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, 1996
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2314065
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
198 E. Tioga St., Tunkhannock, Pennsylvania 18657
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(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 $5.00 356,320
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(Title of class) (Number of Shares outstanding
as of March 26, 1997)
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. [X] 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 26, 1997 was $12,589,542.
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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 which management believes to be adequate to offset potential losses
on the Company's existing loans. However,
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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 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
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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.
Grange National Bank
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, 1996, the Bank had total assets of $103,966,000, total
deposits of $91,056,000 and total shareholders' equity of $10,706,000. 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 eight 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, Bradford 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 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 1995 and 1996.
Management does not expect the department to generate net income for the next
several years.
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The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any 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 62% of the Bank's
loan portfolio at December 31, 1996 and 66% at December 31, 1995. 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 40% of the Bank's total average interest earning assets. At
December 31, 1996 mortgage loans were approximately 40% 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
Union Bank, headquartered in Charlotte, North Carolina, 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, Corestates Bank, headquartered in Philadelphia, Pioneer Bank,
headquartered in Carbondale, Pennsylvania, First Valley Bank, headquartered in
Bethlehem, Pennsylvania and Northern Central Bank, headquartered in
Williamsport, 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 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.
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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 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
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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 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
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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 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
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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 Deposit Insurance Funds Act of 1996 (DIFA) passed by Congress and
signed by the President, mandates banks to help pay the cost of the bonds issued
by the "Financing Corporation" (FICO), which were used to finance the savings
and loan bailout. The current annual cost to all Bank Insurance Fund (BIF)
Members is 1.296 cents per $100 of deposits. Members of the Savings Association
Insurance Fund (SAIF) are required to pay 6.48 cents per $100 of deposits. This
assessment is expected to cost the Bank approximately $12,000 in 1997.
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.
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.
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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 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.
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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, 1996, the Company had a total of 50 full-time and 13
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, at the intersection of U.S. Routes 309
and 29 in Monroe Township, Pennsylvania, and on Main Street in Little Meadows,
Pennsylvania. In 1996, the Bank purchased a former bank branch building, in
Towanda, from Northern Central Bank and began operating a branch office there in
November. The Bank has an operating lease with PNC to rent a former First
Eastern Bank office as a branch office in Edwardsville, Pennsylvania, and a
lease agreement a branch office in a shopping plaza in Trucksville, Luzerne
County. 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 purchased a property in
Laceyville, near the Bank's main office, to be used for additional operations of
the Bank, and to rent to tennants.
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.
11
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
None
12
<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, 1996.
Item 6: Selected Financial Data
Incorporated by reference from the section entitled "Selected Financial
Data" in the Company's Annual Report to shareholders for the year ended December
31, 1996.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, 1996.
Item 8: 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,
1996.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
13
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 11: Executive Compensation
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
Item 13: Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders filed pursuant to General Instruction
G(3) to Form 10-KSB.
14
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules 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, 1996,
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, 1996 and 1995
Consolidated Statements of Income -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2) Financial Statement Schedules. Financial statement schedules
are omitted because they are not applicable or the required information is shown
in the financial statements or notes thereto.
(3) 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 1997 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
15
<PAGE>
Grange National Banc Corp.'s Registration Statement on Form 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).
10.4 Incentive Stock Option Plan (Filed with the 1996 Proxy Statement
on April 1, 1996).
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,
1996 (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, 1996.
16
<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, 1996 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, 1996 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.
17
<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, 1997 /s/ Robert C. Wheeler
-------------- -----------------------------------
Robert C. Wheeler
(Chairman of the Board)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert C. Wheeler 3/26/97 /s/ John W. Purtell 3/26/97
- ---------------------------------- -----------------------------------
Robert C. Wheeler (Date) John W. Purtell (Date)
Chairman of the Board Vice-Chairman and Director
Director
/s/ Sally A. Steele 3/26/97 /s/ Brian R. Ace 3/26/97
- ---------------------------------- -----------------------------------
Sally A. Steele (Date) Brian R. Ace (Date)
Secretary and Director Director
/s/ Thomas C. Burns 3/26/97 /s/ R. Levi Tyler 3/26/97
- ---------------------------------- -----------------------------------
Thomas C. Burns (Date) R. Levi Tyler (Date)
Director Director
/s/ W. Kenneth Price 3/26/97 /s/ Philip O. Farr 3/26/97
- ---------------------------------- -----------------------------------
W. Kenneth Price (Date) Philip O. Farr (Date)
Director Comptroller
Chief Accounting Officer
/s/ Thomas A. McCullough 3/26/97
- ----------------------------------
Thomas A. McCullough (Date)
President and Director
Chief Executive Officer
Chief Financial Officer
18
To our Shareholders,
Though figures released throughout the year were often varied and
contradictory, 1996 closed as the sixth consecutive year of the current U. S.
economic expansion. Growth during the year seemed to be driven by consumption
and household sales and by capital investment by businesses. This growth,
without too many inflationary pressures, has meant that the Federal Reserve
Board did not have to intervene and, as a consequence, interest rates rose only
slightly.
We are pleased that the Grange National Bank had a part in this growth and
that once again, the Bank experienced record net income for the year; an
increase of 27% over 1995. Growth in all of the Bank's offices continued during
the year with the newer offices at Little Meadows in Susquehanna County and the
Towanda office in Bradford County beginning to contribute to this growth. The
ninth office of the Bank opened in Trucksville, Luzerne County in February of
this year, in a new leased building. This office is located on route 309 in a
high traffic area and the Board feels there is good growth potential for this
office.
As begun in 1995, shareholders continued to receive their dividends in the
form of stock for 1996. These stock dividends have been well received by the
shareholders and they aid in the growth of the Bank by increasing its capital as
well as increasing each shareholder's equity. The Bank's employee retirement
plan usually has funds available to purchase the stock from shareholders who
prefer to have the cash rather than the stock.
The Board of Directors of the Grange National Bank was saddened this year
by the sudden loss of one of its members. Cyrus J. Cornell, past President of
the Bank and founder and former owner of Cornell Mfg. Inc. died unexpectedly
during the year. He was a Board Member for 43 years and during that time, took
an active interest in all of the activities of the Board. The loss of his
presence, experience and constructive advice will be missed by everyone who knew
him.
As we head into 1997 and the unknowns that every new year brings, the Board
wants to again express their gratitude for your continued faith and support and
reaffirm their pledge to work toward increased equity for each shareholder. We
are cautiously optimistic about 1997, and although income growth may be slower
than was experienced in 1996, we have every reason to expect another fine year.
Sincerely,
Chairman
-1-
<PAGE>
Grange National Banc Corp. and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Gross interest income ............ $ 7,655 $ 6,599 $ 5,296 $ 4,955 $ 4,766
Gross interest expense ........... 3,245 2,858 2,093 2,105 2,281
-------- ------- ------- ------- -------
Net interest income .............. 4,410 3,741 3,203 2,850 2,485
Loan loss provision .............. 125 115 87 120 97
-------- ------- ------- ------- -------
Net interest income after
loan loss provision ........... $ 4,285 $ 3,626 $ 3,116 $ 2,730 $ 2,388
======== ======= ======= ======= =======
Income before income taxes ....... $ 2,158 $ 1,697 $ 1,531 $ 1,252 $ 1,117
Provision for income taxes ....... 660 518 485 387 340
-------- ------- ------- ------- -------
Net income ....................... $ 1,498 $ 1,179 $ 1,046 $ 865 $ 777
======== ======= ======= ======= =======
PER SHARE DATA:
Net income ....................... $4.10 $ 3.27 $ 3.42 $ 3.30 $ 2.96
Cash dividends ................... $ 0.20 $ 0.42 $ 0.33 $ 0.33
Stock dividends .................. $0.74 $ 0.27
AVERAGE SHARES OUTSTANDING ......... 360 360 306 262 262
FINANCIAL CONDITION AT
YEAR END:
Total assets ................... $104,199 $91,622 $76,305 $69,860 $62,223
Total loans .................... 62,033 52,538 46,733 41,002 37,740
Total deposits ................. 91,055 79,866 67,014 62,832 55,909
Stockholders' equity ........... 10,940 9,522 8,243 5,544 4,766
RATIOS:
Based on Average Balances:
Return on assets ............... 1.51% 1.40% 1.41% 1.29% 1.40%
Return on equity ............... 14.73 13.32 15.08 16.61 17.46
Equity to assets ............... 10.30 10.51 9.36 7.74 8.01
Primary capital to assets ...... 10.63 11.09 9.96 8.31 8.54
Internal capital generation rate 14.56 12.43 13.05 14.93 15.49
At Year End:
Equity to assets ............... 10.50 10.39 10.80 7.94 7.66
Primary capital to assets ...... 11.10 10.97 11.43 8.53 8.21
Dividend payout ratio .......... 1.20% 6.69% 13.43% 10.10% 11.25%
BOOK VALUE/SHARE ................... $ 30.79 $ 26.43 $ 23.85 $ 21.14 $ 18.17
</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.
