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, 1997
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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
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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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) 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-B 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-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the year ending December 31, 1997 were
$9,475,000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 26 was $18,661,452. As of March 26, 1998, the
Registrant had 363,300 shares of Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders are incorporated herein
by reference in response to Part II hereof, and the definitive Proxy Statement
relating to the 1998 Annual Meeting of Shareholders is incorporated by reference
in response to Part III hereof.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
PART I
Item 1: BUSINESS
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 (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, two
branch offices in Susquehanna County, Pennsylvania, two branch offices in
Luzerne County, Pennsylvania and one branch office in Bradford County,
Pennsylvania. The Bank has three automated teller machines ("ATM"). 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 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, 1997, the Company, on a consolidated basis, had total
assets of $124,417,000, total deposits of $108,789,000, and total shareholder's
equity of $12,638,000.
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
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business at several locations in Wyoming, Susquehanna, Bradford, and Luzerne
Counties, Pennsylvania. The Bank is a member of the Federal Reserve System.
As of December 31, 1997, the Bank had total assets of $124,125,000, total
deposits of $108,794,000 and total shareholders' equity of $12,301,000. 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 nine full service banks, which include drive-in facilities and
bank-by-mail services. The bank's 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.
Life insurance, accident and health insurance and annuities are available
through Grange National Insurance Agency, a wholly owned subsidiary of the Bank.
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 1996 and 1997.
Management does not expect the department to generate net income for the next
several years.
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 69% of the Bank's
loan portfolio at December 31, 1997 and 62% at December 31, 1996. 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, and 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 42% of the Bank's total average interest earning assets. At December 31, 1997
mortgage loans were approximately 41% of total interest earning assets.
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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, Peoples National Bank, headquartered
in Hallstead, 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. 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
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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 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
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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.
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 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
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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" is 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 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
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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 $14,000 in 1998.
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. 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.
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FDICIA also provides that the federal regulators may take certain
discretionary actions with respect to any institution that is undercapitalized,
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.
Interstate Banking
The "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994"
(the "Interstate Act"), among other things, permitted bank holding companies to
acquire banks in any state one year after enactment. Effective June 1, 1997, a
bank may merge with a bank in another state so long as both states have not
opted out of interstate branching between the date of enactment and May 31,
1997. States were permitted to enact laws opting out of interstate branching
before June 1, 1997, subject to certain conditions. States were also permitted
to enact laws permitting interstate merger transactions before June 1, 1997 and
host states were permitted to impose conditions on a branch resulting from an
interstate merger transaction that occurs before June 1, 1997, if the conditions
did
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not discriminate against out-of-state banks, were not preempted by Federal law
and did not apply or require performance after May 31, 1997. Pennsylvania
enacted laws opting in immediately to interstate merger and interstate branching
transactions. Interstate acquisitions and mergers would both be subject, in
general, to certain concentration limits and state entry rules relating to the
age of the bank.
Under the Interstate Act, the responsible federal regulatory agency is
permitted to approve the acquisition of a branch of an insured bank by an
out-of-state bank or bank holding company without the acquisition of the entire
bank or the establishment of a "de novo" branch only if the law of the state in
which the branch is located permits out-of-state banks to acquire a branch of a
bank without acquiring the bank or permits out-of-state banks to establish "de
novo" branches. Pennsylvania passed such a law.
On July 3, 1997, the President signed into law an amendment to the
Interstate Act which provides in general that branches of state-chartered banks
that operate in other states will be covered by the laws of the chartering
state, rather than the host state.
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, 1997, the Company had a total of 77 full and 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
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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
tenants.
Item 3: Legal Proceedings
The nature of the Company's business generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of the management of the Company, there are no
proceedings pending to which the Company is a party or to which its property is
subject, which, if determined adversely to the Company, would be material in
relation to the Company's shareholders' equity or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
None
11
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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, 1997.
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, 1997.
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, 1997.
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,
1997.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
12
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.
Item 11: Executive Compensation
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders filed pursuant to General Instruction
E(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 1998 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.
Item 13: Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement relating to
the 1998 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.
13
<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, 1997,
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, 1997 and 1996
Consolidated Statements of Income -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1997, 1996 and 1995
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.
Exhibits
--------
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).
14
<PAGE>
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).
*10.1 Employee Stock Option Plan (Filed as Exhibit 10.1 to Grange
National Banc Corp.'s Registration Statement on Form SB-2
(Registration No. 33-76838) filed with the Commission on
March 24, 1994).
*10.2 Non-employee Director Stock Option Plan (Filed as Exhibit
10.2 to Grange National Banc Corp.'s Registration Statement
on Form 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).
13.1 Annual Report to Shareholders for the year ended December
31, 1997 (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).
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
15
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified
under applicable items herein)
Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 1997 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, 1997 in not deemed "filed" with the Securities and Exchange
Commission for any purpose.
Certain portions of the Company's 1998 Proxy Statement filed in connection
with its Annual Meeting of Shareholders are incorporated by reference in Part II
of this Report.
Other documents incorporated by reference are listed in the Exhibit Index.
16
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRANGE NATIONAL BANC CORP.
(Registrant)
Date March 25, 1998 /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 3/25/98
- --------------------------------- --------------------------
Robert C. Wheeler (Date) John W. Purtell (Date)
Chairman of the Board Vice-Chairman and Director
Director
/s/ Sally A. Steele 3/25/98 /s/ Brian R. Ace 3/25/98
- --------------------------------- --------------------------
Sally A. Steele (Date) Brian R. Ace (Date)
Secretary and Director Director
/s/ Thomas C. Burns 3/25/98 /s/ R. Levi Tyler 3/25/98
- --------------------------------- --------------------------
Thomas C. Burns (Date) R. Levi Tyler (Date)
Director Director
/s/ W. Kenneth Price 3/25/98 /s/ Edward A. Coach 3/25/98
- --------------------------------- ---------------------------
W. Kenneth Price (Date) Edward A. Coach (Date)
Director Director
/s/ Thomas A. McCullough 3/25/98 /s/ Philip O. Farr 3/25/98
- --------------------------------- --------------------------
Thomas A. McCullough (Date) Philip O. Farr (Date)
President and Director Comptroller
Chief Executive Officer Chief Accounting Officer
Chief Financial Officer
17
<PAGE>
EXHIBIT 13
[GRANGE NATIONAL BANK LETTERHEAD]
To our Shareholders,
As a result of the outstanding dedication and efforts of our Employees
and Board of Directors our company once again achieved record growth and
earnings. Total assets increased by $20,218,000 or 19.4%. This increase occurred
primarily as a result of the growth we experienced at our newest offices in
Towanda and Back Mountain. Despite incurring considerable startup expenses
associated with the establishment of these offices we managed to achieve a
record net profit of $1,608,000, resulting in net basic earnings per share of
$4.42. These outstanding results were reflected in the market value of our stock
which rose 33% from $42.00 to $56.00 per share at year end.
During 1997 we celebrated our 90th year as an independent community
bank. This is quite an achievement considering the rapid consolidation being
experienced in the banking industry. We are proud of our ability to remain
independent but we recognize that to continue doing so we must remain
competitive. In that regard we introduced two new products last year. In 1997 we
received approval from the Comptroller of the Currency to establish an operating
subsidiary for the purpose of engaging in Insurance Agency activities. We also
received an insurance license from the Pennsylvania Insurance Department and
several of our licensed personnel will receive training regarding the sale of
Life Insurance and Annuity products. During 1997 we began offering a "Master
Money Card." This card can be used in a similar fashion as a credit card however
it offers the added convenience of debiting the purchase price from the
customer's checking account without the need to write a check. This product is
quite popular with our customers and should provide an additional source of
income for the bank.
