1 capital, the
allowance for loan losses, mandatory convertible debt and subordinated and other
qualifying securities. The amount of Tier 2 capital may not exceed the amount of
Tier 1 capital. In calculating "risk-weighted assets", certain risk percentages,
as specified by the Federal Reserve Board, are applied to particular categories
of both on and off-balance sheet assets. The guidelines require that banking
organizations maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4%, and require a minimum ratio of Tier 1 and Tier 2 capital to risk-weighted
assets of 8%.
The Federal Reserve Board has an additional capital standard, referred to
as the Tier 1 leverage ratio. The Tier 1 leverage ratio is defined as Tier 1
capital (as defined under the risk-based guidelines) divided by average total
assets (net of allowance for losses and goodwill). The minimum leverage ratio is
3% for banking organizations that do not anticipate significant growth and that
have well-diversified risk (including no undue interest rate risk), excellent
asset quality, high liquidity and good earnings. Other banking organizations are
expected to have ratios of at least 4 to 5%, depending upon their particular
circumstances, or risk profile of a given banking organization. The Federal
Reserve Board has not advised the Bank of any specific minimum Tier 1 leverage
ratio applicable to it.
The table below sets forth the Bank's Tier 1 and Tier 2 capital, risk
adjusted assets (including off-balance sheet items) the Bank's risk-based
capital ratios, and the Bank's Tier 1
12
<PAGE>
leverage ratios. At December 31, 1995 and 1994, the Bank exceeded all regulatory
capital requirements.
Risk-Based Capital
December 31, (in thousands, except ratios) 1995 1994
Tier I capital:
Shareholders' equity ................... $ 9,194 $ 8,243
--------------------------------------
Tier II capital:
Loan loss reserve ...................... 532 479
--------------------------------------
Total Qualifying Capital ................. $ 9,726 $ 8,722
======================================
Risk-adjusted assets (including
off-balance sheet items) ............... $49,771 $45,961
Tier I Capital Ratio (4.00% required) .... 18.47% 17.93%
Total Capital Ratio (8.00% required) ..... 19.54% 18.98%
Tier I Leverage Ratio .................... 10.91% 11.19%
RESULTS OF OPERATIONS
Net income for 1995 totaled $1,179,000 ($3.41 per share, based on 345,684
weighted average common shares) as compared to 1994's net income of $1,046,000
($3.42 per share, based on 305,571 weighted average common shares), and 1993's
net income of $865,000 ($3.30 per share, based on 262,305 weighted average
common shares).
Net interest income or the spread between total interest income and
interest expense directly impacts the results of operations. The net interest
yield for 1995 increased to 4.85% from 4.73% in 1994, the result of an increase
of an increase of 73 basis points in interest earning assets as compared to an
increase of 61 basis points for interest bearing liabilities. Average rates on
loans increased from 9.36% in 1994 to 9.88% in 1995, and average rates on
investment securities increased from 5.25% in 1994 to 6.11% in 1995. Net
interest income for 1995 increased by $529,000 (on a tax equivalent basis) or
16% as compared to $367,000 or 13% for 1994 vs. 1993. However overall, $469,000
of the increase was due to changes in volume, compared to $60,000 due to changes
in rates on assets and liabilities.
Loans at year end increased by $5,751,000 or 12% for 1995 over 1994,
compared to an increase of $5,731,000 or 14% for 1994 over 1993, and deposits at
year end increased by $12,852,000 or 19% for 1995 over 1994, compared to
$4,182,000 or 7% for 1994 over 1993. Investment securities, at year end,
increased $11,634,000 or 58% for 1995 over 1994 compared to an increase of
$182,000 or 1% for 1994 over 1993. Income on loans increased by $860,000 or 21%
for 1995 compared to 1994, and interest on investment securities increased by
$393,000 or 36%. The robust deposit growth during 1995 provided funding for the
growth in loans and securities. As loans continue to grow during 1996 maturing
investments will be available to
13
<PAGE>
provide funds for those loans. This is preferable because loans are higher
yielding asset than investment securities.
The average rates on all interest earning assets increased during 1995, as
did the average rates paid on interest bearing liabilities. As previously
indicated, management expects interest rates to be relatively stable during
1996. Loan growth should increase as previously indicated. Deposit volume should
continue to increase substantially during 1996 due to continued deposit growth
at the Edwardsville office and the purchase of deposits of the Little Meadows
office from PNC Bank in March of 1996. Increasing the loan to deposit ratio from
the 65% for 1995 back to rate during 1994 of 69%, should increase the net
interest yield.
Salaries and employee benefits increased by $170,000 or 18% in 1995 as
compared to 1994, primarily because of hiring employees for the Edwardsville
office, along with annual salary increases. The addition of the Little Meadows
office will add to salary and employee benefits expense during 1996, but to a
lesser degree because it has fewer employees.
Occupancy and furniture and equipment expense increased by $113,000 or 33%
in 1995 as compared to 1994. The increase is due primarily to costs involved
with the opening and on going expenses of the Edwardsville office. The annual
lease for Edwardsville is $37,000, and other normal operating costs associated
with offices, such as real estate taxes, maintenance, electric account for most
of the increase in occupancy and furniture and equipment expenses. Advertising
expenses increased $45,000 or 173% for 1995, compared to 1994, due to the
promotion of the Edwardsville office, the "Golden CD" program and Christmas Club
promotions. During each of the advertising campaigns, management monitored the
effectiveness of the advertising, based on the deposits gained and customer
responses as to what prompted them to come to the Bank, to assure that deposits
were being generated as a result of the money invested. Based on this
information management believes the money invested in these advertising
campaigns was very effective, and provides the Bank opportunities to sell
additional services to these new customers.
Federal Deposit Insurance Corporation (FDIC) costs to the Bank decreased
for the first time in many years, from $158,000 in 1994 to $121,000 in 1995, a
will be even lower in 1996. The FDIC lowered the premium payable by the Bank to
4 cents per hundred dollars of deposits during the last half of 1995, and
announced a premium schedule for 1996, under which the Bank will pay zero cents
per hundred dollars of deposits, at least during the first half of 1996.
Although the premium for the second half of 1996 is uncertain at this time, any
increase should be minimal.
IMPACT OF INFLATION
The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most industrial companies
that have significant investments in fixed assets or inventories. Management
believes that the most significant impact on financial results is changes in
interest rates and the Company's ability to react to those changes. The
discussion
14
<PAGE>
under liquidity and rate sensitivity provides additional information concerning
the importance of maintaining a balanced position between interest sensitive
assets and interest sensitive liabilities, in order to protect against wide
interest rate fluctuations. Inflation also has an important impact on the growth
of total assets in the banking industry and the resulting need to increase
equity capital at higher than normal rates in order to maintain an appropriate
equity to assets ratio. An important effect of this has been the reduction of
the proportion of earnings paid out in the form of dividends. Another
significant effect of inflation is on other expenses which tend to rise during
periods of general inflation.