-2-
<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
(Bank) as its only subsidiary. Established in 1907, the Bank provides friendly
and affordable 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 discount brokerage, safe deposit
facilities and payroll processing.
The Trust department 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 $1,498,000 in 1996 compared to
$1,179,000 in 1995, an increase of 27% for the period. The returns on assets and
equity were 1.51% and 14.73%, respectively, in 1996 compared to 1.40% and 13.32%
in 1995. Although the Company's return on assets continues to be very strong,
the return on equity continues to be depressed due to the Company's high equity
to assets ratio of 10.50% at 1996 year end. A high equity to assets ratio while
depressing the return on equity ratio, allows the company to expand the Bank, as
it has recently done with the opening of offices in Edwardsville, Little
Meadows, Towanda and the Back Mountain office, which opened in February 1997.
The deposits these offices attract will reduce the equity to assets ratio to a
more typical level of around 8.50%, and provide the resources for increased
lending and investment by the Bank. These loans and investments in turn will
enable the Bank to generate higher future profits.
Per share net income increased to $4.10 in 1996 from $3.27 in 1995, for an
increase of 25%. Total dividends paid to stockholders increased from $0.47 (cash
and stock dividend) in 1995, to $0.74 (stock dividend) in 1996, an increase of
57%. The stock dividends declared by the Company increases the amount of stock
in circulation, while keeping capital in the Bank for future expansion needs.
At year end 1996, Grange had total assets of $104,199,000, total deposits
of $91,055,000, and total shareholders' equity of $10,940,000, compared to
$91,622,000 in total assets, $79,866,000 in total deposits, and $9,522,000 in
total shareholders' equity at year end 1995, increases of 14%, 14% and 15%,
respectively. At year end the Company had approximately 700 shareholders and
sixty-four full and part-time employees. During 1996 Grange paid over $1,300,000
in salaries and benefits to its employees and paid over $660,000 in taxes.
-3-
<PAGE>
The Bank opened its seventh office in Little Meadows and its eighth office
in Towanda during 1996. The Little Meadows office was slated to be closed by
Meridian Bank (now Corestates), so the Bank purchased the property and deposit
accounts from Meridian. The Towanda office was a former branch office of
Northern Central Bank, which consolidated its offices up the street when they
purchased the First National Bank of Bradford County. Deposit accounts were not
acquired from Northern Central in this transaction. The Little Meadows office is
a natural extension of the Bank's market area from Lawton and is located in a
solid rural community. The Towanda office is situated in an excellent location
in downtown Towanda and should generate significant loans as well as deposits.
The Bank's long awaited Back Mountain office in Trucksville opened in February
1997 with a facility which has certainly impressed the marketplace. The Grand
Opening is scheduled for the first week of April.
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,
1996, net interest yields increased from 4.73% in 1994 to 4.87% in 1996.
Interest rate risk management requires the Bank 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 requirements of the Company.
These requirements include funding for loans to customers, funding to take
advantage of prudent investment strategies, and funding for bank operations
expansion. Management shifted its emphasis during 1996 from reliance primarily
on interest bearing deposits available daily, to investing more of those funds
in longer term investments and relying on access to the Bank's line of credit at
the Federal Home Loan Bank of Pittsburgh to fund daily cash needs. Maturing
investments and time deposits continue to provide funding for the longer term,
while the line of credit funds short term fluctuations. The
-4-
<PAGE>
Company's line of credit at the Federal Home Loan Bank is $2,630,000, which had
a balance at December 31, 1996 of $875,000. The Bank's deposit balance at FHLB
was approximately $1,180,000. Investments maturing or expected to be called in
1997 include $595,000 in time deposits and $6,600,000 in bonds classified as
held to maturity, and $2,500,000 in bonds available for sale. In addition, the
bank holds an additional $8,812,000 in securities, maturing in more than one
year, classified as available for sale, which can also be used to meet liquidity
needs. Additional liquidity is 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 during both rising and
declining rate environments, 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 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.
Management of the loan portfolio has more variables than the investment
portfolio. Competition from other lenders as well as consumer's desire for
particular loan products greatly influence management's decisions regarding the
composition of the loan portfolio. The Bank is able to create loan products to
enhance its ability to react to interest rate changes, but consumers will
require features which will make them attractive before they will utilize the
loan products. While convenience and service are considered by the consumer,
pricing is also considered. Consumers will generally require more favorable
pricing when interest rate risk is shifted from the Bank to them. Certain
products such as fixed rate mortgages are expected by the consumer. These
products carry considerable interest rate risk because of their long term and
need to be priced accordingly. (In pricing these products, such as long term
mortgages, consideration of interest rate risk is in addition to other factors
such as collateral risk, credit risk, and repayment risks.) Competition from
other lenders greatly impacts the Bank's choices regarding pricing and terms for
loans.
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
-5-
<PAGE>
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,
1996. 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.
Repricing
Less than Three to One to After
three twelve five five
(In thousands) months months years years
--------- -------- ------ -----
Assets:
Interest bearing deposits........ $1,281 $ 496 $ 198
Investment securities:
Available for sale............... 2,508 8,805
Held to maturity................. 3,903 2,696 14,924 $ 747
Loans............................ 15,101 5,641 8,422 32,869
------ ------ ------- -------
Total.............................. 20,285 11,341 32,349 33,616
------ ------ ------- -------
Liabilities:
Time deposits.................... 13,250 18,899 13,179
Other deposits................... 3,352 5,028 10,056 15,085
Borrowed funds................... 1,210 36 367
------ ------ ------- -------
Total.............................. 17,812 23,963 23,235 15,452
------ ------ ------- -------
Gap:
By period........................ $2,473 ($7,419) $3,510 $18,565
====== ======= ======= =======
By cumulative.................... $2,473 ($4,946) ($1,436) $17,129
====== ======= ====== =======
Cumulative Gap as
Percentage of total assets....... 2.37% -4.75% -1.37% 16.44%
Interest rates are expected to remain fairly stable for most of 1997, 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. The Bank now purchases
bonds with primarily four to
-6-
<PAGE>
seven year maturities. These maturities, along with the use of the Bank's credit
line at the Federal Home Loan Bank, provides adequate cash flow to respond to
changing interest rates and liquidity needs. Management continuously 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, 1996 increased by $9,495,000 or 18%
to $62,033,000 from the December 31, 1995 total of $52,538,000. This compares
with a 12% increase in 1995 and a 14% increase in 1994. The average loan balance
for 1996 was $56,316,000 compared to $49,868,000 for 1995. Primary growth
occurred in one-to-four family mortgages, commercial loans, and municipal loans.
One-to-four family mortgages increased by $4,382,000 or 17% to $30,209,000 at
year end 1996. Commercial loans increased by $2,544,000 or 25% to $12,726,000
and Municipal loans increased by $1,502,000 or 499% to $1,803,000 at year end.
Most of the residential and commercial loan activity has come from the
Edwardsville office and the Bowman's Creek office. Both of these offices are in
the Wilkes-Barre to Tunkhannock corridor and should be a favorable indicator for
loan demand at the Bank's newest office in the Back Mountain, at Trucksville. A
loan to one school district accounted for $1,000,000 of growth in municipal
loans. Additional loan growth during 1997 is expected at the Towanda office,
which opened in November 1996. The average interest rate on total loans
decreased slightly from 9.88% for 1995 to 9.69% for 1996.