Last year we embarked on a revitialization program for the Business
District in Laceyville. This community, which is the location of our original
bank building, has seen a steady decline in recent years. Following the closure
of a retail appliance store across the street from the bank, our Board of
Directors decided to purchase the building for the purpose of creating new
business opportunities for the town. After renovations, a space was rented for a
family style restaurant which appears to be quite prosperous. Additionally, we
are negotiating with several other potential occupants. Eventually we would like
to operate our insurance agency from this location. The Bank has also played an
active role in obtaining several redevelopment grants from the Commonwealth of
Pennsylvania, and we have plans to provide low interest loans to store owners
through a Community Redevelopment Program through the Federal Home Loan Bank.
We believe that our prospects for continued success are very bright
indeed. Our products and services are competitive, our facilities are attractive
as well as functional, and our personnel are well motivated and anxious to
provide the quality of service that our customers deserve.
<PAGE>
Despite our relatively small size we have managed to compete effectively against
larger institutions by providing superior service, longer banking hours and
significantly lower service charges on deposit accounts. We believe that these
factors will continue to benefit our bank in the aftermath of the mergers which
are in process between Corestates Bank and First Union Bank, and Franklin First
Savings Bank and M&T Bank, as a portion of these customers seek an alternative
institution for their banking needs.
The Board of Directors, Management and Employees want our Shareholders
to know that we are grateful for your continued support and confidence. As you
can see we have been quite busy in the expansion of our bank. We believe that a
continuation of this process is the correct path to take at this time. Please be
assured that we will continue to stay focused on what we believe is a sound
growth strategy, and we are confident that these efforts will result in
continued financial strength and prosperity for our Bank, Shareholders and the
Communities we serve.
Best regards,
GRANGE NATIONAL BANK
Thomas A. McCullough
President and Chief Executive Officer
-2-
<PAGE>
Grange National Banc Corp. and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
SUMMARY OF OPERATIONS:
Gross interest income.......................... $ 8,798 $7,655 $6,599 $5,296 $4,955
Gross interest expense......................... 3,788 3,245 2,858 2,093 2,105
-----------------------------------------------------------------
Net interest income............................ 5,010 4,410 3,741 3,203 2,850
Loan loss provision............................ 190 125 115 87 120
-----------------------------------------------------------------
Net interest income after
loan loss provision......................... $ 4,820 $4,285 $3,626 $3,116 $2,730
=================================================================
Income before income taxes..................... $ 2,292 $ 2,158 $1,697 $1,531 $1,252
Provision for income taxes..................... 684 660 518 485 387
-----------------------------------------------------------------
Net income..................................... $ 1,608 $ 1,498 $1,179 $1,046 $865
=================================================================
PER SHARE DATA:
Net income basic............................... $ 4.42 $ 4.14 $ 3.26 $ 3.39 $ 3.16
Net income diluted............................. $ 4.15 $ 4.03 $ 3.26 $ 3.39 $ 3.16
Cash dividends................................. $ 0.20 $ 0.42 $ 0.33
Stock dividends................................ $ 0.88 $ 0.74 $ 0.27
AVERAGE SHARES OUTSTANDING....................... 363 362 362 309 274
FINANCIAL CONDITION AT
YEAR END:
Total assets................................. $124,417 $104,199 $91,622 $76,305 $69,860
Total loans.................................. 76,995 62,033 52,538 46,733 41,002
Total deposits............................... 108,789 91,055 79,866 67,014 62,832
Stockholders' equity......................... 12,638 10,940 9,522 8,243 5,544
RATIOS:
Based on Average Balances:
Return on assets............................. 1.39% 1.51% 1.40% 1.41% 1.29%
Return on equity............................. 13.70 14.73 13.32 15.08 16.61
Equity to assets............................. 10.15 10.30 10.51 9.36 7.74
Primary capital to assets.................... 10.67 10.63 11.09 9.96 8.31
Internal capital generation rate............. 13.50 14.56 12.43 13.05 14.93
At Year End:
Equity to assets............................. 10.16 10.50 10.39 10.80 7.94
Primary capital to assets.................... 10.77 11.10 10.97 11.43 8.53
Cash dividend payout ratio................... 1.43% 1.20% 6.69% 13.43% 10.10%
BOOK VALUE/SHARE................................. $ 34.79 $ 30.79 $ 26.43 $ 23.85 $ 21.14
</TABLE>
Note: share and per share amounts have been restated to give effect to stock
dividends and stock splits.
-3-
<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, insurance 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. Insurance offerings include life and disability insurance, as
well as annuities. 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 $1,608,000 in 1997 compared
to $1,498,000 in 1996, an increase of 7% for the period. The returns on assets
and equity were 1.39% and 13.70%, respectively, in 1997 compared to 1.51% and
14.73% in 1996. Lower earnings ratios for 1997 result from adding the Towanda
office in late 1996 and the Back Mountain office in 1997. The Company's high
equity to assets ratio of 10.15% at 1997 year end continues to have an adverse
effect on the return on equity ratio. 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 Little Meadows, Towanda and
the Back Mountain. The deposits these offices are attracting continues to 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 $4.42 in 1997 from $4.14 in 1996, for
an increase of 7%. Dividends to stockholders increased from $0.74 (stock
dividend) in 1996, to $0.88 (stock dividend) in 1997, an increase of 16%. The
stock dividends declared by the Company increases the amount of stock in
circulation, while keeping capital in the Bank for future expansion needs. From
the stockholder's standpoint, they do not pay tax on the stock they receive, and
have the option of selling the stock if they do want the cash.
At year end 1997, Grange had total assets of $124,417,000, total
deposits of $108,789,000, and total shareholders' equity of $12,638,000,
compared to $104,199,000 in total assets, $91,055,000 in total deposits, and
$10,940,000 in total shareholders' equity at year end 1996, increases of 19%,
19% and 16%, respectively. At year end the Company had
-4-
<PAGE>
approximately 830 shareholders and seventy-seven full and part-time employees.
During 1997 Grange paid over $1,620,000 in salaries and benefits to its
employees and paid over $750,000 in taxes.
1997 was filled with office openings, new products, new projects,
celebration and honors for the Bank, its employees and customers. During
February the Bank opened its Back Mountain office in Trucksville. The stately
building has greatly increased the Bank's visibility and enhanced the Bank's
image in Luzerne County. Our people, service and products are complemented by
the facility, to make the office highly effective in attracting loans and
deposits.
The Bank forged ahead to offer new products for its customers and
established the Grange National Insurance Agency as a subsidiary of the Bank.
Grange National Insurance Agency now offers life, health and disability
insurance, as well as annuities. Property and casualty are expected to be added
during 1998. Additionally, the Bank now offers the Master Money debit card to
its customers. The card works like an ATM card as well as a check, and is
accepted everywhere merchants accept MasterCard.
Among the proudest accomplishments for the Company is the renovation of
the former "Bluhm's II" building on Main Street, Laceyville. The building now
houses a restaurant, has space available for another store and additional space
for bank use in the future. This renovation has helped spark plans for other
downtown revitalization efforts. This project is most appropriate as the Bank
celebrated its 90th year with an open house at Laceyville. Topping off the year
was the appointment of Chairman of the Board, Robert C. Wheeler to the
Philadelphia Federal Reserve Bank's Community Bank Council. This is a well
deserved honor for Bob and recognizes Bob's enthusiastic and long community
service.
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,
net interest yields have ranged from 4.79% in 1997 to 4.87% in 1996 and 4.85% in
1995.
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,
-5-
<PAGE>
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 continued its strategy of relying on access to the Bank's
line of credit at the Federal Home Loan Bank of Pittsburgh to fund daily cash
needs, enabling the Bank to be more fully invested in higher yielding
investments. Maturing investments and time deposits continue to provide funding
for the longer term, while the line of credit funds short term fluctuations. The
Company's "borrowing capacity" at the Federal Home Loan Bank is $41,926,000,
which had a $357,000 balance at December 31, 1997. The Bank's deposit balance at
FHLB was approximately $2,021,000. Investments maturing or expected to be called
in 1998 include $5,172,000 in bonds classified as held to maturity, and
$3,036,000 in bonds available for sale. In addition, the bank holds an
additional $9,345,000 in bonds, 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 - 12 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
-6-
<PAGE>
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 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,
1997. 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.