COMMUNITY REINVESTMENT ACTIVITIES
The Community Reinvestment Act of 1977 (CRA) was adopted to encourage all
financial institutions to help meet the credit needs of the communities they
serve. The Act requires that each institution perform an annual self assessment
of its record in meeting the needs of its entire community, including low and
moderate income families, consistent with safe and sound banking practices. It
also requires that financial institutions keep a record of their CRA related
performance and that this record be made available to the public. The management
of the Bank is proud of its Community Reinvestment activities and its
performance in meeting the credit needs of people of all income levels, race,
religions or national origins. Following its most recent examination of the
Bank's CRA practices, the Comptroller of the Currency awarded the Bank an
"Outstanding" rating under the Community Reinvestment Act.
Effective June 14, 1993 the Board of Finance and Revenue of the
Commonwealth of Pennsylvania adopted a Community Reinvestment Act (CRA) of its
own. This policy seeks to ensure that financial institutions who accept public
funds as deposits maintain an acceptable record of reinvestment within the
community they serve. The Bank received notification from the Treasurer of the
Commonwealth of Pennsylvania that a CRA evaluation had been completed by their
office for 1994 and the Bank had received a rating of "Outstanding".
The Bank plans to continue its efforts to develop and promote products
which are affordable and accessible to all segments of its marketplace.
In 1991 the Bank became a member of the Federal Home Loan Bank of
Pittsburgh. The primary reason for joining the Federal Home Loan Bank was to
take advantage of various Community Reinvestment programs which are offered by
this institution. One of these programs is the Affordable Housing Program which
permits a member bank to borrow funds from the Federal Home Loan Bank at reduced
rates and re-lend the funds to needy families. Consequently the Bank loaned
approximately $500,000 to twelve families to purchase their first homes, through
this program. In January 1995 the Bank applied for funds to be used to help the
Wyoming County Chapter of the Habitat For Humanity to provide low cost housing
for low to moderate income families. Unfortunately this effort was not
successful. In February of 1996 the Bank offered to provide reduced rate loans
with no bank fees and accelerated processing time to all local victims of the
Flood of 1996.
15
<PAGE>
OTHER ACTIVITIES
The Bank began issuing MAC cards to its customers in 1993, installed its
first MAC automated teller machine in Tunkhannock in 1994, and joined the PLUS
system in 1996, inorder to give its customers greater choice in the use of their
ATM cards. Management believes that implementation of services such as MAC cards
are vital to maintaining the Bank's competitive position in its market areas.
During the fourth quarter of 1995 the Bank entered into an agreement with
Meridian Bank to purchase the building and deposits of their branch at Little
Meadows, Pennsylvania. The office was scheduled to be closed by Meridian Bank
and would have left the community without any convent banking options. Grange
National Bank took over the office effective March 25, 1996 and immediately
expanded the hours of operation and reduced most fees on deposit accounts. The
residents of Little Meadows and the surrounding communities will now benefit
from the affordable, friendly service of an independent bank.
The Bank also signed an agreement during the fourth quarter to lease space
for a branch office, subject to regulatory approval, in Trucksville, Luzerne
County, at a shopping mall to be built at the former location of the "Howard
Duke Isaac" car dealership.
TRUST DEPARTMENT
In 1992 the Comptroller of the Currency approved the Bank's application
for the establishment of a Trust Department. The Bank appointed a Trust Officer,
retained the services of an attorney with estate planning experience and began
to exercise its trust powers in 1993. The Bank has recognized only minimal
income from the Trust department up to this point, but the department has begun
to grow and the Bank knows it takes several years of building before the Trust
Department will support itself.
16
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Interest Average (1) Interest Average
(Dollars in thousands) Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages .............................. $29,598 $ 2,807 9.48% $26,964 $ 2,514 9.32%
Installment ............................ 3,933 439 11.16 3,232 362 11.20
Commercial ............................. 16,337 1,680 10.28 13,261 1,190 8.97
---------------------- -----------------------
Total loans .......................... 49,868 4,926 9.88 43,457 4,066 9.36
---------------------- -----------------------
Securities available for sale:
U.S. Treasury securities ............... 8,185 432 5.28 9,529 464 4.87
Other securities ....................... 315 20 6.35 253 14 5.53
---------------------- -----------------------
Total available for sale ............. 8,500 452 5.32 9,782 478 4.89
---------------------- -----------------------
Securities held to maturity:
U.S. government agencies ............... 11,850 784 6.62 5,944 325 5.47
Municipal bonds ........................ 2,651 161 6.07 3,431 181 5.28
Other securities ....................... 984 69 7.01 1,432 96 6.70
---------------------- -----------------------
Total held to maturity ............... 15,485 1,014 6.55 10,807 602 5.57
---------------------- -----------------------
Total investment securities ........ 23,985 1,466 6.11 20,589 1,080 5.25
---------------------- -----------------------
Federal funds sold ...................... 354 14 3.95
Deposits in banks ....................... 5,022 290 5.77 5,192 228 4.39
---------------------- -----------------------
TOTAL .............................. $78,875 6,682 8.47 $69,592 5,388 7.74
=======--------------- =======----------------
INTEREST BEARING
LIABILITIES:
Deposits:
NOW and super-NOW ...................... $ 7,669 155 2.02 $ 6,785 140 2.06
Savings and money market ............... 21,375 609 2.85 20,994 552 2.63
Certificates of deposit ................ 36,329 2,044 5.63 29,535 1,355 4.59
Other time deposits .................... 200 11 5.50 200 8 4.00
---------------------- -----------------------
Total deposits ....................... 65,573 2,819 4.30 57,514 2,055 3.57
Other borrowed funds .................... 786 39 4.96 788 38 4.82
---------------------- -----------------------
TOTAL .............................. 66,359 2,858 4.31 58,302 2,093 3.59
Non-interest bearing
funds, net (2) .......................... 12,516 11,290
---------------------- -----------------------
TOTAL SOURCES TO FUND
EARNING ASSETS ........................... $78,875 2,858 3.62 $69,592 2,093 3.01
=======--------------- =======----------------
NET INTEREST/YIELD ....................... $ 3,824 4.85% $ 3,295 4.73%
======= =======
</TABLE>
(1) Average balances are daily averages. (2) Demand deposits, stockholders'
equity and other non-interest bearing liabilities less non-interest earning
assets.
Non-accrual loans are reflected in the loan balances, but contributing
no interest income.
NOTE - Tax exempt interest income has been converted to a tax equivalent basis
at the U.S. federal income tax rate of 34%.