Major classifications of loans at December 31, 1996 and 1995 are as
follows:
(In thousands) 1996 1995
------- -------
Real estate mortgages:
Agricultural ................................. $ 961 $ 972
Residential, 1 - 4 family .................... 30,209 25,827
Residential, multi-family .................... 603 480
Nonfarm, nonresidential properties ........... 7,208 7,295
------- -------
Total real estate mortgages ............. 38,981 34,574
Agricultural loans ............................. 388 245
Commercial loans ............................... 12,726 10,182
Municipal loans ................................ 1,803 301
Consumer loans ................................. 8,770 7,819
------- -------
Total .......................................... 62,668 53,121
Unearned income ................................ 635 583
------- -------
Total .......................................... $62,033 $52,538
======= =======
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1996 are as follows:
-7-
<PAGE>
Within One - After
(In thousands) One Year Five Years Five Years Total
-------- ---------- ---------- -----
Real estate mortgages ....... $ 750 $ 3,351 $34,881 $38,982
Agricultural loans .......... 112 114 162 388
Commercial loans ............ 2,016 2,727 7,983 12,726
Municipal loans ............. 1,376 74 353 1,803
Consumer loans .............. 1,829 5,144 1,796 8,769
------ ------- ------- -------
Total ....................... $6,083 $11,410 $45,175 $62,668
====== ======= ======= =======
Loans at fixed
interest rates ............ $5,067 $ 8,947 $31,838 $45,852
Loans at variable
interest rates ............ 1,016 2,463 13,337 16,816
------ ------- ------- -------
Total ....................... $6,083 $11,410 $45,175 $62,668
====== ======= ======= =======
Non-accrual loans at December 31, 1996 were $247,000 and $156,00 in 1995.
Accrual of interest is discontinued on a loan when management believes after
considering economic and business conditions and results collection efforts,
that the borrower's financial condition is such that full recovery of the loan
balance is doubtful. Interest that would have been accrued if the loans were not
classified as non-accrual was approximately $24,000 in 1996 and $15,000 in 1995.
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.
Net charge-offs during 1996 were $34,000 compared to $62,000 during 1995,
representing a reduction of 45% for the period. Average loans increased from
$49,868,000 for 1995 to $56,316,000 for 1996. At December 31 the balance in the
allowance for loan losses increased from $532,000 to $623,000, for 1995 and 1996
respectively, and the ratio of loan loss allowance to loans was 1.01% and 1.00%
respectively. Management is of the opinion that the quality of the loan
portfolio remains strong, but anticipates that losses over the next year may
increase in proportion to the increase in the size of the loan portfolio, and a
projected loss of $32,000 in connection with two commercial loans. 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.
-8-
<PAGE>
The following sets forth loans past due 90 days or more on which interest
has continued to be accrued, at December 31:
(In thousands) 1996 1995
---- ----
Real estate mortgages ...................................... $ 67 $194
Demand ..................................................... 11 27
Installment ................................................ 0 0
--- ----
TOTAL....................................................... $ 78 $221
--- ====
This table summarizes the Company's loan loss experience for the years
ended December 31:
(In thousands) 1996 1995
------- -------
Balance at beginning of period ..................... $ 532 $ 479
------- -------
Charge-offs:
Commercial, consumer and agricultural ............ 14 16
Real estate mortgages ............................ 18 49
Installment ...................................... 9 14
------- -------
TOTAL .............................................. 41 79
------- -------
Recoveries:
Commercial, consumer and agricultural ............ 6 5
Real estate mortgages ............................ 0 8
Installment ...................................... 1 4
------- -------
TOTAL............................................... 7 17
------- -------
Net charge-offs .................................... 34 62
------- -------
Provision charged to operations .................... 125 115
------- -------
Balance at end of period ........................... $ 623 $ 532
======= =======
Average loans outstanding .......................... $56,316 $49,868
Loans outstanding, December 31 ..................... $62,033 $52,538
Loan reserve ratios:
Net loan charge-offs - average loans ............. 0.06% 0.12%
Reserve - loans, December 31 ..................... 1.00% 1.01%
INVESTMENT PORTFOLIO
The Company's investment portfolio increased by $2,336,000 or 7% during the
year ended December 31, 1996 to $34,003,000. The minimal increase was due to
strong loan demand during 1996 and the already relatively large size of the
portfolio due to weaker loan demand during 1995. Available for sale securities
increased by $1,222,000 or 12% to $11,733,000 and Held to maturity securities
increased by $1,114,000, or 5% to $22,270,000, from December 31, 1995 to
December 31, 1996.
-9-
<PAGE>
Loan demand was particularly strong during the last half of 1996 and
management basically stayed out of the bond market during that time. Credit
quality remains a high priority when purchasing bonds, and management continues
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 into 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 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, 1996, reflect a reduction in the unrealized gain from December 31,
1995 of $62,000. Securities available for sale still reflect a $3,000 gain over
historical cost.
The carrying value of investment securities both available for sale, and
held to maturity at December 31, are summarized as follows:
(In thousands) 1996 1995
------- -------
Available for sale:
U.S. Treasury securities..................... $11,313 $10,154
Other securities............................. 420 357
------- -------
Total..................................... $11,733 $10,511
======= =======
Held to maturity:
U.S. Treasury securities.....................
U.S. government agencies and corporations.... $18,142 $16,701
State and municipal securities............... 3,740 3,681
Other securities............................. 388 774
------- -------
Total............................ $22,270 $21,156
======= =======
The following table sets forth the maturities of investment and debt
securities at December 31, 1996 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of such securities:
<TABLE>
<CAPTION>
Maturing Maturing Maturing Maturing
within one to five five to ten after ten
(In thousands) one year years years years
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury
securities........ $2,502 5.99% $ 8,810 6.01%
Other securities.... $418
------ ------- ----
Total............... $2,502 5.99% $ 8,810 6.01% $418
====== ======= ====
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. government
agencies and
corporations......... $4,449 6.84% $11,378 6.18% $1,681 6.34% $634 7.75%
State and municipal
securities........... 300 8.71% 2,870 6.83% 570 6.63%
Other securities....... 300 6.21% 88 6.32%
------ ------- ------ ----
Total................ $5,049 6.74% $14,336 6.31% $2,251 6.42% $634 7.75%
====== ======= ====== ====
</TABLE>
DEPOSITS
Deposits at December 31, 1996 were $91,055,000, an increase of $11,189,000
or 14% from the December 31, 1995 balance of $79,866,000. Non-interest bearing
deposits increased $3,346,000 or 38%, to $12,207,000 and interest bearing
deposits increased $7,844,000 or 11% to $78,849,000. The percentage of
non-interest bearing deposits to average total deposits for 1996 was 13%
compared to 11% for 1995. The increase in the percentage of average non-interest
bearing deposits to average total deposits is important to the Bank's
profitability because it decreases the Bank's overall interest expense.
Average time deposits increased by $6,662,000 during 1996 to $43,191,000
from $36,529,000 during 1995. Their proportion of total average deposits
remained at 49%. Average deposits in savings and money market accounts increased
by $2,533,000 from 1995 to 1996, and average deposits in NOW and Super-NOW
accounts increased by $992,000 during the same period. Management anticipates
continued strong growth in deposits with the opening of the office in Towanda in
November 1996 and the Back Mountain office at Trucksville in February 1997.
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:
1996 1995
------------------ -----------------
Average Average Average Average
(In thousands) Balance Rate Balance Rate
------- ------- ------- -------
Demand deposits:
Noninterest bearing................ $11,571 $ 8,412
Interest bearing................... 8,661 2.00% 7,669 2.02%
Savings and money market deposits.... 23,908 2.74% 21,375 2.85%
Time deposits........................ 43,191 5.49% 36,529 5.63%
------- -------
TOTAL................................ $87,331 $73,985
======= =======
-11-
<PAGE>
Maturities of certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1996 are as follows:
Certificates Other
of Time
(In thousands) Deposits Deposits Total
------------ -------- -----
3 months or less.......................... $2,027 $2,027
3 to 6 months............................. 1,172 1,172
6 to 12 months............................ 2,152 2,152
Over 12 months............................ 2,096 2,096
No set maturity, state deposit............ $200 200
------ ---- ------
TOTAL...................... $7,447 $200 $7,647
====== ==== ======
CAPITAL
An adequate capital position is necessary to support continued growth and
earnings, to meet the needs of depositors and borrowers, and to sustain a
reasonable rate of return for stockholders. Stockholders' equity increased by
$1,418,000 or 15% from $9,522,000 at December 31, 1995 to $10,940,000 at
December 31, 1996. This was only a slightly smaller increase than the $1,279,000
or 16% increase from December 1994 to December 1995. The average equity to
assets ratio was 10.30%, 10.51% and 9.36% for the years 1996, 1995 and 1994,
respectively.