-7-
<PAGE>
<TABLE>
<CAPTION>
Repricing
Less than Three to One to After
three twelve five five
(In thousands) months months years years
--------------------------------------------------
<S> <C> <C>
Assets:
Interest bearing deposits ................... $ 2,021 $ 397
Investment securities:
Available for sale ........................ 3,039 3,563 $ 6,377
Held to maturity .......................... 1,530 3,074 15,400 5,202
Loans........................................ 12,578 5,522 16,735 42,982
------------------------------------------------
Total......................................... 16,129 11,635 36,095 54,561
------------------------------------------------
Liabilities:
Time deposits ............................... 15,203 17,653 22,807
Other deposits .............................. 3,845 5,768 11,535 17,303
Borrowed funds .............................. 1,922 357
------------------------------------------------
Total......................................... 20,970 23,421 34,699 17,303
------------------------------------------------
Gap:
By period.................................... ($4,841) ($11,786) $ 1,396 $ 37,258
================================================
By cumulative................................ ($4,841) ($16,627) ($15,231) $ 22,027
================================================
Cumulative Gap as
Percentage of total assets ................ -3.89% -13.36% -12.24% 17.70%
</TABLE>
Interest rates are expected to remain fairly stable for most of 1998, 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 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 inorder to
adjust loan pricing or deposit pricing when conditions change.
LOAN PORTFOLIO
Total loans outstanding at December 31, 1997 increased by $14,963,000
or 24% to $76,996,000 from the December 31, 1996 total of $62,033,000. This
compares with a 18% increase in 1996 and a 12% increase in 1995. The average
loan balance for 1997 was $69,392,000 compared to $56,316,000 for 1996. Primary
growth occurred in one-to-four family mortgages, commercial mortgages and
consumer loans. One-to-four family mortgages increased
-8-
<PAGE>
by $11,031,000 or 37% to $41,239,000 at year end 1997. Commercial mortgages
increased by $2,390,000 or 33% to $9,598,000 and consumer loans increased by
$1,209,000 or 14% to $9,979,000 at year end. Most of the loan activity has come
from the Towanda, Edwardsville, Back Mountain and Bowman's Creek offices. These
offices are generally competing with very large banks and is an indication for
the consumer and businessman's need for the service of a community bank. The
average interest rate on total loans decreased slightly from 9.69% for 1996 to
9.39% for 1997.
Major classifications of loans at December 31, 1997 and 1996 are as
follows:
(In thousands) 1997 1996
---- ----
Real estate mortgages:
Agricultural ...................................... $ 1,441 $ 961
Residential, 1 - 4 family ......................... 41,239 30,209
Residential, multi-family ......................... 687 603
Nonfarm, nonresidential properties ................ 9,598 7,208
------- -------
Total real estate mortgages .................. 52,965 38,981
Agricultural loans .................................. 285 388
Commercial loans..................................... 12,702 12,726
Municipal loans...................................... 1,789 1,803
Consumer loans....................................... 9,979 8,770
------- -------
Total................................................ 77,720 62,668
Unearned income ..................................... 725 635
------- -------
Total ............................................... $76,995 $62,033
======= =======
-9-
<PAGE>
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Within One - After
(In thousands) One Year Five Years Five Years Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgages $ 961 $ 7,836 $44,168 $52,965
Agricultural loans .. 136 135 14 285
Commercial loans .... 3,342 3,993 5,367 12,702
Municipal loans ..... 1,171 422 197 1,790
Consumer loans ...... 567 6,630 2,782 9,979
-----------------------------------------------------
Total ............... $ 6,177 $19,016 $52,528 $77,721
=====================================================
Loans at fixed
interest rates .... $ 2,431 $14,693 $42,691 $59,815
Loans at variable
interest rates .... 3,746 4,323 9,837 17,906
-----------------------------------------------------
Total ............... $ 6,177 $19,016 $52,528 $77,721
=====================================================
</TABLE>
Non-accrual loans at December 31, 1997 were $136,000 and $247,00 in
1996. 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 $13,000 in 1997 and $24,000
in 1996.
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 1997 were $46,000 compared to $34,000 during
1996, representing an increase of 35% for the period. Average loans increased
from $56,316,000 for 1996 to $69,392,000 for 1997. At December 31 the balance in
the allowance for loan losses increased from $623,000 to $767,000, for 1996 and
1997 respectively, and the ratio of loan loss allowance to loans was 1.00%.
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 $50,000 in connection with a commercial loan. Provisions for loan losses
have increased in the last two years due to
-10-
<PAGE>
management's efforts to maintain the reserve at a level adequate for the
increasing size of the loan portfolio and to cover other potential losses which
have been identified by management and the Board of Directors.
The following sets forth loans past due 90 days or more on which
interest has continued to be accrued, at December 31:
(In thousands) 1997 1996
---- ----
Real estate mortgages............................ $311 $67
Demand........................................... 0 11
Installment...................................... 1 0
-----------------
TOTAL............................................ $312 $78
=================
This table summarizes the Company's loan loss experience for the years
ended December 31:
(In thousands) 1997 1996
---- ----
Balance at beginning of period....................... $ 623 $ 532
-----------------
Charge-offs:
Commercial, consumer and agricultural.............. 49 14
Real estate mortgages.............................. 0 18
Installment........................................ 2 9
-----------------
TOTAL................................................ 51 41
-----------------
Recoveries:
Commercial, consumer and agricultural.............. 3 6
Real estate mortgages.............................. 0 0
Installment........................................ 2 1
-----------------
TOTAL................................................ 5 7
-----------------
Net charge-offs...................................... 46 34
-----------------
Provision charged to operations...................... 190 125
-----------------
Balance at end of period............................. $ 767 $ 623
=================
Average loans outstanding............................ $69,392 $56,316
Loans outstanding, December 31....................... $76,995 $62,033
Loan reserve ratios:
Net loan charge-offs - average loans............... 0.07% 0.06%
Reserve - loans, December 31....................... 0.99% 1.00%
INVESTMENT PORTFOLIO
The Company's investment portfolio increased by $4,205,000 or 12%
during the year ended December 31, 1997 to $38,208,000. The increase was due to
deposit growth. If not for
-11-
<PAGE>
the continued strong loan demand, investment growth would have been greater.
Available for sale securities increased by $1,269,000 or 11% to $13,002,000 and
Held to maturity securities increased by $2,936,000, or 13% to $25,206,000, from
December 31, 1996 to December 31, 1997.
Management has started to purchase longer term bonds in its
available-for-sale portfolio in order to achieve higher returns. Should the
value of these bonds decline significantly due to rising interest rates,
management will consider selling the bonds in order to minimize any loss.
Management considers the risk of this strategy to be manageable. 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, 1997, reflect an increase in the unrealized gain from December 31,
1996 of $81,000.
The carrying value of investment securities both available for sale,
and held to maturity at December 31, are summarized as follows:
(In thousands) 1997 1996
---- ----
Available for sale:
U.S. Treasury securities ................ $ 6,602 $11,313
U.S. government agencies and corporations 3,709
State and Municipal Securities .......... 2,189
Other securities ........................ 502 420
------- -------
Total ................................ $13,002 $11,733
======= =======
Held to maturity:
U.S. Treasury securities ................