17
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
NET INTEREST INCOME
CHANGES DUE TO VOLUME AND RATE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
Total Due To Due To Total Due To Due To
Change Volume Rate Change Volume Rate
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans.............................. $860 $627 $233 $372 $416 ($44)
Investment securities.............. 386 238 148 (64) 153 (217)
Federal funds sold................. (14) (14) 0 (129) (133) 4
Deposits in other banks............ 62 (7) 69 176 199 (23)
------------------------------------------------------------------------------------
TOTAL......................... 1,294 844 450 355 635 (280)
------------------------------------------------------------------------------------
INTEREST EXPENSE:
Now/Super-Now deposits............. 15 18 (3) 2 22 (20)
Savings/Money market deposits...... 57 10 47 (128) (59) (69)
Time deposits...................... 692 347 345 117 193 (76)
Other Borrowings................... 1 0 1 (3) (4) 1
------------------------------------------------------------------------------------
TOTAL......................... 765 375 390 (12) 152 (164)
------------------------------------------------------------------------------------
NET INTEREST INCOME.................. $529 $469 $60 $367 $483 ($116)
====================================================================================
</TABLE>
The change in interest due to volume and due to rate has been allocated by
reference to changes in the average balances and the average interest rates of
interest earning assets and interest bearing liabilities. Tax-exempt interest
income has been converted to a tax equivalent basis at the U.S. federal income
tax rate of 34%.
18
<PAGE>
INDEPENDENT AUDITOR'S OPINION
The Board of Directors and Stockholders
Grange National Banc Corp.
We have audited the consolidated balance sheets of Grange National Banc
Corp. and subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Grange National
Banc Corp. and subsidiary as of December 31, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for investments when the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," effective January 1, 1994.
Daniel Kenia, P.C.
January 24, 1996
19
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks .................................. $ 1,793,476 $ 1,486,145
Interest bearing deposits ................................ 2,713,768 5,501,885
Investment securities (Note 2):
Available for sale:
U.S. Treasury securities ............................. 10,154,479 8,357,650
Other securities ..................................... 356,600 262,050
-------------------------------
Total available for sale ........................... 10,511,079 8,619,700
Held to maturity:
U.S. government agencies ............................. 16,700,901 7,492,892
Municipal bonds ...................................... 3,680,547 2,780,954
Other securities ..................................... 774,031 1,138,827
-------------------------------
Total held to maturity, (fair value
1995, $21,355,000; 1994, $11,143,000) ............ 21,155,479 11,412,673
-------------------------------
Loans (Note 3) ........................................... 53,120,620 47,188,932
Less: unearned interest income .......................... 582,798 455,610
Less: allowance for loan losses ......................... 532,325 479,390
-------------------------------
Loans, net ........................................ 52,005,497 46,253,932
Bank premises and equipment, net (Note 4) ................ 2,236,370 2,201,107
Accrued interest and other assets ........................ 1,136,680 642,814
Other real estate ........................................ 69,618 187,071
-------------------------------
TOTAL ASSETS ............................................... $ 91,621,967 $ 76,305,327
===============================
LIABILITIES:
Domestic Deposits:
Non-interest bearing deposits .......................... $ 8,860,513 $ 7,698,578
Interest bearing deposits .............................. 71,005,086 59,315,159
-------------------------------
Total deposits ....................................... 79,865,599 67,013,737
Other borrowed funds (Note 5) ............................ 1,712,342 772,039
Accrued interest and other liabilities ................... 521,759 276,539
-------------------------------
Total liabilities .................................... 82,099,700 68,062,315
-------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 1)
STOCKHOLDERS' EQUITY (NOTE 1):
Preferred stock authorized 1,000,000 shares of $5 par;
None issued
Common stock authorized 5,000,000 shares of
$5 par; 348,774 and 345,654 shares issued and
outstanding in 1995 and 1994, respectively ............... 1,743,870 1,728,270
Additional paid-in capital ................................. 1,559,336 1,483,334
Retained earnings .......................................... 6,154,547 5,137,944
Unrealized holding gains (losses) on investment securities
(net of deferred income taxes (Note 6) ................. 65,000 (106,000)
Treasury stock, at cost .................................. (486) (536)
-------------------------------
Total stockholders' equity ........................... 9,522,267 8,243,012
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 91,621,967 $ 76,305,327
===============================
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans ............................ $ 4,897,858 $ 4,035,673 $ 3,678,342
Interest on investment securities:
U.S. Treasury securities ............................ 432,412 463,615 460,314
Obligations of other U.S. government
agencies and corporations ......................... 783,746 324,610 368,991
Obligations of states and political
subdivisions (tax-exempt) ......................... 106,395 119,778 119,876
Other securities .................................... 89,204 110,453 132,640
Interest on federal funds sold ........................ 0 13,573 142,642
Interest on deposits in banks ......................... 289,497 228,631 51,896
---------------------------------------------------------------------------
Total interest income ......................... 6,599,112 5,296,333 4,954,701
---------------------------------------------------------------------------
Interest Expense:
Interest on deposits .................................. 2,818,839 2,055,052 2,063,702
Interest on borrowed funds ............................ 39,500 38,361 40,901
---------------------------------------------------------------------------
Total interest expense ........................ 2,858,339 2,093,413 2,104,603
---------------------------------------------------------------------------
Net interest income ............................. 3,740,773 3,202,920 2,850,098
Provision for loan losses (Note 3) ................ 115,000 87,000 120,000
---------------------------------------------------------------------------
Net interest income after
provision for loan losses ..................... 3,625,773 3,115,920 2,730,098
Other Income (Note 7) ................................... 393,227 315,657 298,421
Other Expenses (Note 8) ................................. (2,321,861) (1,901,031) (1,776,244)
---------------------------------------------------------------------------
Income before taxes ..................................... 1,697,139 1,530,546 1,252,275
Provision for income taxes (Notes 1 and 6) .............. 518,000 485,000 387,000
---------------------------------------------------------------------------
Net income .............................................. $ 1,179,139 $ 1,045,546 $ 865,275
===========================================================================
Earnings per share (Notes 1 and 11):
Net income .............................................. $ 3.41 $ 3.42 $ 3.30
===========================================================================
Weighted average common shares .......................... 345,684 305,571 262,305
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional Unrealized
Treasury Stock Paid-in Retained Gains/
Stock $5 Par Capital Earnings (Losses) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 .......... (300) 1,311,600 3,454,957 4,766,257
Net income .......................... 865,275 865,275
Cash dividend $0.33
per share ......................... (87,435) (87,435)
Sale of stock from treasury ......... 50 50
-----------------------------------------------------------------------------------------------
Balance, December 31, 1993 .......... (250) 1,311,600 4,232,797 5,544,147
Adoption of SFAS No. 115 ............ 70,000 70,000
Net income .......................... 1,045,546 1,045,546
Cash dividend $0.42
per share ......................... (140,399) (140,399)
Issuance of common stock ............ 416,670 1,483,334 1,900,004
Sale of stock from treasury ......... 50 50