The Board of Directors decision to declare stock dividends instead of cash
dividends has, along with strong profits, helped maintain a high equity to
assets ratio. Because of the strong demand for the Company's stock, the stock
dividend is popular with stockholders. The additional equity is necessary to
keep pace with the strong deposit growth the Bank has experienced, and expects
to continue as a result of the new offices opened over the last two years. The
Board of Directors hope the additional stock generated by the stock dividends
will help satisfy the demand for the Company's stock as well as make some stock
available for the 401(k) Employee Stock Ownership Plan which the Company
established in late 1995.
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", 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
-12-
<PAGE>
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 leverage ratios. At December 31, 1996 and
1995, the Bank exceeded all regulatory capital requirements.
Risk-Based Capital
December 31, (in thousands, except ratios) 1996 1995
------- -------
Tier I capital:
Shareholders' equity.............................. $10,780 $ 9,194
------- -------
Tier II capital:
Loan loss reserve................................. 623 532
------- -------
Total Qualifying Capital............................ $11,403 $ 9,726
======= =======
Risk-adjusted assets (including
off-balance sheet items).......................... $61,371 $49,771
Tier I Capital Ratio (4.00% required)............... 17.57% 18.47%
Total Capital Ratio (8.00% required)................ 18.58% 19.54%
Tier I Leverage Ratio............................... 10.89% 10.91%
RESULTS OF OPERATIONS
Net income for 1996 totaled $1,498,000 ($4.10 per share, based on 365,180
weighted average common shares) as compared to 1995's net income of $1,179,000
($3.27 per share based on 345,684 weighted average common shares), and 1994's
net income of $1,046,000 ($3.42 per share based on 305,571 weighted average
common shares).
Net interest income or the spread between total interest income and
interest expense directly impacts the results of operation. The net interest
yield for 1996 increased to 4.87% from 4.85% in 1995. While the average rate on
interest earning assets fell from 8.47% to 8.35%, the average rate on the total
sources to fund the earning assets also fell from 3.62% to 3.48%. The
-13-
<PAGE>
Bank was able to maintain its interest rate spread during this falling rate
environment due to having well balanced GAP positions. Average rates on loans
declined from 9.88% in 1995 to 9.69% in 1996, while average rates on investments
increased from 6.11% in 1995 to 6.35% in 1996. Net interest income for 1996
increased by $716,000 (on a tax equivalent basis) or 35% as compared to $529,000
or 16% for 1995 vs. 1994. Overall, $688,000 of the change was due to volume and
only $28,000 of the change was due to changes in rates on assets and
liabilities.
Loans at year end increased by $9,495,000 or 18% for 1996 over 1995,
compared to an increase of $5,751,000 or 12% for 1995 over 1994, and deposits at
year end increased by $11,189,000 or 14% for 1996 over 1995, compared to
$12,852,000 or 19% for 1995 over 1994. Investment securities, at year end,
increased $2,336,000 or 7% for 1996 over 1995, compared to $11,634,000 or 58%
for 1995 over 1994. Income on loans increased by $529,000 (on a tax equivalent
basis) or 11% for 1996 compared to 1995, and interest on investment securities
increased $748,000 (on a tax equivalent basis) or 51%. The growth of the
investment portfolio during 1995 and 1996 slowed during the last half of 1996 as
the demand for loans rebounded. Management took advantage of new bond issues
from U. S. government agencies featuring higher interest rates but subject to
numerous call options. Although the redemption date is less certain because of
the call options, these bonds usually produce significantly higher yields in
exchange for shifting the reinvestment risk to the bank.
The average rates on interest earning assets decreased during 1996, as did
the average rates paid on interest bearing liabilities. The loan to deposit
ratio at 1996 year end was 67% compared to 65% at 1995 year end. Loan growth is
expected to continue, and the loan to deposit ratio should continue to increase
slightly, as loan demand is experienced at the Edwardsville, Little Meadows,
Towanda, and Back Mountain offices.
Salaries and employee benefits increased by $271,000 or 25% in 1996 as
compared to 1995, primarily because of hiring of additional employees for the
Little Meadows and Towanda offices, annual salary increases, and changes in the
Bank's overall compensation programs which reward employees based on
performance.
Occupancy and furniture and equipment expense increased by $23,000 or 5% in
1996 as compared to 1995. The small increase in these expenses reflect the low
costs in acquiring the physical offices at Little Meadows and Towanda. The
Little Meadows office was already a bank office in operation and acquired by the
Bank at the book value of the assets. The Towanda office had been a banking
facility which became available to the Bank because of another bank's
consolidation of facilities. The price for the facility was reasonable and
involved only minimal expense to have the office ready to open. Occupancy
expense will increase to a larger extent during 1997 due to the Back Mountain
office which has an annual lease payment of $70,000, in addition to other normal
operating costs, such as real estate taxes, depreciation, maintenance and
utilities.
-14-
<PAGE>
The Deposit Insurance Funds Act of 1996 (DIFA) passed by Congress and
signed by the President, mandates banks to help pay the cost of the bonds issued
by the "Financing Corporation" (FICO), which were used to finance the savings
and loan bailout. The current annual cost to all Bank Insurance Fund (BIF)
members is 1.296 cents per $100 of deposits. Members of the Savings Association
Insurance Fund (SAIF) are required to pay 6.48 cents per $100 of deposits.
Although banks are being required to pay much less than savings associations, it
should be noted that the savings associations were the institutions that created
the losses. This assessment is expected to cost the Bank approximately $12,000
in 1997. The Federal Deposit Insurance Corporation (FDIC) premium on deposit
insurance remains at zero for 1997.
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 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 in 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
-15-
<PAGE>
Treasurer of the Commonwealth of Pennsylvania that a CRA evaluation had been
completed by their office for 1996 and the Bank had received a rating of
"Outstanding".
In accordance with its plans to continue its efforts to develop products
which are affordable and accessible to all segments of its marketplace, the Bank
has worked with one of its correspondent banks, the Atlantic Central Banker's
Bank, to offer a mortgage product to customers, which only requires a 5% down
payment. This mortgage would require private mortgage insurance, have a low
interest rate, and be sold on the secondary mortgage market.
During 1996, the Bank participated in a Community Development Block Grant
Program in Noxen Township, Wyoming County. Under the terms of the program, the
Bank agreed to provide rehabilitation loans for residential properties, to low
and very low income individuals and families. These loans would be written at no
interest and the Bank would be reimbursed based upon a formula established by
the Pennsylvania Department of Community Affairs. The Bank has previously
provided similar finance programs to the Boroughs of Meshoppen and Laceyville.
In response to devastating floods in January 1996, the Bank offered to
defer payments on existing home mortgages for flood victims and provide reduced
rate mortgages with accelerated processing time to victims who desired to
relocate.
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
the program. In January 1995 and 1997 the bank applied for funds to be used to
help the Wyoming County Chapter of Habitat for Humanity to provide low cost
housing for low to moderate income families. Unfortunately these efforts have
not been successful.
OTHER ACTIVITIES
The Company purchased the former "Bluhm's II" building on Main Street in
Laceyville, during 1996. This building is located a short distance from the
Bank's existing office in Laceyville. Management plans to utilize the building
as a future data processing center and as a location for retail insurance sales.
The Bank is also negotiating with a possible tenant who would like to establish
a restaurant in the building. Management believes that these additions would
have a positive effect on the Laceyville business community revitalization
efforts.
TRUST DEPARTMENT
The Bank's Trust Department, established in 1992, continues to grow and
expand. Offering personal trusts, irrevocable trusts, insurance trusts, trusts
under will, estate management
-16-
<PAGE>
services and IRAs. Additional employees have been added to handle the growth of
accounts and serve the required functions. Management does not expect the Trust
Department to be profitable for at least the next three years.
