U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-13664
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GRANGE NATIONAL BANC CORP
PENNSYLVANIA 23-2314065
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
198 E. Tioga St., Tunkhannock, Pennsylvania
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(Address of principal executive offices)
(717) 836-2100
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: 774,207
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Transitional Small Business Disclosure Format (Check one): Yes ; No X
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
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Page
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Consolidated Statements of Financial Position as
of September 30, 1999 and December 31, 1998..............................................................2
Consolidated Statements of Income and Comprehensive Income For the
Three and Nine Months Ended September 30, 1999 and 1998..................................................3
Consolidated Statements of Changes to Stockholder's Equity For the Nine Months
Ended September 30, 1999 and 1998........................................................................4
Consolidated Statements of Cash Flows For the Nine Months ended
September 30, 1999 and 1998..............................................................................5
Notes to Consolidated Financial Statements...........................................................6 - 7
ITEM 2. Management's Discussion and Analysis of Financial Condition................................8 - 14
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K...............................................................15
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1
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
Consolidated Statements of Financial Position,
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Audited)
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<S> <C> <C>
ASSETS:
Cash and due from banks ............................................. $ 2,650,359 $ 2,615,466
Interest bearing deposits ........................................... 2,377,932 5,610,125
Investment securities, available for sale (Note 3) .................. 42,154,855 30,251,442
Investment securities, held to maturity
(fair value 1999, $12,230,000; 1998, $16,677,000) ................. 12,773,223 16,454,603
Loans, net of unearned interest ..................................... 100,337,106 90,499,161
Less: allowance for loan losses .................................... 1,063,360 940,150
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Loans - net .................................................. 99,273,746 89,559,011
Bank premises and equipment - net ................................... 2,972,236 3,135,784
Other real estate ................................................... 231,601 107,789
Accrued interest and other assets ................................... 3,115,893 2,080,598
Intangible assets ................................................... 131,969 138,384
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TOTAL ASSETS ...................................................... $ 165,681,814 $ 149,953,202
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LIABILITIES:
Domestic deposits:
Non-interest bearing deposits ..................................... $ 22,791,154 $ 20,710,241
Interest bearing deposits ......................................... 116,002,328 109,181,088
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Total deposits .................................................. 138,793,482 129,891,329
Other borrowed funds ................................................ 10,562,168 4,471,214
Accrued interest and other liabilities .............................. 918,069 823,343
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Total liabilities ............................................... 150,273,719 135,185,886
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STOCKHOLDERS' EQUITY:
Preferred stock authorized 1,000,000 shares of $5 par;
None issued
Common stock authorized 5,000,000 shares of $5 par value, 774,209
and 751,558 shares issued and outstanding in 1999 and 1998 (Note 4) 3,871,045 3,757,790
Additional paid-in capital .......................................... 1,184,857 731,661
Retained earnings ................................................... 11,358,241 10,017,937
Accumulated other comprehensive income .............................. (1,006,000) 260,000
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Total ................................................................ 15,408,143 14,767,388
Treasury stock, 6 shares in 1999 and 1998 at cost ................. (48) (72)
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Total stockholders' equity ...................................... 15,408,095 14,767,316
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 165,681,814 $ 149,953,202
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</TABLE>
See Notes to Consolidated Financial Statements
2
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans ................................ $ 2,077,728 $ 1,913,515 $ 5,999,788 $5,513,102
Interest and dividends
on investment securities ................................ 825,181 612,357 2,288,795 1,749,462
Interest on deposits in banks ............................. 9,777 62,891 120,779 142,077
----------- ----------- ----------- ----------
Total interest income ............................. 2,912,686 2,588,763 8,409,362 7,404,641
----------- ----------- ----------- ----------
Interest Expense:
Interest on deposits ...................................... 1,144,851 1,121,849 3,408,773 3,216,155