U.S. government agencies and corporations $18,905 $18,142
State and municipal securities .......... 4,181 3,740
Other securities ........................ 2,120 388
------- -------
Total ....................... $25,206 $22,270
======= =======
The following table sets forth the maturities of investment and debt
securities at December 31, 1997 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of such securities:
-12-
<PAGE>
<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> <C>
Available for sale:
U.S. Treasury
securities ...... $3,036 5.72% $ 3,509 6.18%
U.S. government
agencies and
corporations ... $3,669 6.50%
State and municipal
securities ..... 2,167 7.12%
Other securities .. $502
------ ------- ------ ----
Total ............. $3,036 5.72% $ 3,509 6.18% $5,836 6.73% $502
====== ======= ====== ====
Held to maturity:
U.S. government
agencies and
corporations .... $2,884 5.79% $10,985 6.48% $4,463 6.73% $573 7.66%
State and municipal
securities ...... 1,195 6.72% 2,743 6.44% 243 7.47%
Other securities .. 87 6.39% 1,537 6.59% 496 6.55%
------ ------- ------ ----
Total ............. $4,166 6.07% $15,265 6.48% $5,202 6.75% $573 7.66%
====== ======= ====== ====
</TABLE>
DEPOSITS
Deposits at December 31, 1997 were $108,789,000, an increase of
$17,734,000 or 19% from the December 31, 1996 balance of $91,055,000.
Non-interest bearing deposits increased $2,469,000 or 20%, to $14,676,000 and
interest bearing deposits increased $15,264,000 or 19% to $94,113,000. The
percentage of non-interest bearing deposits to average total deposits for 1997
remained at 13% as they were for 1996. 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 $7,550,000 during 1997 to
$50,741,000 from $43,191,000 during 1996. Their proportion of total average
deposits remained at 58%. Average deposits in savings and money market accounts
increased by $2,283,000 from 1996 to 1997, and average deposits in NOW and
Super-NOW accounts increased by $3,215,000 during the same period. Management
anticipates continued strong growth in deposits from the office in Towanda and
the Back Mountain office at Trucksville.
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:
-13-
<PAGE>
1997 1996
Average Average Average Average
(In thousands) Balance Rate Balance Rate
------- ------- ------- -------
Demand deposits:
Noninterest bearing..................... $ 14,786 $11,571
Interest bearing........................ 10,905 2.17% 8,661 2.00%
Savings and money market deposits......... 26,191 2.74% 23,908 2.74%
Time deposits............................. 50,741 5.52% 43,191 5.49%
-------- -------
TOTAL..................................... $102,623 $87,331
======== =======
Maturities of certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1997 are as follows:
Certificates Other
of Time
(In thousands) Deposits Deposits Total
------------ -------- -----
3 months or less ............. $2,929 $2,929
3 to 6 months ................ 1,046 1,046
6 to 12 months ............... 2,160 2,160
Over 12 months ............... 2,900 2,900
No set maturity, state deposit $200 200
--------------------------------
TOTAL ......... $9,035 $200 $9,235
================================
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
$1,698,000 or 16% from $10,940,000 at December 31, 1996 to $12,638,000 at
December 31, 1997. This was approximately the same increase as the $1,418,000 or
15% increase from December 1995 to December 1996. The average equity to assets
ratio was 10.15%, 10.30% and 10.51% for the years 1997, 1996 and 1995,
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 past several 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.
-14-
<PAGE>
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 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) 1997 1996
Tier I capital:
Shareholders' equity .............. $12,414 $10,780
------- -------
Tier II capital:
Loan loss reserve ................. 767 623
------- -------
Total Qualifying Capital ............ $13,181 $11,403
======= =======
Risk-adjusted assets (including
off-balance sheet items) .......... $76,937 $61,371
Tier I Capital Ratio (4.00% required) 16.14% 17.57%
Total Capital Ratio (8.00% required) 17.13% 18.58%
Tier I Leverage Ratio ............... 10.71% 10.89%
-15-
<PAGE>
RESULTS OF OPERATIONS
Net income for 1997 totaled $1,608,000 ($4.42 basic per share, based on
363,099 weighted average common shares) as compared to 1996's net income of
$1,498,000 ($4.14 per share based on 361,907 weighted average common shares),
and 1995's net income of $1,179,000 ($3.26 per share based on 361,798 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 1997 declined to 4.79% from 4.87% in 1996. While the average rate on
interest earning assets fell from 8.35% to 8.29%, the average rate on the total
sources to fund the earning assets increased from 3.48% to 3.50%. The Bank's
interest rate spread declined primarily due to lower rates on new loans and many
existing being refinanced by customers. Average rates on loans declined from
9.69% in 1996 to 9.39% in 1997, while average rates on investments increased
from 6.35% in 1996 to 6.38% in 1997. Net interest income for 1997 increased by
$635,000 (on a tax equivalent basis) or 15% as compared to $716,000 or 19% for
1996 vs. 1995. Overall, volume had a positive impact of $820,000 and rate had a
negative impact of $185,000 on the change in interest income.
Loans at year end increased by $14,963,000 or 24% for 1997 over 1996,
compared to an increase of $9,495,000 or 18% for 1996 over 1995, and deposits at
year end increased by $17,733,000 or 19% for 1997 over 1996, compared to
$11,189,000 or 14% for 1996 over 1995. Investment securities, at year end,
increased $4,205,000 or 12% for 1997 over 1996 compared to $2,336,000 or 7% for
1996 over 1995. Income on loans increased by $1,060,000 (on a tax equivalent
basis) or 19% for 1997 compared to 1996, and interest on investment securities
increased $56,000 (on a tax equivalent basis) or 3%. Management began purchasing
longer maturity (i.e. 7 - 10 years) bonds in 1997 in order to improve yields.
These longer bonds are being designated as available for sale, in order to have
the option of selling the bonds should their values decline significantly due to
interest rate changes.
The average rates on interest earning assets decreased during 1997,
while the average rates paid on interest bearing liabilities remained steady.
The loan to deposit ratio at 1997 year end was 70% compared to 67% at 1996 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. In addition,
the Bank recently hired an employee with a strong commercial loan background and
strong ties in Luzerne County to help generate additional business in that
marketplace.
Salaries and employee benefits increased by $255,000 or 19% in 1997 as
compared to 1996, primarily because of hiring of additional employees for the
Towanda and Back Mountain offices, annual salary increases, and changes in the
Bank's overall compensation programs which reward employees based on
performance.
-16-
<PAGE>
Occupancy and furniture and equipment expense increased by $179,000 or
39% in 1997 as compared to 1996. The large increase in these expenses reflect a
full year's costs at Towanda, as opposed to a partial year in 1996, and the cost
of the Back Mountain office. The effect of adding two branch offices so quickly
was reflected in the rate of increase in occupancy and furniture and equipment
costs.
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 $14,000
in 1998. The Federal Deposit Insurance Corporation (FDIC) premium on deposit
insurance remains at zero for 1998.
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.
YEAR 2000 IMPACT
Management is currently working to resolve the potential impact of
"Year 2000" issues on the processing of date-sensitive information by its
computer systems. The Year 2000 issues relate to the ability of computer systems
to be able to distinguish date data between the twentieth and twenty-first
centuries. Management anticipates that the Bank's computer systems will be
compliant by the end of 1998 and is currently testing for such compliance. The
Bank could also be adversely affected if its customers rely on data processing
systems that are not Year 200 compliant prior to the end of 1999. The Bank,
therefore, is taking a proactive role to advise its customers of the possible
problems with their systems regarding Year 2000 issues.
-17-
<PAGE>
The costs that have been incurred by the Bank in addressing its
potential Year 2000 problems have not had a material adverse impact on the
Bank's financial position, results of operations or cash flows. However, the
inability of the Bank or its customers to resolve Year 2000 issues in a timely
manner could result in a material financial risk. Management believes that the
bank is devoting appropriate resources to resolve its Year 2000 issues in a
timely manner and does not currently expect that doing so will have a material
adverse impact on the Bank's financial position, results of operations or cash
flows in the future.
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 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.
-18-
<PAGE>
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.
OTHER ACTIVITIES
The Company purchased an renovated the former "Bluhm's II" and R.B.
Learn buildings on Main Street in Laceyville, during 1996 and 1997. These
buildings are located a short distance from the Bank's existing office in
Laceyville. Management plans to utilize the space as a future data processing
center and as a location for retail insurance sales. The Bank is also leasing
space to 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 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.