-17-
<PAGE>
Grange National Banc Corp. and Subsidiary
Average Balances, Interest Income/Expense and Rates
<TABLE>
<CAPTION>
Years Ended December 31, 1996 December 31, 1995
---------------------------------- ----------------------------------
(1) Interest Average (1) Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages ..................... $37,097 $3,560 9.60% $29,598 $2,807 9.48%
Installment ................... 4,930 501 10.16 3,933 439 11.16
Commercial .................... 14,289 1,394 9.76 16,337 1,680 10.28
------- ------ ------- ------
Total loans ................. 56,316 5,455 9.69 49,868 4,926 9.88
------- ------ ------- ------
Securities available for sale:
U.S. Treasury securities ...... 11,341 664 5.85 8,185 432 5.28
Other securities .............. 392 24 6.12 315 20 6.35
------- ------ ------- ------
Total available for sale .... 11,733 688 5.86 8,500 452 5.32
------- ------ ------- ------
Securities held to maturity:
U.S. government agencies ...... 18,492 1,217 6.58 11,850 784 6.62
Municipal bonds ............... 4,124 278 6.74 2,651 161 6.07
Other securities .............. 502 31 6.18 984 69 7.01
------- ------ ------- ------
Total held to maturity ...... 23,118 1,526 6.60 15,485 1,014 6.55
------- ------ ------- ------
Total investment securities 34,851 2,214 6.35 23,985 1,466 6.11
------- ------ ------- ------
Deposits in banks ............... 2,092 116 5.54 5,022 290 5.77
------- ------ ------- ------
TOTAL ..................... $93,259 $7,785 8.35 $78,875 6,682 8.47
======= ====== ======= ======
INTEREST BEARING
LIABILITIES:
Deposits:
NOW and super-NOW ............. $ 8,661 173 2.00 $ 7,669 155 2.02
Savings and money market ...... 23,908 655 2.74 21,375 609 2.85
Certificates of deposit ....... 42,991 2,358 5.48 36,329 2,044 5.63
Other time deposits ........... 200 12 6.00 200 11 5.50
------- ------ ------- ------
Total deposits .............. 75,760 3,198 4.22 65,573 2,819 4.30
Other borrowed funds ........... 922 47 5.10 786 39 4.96
------- ------ ------- ------
TOTAL ..................... 76,682 3,245 4.23 66,359 2,858 4.31
Non-interest bearing
funds, net (2) ................. 16,577 12,516
------- ------ ------- ------
TOTAL SOURCES TO FUND
EARNING ASSETS .................. $93,259 3,245 3.48 $78,875 2,858 3.62
======= ====== ======= ======
NET INTEREST/YIELD .............. $4,540 4.87% $3,824 4.85%
====== ======
</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 balances, but contributing no income.
NOTE - Tax exempt interest income has been converted to a tax equivalent basis
at the U.S. federal income tax rate of 34%.
-18-
<PAGE>
Grange National Banc Corp. And Subsidiary
Net Interest Income
Changes Due to Volume and Rate
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Total Due To Due To Total Due To Due To
(In thousands) Change Volume Rate Change Volume Rate
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans ....................... $ 529 $ 622 ($93) $ 860 $627 $233
Investment securities ....... 748 688 60 386 238 148
Federal funds sold .......... 0 0 0 (14) (14) 0
Deposits in other banks ..... (174) (162) (12) 62 (7) 69
------ ------ ---- ------ ---- ----
TOTAL .................. 1,103 1,148 (45) 1,294 844 450
------ ------ ---- ------ ---- ----
INTEREST EXPENSE:
Now/Super-Now deposits ...... 18 16 2 15 18 (3)
Savings/Money market deposits 46 69 (23) 57 10 47
Time deposits ............... 314 367 (53) 692 347 345
Other Borrowings ............ 9 8 1 1 0 1
------ ------ ---- ------ ---- ----
TOTAL ................... 387 460 (73) 765 375 390
------ ------ ---- ------ ---- ----
NET INTEREST INCOME ........... $ 716 $ 688 $28 $ 529 $469 $ 60
====== ====== === ====== ==== ====
</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
has been converted to a tax equivalent basis at the U.S. federal income tax rate
of 34%.
-19-
<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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996 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.
/s/ Daniel Kenia
------------------
Daniel Kenia, P.C.
January 22, 1997
-20-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
ASSETS:
Cash and due from banks ............................................... $ 2,566,232 $ 1,793,476
Interest bearing deposits ............................................. 1,974,642 2,713,768
Investment securities (Note 2):
Available for sale:
U.S. Treasury securities .......................................... 11,312,540 10,154,479
Other securities .................................................. 420,150 356,600
------------ -----------
Total available for sale ........................................ 11,732,690 10,511,079
Held to maturity:
U.S. government agencies .......................................... 18,141,884 16,700,901
Municipal bonds ................................................... 3,740,104 3,680,547
Other securities .................................................. 387,835 774,031
------------ -----------
Total held to maturity, (market value
1996, $22,182,000; 1995, $21,355,000) ......................... 22,269,823 21,155,479
------------ -----------
Loans (Note 3) ........................................................ 62,667,685 53,120,620
Less: unearned interest income ....................................... 634,639 582,798
Less: allowance for loan losses ...................................... 622,821 532,325
------------ -----------
Loans, net ..................................................... 61,410,225 52,005,497
Bank premises and equipment, net (Note 4) ............................. 2,680,580 2,236,370
Accrued interest and other assets ..................................... 1,407,712 1,136,680
Premium on deposits ................................................... 157,485
Other real estate ..................................................... 69,618
------------ -----------
TOTAL ASSETS ............................................................ $104,199,389 $91,621,967
============ ===========
LIABILITIES:
Domestic Deposits:
Non-interest bearing deposits ....................................... $ 12,206,738 $ 8,860,513
Interest bearing deposits ........................................... 78,848,660 71,005,086
------------ -----------
Total deposits .................................................... 91,055,398 79,865,599
Other borrowed funds (Note 5) ......................................... 1,613,160 1,712,342
Accrued interest and other liabilities ................................ 590,973 521,759
------------ -----------
Total liabilities ................................................. 93,259,531 82,099,700
------------ -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 1)
STOCKHOLDERS' EQUITY (NOTE 1):
Preferred stock authorized 1,000,000 shares of $5 par;
None issued nor outstanding..........................................