Purchase of treasury stock .......... (336) (336)
Unrealized holding losses
on investment securities .......... (230,000) (230,000)
Deferred tax asset .................. 54,000 54,000
-----------------------------------------------------------------------------------------------
Balance, December 31, 1994 .......... (536) 1,728,270 1,483,334 5,137,944 (106,000) 8,243,012
Net income .......................... 1,179,139 1,179,139
Cash dividend $0.20
per share ......................... (69,126) (69,126)
Stock dividend $0.27 per
share, plus cash in lieu of ....... 0
fractional shares ................. 13,935 69,675 (93,410) (9,800)
Issuance of common stock ............ 1,665 6,327 7,992
Sale of stock from treasury ......... 50 50
Unrealized holding gains
on investment securities .......... 258,000 258,000
Deferred tax liability .............. (87,000) (87,000)
-----------------------------------------------------------------------------------------------
Balance, Dceember 31, 1995 .......... ($486) $ 1,743,870 $ 1,559,336 $ 6,154,547 $ 65,000 $ 9,522,267
===============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 1,179,139 $ 1,045,546 $ 865,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 176,120 146,920 130,764
Provision for loan losses .................................. 115,000 87,000 120,000
Increase (decrease) in deferred income taxes ................. 58,000 (102,000) (20,000)
Changes in operating assets and liabilities:
Increase in accrued interest and other assets ............... (493,866) (16,591) (11,620)
Increase (decrease) in accrued interest and other liabilities 187,220 74,440 (303,431)
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ....................................... 1,221,613 1,235,315 780,988
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase bank premises and equipment ......................... (211,383) (220,200) (338,306)
Decrease (increase) in other real estate ..................... 117,453 (22,607) (164,464)
Purchase of securities "available for sale" .................. (6,346,937) (3,687,056)
Sales of securities "available for sale" ..................... 498,704
Redemptions of securities "available for sale" ............... 4,127,854 4,300,000
Purchase of securities "held to maturity" .................... (14,424,317) (5,815,209) (9,649,255)
Redemptions of securities "held to maturity" ................. 4,574,373 4,597,020 3,765,536
Decrease in mortgage-backed securities ....................... 107,138 316,766 263,281
Increase in loans to customers ............................... (5,866,565) (5,750,933) (3,314,461)
Decrease (increase) in deposits in banks ..................... 2,788,117 (3,670,824) (1,169,380)
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES ....................................... (14,635,563) (9,953,043) (10,607,049)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in deposits before interest credited ................ 10,438,999 2,827,536 4,499,975
Increase (decrease) in borrowed funds ........................ 940,303 (407,452) 1,021,989
Interest credited to deposits ................................ 2,412,863 1,353,796 1,660,603
Cash dividends paid .......................................... (78,926) (140,399) (87,435)
Decrease (increase) in treasury stock ........................ 50 (286) 50
Issuance of common stock ..................................... 7,992 1,900,004 0
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ....................................... 13,721,281 5,533,199 7,095,182
------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS ............................................. 307,331 (3,184,529) (2,730,879)
CASH AND CASH EQUIVALENTS, January 1 .......................... 1,486,145 4,670,674 7,401,553
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, December 31 ........................ $ 1,793,476 $ 1,486,145 $ 4,670,674
============ ============ ============
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .................................................... $ 566,855 $ 1,076,592 $ 589,537
Income taxes ................................................ $ 598,000 $ 466,300 $ 554,675
Non-cash investing and financing activities:
Unrealized gains (losses) on securities, net of tax ......... $ 258,000 ($ 106,000)
Stock dividend .............................................. $ 83,610
See Notes to Consolidated Financial Statements
</TABLE>
23
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following summary of significant accounting policies is presented
for the reader to obtain a better understanding of the Company's financial
statements and related financial data included in this report. The
accounting and reporting policies and practices of the Company conform to
generally accepted accounting principles within the banking industry.
BUSINESS AND PRINCIPLES OF CONSOLIDATION:
Grange National Banc Corp. (Company) and its subsidiary the Grange
National Bank of Wyoming County (Bank) provide banking services to
domestic customers primarily in northeastern Pennsylvania. The
consolidated financial statements include the accounts of the Company and
its bank subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES:
Investment securities are stated at cost adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments
to interest income. Gains or losses on disposition are based on the net
proceeds and the adjusted carrying value of the securities using the
specific identification method.
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS No. 115"), which the Company adopted
as of January 1, 1994. SFAS No. 115 requires the Company to classify each
debt and equity security in one of three categories: held to maturity,
available for sale or trading. Investments classified as held to maturity
are reflected at amortized cost. Investments classified as either
available for sale or trading securities are reflected at fair market
value. Unrealized gains or losses on trading securities are included in
earnings. Unrealized gains and losses on available for sale securities are
excluded from earnings and reflected, net of income taxes, in a separate
component of stockholders' equity until realized. All equity and U.S.
24
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Treasury securities are classified as "available for sale" and all other
securities are classified as "held to maturity".
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans are stated at face value, net of unearned discount and the
allowance for loan losses. Unearned discount on consumer loans is
recognized as income over the terms of the loans by the rule of 78's
method. Interest on other loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The
allowance for loan losses is established through a provision for loan
losses charged to operating expenses. Loan losses and recoveries are
charged or credited to the allowance for loan loss account at the time
incurred. The provision for loan losses and related allowance for loan
losses are based upon management's continual evaluation of the current
loan portfolio and prior loan loss experience. Accrual of interest is
discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is
doubtful.
PREMISES AND EQUIPMENT:
Buildings and office equipment are stated at cost less accumulated
depreciation computed on the straight line method. Costs incurred for
routine maintenance and repairs are expensed currently. The estimated
depreciable lives used in computing depreciation are as follows:
Buildings and improvements 7 to 50 years
Equipment and furniture 5 to 20 years
National banking law restricts the investment in bank premises to the
amount of a bank's capital stock. However, in certain circumstances, and
with regulatory approval, investment in bank premises can be as much as
50% of the stockholders' equity. The ratio of investment in bank premises
to stockholders' equity at December 31, 1995 was within the approved 50%
limit and no regulations have been violated.
OTHER REAL ESTATE:
Other real estate consists of properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. These
properties are carried at the lower of cost or fair market value based on
appraised value at the date of foreclosure. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses.
25
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
TREASURY STOCK:
Treasury Stock is shown at cost and consists of twenty-three and
twenty-six shares of common stock in 1995 and 1994, respectively.
PENSION PLAN:
The Bank has a SEP-IRA pension plan in effect for substantially all
employees. Salaries and employee benefits expense includes $48,099 in
1995, $35,090 in 1994 and $34,193 in 1993 for the plan. Contributions
under the defined contribution plan are made at the discretion of the
Board of Directors, and amounted to 8% of gross salaries for the past five
years.