Interest on borrowed funds ................................ 147,209 32,934 317,933 67,890
----------- ----------- ----------- ----------
Total interest expense ............................ 1,292,060 1,154,783 3,726,706 3,284,045
----------- ----------- ----------- ----------
Net interest income ................................. 1,620,626 1,433,980 4,682,656 4,120,596
Provision for loan losses ............................. 20,000 75,000 170,000 200,000
----------- ----------- ----------- ----------
Net interest income after provision for loan losses . 1,600,626 1,358,980 4,512,656 3,920,596
----------- ----------- ----------- ----------
Other Income:
Service charges and other income .......................... 254,837 200,792 720,536 584,477
Gain (loss) on sale of securities ......................... (27,076) (18,682)
Gain (loss) on sale of other real estate .................. (400) 28,584 (24,961)
----------- ----------- ----------- ----------
Total other income ................................ 227,361 200,792 730,438 559,516
----------- ----------- ----------- ----------
Other Expenses:
Salaries and employee benefits ............................ 507,354 468,679 1,496,184 1,346,330
Occupancy expense ......................................... 128,518 117,283 341,491 288,566
Equipment expense ......................................... 72,665 73,789 238 677 214,379
Other operating expense ................................... 318,622 259,816 868,163 762,062
----------- ----------- ----------- ----------
Total other expenses .............................. 1,027,159 919,567 2,944,515 2,611,337
----------- ----------- ----------- ----------
Income before income taxes .................................. 800,828 640,205 2,298,579 1,868,775
Provision for income taxes .................................. 186,139 177,000 599,000 561,000
----------- ----------- ----------- ----------
Net income .................................................. $ 614,689 $ 463,205 $ 1,699,579 $1,307,775
----------- ----------- ----------- ----------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising during period ... ($ 312,000) $ 279,800 ($1,266,000) $ 303,300
----------- ----------- ----------- ----------
Comprehensive income ........................................ $ 302,689 $ 743,005 $ 433,579 $1,611,075
=========== =========== =========== ==========
Earnings per share (Note 4) ................................. $ 0.73 $ 0.56 $ 1.98 $ 1.61
=========== =========== =========== ==========
Weighted average common shares .............................. 845,962 824,880 859,291 810,743
</TABLE>
See Notes to Consolidated Financial Statements
3
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 1998
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STOCKHOLDERS' EQUITY, January 1 ............................. $ 14,767,316 $ 12,637,804
COMMON STOCK, $5.00 PAR VALUE
Options exercised ........................................... 76,630 18,455
Stock dividend $0.47 and $0.62 per share in 1999 and 1998,
plus cash in lieu of fractional shares ................. 36,625 16,865
Stock split ................................................. 1,841,240
ADDITIONAL PAID-IN CAPITAL
Options exercised ........................................... 145,546 48,044
Stock dividend $0.47 and $0.62 per share in 1999 and 1998,
plus cash in lieu of fractional shares ................. 307,650 192,261
Stock split ................................................. (1,841,240)
RETAINED EARNINGS
Stock dividend $0.47 and $0.62 per share in 1999 and 1998,
plus cash in lieu of fractional shares ................. (344,275) (209,126)
Cash paid in lieu of fractional shares due to stock dividend (15,000) (17,095)
Net income .................................................. 1,699,579 1,307,775
ACCUMULATED OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax ............... (1,266,000) 303,300
TREASURY STOCK
Reissuance of common stock
(1 and 5 shares in 1999 and 1998, respectively, at cost) 24 120
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STOCKHOLDERS' EQUITY, September 30 .......................... $ 15,408,095 $ 14,298,403
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
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For the Nine Months Ended September 30, 1999 1998
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OPERATING ACTIVITIES:
Net income .................................................................... $ 1,699,579 $ 1,307,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................... 233,750 206,550
Provision for loan losses ................................................... 170,000 200,000
Increase (decrease) in deferred income taxes ................................ (646,000) 69,500
Changes in operating assets and liabilities:
Increase (decrease) in accrued interest income and other assets .............. (324,880) (207,674)
Increase (decrease) in accrued interest expense and other liabilities ........ 36,726 36,629
NET CASH PROVIDED BY
OPERATING ACTIVITIES ........................................................ 1,169,175 1,612,780
INVESTING ACTIVITIES:
Purchase bank premises and equipment .......................................... (70,202) (236,885)
Decrease (increase) in other real estate ...................................... (123,812) 14,755
Purchase of securities "available for sale" ................................... (11,099,470) (11,962,275)
Decrease (increase) in mortgage-backed securities "available for sale" ........ (6,071,956) (1,149,132)
Sales of securities "available for sale" ...................................... 2,903,735