Common stock authorized 5,000,000 shares of $5 par, 355,291 and 348,774
shares issued and outstanding in 1996 and 1995, respectively ........ 1,776,455 1,743,870
Additional paid-in capital ............................................ 1,767,949 1,559,336
Retained earnings ..................................................... 7,392,890 6,154,547
------------ -----------
Total ............................................................. 10,937,294 9,457,753
Unrealized holding gains on investment securities
(net of deferred income taxes) (Note 6) ............................... 3,000 65,000
Treasury stock, at cost (Note 1) ...................................... (436) (486)
------------ -----------
Total stockholders' equity ........................................ 10,939,858 9,522,267
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $104,199,389 $91,621,967
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
-21-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans ............. $5,421,051 $4,897,858 $4,035,673
Interest on investment securities:
U.S. Treasury securities ............. 664,440 432,412 463,615
Obligations of other U.S. government
agencies and corporations .......... 1,216,544 783,746 324,610
Obligations of states and political
subdivisions (tax-exempt) .......... 183,183 106,395 119,778
Other securities ..................... 54,442 89,204 110,453
Interest on federal funds sold ......... 13,573
Interest on deposits in banks .......... 115,601 289,497 228,631
---------- ---------- ----------
Total interest income .......... 7,655,261 6,599,112 5,296,333
---------- ---------- ----------
Interest Expense:
Interest on deposits ................... 3,198,198 2,818,839 2,055,052
Interest on borrowed funds ............. 47,102 39,500 38,361
---------- ---------- ----------
Total interest expense ......... 3,245,300 2,858,339 2,093,413
---------- ---------- ----------
Net interest income .............. 4,409,961 3,740,773 3,202,920
Provision for loan losses (Note 3) . 125,000 115,000 87,000
---------- ---------- ----------
Net interest income after
provision for loan losses ...... 4,284,961 3,625,773 3,115,920
Other Income (Note 7) .................... 500,271 393,227 315,657
Other Expenses (Note 8) .................. (2,627,512) (2,321,861) (1,901,031)
---------- ---------- ----------
Income before taxes ...................... 2,157,720 1,697,139 1,530,546
Provision for income taxes (Notes 1 and 6) 660,000 518,000 485,000
---------- ---------- ----------
Net income ............................... $1,497,720 $1,179,139 $1,045,546
========== ========== ==========
Earnings per share (Notes 1 and 11):
Net income ............................... $ 4.10 $ 3.27 $ 3.42
========== ========== ==========
Weighted average common shares ........... 365,180 360,262 305,571
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-22-
<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, 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
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, December 31, 1995............. ($486) $1,743,870 $1,559,336 $6,154,547 $65,000 $9,522,267
Net income............................. 1,497,720 1,497,720
Stock dividend $0.74 per share,
plus cash in lieu of
fractional shares.................... 32,585 208,613 (259,377) (18,179)
Sale of stock from treasury............ 50 50
Unrealized holding losses
on investment securities............. (94,000) (94,000)
Deferred tax asset..................... 32,000 32,000
----- ---------- ---------- ---------- ------ -----------
Balance, December 31, 1996............. ($436) $1,776,455 $1,767,949 $7,392,890 $3,000 $10,939,858
===== ========== ========== ========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-23-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 1,497,720 $ 1,179,139 $1,045,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 203,166 176,120 146,920
Provision for loan losses ............................... 125,000 115,000 87,000
Increase (decrease) in deferred income taxes ............ (68,000) 58,000 (102,000)
Changes in operating assets and liabilities:
Increase in accrued interest income and other assets ..... (271,032) (493,866) (16,591)
Increase in accrued interest expense and other liabilities 137,214 187,220 74,440
----------- ----------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES .................................... 1,624,068 1,221,613 1,235,315
----------- ----------- ----------
INVESTING ACTIVITIES:
Purchase bank premises and equipment ...................... (634,607) (211,383) (220,200)
Decrease (increase) in other real estate .................. 69,618 117,453 (22,607)
Purchase of securities "available for sale" ............... (5,114,997) (6,346,937) (3,687,056)
Sales of securities "available for sale" .................. 498,704
Redemptions of securities "available for sale" ............ 3,831,386 4,127,854 4,300,000
Purchase of securities "held to maturity" ................. (7,161,007) (14,424,317) (5,815,209)
Redemptions of securities "held to maturity" .............. 6,825,442 4,574,373 4,597,020
Decrease (increase) in mortgage-backed securities ......... (778,779) 107,138 316,766
Increase in loans to customers ............................ (9,529,728) (5,866,565) (5,750,933)
Decrease (increase) in deposits in banks .................. 739,126 2,788,117 (3,670,824)
Premium paid on core deposits ............................. (170,254)
----------- ----------- ----------
NET CASH USED IN
INVESTING ACTIVITIES .................................... (11,923,800) (14,635,563) (9,953,043)
----------- ----------- ----------
FINANCING ACTIVITIES:
Increase in deposits before interest credited ............. 8,749,797 10,438,999 2,827,536
Increase (decrease) in borrowed funds ..................... (99,182) 940,303 (407,452)
Interest credited to deposits ............................. 2,440,002 2,412,863 1,353,796
Cash dividends paid ....................................... (18,179) (78,926) (140,399)
Decrease (increase) in treasury stock ..................... 50 50 (286)
Issuance of common stock .................................. 7,992 1,900,004
----------- ----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................... 11,072,488 13,721,281 5,533,199
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................................... 772,756 307,331 (3,184,529)
CASH AND CASH EQUIVALENTS, January 1 ....................... 1,793,476 1,486,145 4,670,674
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, December 31 ..................... $ 2,566,232 $ 1,793,476 $1,486,145
=========== =========== ==========
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................. $ 761,079 $ 566,855 $1,076,592
Income taxes ............................................. $ 639,000 $ 598,000 $ 466,300
Non-cash investing activities:
Unrealized gains (losses) on securities .................. ($94,000) $258,000 ($06,000)
Stock dividend ........................................... 241,198 $ 83,610
</TABLE>
See Notes to Consolidated Financial Statements
-24-
<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 (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 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.
-25-
<PAGE>
All equity and U.S. 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 of 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:
Building 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, 1996 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.
Treasury Stock:
Treasury stock is shown at cost and consists of twenty and twenty-six
shares of common stock in 1996 and 1995, respectively.
-26-
<PAGE>
Pension Plan:
The Bank's pension plan is an Employee Stock Ownership Plan with 401(k)
Provisions ("KSOP") which covers substantially all employees. The Plan, which is
a type of stock bonus plan, is a plan of deferred compensation in which Company
contributions are used to provide participating employees with stock in Grange
National Banc Corp. The KSOP also provides that participants may make
contributions to the Plan on a before-tax basis, pursuant to provisions found
under Section 401(k) of the Internal Revenue Code. Participants may elect to
defer up to 15% of their current compensation and the Company may match up to
$1.00 for each $1.00 that is deferred. The Company contributed $4,498 as
matching contribution to employee deferrals during 1996. The Company also made
an Employer Optional Contribution to the Plan of $56,147 during 1996, which
represents 6% of gross salaries. During prior years, the Bank had a SEP-IRA
pension plan. Contributions to the SEP-IRA was $48,099 in 1995 and $35,090 in
1994, and amounted to 8% of gross salaries.
Cash and Cash Equivalents:
The Company considers cash and due from banks 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 on 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
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 asset or liability calculated for each
period.
The Company and its subsidiary file a consolidated federal income tax
return.
Earnings Per Share:
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Stock
-27-
<PAGE>
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method,
unless such options are anti-dilutive. During 1996 and 1995 the Company declared
stock dividends of $0.74 and $0.27 per share. The accompanying financial
statements have been revised to give retroactive effect of the stock dividends
for all periods presented.
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, 1996 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 (in thousands):
Contract or Notional Amount
1996 1995
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit......... $2,755 $2,317
Standby letters of credit............ $ 143 $ 101
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 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 is based on management's
credit assessmant of the counterparty.
-28-
<PAGE>
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to 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 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 $1,250,000, unless secured by bank
deposits or partially guaranteed by an agency of the federal government.
Regulatory Matters:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies and undergoes periodic examinations by such
regulatory authorities. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts of capital to total "risk weighted"
assets. At December 31, 1996 the Bank is required to have minimum Tier 1 and
Total Capital ratios of 4% and 8% respectively. The Bank's actual ratios at that
date were 17.57% and 18.58% respectively. The Bank's leverage ratio at December
31, 1996 was 10.89%. As of the most recent examination, federal regulators
categorized the Bank as well capitalized within regulatory criteria. Since that
notification, there are no conditions or events that management believes would
change the Bank's category.
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, 1996, the Bank had
retained earnings of $7,393,000 of which under federal regulations, the Bank's
extension of credit to its parent company must be on the same terms and
conditions as extensions of credit to nonaffilliates. The maximum amount the
Bank can loan to
-29-
<PAGE>
the Company is limited to 20% of its capital and surplus. Such extensions of
credit, with limited exceptions, must be fully collateralized.