CASH AND CASH EQUIVALENTS:
The Company considers cash and due from banks and federal funds sold as
cash and cash equivalents for purposes of the Statements of Cash Flows.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently payable and
deferred taxes related primarily to the temporary differences between the
financial reporting and tax basis of an asset or liability. The temporary
differences relate principally to the use of different accounting methods
for financial (accrual basis) and tax (cash basis) purposes, accumulated
depreciation of bank premises and equipment, recognition of interest
income on consumer loans with terms exceeding five years, accretion of
discounts on financial basis of securities, and allowances for loan
losses. Deferred taxes represent future tax consequences of the
differences which will either be taxable or deductible in the year the
assets and liabilities are recovered or settled. Under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable
to future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The income
tax expense (or benefit) is the difference between the deferred tax
liability calculated for each period.
The Company and its subsidiary file a consolidated federal income tax
return.
26
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
EARNINGS PER SHARE:
Net income per share is computed by dividing net income by the weighted
average number of shares outstanding for the period. The effect of stock
options is not material.
RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
The Bank is required to maintain average balances with various
correspondent banks. The amount of those balances for the year ended
December 31, 1995 was approximately $20,000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, and standby letters of credit. Those instruments involve to
varying degrees elements of credit, interest rate or liquidity risk in
excess of the amount recognized in the consolidated balance sheet. The
contract or notional amounts of those instruments express the extent of
involvement the Company has in particular classes of financial
instruments.
Company exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company may require collateral or other security to
support financial instruments with off-balance sheet risk. These
commitments at December 31 are as follows:
Contract or
Notional Amount
1995 1994
---- ----
Financial instruments whose contract (In thousands)
amounts represent credit risk:
Commitments to extend credit ......... $2,317 $2,495
Standby letters of credit ............ $ 101 $ 51
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without
27
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The Company evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company on extension of
credit is based on management's credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the
Company guaranteeing performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
CONCENTRATIONS OF CREDIT:
All of the Bank's loans, commitments, and commercial and standby letters
of credit have been granted to customers in the Bank's market area. All
such customers are depositors of the Bank. Investments in municipal
securities involve governmental entities within Pennsylvania. The
concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were
granted primarily to commercial borrowers. The Bank, as a matter of
policy, does not extend credit to any single borrower or group of related
borrowers in excess of $750,000, unless secured by bank deposits or
partially guaranteed by an agency of the federal government.
REGULATORY MATTERS:
The Bank is required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. At December
31, 1995, the Bank is required to have minimum Tier I and Total Capital
ratios of 4% and 8%, respectively. The Bank's actual ratios at that date
were 18.47% and 19.54%, respectively. The Bank's Leverage ratio at
December 31, 1995 was 10.91%.
Dividends are paid by the Company from its assets which are mainly
provided by dividends from the Bank. However, certain regulatory
restrictions exist regarding the ability of the Bank to transfer funds to
the Company in the form of cash dividends, loans or advances. As of
December 31, 1995, the Bank had retained earnings of $6,155,000 of which
$2,250,000 was available for distribution to the Company as dividends
without prior regulatory approval.
Under Federal Reserve regulation, the maximum amount available for
transfer from the Bank to the Company in the form of loans approximated
20% of consolidated net assets, unless such loans are collateralized by
specified obligations.
28
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
LINE OF CREDIT:
At December 31, 1995 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $24,353,000 at a
variety of available terms.
2. INVESTMENT SECURITIES:
The amortized cost and estimated fair value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
----------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury notes ............................... $10,059 $98 ($3) $10,154
Other securities .................................. 355 2 357
----------------------------------------------------------------------
Total available for sale ....................... $10,414 $100 ($3) $10,511
======================================================================
Held to maturity:
Obligations of other U.S. government
agencies or corporations ........................ $16,701 $194 ($34) $16,861
Obligations of states and
political subdivisions .......................... 3,681 35 (1) 3,715
Other securities .................................. 774 5 779
----------------------------------------------------------------------
Total held to maturity ......................... $21,156 $234 ($35) $21,355
======================================================================
1994
----------------------------------------------------------------------
Available for sale:
U.S. Treasury notes ............................... $8,517 $4 ($163) $8,358
Other securities .................................. 262 262
----------------------------------------------------------------------
Total available for sale ....................... $8,779 $4 ($163) $8,620
======================================================================
Held to maturity:
Obligations of other U.S. government
agencies or corporations ........................ $7,493 $6 ($242) $7,257
Obligations of states and
political subdivisions .......................... 2,781 10 (33) 2,758
Other securities .................................. 1,139 2 (13) 1,128
----------------------------------------------------------------------
Total held to maturity ......................... $11,413 $18 ($288) $11,143
======================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from
29
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------------- --------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing within one year ............................ $3,800 $3,802 $9,661 $9,693
Maturing in one to five years ....................... 6,259 6,352 9,861 10,038
Maturing in five to ten years ....................... 740 734
Maturing after ten years ............................ 894 890
No set maturity ..................................... 355 357
----------------------------------------------------------------------
TOTAL .......................................... $10,414 $10,511 $21,156 $21,355
======================================================================
</TABLE>
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans at December 31 are as follows:
(In thousands) 1995 1994
---- ----
Real estate mortgages:
Agricultural ................................... $972 $1,119
Residential, 1 - 4 family ...................... 25,827 23,591
Residential, multi-family ...................... 480 526
Nonfarm, nonresidential properties ............. 7,295 7,248
------------------------------
Total real estate mortgages ............... 34,574 32,484
Agricultural loans ............................... 245 240
Commercial loans ................................. 10,182 7,778
Municipal loans .................................. 301 539
Consumer loans ................................... 7,803 6,133
Overdrafts ....................................... 16 15
------------------------------
Gross loans ................................. 53,121 47,189
Less: Unearned income ........................... 583 456
Allowance for loan losses ................. 532 479
------------------------------
Loans, net ........................... $52,006 $46,254
==============================
30
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Nonaccrual loans at December 31, 1995 and 1994, were $156,000 and
$126,000, respectively.