-19-
<PAGE>
Grange National Banc Corp and Subsidiary
Average Balances, Interest Income/Expense and Rates
<TABLE>
<CAPTION>
Years Ended December 31, 1997 December 31, 1996
(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 ..................... $ 44,474 $3,873 8.71% $37,097 $3,560 9.60%
Installment ................... 4,816 560 11.63 4,930 501 10.16
Commercial .................... 20,102 2,082 10.36 14,289 1,394 9.76
---------------------- ---------------------
Total loans ................. 69,392 6,515 9.39 56,316 5,455 9.69
---------------------- ---------------------
Securities available for sale:
U.S. Treasury securities ...... 9,660 584 6.05 11,341 664 5.85
U.S. government agencies ...... 1,338 87 6.50
Municipal bonds ............... 670 49 7.31
Other securities .............. 471 28 5.94 392 24 6.12
---------------------- ---------------------
Total available for sale .... 12,139 748 6.16 11,733 688 5.86
---------------------- ---------------------
Securities held to maturity:
U.S. government agencies ...... 18,498 1,184 6.40 18,492 1,217 6.58
Municipal bonds ............... 4,039 278 6.88 4,124 278 6.74
Other securities .............. 920 60 6.52 502 31 6.18
---------------------- ---------------------
Total held to maturity ...... 23,457 1,522 6.49 23,118 1,526 6.60
---------------------- ---------------------
Total investment securities 35,596 2,270 6.38 34,851 2,214 6.35
---------------------- ---------------------
Deposits in banks .............. 3,155 177 5.61 2,092 116 5.54
---------------------- ---------------------
TOTAL ..................... $108,143 $8,962 8.29 $93,259 $7,785 8.35
-------- -------
---------------------- ---------------------
INTEREST BEARING
LIABILITIES:
Deposits:
NOW and super-NOW ............... $ 10,905 $ 237 2.17 $ 8,661 $ 173 2.00
Savings and money market ........ 26,191 717 2.74 23,908 655 2.74
Certificates of deposit ......... 50,541 2,788 5.52 42,991 2,358 5.48
Other time deposits ............. 200 11 5.50 200 12 6.00
---------------------- --------------------
Total deposits ................ 87,837 3,753 4.27 75,760 3,198 4.22
Other borrowed funds ............. 844 34 4.03 922 47 5.10
---------------------- --------------------
TOTAL ....................... 88,681 3,787 4.27 76,682 3,245 4.23
Non-interest bearing funds, net (2) 19,462 16,577
---------------------- --------------------
TOTAL SOURCES TO FUND
EARNING ASSETS .................... $108,143 3,787 3.50 $93,259 3,245 3.48
-------- -------
---------------------- --------------------
NET INTEREST/YIELD ................ $5,175 4.79% $4,540 4.87%
====== ======
</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%.
-20-
<PAGE>
Grange National Banc Corp. And Subsidiary
Net Interest Income
Changes Due to Volume and Rate
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
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 ....................... $1,060 $1,234 ($174) $ 529 $ 622 ($93)
Investment securities ....... 56 46 10 748 688 60
Deposits in other banks ..... 61 59 2 (174) (162) (12)
------------------------------------------------------------------
TOTAL .................. 1,177 1,339 (162) 1,103 1,145 (45)
------------------------------------------------------------------
INTEREST EXPENSE:
Now/Super-Now deposits ...... 64 48 16 18 16 2
Savings/Money market deposits 62 62 0 46 69 (23)
Time deposits ............... 429 413 16 314 367 (53)
Other Borrowings ............ (13) (4) (9) 9 8 1
------------------------------------------------------------------
TOTAL ................... 542 519 23 387 460 (73)
------------------------------------------------------------------
NET INTEREST INCOME ........... $ 635 $ 820 ($185) $ 716 $ 688 $28
==================================================================
</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%.
-21-
<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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Daniel Kenia, P.C.
Tunkhannock, Pennsylvania
January 22, 1998
-22-
<PAGE>
<TABLE>
<CAPTION>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
---- ----
<S> <C> <C>
ASSETS:
Cash and due from banks ............................................... $ 2,514,202 $ 2,566,232
Interest bearing deposits ............................................. 2,417,987 1,974,642
Investment securities (Note 2):
Available for sale .................................................. 13,001,723 11,732,690
--------------------------------
Held to maturity, (market value
1997, $25,316,000; 1996, $22,182,000) ............................. 25,205,836 22,269,823
--------------------------------
Loans (Note 3) ........................................................ 77,720,098 62,667,685
Less: unearned interest income ....................................... 724,670 634,639
Less: allowance for loan losses ...................................... 767,475 622,821
--------------------------------
Loans, net ..................................................... 76,227,953 61,410,225
Bank premises and equipment, net (Note 4) ............................. 3,028,098 2,680,580
Accrued interest and other assets ..................................... 1,730,580 1,407,712
Premium on deposits ................................................... 140,460 157,485
Other real estate ..................................................... 149,795
--------------------------------
TOTAL ASSETS ............................................................ $ 124,416,634 $ 104,199,389
================================
LIABILITIES:
Domestic Deposits:
Non-interest bearing deposits ....................................... $ 14,675,828 $ 12,206,738
Interest bearing deposits ........................................... 94,112,851 78,848,660
--------------------------------
Total deposits .................................................... 108,788,679 91,055,398
Other borrowed funds (Note 5) ......................................... 2,279,294 1,613,160
Accrued interest and other liabilities ................................ 710,857 590,973
--------------------------------
Total liabilities ................................................. 111,778,830 93,259,531
--------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 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, 363,305 and 355,291
shares issued in 1997 and 1996, respectively ........................ 1,816,525 1,776,455
Additional paid-in capital ............................................ 2,052,158 1,767,949
Retained earnings ..................................................... 8,685,313 7,392,890
--------------------------------
Total ............................................................. 12,553,996 10,937,294
Unrealized holding gains on investment securities
(net of deferred income taxes) (Note 6) ............................... 84,000 3,000
Treasury stock, at cost (Note 1) ...................................... (192) (436)
--------------------------------
Total stockholders' equity ........................................ 12,637,804 10,939,858
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 124,416,634 $ 104,199,389
================================
</TABLE>
See Notes to Consolidated Financial Statements
-23-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans ............. $ 6,462,812 $ 5,421,051 $ 4,897,858
Interest on investment securities:
U.S. Treasury securities ............. 583,566 664,440 432,412
Obligations of other U.S. government
agencies and corporations .......... 1,271,288 1,216,544 783,746
Obligations of states and political
subdivisions (tax-exempt) .......... 216,027 183,183 106,395
Other securities ..................... 87,259 54,442 89,204
Interest on deposits in banks ............ 177,221 115,601 289,497
--------------------------------------------
Total interest income ............ 8,798,173 7,655,261 6,599,112
--------------------------------------------
Interest Expense:
Interest on deposits ................... 3,753,657 3,198,198 2,818,839
Interest on borrowed funds ............. 34,145 47,102 39,500
--------------------------------------------
Total interest expense ........... 3,787,802 3,245,300 2,858,339
--------------------------------------------
Net interest income .............. 5,010,371 4,409,961 3,740,773
--------------------------------------------
Provision for loan losses (Note 3) ... 190,000 125,000 115,000
--------------------------------------------
Net interest income after
provision for loan losses ........ 4,820,371 4,284,961 3,625,773
Other Income (Note 7) .................... 676,731 500,271 393,227
Other Expenses (Note 8) .................. (3,205,301) (2,627,512 (2,321,861)
--------------------------------------------
Income before taxes ...................... 2,291,801 2,157,720 1,697,139
Provision for income taxes (Notes 1 and 6) 684,000 660,000 518,000
--------------------------------------------
Net income ............................... $1,607,801 $1,497,720 $ 1,179,139
============================================
Earnings per share (Notes 1, 11 and 12):
Basic .................................... $ 4.42 $ 4.14 $ 3.26
============================================
Diluted .................................. $ 4.15 $ 4.03 $ 3.26
============================================
</TABLE>
See Notes to Consolidated Financial Statements
-24-
<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> <C> <C>
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
Net income .................. 1,607,801 1,607,801
Stock dividend $0.74 per
share, plus cash in lieu of
fractional shares ......... 33,210 259,074 (315,378) (23,094)
Issuance of common stock .... 6,860 25,135 31,995
Sale of stock from treasury . 244 244
Unrealized holding gains
on investment securities .. 124,000 124,000
Deferred tax liability ...... (43,000) (43,000)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 .. ($192) $1,816,525 $2,052,158 $8,685,313 $84,000 $12,637,804
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
-25-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ............................................................ $1,607,801 $ 1,497,720 $1,179,139
Adjustments to reconcile net income to act cash
provided by operating activities:
Depreciation and amortization ..................................... 284,748 203,166 176,120
Provision for loan losses ......................................... 190,000 125,000 115,000