Line of Credit:
At December 31, 1996 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $30,194,000 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>
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury notes............................ $11,312 $ 39 ($ 38) $11,313
Other securities............................... 418 $ 2 420
------- ---- ----- -------
Total available for sale.................... $11,730 $ 41 ($ 38) $11,733
======= ==== ===== =======
Held to maturity:
Obligations of other U.S. government
agencies or corporations..................... $18,142 $ 41 ($135) $18,048
Obligations of states and
political subdivisions....................... 3,740 20 (14) 3,746
Other securities .............................. 388 388
------- ---- ----- -------
Total held to maturity...................... $22,270 $ 61 ($149) $22,182
======= ==== ===== =======
1995
------------------------------------------------
Available for sale:
U.S. Treasury notes............................ $10,059 $ 98 ($ 3) $10,154
Other securities............................... 355 357
------- ---- ----- -------
Total available for sale.................... $10,414 $ 98 ($ 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
======= ==== ===== =======
</TABLE>
-30-
<PAGE>
The amortized cost and estimated fair value of debt securities at December
31, 1996 by contractual maturity, are shown below. Expected maturities will
differ from 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 Market Amortized Market
(In thousands) Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Maturing within one year............... $2,502 $2,508 $5,049 $5,075
Maturing in one to five years.......... 8,810 8,805 14,336 14,267
Maturing in five to ten years.......... 2,251 2,209
Maturing after ten years............... 634 631
No set maturity........................ 418 420
------- ------- ------- -------
TOTAL............................. $11,730 $11,733 $22,270 $22,182
======= ======= ======= =======
</TABLE>
3. Loans and Allowance for Loan Losses:
Major classifications of loans at December 31 are as follows:
(In thousands) 1996 1995
----- ----
Real estate mortgages:
Agricultural ............................... $ 961 $ 972
Residential, 1 - 4 family .................. 30,209 25,827
Residential, multi-family .................. 603 480
Nonfarm, nonresidential properties ......... 7,208 7,295
------- -------
Total real estate mortgages ........... 38,981 34,574
Agricultural loans ........................... 388 245
Commercial loans ............................. 12,726 10,182
Municipal loans .............................. 1,803 301
Consumer loans ............................... 8,751 7,803
Overdrafts ................................... 19 16
------- -------
Gross loans ............................. 62,668 53,121
Less: Unearned income ....................... 635 583
Allowance for loan losses ............. 623 532
------- -------
Loans, net ....................... $61,410 $52,006
======= =======
Nonaccrual loans at December 31, 1996 and 1995, were $247,000 and $156,000,
respectively.
-31-
<PAGE>
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
(In thousands) 1996 1995 1994
---- ---- ----
Balance, January 1 ................... $532 $479 $412
Provision charged to operations ...... 125 115 87
Loans charged off .................... (41) (79) (32)
Recoveries ........................... 7 17 12
---- ---- ----
Balance, December 31 ................. $623 $532 $479
==== ==== ====
4. Premises and Equipment:
Premises and equipment are summarized as follows:
Accumulated
Gross Book Amortization Net Book
December 31, 1996: Value & Depreciation Value
---------- -------------- --------
Land............................... $434,757 $434,757
Buildings.......................... 2,112,920 $610,334 1,502,586
Construction in process............ 114,393 114,393
Furniture and equipment............ 1,701,515 1,072,671 628,844
---------- ---------- ----------
Total......................... $4,363,585 $1,683,005 $2,680,580
========== ========== ==========
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
========== ========== ==========
Depreciation and amortization were applied as follows:
1996 1995 1994
---- ---- ----
Premises................................ $66,297 $64,265 $66,389
Furniture and equipment................. 124,100 111,855 80,531
------- -------- --------
Total.............................. $190,397 $176,120 $146,920
======== ======== ========
The Bank has non-cancelable operating leases on the building for its
Edwardsville and Back Mountain Offices. Rental expense for 1996 was $37,000.
Rental payments for 1997 will be $98,000, and $107,000 for 1998 through 2000.
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 $335,388 in 1996
and $118,634 in 1995.
-32-
<PAGE>
The Bank has a line of credit with the Federal Home Loan Bank for
$2,630,000 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 $875,000 at
December 31, 1996.
A mortgage on the Tunkhannock property, held by Joann Coolbaugh is payable
in monthly installments of $52,60, including interest at 8%, due July 9, 1997,
with a year end balance of $35,915 in 1996 and $93,634 in 1995.
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 $366,858 in 1996 and $400,074 in 1995.
The FHLB and Tunkhannock loans mature as follows:
2002
1997 1998 1999 2000 2001 and beyond
---- ---- ---- ---- ---- ----------
$47,804 $12,374 $12,878 $13,159 $12,118 $304,440
6. Income Taxes:
The components of the federal income tax provisions are as follows:
1996 1995 1994
---- ---- ----
Currently payable........................... $701,000 $547,000 $533,000
Deferred portion............................ (41,000) (29,000) (48,000)
-------- -------- --------
Total.................................. $660,000 $518,000 $485,000
======== ======== ========
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>
1996 1995
---- ----
<S> <C> <C>
Accrued income................................................ $30,000 $61,000
Depreciation.................................................. 78,000 70,000
Accretion of discounts on securities.......................... 34,000 20,000
Unrealized gains on available for sale investment securities.. 1,000 33,000
Allowance for loan losses..................................... (162,000) (130,000)
-------- -------
Net deferred tax liability (asset)....................... ($19,000) $54,000
======== =======
</TABLE>
-33-
<PAGE>
A reconciliation of income tax expense at the federal statutory rate and
the effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate.. $733,000 34.0% $577,000 34.0% $520,000 34.0%
Tax-exempt income
from investments........... (53,000) (2.5) (35,000) (2.1) (34,000) (2.2)
Tax-exempt income
from loans................. (18,000) (0.8) (8,000) (0.5) (8,000) (0.5)
Other........................ (2,000) (0.1) (16,000) (0.9) 7,000 0.4
-------- ---- -------- ---- -------- ----
Total................... $660,000 30.6% $518,000 30.5% $485,000 31.7%
======== ==== ======== ==== ======== =====
</TABLE>
7. Other Income:
Other income for the years ended December 31, consists of the following:
1996 1995 1994
---- ---- ----
Service charges and fees ............ $141,357 $128,950 $ 61,37
Service charges on deposit accounts.. 292,382 224,805 193,524
Gain (loss) on sale of securities ... (3,952)
Gain (loss) on sale of real estate... (21,488) (18,683)
Other ............................... 88,020 62,107 60,758
-------- -------- --------
Total other income ............. $500,271 $393,227 $315,657
======== ======== ========
8. Other Expenses:
Other expenses for the years ended December 31, consists of the following:
1996 1995 1994
---- ---- ----
Salaries and employee benefits ... $1,367,510 $1,096,961 $ 927,137
Occupancy expenses ............... 241,019 216,929 161,953
Furniture and equipment expenses.. 241,886 242,555 184,686
Other operating expenses ......... 777,097 765,416 627,255
---------- ---------- ----------
Total other expenses ........ $2,627,512 $2,321,861 $1,901,031
========== ========== ==========
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:
-34-
<PAGE>
1996 1995 1994
---- ---- ----
Balance, January 1 ....... $1,107,115 $1,024,446 $1,082,178
Additions ................ 252,281 301,542 886,923
Amounts collected ........ (362,326) (218,873) (944,655)
Amounts charged off.......
---------- ---------- -----------
Balance, December 31 ..... $ 997,070 $1,107,115 $1,024,446
========== ========== ==========
10. Grange National Banc Corp. (Parent Company Only) Financial Statements:
BALANCE SHEETS, DECEMBER 31 1996 1995
---- ----
ASSETS
Cash ........................................... $ 31 $ 210
Investment in bank subsidiary .................. 10,706,383 9,285,493
Securities "available for sale" ................ 8,500 8,550
Land (Note 1) .................................. 306,541 253,365
----------- -----------
TOTAL ASSETS .......................... $11,021,455 $9,547,618
=========== ==========
LIABILITIES
Notes payable, bank subsidiary ................. $ 81,597 $ 25,351
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock authorized 1,000,000 shares
of $5 par: None issued........................