Changes in the allowance for loan losses for the years ended December 31
were as follows:
(In thousands) 1995 1994 1993
---- ---- ----
Balance, January 1 ..................... $479 $412 $344
Provision charged to operations ........ 115 87 120
Loans charged off ...................... (79) (32) (70)
Recoveries ............................. 17 12 18
----------------------------------------
Balance, December 31 ................... $532 $479 $412
========================================
4. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
Accumulated
Gross Book Amortization Net Book
Value & Depreciation Value
---------- ---------- ----------
December 31, 1995:
Land ......................... $ 399,259 $ 399,259
Buildings .................... 1,930,748 $ 544,037 1,386,711
Furniture and equipment ...... 1,398,971 948,571 450,400
-----------------------------------------------
Total ................... $3,728,978 $1,492,608 $2,236,370
===============================================
December 31, 1994:
Land ......................... $ 399,259 $ 399,259
Buildings .................... 1,893,299 $ 479,772 1,413,527
Furniture and equipment ...... 1,225,037 836,716 388,321
-----------------------------------------------
Total ................... $3,517,595 $1,316,488 $2,201,107
===============================================
Depreciation and amortization were applied as follows:
1995 1994 1993
-------- -------- --------
Premises......................... $ 64,265 $ 66,389 $ 64,804
Furniture and equipment.......... 111,855 80,531 65,960
-----------------------------------------------
Total....................... $176,120 $146,920 $130,764
===============================================
31
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
The Bank has a non-cancelable operating lease on the building for its
Edwardsville office. Rental expense for 1995 was $37,000. Rental payments
are $37,000 per year each year through the year 2000, and $34,000 for the
year 2001.
5. OTHER BORROWED FUNDS:
Other borrowed funds include interest-bearing demand notes payable to
the U.S. Treasury for Treasury collections made by the Bank. Remittances
of amounts collected are made upon demand. The year end balance due was
$118,634 in 1995 and $213,479 in 1994.
The Bank has a line of credit with the Federal Home Loan Bank for
$2,800,000 which could be utilized for various operating purposes.
Borrowings under this line of credit are secured by qualified assets
(primarily investment securities). Interest paid on these short term
borrowings varies based on interest rate fluctuations. The outstanding
balance of which was $1,100,000 at December 31, 1995.
A mortgage on the Tunkhannock property, held by Joann Coolbaugh is
payable in monthly installments of $5,260, including interest at 8%, due
July 9, 1997, with a year end balance of $93,634 in 1995 and $146,873 in
1994.
The Federal Home Loan Bank of Pittsburgh has loaned the Bank $440,000 to
fund the Bank's Affordable Housing Program. These loans are amortized over
25 years, at 4%, payable monthly and due in ten years. The year end
balance due the Federal Home Loan Bank was $400,074 in 1995 and $411,687
in 1994.
The FHLB and Tunkhannock loans mature as follows:
2001
1996 1997 1999 2000 and beyond
------- ------- ------- ------- ----------
$90,827 $47,747 $12,878 $13,159 $316,612
6. INCOME TAXES:
The components of the federal income tax provisions are as follows:
1995 1994 1993
---- ---- ----
Currently payable ........... $547,000 $533,000 $407,000
Deferred portion ............ (29,000) (48,000) (20,000)
----------------------------------------
Total .................. $518,000 $485,000 $387,000
========================================
32
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
The sources of the net deferred income tax liability (asset) in other
liabilities (assets) for the years ended at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accrued income ...................................................................... $61,000 $91,000
Depreciation ........................................................................ 70,000 64,000
Other ............................................................................... 20,000 8,000
Unrealized gains (losses) on available for sale investment securities ............... 33,000 (54,000)
Allowance for loan losses ........................................................... (130,000) (113,000)
-----------------------------------
Net deferred tax liability (asset) ............................................. $54,000 ($4,000)
===================================
</TABLE>
A reconciliation of income tax expense at the federal statutory rate and
the effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at
statutory rate ............. $577,000 34.0% $520,000 34.0% $426,000 34.0%
Tax-exempt income
from investments ........... (35,000) (2.1) (34,000) (2.2) (30,000) (2.4)
Tax-exempt income
from loans ................. (8,000) (0.5) (8,000) (0.5) (9,000) (0.7)
Other ........................ (16,000) (0.9) 7,000 0.4
---------------------------------------------------------------------------------------------
Total ................... $518,000 30.5% $485,000 31.7% $387,000 30.9%
=============================================================================================
</TABLE>
7. OTHER INCOME:
Other income for the years ended December 31, consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service charges and fees ..................................... $128,950 $61,375 $115,618
Service charges on deposit accounts .......................... 224,805 193,524 127,464
Gain (loss) on sale of securities ............................ (3,952)
Gain (loss) on sale of real estate ........................... (18,683) 17,629
Other ........................................................ 62,107 60,758 37,710
----------------------------------------------------------
Total other income ...................................... $393,227 $315,657 $298,421
==========================================================
</TABLE>
33
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
8. OTHER EXPENSES:
Other expenses for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits .............................. $1,096,961 $927,137 $886,020
Occupancy expenses .......................................... 216,929 161,953 156,310
Furniture and equipment expenses ............................ 242,555 184,686 150,465
Other operating expenses .................................... 765,416 627,255 583,449
----------------------------------------------------------
Total other expenses ................................... $2,321,861 $1,901,031 $1,776,244
==========================================================
</TABLE>
9. RELATED PARTY TRANSACTIONS:
During the ordinary course of business, loans are made to officers,
directors, and their related interests. These transactions are made on
substantially the same terms and at those rates prevailing at the time for
comparable transactions with others.
A summary of this loan activity is listed below:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 ........................................... $1,024,446 $1,082,178 $930,859
Additions .................................................... 301,542 886,923 947,259
Amounts collected ............................................ (218,873) (944,655) (795,940)
Amounts charged off ..........................................