Increase (decrease) in deferred income taxes ...................... 58,000 (68,000) 58,000
Changes in operating assets and liabilities:
Decrease in accrued interest income and other assets ................ (380,868) (271,032) (493,866)
Increase (decrease) in accrued interest expense and other liabilities 119,884 137,214 187,220
---------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................................................ 1,879,565 1,624,068 1,221,613
----------------------------------------
INVESTING ACTIVITIES:
Purchase bank premises and equipment ................................ (615,241) (634,607) (211,383)
Decrease (increase) in other real estate ............................ (149,795) 69,618 117,453
Purchase of securities "available for sale" ......................... (3,723,722) (5,114,997) (6,346,937)
Increase in mortgage-backed securities "available for sale .......... (3,731,563) 498,704
Sales of securities "available for sale ............................. 3,755,046
Redemptions of securities "available for sale ....................... 2,512,206 3,831,386 4,127,854
Purchase of securities "held to maturity" ........................... (9,703,703) (7,161,007) (14,424,317)
Redemptions of securities "held to maturity" ........................ 7,747,916 6,825,442 4,574,373
Increase in mortgage-backed securities "held to maturity" ........... (980,226) (778,779) 107,138
Increase in loans to customers ...................................... (15,007,728) (9,529,728) (5,866,565)
Increase in deposits in banks ....................................... (443,345) 739,126 2,788,117
Premium paid on core deposits ....................................... (170,254)
----------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES ................................................ (20,340,155) (11,923,800) (14,635,563)
----------------------------------------
FINANCING ACTIVITIES:
Increase in deposits before interest credited ....................... 14,567,265 8,749,797 10,438,999
Increase (decrease) in borrowed funds ............................... 666,134 (99,182) 940,303
Interest credited to deposits ....................................... 3,166,016 2,440,002 2,412,863
Cash dividends paid ................................................. (23,094) (18,179) (78,926)
Decrease in treasury stock .......................................... 244 50 50
Issuance of common stock ............................................ 31,995 7,992
----------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................................................ 18,408,560 11,072,488 13,721,281
----------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................................... (52,030) 772,756 307,331
CASH AND CASH EQUIVALENTS, January 1 .................................. 2,566,232 1,793,476 1,486,145
----------------------------------------
CASH AND CASH EQUIVALENTS, December 31 ................................ $ 2,514,202 $ 2,566,232 $1,793,476
========================================
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................................................ $ 993,280 $ 761,079 $ 566,855
Income taxes ........................................................ $ 765,553 $ 639,000 $ 598,000
Non-cash investing activities:
Unrealized gains (losses) on securities ............................. $ 84,000 $ (94,000) 258,000
Stock dividend ...................................................... 292,284 241,198 $83,610
</TABLE>
See Notes to Consolidated Financial Statements
-26-
<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:
The Company follows 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"). 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. Upon purchase of securities
the Company specifically designates which securities are classified as
"available for sale" and "held to maturity".
-27-
<PAGE>
Amortization of premiums and accretion of discounts 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.
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 a method that approximates the simple
interest 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.
The bank has adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," in its
evaluation of the loan portfolio. SFAS 114 requires that certain impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's original effective interest rate. As a practical expedient,
impairment may be measured based on the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance.
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, 1997 was within the approved 50% limit and no regulations have been
violated.
-28-
<PAGE>
Intangible Assets:
Intangible assets are included in the other assets and are being
amortized over a period of fifteen years using the straight line method.
Amortization for 1997 and 1996 was $17,025 and $12,769, respectively.
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 eight and twenty shares
of common stock in 1997 and 1996, respectively.
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 $12,982 and
$4,498 as matching contribution to employee deferrals during 1997 and 1996. The
Company also made an Employer Optional Contribution to the Plan of $71,139 and
$56,147 during 1997 and 1996, which represents 6% of gross salaries for each
year. During prior years, the Bank had a SEP-IRA pension plan. Contributions to
the SEP-IRA was $48,099 in 1995 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
-29-
<PAGE>
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:
Effective for 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
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, 1997 was approximately $20,000.
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities:
The Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which the Company has adopted for 1997. The statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provided
consistent standards for distinguishing transfers of financial assets that are
sales from transfers from secured borrowings.
-30-
<PAGE>
This Statement provides implementation guidance for assessing isolation
of transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitization, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities.
The adoption of the SFAS No. 125 standards did not have a material
effect on operating results for 1997.
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
1997 1996
Financial instruments whose contract ---- ----
amounts represent credit risk:
Commitments to extend credit....... $2,676 $2,755
Standby letters of credit......... $ 49 $ 143
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 assessment of the counterparty.
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.
-31-
<PAGE>
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, 1997 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 16.14% and 17.13% respectively. The Bank's leverage ratio at
December 31, 1997 was 10.71%. 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, 1997, the Bank had
retained earnings of $8,433,000 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 nonaffiliates. The maximum amount the
Bank can loan to the Company is limited to 20% of its capital and surplus. Such
extensions of credit, with limited exceptions, must be fully collateralized.
-32-
<PAGE>
Line of Credit:
At December 31, 1997 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $41,569,000 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>
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury notes ....................... $ 6,545 $ 64 $ (7) $ 6,602
U.S. government agencies and corporations 3,669 40 3,709
Municipal bonds ............................ 2,167 23 (1) 2,189
Other securities .......................... 493 9 502
-----------------------------------------------------
Total available for sale ............... $12,874 $136 $ (8) $13,002
=====================================================
Held to maturity:
U.S. government agencies and corporations $18,905 $109 $ (47) $18,967
Municipal bonds ......................... 4,181 23 (6) 4,198
Other securities .......................... 2,120 31 2,151
-----------------------------------------------------
Total held to maturity ................. $25,206 $163 $ (53) $25,316
=====================================================
1996
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:
U.S. government agencies and corporations $18,142 $ 41 $(135) $18,048
Municipal bonds ......................... 3,740 20 (14) 3,746
Other securities .......................... 388 388
-----------------------------------------------------
Total held to maturity ................. $22,270 $261 $(149) $22,182
=====================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997 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.
-33-
<PAGE>
<TABLE>
<CAPTION>
Available For Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing within one year..................... $ 3,036 $ 3,039 $ 4,166 $ 4,164
Maturing in one to five years................ 3,509 3,563 15,265 15,333
Maturing in five to ten years................ 5,836 5,898 5,202 5,238
Maturing after ten years..................... 573 581
No set maturity.............................. 493 502
-------------------------------------------------------------
TOTAL................................... $12,874 $13,002 $25,206 $25,316
=============================================================
</TABLE>
3. Loans and Allowance for Loan Losses:
Major classifications of loans at December 31 are as follows:
(In thousands) 1997 1996
---- ----
Real estate mortgages:
Agricultural ..................... $ 1,441 $ 961
Residential, 1 - 4 family ........ 41,239 30,209
Residential, multi-family ........ 687 603
Nonfarm, nonresidential properties 9,598 7,208
----------------------
Total real estate mortgages . 52,965 38,981
Agricultural loans ................. 285 388
Commercial loans ................... 12,702 12,726
Municipal loans .................... 1,789 1,803
Consumer loans ..................... 9,955 8,751
Overdrafts ......................... 24 19
----------------------
Gross loans ................... 77,720 62,668
Less: Unearned income ............. 725 635
Allowance for loan losses ... 767 623
-------
Loans, net ............. $76,628 $61,410
======================
Nonaccrual loans at December 31, 1997 and 1996, were $136,000 and
$247,000, respectively.