Common stock authorized 5,000,000 shares
of $5 par; 355,291 and 348,774 shares issued
and outstanding in 1996 and 1995, respectively 1,776,455 1,743,870
Additional paid-in capital ..................... 1,767,949 1,559,336
Retained earnings .............................. 7,392,890 6,154,547
Unrealized holding gains (losses) on investment
securities (net of deferred income taxes) .... 3,000 65,000
Less: Treasury stock, at cost (Note 1) ........ (436) (486)
----------- -----------
STOCKHOLDERS' EQUITY ................... 10,939,858 9,522,267
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................. $11,021,455 $9,547,618
=========== ==========
-35-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary ............... $ 18,179 $ 308,926 $ 155,399
Dividends from other securities .............. 195 158 142
Interest on deposits ......................... 0 9 15
---------- ---------- ----------
Total income .................... 18,374 309,093 155,556
---------- ---------- ----------
OPERATING EXPENSES:
Interest expense ............................. 3,182 14,882 16,488
Other operating expense ...................... 312 3,160 961
---------- ---------- ----------
Total operating expenses ........ 3,494 18,042 17,449
---------- ---------- ----------
Income before undistributed income of subsidiary 14,880 291,051 138,107
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY ................................... 1,482,840 888,088 907,439
---------- ---------- ----------
NET INCOME ..................................... 1,497,720 1,179,139 1,045,546
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED, DECEMBER 31 1995 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income ................................... $1,497,720 $1,179,139 $1,045,546
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
subsidiary ............................... 1,482,840 (888,088) (907,439)
---------- ---------- ----------
Net cash provided by
operating activities ............... 14,880 291,051 138,107
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase real estate ......................... (53,176)
Purchase securities "available for sale"......
Investment in Bank subsidiary ................ (7,992) (1,900,004)
---------- ---------- ----------
Net cash used in
investing activities ............... (53,176) (7,992) (1,900,004)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable .................. 56,246 (212,182) 347
Sale (purchase) of treasury stock ............ 50 50 (286)
Issuance of common stock ..................... 7,992 1,900,004
Dividends to stockholders .................... (18,179) (78,926) (140,399)
---------- ---------- ----------
Net cash provided by (used in)
financing activities ............... 38,117 (283,066) 1,759,666
---------- ---------- ----------
INCREASE (DECREASE) IN CASH .................... (179) (7) (2,231)
CASH BALANCE, JANUARY 1 ........................ 210 217 2,448
---------- ---------- ----------
CASH BALANCE, DECEMBER 1 ....................... $ 31 $ 210 $ 217
========== ========== ==========
</TABLE>
-36-
<PAGE>
11. Stockholder's 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 shareholder 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 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 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.
-37-
<PAGE>
<TABLE>
<CAPTION>
Non-Employee
Employee Director Exercise
Year ended December 31, 1995 Stock Options Stock Options Prices
------------- ------------- --------
<S> <C> <C> <C>
Outstanding 1994...................... 12,000 8,000 $24.00 to $26.25
Granted............................... 34,590 13,840 $32.50
Exercised............................. 333 $24.00
Outstanding........................... 46,257 21,840 $24.00 to $32.50
Year ended December 31, 1996
Outstanding 1995...................... 46,257 21,840 $24.00 to $32.50
Granted...............................
Lapsed................................ 1,730
Adjustment for stock dividend......... 1,037 478
Outstanding........................... 47,294 20,588 $23.32 to $31.86
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the stock option plans been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Net income - as reported $1,498,000
Net income - pro forma $1,190,000
Income per share - as reported $ 4.16
Income per share - pro forma $ 3.30
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 2.0%; risk-free interest rate of 6.69%; expected
lives of 10 years, which is the option term; and variability of 3.12%.
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 Dividends:
The Company has declared stock dividends in December and June of 1996 and
December of 1995 at the following rates $0.40, $0.34, and $0.27, respectively,
with fractional shares paid in cash.
-38-
<PAGE>
Preferred Stock:
The Company authorized 1,000,000 shares of preferred stock at $5 par value.
At December 31, 1996 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 the amount and timing of future cash flows, estimated
discount rates, as well as management's best judgement with respect to current
economic conditions. Many of the estimates involve uncertainties and matters of
significant judgement 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, 1996 and 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 with similar credit quality.
-39-
<PAGE>
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 maturities.
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........................ $2,566 $2,566 $1,793 $1,793
Interest bearing deposits...................... 1,975 1,979 2,714 2,715
Investment securities.......................... 34,002 33,901 31,570 31,866
Loans, net..................................... 61,410 61,408 52,006 51,861
Accrued interest receivable and other assets... 1,408 1,408 1,137 1,137
Financial liabilities:
Deposit liabilities............................ 91,055 91,060 79,866 79,906
Other borrowed funds........................... 1,613 1,613 1,712 1,712
Accrued interest payable and
other liabilities............................ 591 591 522 522
</TABLE>
-40-
<PAGE>
Summary of Quarterly Results of Operations
First Second Third Fourth
In thousands, except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------ ------- ------- ------- -------
1996
- ----
Interest income ................. $1,806 $1,890 $1,951 $2,008
Net interest income ............. 1,017 1,082 1,137 1,174
Provision for loan losses ....... 13 17 35 60
Other income .................... 95 36 132 137
Other expenses .................. 564 641 671 752
Net income ...................... 370 386 398 344
Net income per share ............ $1.03 $ 1.06 $ 1.09 $ 0.92
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 ............ $0.81 $ 0.84 $ 0.88 $ 0.74
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 stockbrokers 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 21, 1996 there were approximately 720 shareholders of record.
-41-
<PAGE>
<TABLE>
<CAPTION>
1996 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Bid............................... $40.00 $36.50 $33.50 $31.75
Ask............................... $42.00 $37.50 $34.50 $32.75
Stock Dividends per Share......... $ 0.40 None $0.34 None
1995 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Bid............................... $29.00 $29.50 $29.50 $29.50
Ask............................... $30.00 $30.50 $30.50 $30.50
Stock Dividends per Share......... $ 0.27 None None None
Cash Dividends per Share.......... None None $0.20 None
1994 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Bid............................... $26.25 -- -- --
Ask............................... $26.75 -- -- --
Market Price...................... -- $24.00 $24.00 $21.00
Book Value........................ -- $23.47 $22.82 $21.84
Cash Dividends per Share.......... $0.25 None $0.17 None
</TABLE>
<TABLE>
<S> <C>
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) 869-11522 (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 Towanda
Lorraine Corwin, Br. Mgr Jeffrey B. Carr, Asst. Cashier and Br. Mgr.
(717) 623-2297 (717) 265-4711
Trucksville On the Internet
L. Lee Posten, Asst. Cashier and Br. Mgr. Web Site: www.grangebank.com
(717) 696-6958 E-Mail: [email protected]
</TABLE>
-42-
<PAGE>
<TABLE>
<S> <C>
Officers
Robert C. Wheeler John W. Purtell
Chairman of the Board Vice Chairman
Thomas A. McCullough Sally A. Steele
President Secretary of the Corporation
Philip O. Farr Melvin E. Milner
Comptroller Vice President
Directors
Brian R. Ace John W. Purtell
Owner, Laceyville Hardware Store President, S.F. Williams Inc.,
automobile dealership and grocery store
Thomas C. Burns
Retired; Dentist until 1994 R. Levi Tyler
Dairy Farmer
Thomas A. McCullough
President and Chief Executive Officer Sally A. Steele
of the Bank and the Company since 1991 Attorney
W. Kenneth Price Robert C. Wheeler
Co-owner of Ken Mar Home Furnishings Retired; Chief Executive Officer of
The Bank and Company until 1990
</TABLE>
-43-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM OUR DECEMBER 31, 1996 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,566
<INT-BEARING-DEPOSITS> 1,975
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,733
<INVESTMENTS-CARRYING> 22,270
<INVESTMENTS-MARKET> 22,182
<LOANS> 62,033
<ALLOWANCE> 623
<TOTAL-ASSETS> 104,199
<DEPOSITS> 91,055
<SHORT-TERM> 1,246
<LIABILITIES-OTHER> 519
<LONG-TERM> 367
0
0
<COMMON> 3,544
<OTHER-SE> 7,396
<TOTAL-LIABILITIES-AND-EQUITY> 104,199
<INTEREST-LOAN> 5,421
<INTEREST-INVEST> 2,119
<INTEREST-OTHER> 115
<INTEREST-TOTAL> 7,655
<INTEREST-DEPOSIT> 3,198
<INTEREST-EXPENSE> 3,245
<INTEREST-INCOME-NET> 4,410
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,628
<INCOME-PRETAX> 2,158
<INCOME-PRE-EXTRAORDINARY> 2,158
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,498
<EPS-PRIMARY> 4.10
<EPS-DILUTED> 4.10
<YIELD-ACTUAL> 4.87
<LOANS-NON> 177
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 532
<CHARGE-OFFS> 41
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 623
<ALLOWANCE-DOMESTIC> 623
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