----------------------------------------------------------
Balance, December 31 ......................................... $1,107,115 $1,024,446 $1,082,178
==========================================================
</TABLE>
34
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. GRANGE NATIONAL BANC CORP. (PARENT COMPANY ONLY)
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
1995 1994
---- ----
ASSETS
<S> <C> <C>
Cash ............................................................ $210 $217
Investment in bank subsidiary ................................... 9,285,493 8,220,463
Securities "available for sale" ................................. 8,550 6,500
Land (Note 1) ................................................... 253,365 253,365
------------------------------------------
TOTAL ASSETS ............................................ $9,547,618 $8,480,545
==========================================
LIABILITIES
Notes payable, bank subsidiary .................................. $25,351 $237,533
------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock authorized 1,000,000 shares
of $5 par: None issued
Common stock authorized 5,000,000 shares
of $5 par; 348,774 and 345,654 shares issued
and outstanding in 1995 and 1994, respectively ................ 1,743,870 1,728,270
Additional paid-in capital ...................................... 1,559,336 1,483,334
Retained earnings ............................................... 6,154,547 5,137,944
Unrealized holding gains (losses) on investment
securities (net of deferred income taxes) ..................... 65,000 (106,000)
Treasury stock, at cost ......................................... (486) (536)
------------------------------------------
STOCKHOLDERS' EQUITY .................................... 9,522,267 8,243,012
------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................................. $9,547,618 $8,480,545
==========================================
</TABLE>
35
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. GRANGE NATIONAL BANC CORP. (PARENT COMPANY ONLY)
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31 1995 1994 1993
---- ---- ----
INCOME:
<S> <C> <C> <C>
Dividends from bank subsidiary ...................... $308,926 $155,399 $89,000
Dividends from other securities ..................... 158 142
Interest on deposits ................................ 9 15 53
-----------------------------------------------------------------
Total income ........................... 309,093 155,556 89,053
-----------------------------------------------------------------
OPERATING EXPENSES:
Interest expense .................................... 14,882 16,488 2,290
Other operating expense ............................. 3,160 961 50
-----------------------------------------------------------------
Total operating expenses ............... 18,042 17,449 2,340
-----------------------------------------------------------------
Income before undistributed income
of subsidiary ....................................... 291,051 138,107 86,713
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY .......................................... 888,088 907,439 778,562
-----------------------------------------------------------------
NET INCOME ............................................ $1,179,139 $1,045,546 $865,275
=================================================================
</TABLE>
36
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. GRANGE NATIONAL BANC CORP. (PARENT COMPANY ONLY)
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED, DECEMBER 31 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................. $1,179,139 $1,045,546 $865,275
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
subsidiary ......................................... (888,088) (907,439) (778,562)
-----------------------------------------------------------------
Net cash provided by
operating activities ......................... 291,051 138,107 86,713
-----------------------------------------------------------------
INVESTING ACTIIVITIES:
Purchase real estate (229,530)
Purchase securities "available for sale" (6,500)
Investment in Bank subsidiary .......................... (7,992) (1,900,004)
-----------------------------------------------------------------
Net cash used in
investing activities ......................... (7,992) (1,900,004) (236,030)
-----------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds (repayment) of notes payable .................. (212,182) 347 237,186
Sale (purchase) of treasury stock ...................... 50 (286) 50
Issuance of common stock ............................... 7,992 1,900,004
Dividends to stockholders .............................. (78,926) (140,399) (87,435)
-----------------------------------------------------------------
Net cash provided by (used in)
financing activities ......................... (283,066) 1,759,666 149,801
-----------------------------------------------------------------
INCREASE (DECREASE) IN CASH ........................... (7) (2,231) 484
CASH BALANCE, JANUARY 1 ............................... 217 2,448 1,964
-----------------------------------------------------------------
CASH BALANCE, DECEMBER 31 ............................. $210 $217 $2,448
=================================================================
</TABLE>
37
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
STOCK SPLIT - RETROACTIVE EFFECT ON FINANCIAL STATEMENTS:
In January 1994, the Board of Directors of the Company voted a
three-for-one split of the Company's common stock, to be effected in the
form of a stock distribution, payable to shareholders of record as of
April 1, 1994. The split was approved by the shareholders as part of an
amendment to the Company's articles of incorporation to increase the
number of authorized shares of common stock from 300,000 to 5,000,000 (an
additional 1,000,000 shares of preferred stock of $5 par value was also
authorized). The financial statements have been revised to give
retroactive effect of the stock split as if the additional shares had been
outstanding for all periods presented.
STOCK OPTIONS:
In January 1994, the Board of Directors adopted an Employee Stock Option
Plan in which stock options may be granted to all officers and key
employees of the Company. The aggregate number of shares which may be
issued upon exercise of the options under the plan is 20,000. Options are
exercisable up to one-third in the second year after the date of grant, up
to two-thirds in the third year after the date of grant and up to 100% in
the fourth year after the date of grant, with options expiring at the end
of ten years after the date of grant.
The Board of Directors also adopted a Stock Option Plan for non-employee
Directors which will be available to all non-employee members of the Board
of Directors. The aggregate number of shares which may be issued upon
exercise of the options under the Director Plan is 20,000 shares and are
exercisable in part from time to time beginning one year after the date of
the grant and expiring ten years thereafter. Effective April 1, 1994,
options to purchase 1,000 shares of stock were automatically granted to
each non-employee Director under this plan expiring April 1, 2004.
The Board of Directors adopted an additional Stock Option Plan (the
"Plan") in November 1995, subject to shareholder approval, covering the
employees and directors. The Plan authorizes the grant of options to
purchase not more than 55,000 shares of Common Stock under the Plan.
Options granted under the Plan are intended to be either incentive stock
options or nonstatutory stock options. As of February 29, 1996 options for
50,160 shares of Common Stock having an exercise price of $32.50 were
outstanding and 4,840 shares of Common Stock were available for future
option grants under the Plan. Of the 50,160 shares of Common Stock
outstanding for options, 36,320 shares of Common Stock were issued as
incentive stock options. The remaining shares outstanding for options were
granted to each non-employee director equally as
38
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
nonstatutory stock options. Pursuant to Section 422 of the Internal
Revenue Code, shareholder approval is required for the incentive stock
options to qualify for favorable tax treatment. Exercise prices of options
granted under all plans are current market prices at time of grant.
Non-Employee
Employee Director Exercise
Stock Options Stock Options Prices
------------ ------------- -----------------
Year ended December 31, 1994
Granted ......................... 12,000 9,000 $24.00 to $26.25
Lapsed .......................... 1,000 $24.00 to $26.25
Outstanding ..................... 12,000 8,000 $24.00 to $26.25
- --------------------------------------------------------------------------------
Year ended December 31, 1995
Outstanding 1994 ................ 12,000 8,000 $24.00 to $26.25
Granted ......................... 36,320 13,840 $32.50
Exercised ....................... 333 $24.00
Outstanding ..................... 47,987 21,840 $24.00 to $32.50
PUBLIC OFFERING:
The Company engaged in a stock offering in 1994. 83,334 shares were sold
at $24 per share for a total of $2,000,016, less offering costs of
$100,012.
STOCK DIVIDEND:
On December 10, 1995 the Company declared a stock dividend of $0.27 per
share.
PREFERRED STOCK:
The Company authorized 1,000,000 shares of preferred stock at $5 par
value. At December 31, 1995 no shares were issued or outstanding.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments is the amount at which an asset
or obligation could be exchanged in a current transaction between willing
parties, other than in a forced liquidation. Fair value estimates are made
at a specific point in time based on the type of financial instrument and
relevant market information.
Because no quoted market price exists for a significant portion of the
Company's financial instruments, the fair values of such financial
instruments are derived based on
39
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
the amount and timing of future cash flows, estimated discount rates, as
well as management's best judgment with respect to current economic
conditions. Many of the estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair
value of those financial instruments and should not be interpreted as an
estimate of the value of Grange National Banc Corp. taken as a whole. The
disclosures do not address the value of recognized and unrecognized
non-financial assets and liabilities or the value of future anticipated
business.
The following methods and assumptions were used to estimate the fair
values of significant financial instruments at December 31, 1995.
CASH AND DUE FROM BANKS:
The carrying amounts of cash and due from banks approximate fair value.
INTEREST BEARING DEPOSITS:
Carrying amounts of variable rate or demand deposits approximate fair
value. The fair value of fixed rate or fixed term interest bearing
deposits are estimated based on discounting future cash flows using
current rates.