The Company adopted SFAS No. 114 effective January 1, 1995. The
adoption of SFAS No. 114 did not have a material effect on the financial
condition or operating results of the Company. At December 31, 1997 and 1996 the
recorded investment in loans that were considered impaired under SFAS No. 114
was $290,000 and $284,000, respectively. No transfers to loan loss were made in
1997 or 1996 for any impaired loans. The average recorded investment in impaired
loans during the years ended December 31, 1997 and 1996 was approximately
$287,000 and $201,000 respectively. Interest payments received on impaired loans
are applied to principal; otherwise, these receipts are recorded as interest
income. For the years ended December 31, 1997 and 1996, the Company recognized
interest income on impaired loans
-34-
<PAGE>
of $18,000 and $22,000. The interest that would have been earned in accordance
with the original terms is approximately $29,000 and $33,000 respectively.
Changes in the allowance for loan losses for the years ended December
31 were as follows:
(In thousands) 1997 1996 1995
---- ---- ----
Balance, January 1 ............ $623 $532 $479
Provision charged to operations 190 125 115
Loans charged off ............. (51) (41) (79)
Recoveries .................... 5 7 17
--------------------------------
Balance, December 31 .......... $767 $623 $532
================================
4. Premises and Equipment:
Premises and equipment are summarized as follows:
Accumulated
Gross Book Amortization Net Book
December 31, 1997: Value & Depreciation Value
---------- -------------- --------
Land .................. $ 440,082 $ 440,082
Buildings ............. 2,515,143 $ 688,675 1,826,468
Furniture and equipment 2,021,578 1,260,030 761,548
---------- ---------- ----------
Total ............ $4,976,803 $1,948,705 $3,028,098
========== ========== ==========
December 31, 1996:
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
========== ========== ==========
Depreciation and amortization were applied as follows:
1997 1996 1995
----- ----- ----
Premises.................................... $ 80,364 $ 66,297 $ 64,265
Furniture and equipment..................... 187,359 124,100 111,855
--------------------------------
Total................................. $267,723 $190,397 $176,120
======================== ===========
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations, including related goodwill, when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
adoption of SFAS No.
-35-
<PAGE>
121 in the first quarter of 1996 did not have a material effect on the financial
condition or operating results of the Company.
The Bank has non-cancelable operating leases on the building for its
Edwardsville and Back Mountain Offices. The aforementioned leases have been
treated as operating leases in the accompanying financial statements. Rental
expense for 1997 was $108,000. Minimum future obligations under noncancelable
operating leases in effect at December 31, 1997 are as follows:
1998 $ 107,200
1999 107,200
2000 107,200
2001 83,950
2002 and thereafter 708,750
----------
Total $1,114,300
==========
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 $750,000 in
1997 and $335,388 in 1996.
The Bank has a line of credit with the Federal Home Loan Bank for
$3,080,000 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 zero at
December 31, 1997.
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 $357,041 in 1997 and $366,858 in 1996. The FHLB loans
mature as follows:
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$12,374 $12,878 $13,159 $12,118 $306,512
6. Income Taxes:
The components of the federal income tax provisions are as follows:
1997 1996 1995
---- ---- ----
Currently payable......................... $749,000 $701,000 $547,000
Deferred portion.......................... (65,000) (41,000) (29,000)
------------------------------
Total................................ $684,000 $660,000 $518,000
==============================
-36-
<PAGE>
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>
1997 1996
---- ----
<S> <C> <C>
Accrued income ............................................. $ 30,000
Depreciation ............................................... $ 85,000 78,000
Accretion of discounts on securities ....................... 40,000 34,000
Unrealized gains on available for sale investment securities 44,000 1,000
Allowance for loan losses .................................. (210,000) (162,000)
------------------------
Net deferred tax (asset) .............................. ($41,000) ($19,000)
========================
</TABLE>
A reconciliation of income tax expense at the federal statutory rate
and the effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate.. $779,000 34.00% $733,000 34.00% $577,000 34.00%
Tax-exempt income
from investments............. (64,000) (2.79) (53,000) (2.50) (35,000) (2.10)
Tax-exempt income
from loans................... (30,000) (1.31) (18,000) (0.80) (8,000) (0.50)
Other.......................... (1,000) (0.05) (2,000) (0.10) (16,000) (0.90)
---------------------------------- -------------------------------
Total..................... $684,000 29.85% $660,000 30.60% $518,000 30.50%
================================== ===============================
</TABLE>
7. Other Income:
Other income for the years ended December 31, consists of the
following:
1997 1996 1995
---- ---- ----
Service charges and fees .......... $163,813 $141,357 $128,950
Service charges on deposit accounts 366,050 292,382 224,805
Gain (loss) on sale of securities . 23,118 (3,952)
Gain (loss) on sale of real estate (21,488) (18,683)
Other ............................. 123,750 88,020 62,107
---------------------------------------
Total other income ........... $676,731 $500,271 $393,227
=======================================
-37-
<PAGE>
8. Other Expenses:
Other expenses for the years ended December 31, consists of the
following:
1997 1996 1995
---- ---- ----
Salaries and employee benefits . $1,622,546 $1,367,510 $1,096,961
Occupancy expenses ............. 363,422 241,019 216,929
Furniture and equipment expenses 275,013 241,886 242,555
Other operating expenses ....... 944,320 777,097 765,416
----------------------------------------
Total other expenses ...... $3,205,301 $2,627,512 $2,321,861
========================================
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:
1997 1996 1995
---- ---- ----
Balance, January 1 . $ 997,070 $1,107,115 $1,024,446
Additions .......... 427,289 252,281 301,542
Amounts collected .. (154,640) (362,326) (218,873)
Amounts charged off
-------------------------------------------
Balance, December 31 $1,269,719 $ 997,070 $1,107,115
===========================================
10. Grange National Banc Corp. (Parent Company Only) Financial Statements:
BALANCE SHEETS, DECEMBER 31 1997 1996
---- ----
ASSETS
Cash .......................... $ 4,660 $ 31
Investment in bank subsidiary . 12,301,438 10,706,383
Securities "available for sale" 34,400 8,500
Land and buildings (Note 1) ... 499,363 306,541
------------------------------
TOTAL ASSETS ......... $12,839,861 $11,021,455
==============================
-38-
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Notes payable, bank subsidiary $198,457 $ 81,597
Other liabilities .............................. 3,600
------------------------------
Total liabilities ....................... $202,057 $ 81,597
------------------------------
STOCKHOLDERS' EQUITY
Preferred stock authorized 1,000,000 shares
of $5 par: None issued
Common stock authorized 5,000,000 shares
of $5 par; 363,305 and 355,291 shares issued
and outstanding in 1997 and 1996, respectively 1,816,525 1,776,455
Additional paid-in capital ..................... 2,052,158 1,767,949
Retained earnings .............................. 8,685,313 7,392,890
Unrealized holding gains (losses) on investment
securities (net of deferred income taxes) .... 84,000 3,000
Less: Treasury stock, at cost (Note 1) ........ (192) (436)
------------------------------
Stockholders' equity ................... 12,637,804 10,939,858
------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................. $ 12,839,861 $ 11,021,455
==============================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary ............... $ 133,094 $ 18,179 $ 308,926
Dividends from other securities .............. 832 195 158
Interest on deposits ......................... 9
Other income .................................. 600
----------------------------------------
Total income .................... 134,526 18,374 309,093
----------------------------------------
OPERATING EXPENSES:
Interest expense ............................. 8,996 3,182 14,882
Other operating expense ...................... 2,789 312 3,160
----------------------------------------
Total operating expenses ........ 11,785 3,494 18,042
----------------------------------------
Income before undistributed income of subsidiary 122,741 14,880 291,051
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY ................................... 1,485,060 1,482,840 888,088
----------------------------------------
NET INCOME ..................................... $1,607,801 $1,497,720 $1,179,139
========================================
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED, DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................... $ 1,607,801 $ 1,497,720 $ 1,179,139
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation ................. 2,023
Equity in undistributed income of
subsidiary .................................. (1,485,060) (1,482,840) (888,088)
---------------------------------------------
Net cash provided by operating activities 124,764 14,880 291,051
---------------------------------------------
INVESTING ACTIVITIES:
Increase in buildings and land ................... (194,845) (53,176)
Purchase securities "available for sale" ......... (19,900)
Investment in Bank subsidiary .................... (7,992)
---------------------------------------------
Net cash used in investing activities ... (214,745) (53,176) (7,992)
---------------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable ...................... 116,860 56,246 (212,182)
Increase in other liabilities .................... 600
Sale of treasury stock ........................... 244 50 50
Issuance of common stock ......................... 7,992
Dividends to stockholders ........................ (23,094) (18,179) (78,926)
---------------------------------------------
Net cash provided by (used in)
financing activities ................... 94,610 38,117 (283,066)
---------------------------------------------
INCREASE (DECREASE) IN CASH ........................ 4,629 (179) (7)
CASH BALANCE, JANUARY 1 ........................... 31 210 217
---------------------------------------------
CASH BALANCE, DECEMBER 31 .......................... $ 4,660 $ 31 $ 210
=============================================
</TABLE>
11. Stockholder's Equity
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.