SECURITIES:
Fair values of securities are based on quoted market prices.
LOANS:
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for mortgage, consumer, commercial real estate and commercial loans
are estimated by discounting future cash flows using interest rates
currently being offered with similar terms to borrowers of similar credit
quality.
DEPOSITS:
The fair value of deposits with no stated maturity; such as,
non-interest bearing demand deposits, variable rate savings, money market
and checking accounts is equal to the carrying amount payable on demand.
Fair value of certificates of deposit are estimated by discounting
estimated future cash flows using current rates offered for deposits of
similar remaining maturities.
40
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
OTHER:
The estimated fair values of accrued interest receivable, accrued
interest payable, debt (principally short term including treasury tax and
loan deposits), and other assets and liabilities are deemed to be equal to
the amounts recognized in the consolidated statements of financial
position.
The following table presents the carrying amounts and estimated fair
values of financial instruments at December 31, 1995:
Carrying Fair
(In thousands) Value Value
----------------------------
Financial assets:
Cash and due from banks ........................ $1,793 $1,793
Interest bearing deposits ...................... 2,714 2,715
Investment securitites ......................... 31,570 31,866
Loans, net ..................................... 52,006 51,861
Accrued interest receivable and other assets ... 1,137 1,137
Financial liabilities:
Deposit liabilities ............................ 79,866 79,906
Other borrowed funds ........................... 1,712 1,712
Accrued interest payable and
other liabilities ............................ 522 522
41
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest income............................ $1,497 $1,602 $1,730 $1,770
Net interest income........................ 894 912 951 984
Provision for loan losses.................. 15 15 25 60
Other income............................... 94 98 105 96
Other expenses............................. 543 556 556 667
Net income................................. 292 302 317 268
Net income per share....................... $0.82 $0.87 $0.92 $0.80
1994
Interest income............................ $1,195 $1,313 $1,383 $1,405
Net interest income........................ 701 811 845 846
Provision for loan losses.................. 30 20 23 14
Other income............................... 68 79 85 84
Other expenses............................. 446 458 458 539
Net income................................. 205 284 307 250
Net income per share....................... $0.67 $0.93 $1.01 $0.82
</TABLE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS:
The Company's Common Stock is traded in the market. Prior to the stock
offering in 1994 the stock was not actively traded. The market prices are the
prices at which shares have been sold by stockholders to the Company's
knowledge. Since the stock was not actively traded in the past, the book value
of the shares at the last day of each quarter has been listed for information
purposes.
The following firm is known to make a market in the Common Stock of Grange
National Banc Corp.
Hopper Soliday & Company, Inc.
1825 Oregon Pike
Lancaster, PA 17601
(717) 560-3000
As of March 22, 1995 there were approximately 720 shareholders of record.
- ------------------------------------------------------------------
Cash
Dividends
Quarter Bid Ask Per Share
------- --- --- ---------
1995 4th $29.00 $30.00 * None
3rd $29.50 $30.50 None
2nd $29.50 $30.50 0.20
1st $29.50 $30.50 None
1994 4th $26.25 $26.75 $0.25
Market Book
Price Value
----- -----
3rd 24.00 23.47 None
2nd 24.00 22.82 0.17
1st 21.00 21.84 None
1993 4th $21.00 $21.14 $0.17
3rd 20.00 20.64 None
2nd 20.00 19.68 0.17
1st 20.00 19.06 None
* Stock dividend $0.27
- ------------------------------------------------------------------
42
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
================================================================================
<TABLE>
<CAPTION>
OFFICERS
<S> <C>
Robert C. Wheeler Cyrus J. Cornell
Chairman of the Board Vice Chairman
Thomas A. McCullough Sally A. Steele
President Secretary
Philip O. Farr Melvin E. Milner
Comptroller Vice President
DIRECTORS
Brian R. Ace W. Kenneth Price
Owner, Laceyville Hardware Store Co-owner of Ken Mar Home Furnishings
Thomas C. Burns John W. Purtell
Retired: Dentist until 1994 President, S.F. Williams Inc.,
automobile dealership and grocery store
Cyrus J. Cornell
Retired; President and owner of Cornell R. Levi Tyler
Mfg., Inc. until 1991 Dairy Farmer
Thomas A. McCullough Sally A. Steele
President and Chief Executive Officer Attorney
of the Bank and the Company since 1991;
previously Vice President of the Bank Robert C. Wheeler
and the Company Retired; Chief Executive Officer of
the Bank and the Company until 1990
Stock transfers: Shareholder services:
Mildred Grose, Assistant Vice-President Philip O. Farr, Comptroller
P.O. Box 40 198 E. Tioga St
Meshoppen, Pa. 18630 Tunkhannock, Pa. 18657
(717) 833-2131 (717) 836-2100
OFFICES
Laceyville Lawton
Bonnie Brodhun, Br. Mgr. and Mortgage Officer Alice Carr, Asst. Cashier and Br. Mgr.
(717) 869-1522 (717) 934-2178
Meshoppen Bowman's Creek
Mildred Grose, AVP and Br. Mgr. Paula C. Coleman, Asst. Cashier and Br. Mgr.
(717) 833-2131 (717) 298-2163
Tunkhannock Edwardsville
Edward J. O'Malley, Asst. Cashier and Br. Mgr. Donald Werts, Asst. Cashier and Br. Mgr.
(717) 836-2100 (717) 283-4462
Little Meadows Trucksville - Coming in 1997
Jeffrey B. Carr, Br. Mgr.
(717) 623-2297
</TABLE>
43
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,793
<INT-BEARING-DEPOSITS> 2,714
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,511
<INVESTMENTS-CARRYING> 21,155
<INVESTMENTS-MARKET> 21,355
<LOANS> 52,538
<ALLOWANCE> 532
<TOTAL-ASSETS> 91,622
<DEPOSITS> 79,866
<SHORT-TERM> 1,312
<LIABILITIES-OTHER> 522
<LONG-TERM> 400
0
0
<COMMON> 3,302
<OTHER-SE> 6,220
<TOTAL-LIABILITIES-AND-EQUITY> 91,622
<INTEREST-LOAN> 4,898
<INTEREST-INVEST> 1,412
<INTEREST-OTHER> 289
<INTEREST-TOTAL> 6,599
<INTEREST-DEPOSIT> 2,819
<INTEREST-EXPENSE> 2,858
<INTEREST-INCOME-NET> 3,741
<LOAN-LOSSES> 115
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 2,322
<INCOME-PRETAX> 1,697
<INCOME-PRE-EXTRAORDINARY> 1,179
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,179
<EPS-PRIMARY> 3.41
<EPS-DILUTED> 3.41
<YIELD-ACTUAL> 4.85
<LOANS-NON> 156
<LOANS-PAST> 221
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 479
<CHARGE-OFFS> 79
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 532
<ALLOWANCE-DOMESTIC> 532
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