-40-
<PAGE>
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.
Weighted
Non-Employee Average
Employee Director Exercise
Year ended December 31, 1995 Stock Options Stock Options Prices
------------- ------------- --------
Outstanding 1994 ............ 12,000 8,000 $ 24.00
Granted ..................... 34,590 13,840 $ 32.50
Exercised ................... (333) $ 24.00
Outstanding ................. 46,257 21,840 $ 29.72
Year ended December 31, 1996
Outstanding 1995 ............ 46,257 21,840 $ 29.72
Granted
Lapsed ...................... 1,730
Adjustment for stock dividend 1,037 478
Outstanding ................. 47,294 20,588 $ 29.35
Year ended December 31, 1997
Outstanding 1996 ............ 47,294 20,588 $ 29.35
Granted ..................... 8,360
Exercised ................... (343) (1,029)
Adjustment for stock dividend 932 392
Outstanding ................. 47,883 28,311 $ 30.26
The Company measures stock based compensation costs using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." 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 1997 and
-41-
<PAGE>
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:
1997 1996
---- ----
Net income - as reported $1,608,000 $1,498,000
Net income - pro forma $1,481,000 $1,190,000
Basic income per share - as reported $ 4.42 $ 4.14
Basic income per share - pro forma $ 4.08 $ 3.29
Diluted income per share - as reported $ 4.15 $ 4.03
Diluted income per share - pro forma $ 3.82 $ 3.20
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% for 1997 and 1996; risk-free interest rate
of 6.34% and 6.69% for 1997 and 1996 respectively; expected lives of 10 years
for 1997 and 1996, which is the option term; and volatility of 5.00% and 3.12%
for 1997 and 1996 respectively.
Stock Dividends:
The Company has declared stock dividends in December and June of 1997,
December and June of 1996 at the following rates $0.46, $0.42, $0.40, $0.34,
respectively, with fractional shares paid in cash. The Company issued 6,642 and
6,517 shares of common stock in conjunction with these dividends. Accordingly,
amounts equal to the fair market value (based on quoted market prices as
adjusted) of the additional shares issued have been charged to retained earnings
and credited to common stock and additional paid-in capital. Earnings per common
share, weighted average shares outstanding, and all stock option activity have
been restated to reflect the stock dividends.
Preferred Stock:
The Company authorized 1,000,000 shares of preferred stock at $5 par
value. At December 31, 1997 no shares were issued or outstanding.
12. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
-42-
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
Numerator:
<S> <C> <C> <C>
Net income $1,607,801 $1,497,720 $1,179,139
Denominator:
Denominator for basic earnings
per share - weighted average shares 358,120 361,907 361,798
Effect of dilutive securities:
Employee stock options 21,789 10,040
------------------------------------
Dilutive potential common shares
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 379,909 371,947 361,798
====================================
Basic earnings per share $4.49 $4.14 $3.26
Diluted earnings per share $4.23 $4.03 $3.26
</TABLE>
13. 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, 1997 and 1996:
Cash and Due From Banks:
The carrying amounts of cash and due from banks approximate fair value.
-43-
<PAGE>
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.
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>
1997 1996
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
--------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .................... $ 2,514 $ 2,514 $ 2,566 $ 2,566
Interest bearing deposits .................. 2,418 2,415 1,975 1,979
Investment securities ...................... 38,208 38,318 34,002 33,901
Loans, net ................................. 76,228 74,407 61,410 61,408
Accrued interest receivable and other assets 1,731 1,731 1,408 1,408
Financial liabilities:
Deposit liabilities ........................ 108,789 108,253 91,055 91,060
Other borrowed funds ....................... 2,279 2,279 1,613 1,613
Accrued interest payable and
other liabilities ........................ 711 711 591 591
</TABLE>
-44-
<PAGE>
Summary of Quarterly Results of Operations
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Interest income ......... $1,983 $2,147 $2,298 $2,370
Net interest income ..... 1,135 1,228 1,310 1,337
Provision for loan
losses ................ 30 30 55 75
Other income ............ 133 167 188 189
Other expenses .......... 731 788 798 888
Net income .............. 362 389 436 420
Net income per share:
Basic .............. $ 0.99 $ 1.07 $ 1.20 $ 1.16
Diluted ............ $ 0.94 $ 1.01 $ 1.12 $ 1.08
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 ............ 95 136 132 137
Other expenses .......... 564 641 671 752
Net income .............. 370 386 398 344
Net income per share:
Basic .............. $ 1.02 $ 1.07 $ 1.10 $ 0.95
Diluted ............ $ 0.99 $ 1.05 $ 1.07 $ 0.92
</TABLE>
The above gives retroactive effect to stock dividends.
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. 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 26, 1998 there were approximately 840 shareholders of
record.
-45-
<PAGE>
<TABLE>
<CAPTION>
1997 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
Bid ..................... $55.00 $42.50 $41.50 $40.00
Ask ..................... $56.00 $43.50 $42.50 $42.00
Stock Dividends per Share $ 0.46 None $ 0.42 None
1996 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
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
</TABLE>
The above are historical amounts and do not consider the effects of stock
dividends.
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
<TABLE>
<CAPTION>
Offices
<S> <C>
Laceyville Lawton
Bonnie Brodhun, Br. Mgr. And Mortgage Officer Alice Carr, Asst. Cashier and Br. Mgr.
(717) 869-1152 (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
Back Mountain On the Internet
L. Lee Posten, Asst. Cashier and Br. Mgr. Web Site: www.grangebank.com
(717) 696-6958 E-Mail: [email protected]
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Officers
<S> <C>
Robert C. Wheeler John W. Purtell
Chairman of the Board Vice Chairman
Thomas A. McCullough Sally A. Steele
President Secretary of the Corporation
Melvin E. Milner Joseph I. Killeen
Vice President Vice President
Philip O. Farr
Comptroller
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
Edward A. Coach
Certified Public Accountant
</TABLE>
-47-