Redemptions of securities "available for sale" ................................ 1,098,278 1,077,453
Purchase of securities "held to maturity" ..................................... (2,560,779) (1,496,875)
Redemptions of securities "held to maturity" .................................. 5,818,382 7,928,113
Decrease (increase) in mortgage-backed securities "held to maturity" .......... 423,776 363,616
Increase in loans to customers ................................................ (9,884,735) (9,751,279)
Increase in deposits in banks ................................................. 3,232,194 (2,154,232)
NET CASH USED IN
INVESTING ACTIVITIES ........................................................ (16,334,589) (17,366,741)
FINANCING ACTIVITIES:
Increase in deposits before interest credited ................................. 5,768,140 11,909,459
Increase (decrease) in borrowed funds ......................................... 6,090,954 376,230
Interest credited to deposits ................................................. 3,134,013 2,997,710
Cash dividends paid ........................................................... (15,000) (17,095)
Decrease in treasury stock .................................................... 24 120
Issuance of common stock ...................................................... 222,176 66,499
NET CASH PROVIDED BY
FINANCING ACTIVITIES ........................................................ 15,200,307 15,332,923
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .............................................................. 34,893 (421,038)
CASH AND CASH EQUIVALENTS, January 1 ........................................... 2,615,466 2,514,202
CASH AND CASH EQUIVALENTS, September 30 ........................................ $ 2,650,359 $ 2,093,164
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................................... $ 268,379 $ 263,304
Income taxes ................................................................. $ 646,139 $ 569,000
Non-cash investing and financing activities:
Unrealized gains (losses) on securities ...................................... $( 1,266,000) $ 303,300
Stock dividend ............................................................... 344,275 209,126
</TABLE>
See Notes to Consolidated Financial Statements
5
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GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS COMBINATION AND PRINCIPLES OF COMBINATION:
Grange National Banc Corp. (Company) was organized and incorporated
under the laws of the Commonwealth of Pennsylvania on October 2, 1984,
for the purpose of becoming a bank holding company. On April 30, 1985
the Company acquired the Grange National Bank of Wyoming County (Bank)
pursuant to a plan of reorganization and merger. The Bank became a
wholly owned subsidiary of the Company, and each outstanding share of
Bank common stock was converted into one share of Company common stock.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary (Bank) with the
reorganization accounted for as a pooling of interests.
2. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the accounting principles and practices
reflected in the annual financial statements, and reflect all
adjustments which are normal and recurring and, in the opinion of
management, necessary for a fair presentation of the results of
operations for the interim periods. The results of operations reported
in interim financial statements are not necessarily indicative of
results to be expected for the year.
3. COMPREHENSIVE INCOME:
In 1997, the Financial Accounting Standards Board issued statement No.
130 - "Reporting Comprehensive Income," which is effective for years
beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. The purpose of
reporting comprehensive income is to report a measure of all changes in
equity that result from recognized transactions and other economic
events of the period other than transactions with owners in their
capacity as owners. Prior to the issuance of this statement, some of
those changes in equity were displayed in a statement that reports the
results of operations, while others were included directly in a
statement of financial position. The 1997 financial statements have
been restated where applicable to reflect the adoption of SFAS No. 130.
4. STOCK OPTIONS:
In January 1994, the Board adopted an Employee Stock Option Plan in
which common stock options may be granted to all officers and key
employees of the Company. The
6
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aggregate number of shares which may be issued upon exercise of the
options under the plan is 43,271. 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's plan is
43,271 shares and are exercisable in part from time to time beginning
one year after the date of grant and expiring ten years thereafter. The
Plan provides for adjustments to the number of options to compensate
for stock dividends and splits. Accordingly all effected figures have
been adjusted to reflect stock dividends. April 1, 1994 and 1997,
options to purchase 2,163 shares of common stock were automatically
granted to each non-employee Director under this plan expiring April 1,
2004.
The Board of Directors adopted an additional Stock Option Plan (the
"Plan") in November 1995 covering the employees and directors. The Plan
authorizes the grant of options to purchase not more than 118,996
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 October 31, 1999 options for 81,360 shares of Common
Stock having various exercise prices were outstanding, 18,777 shares
have been exercised, and 18,859 shares were available for future option
grants under the Plan. Of the 116,532 shares of Common Stock
outstanding for options, 73,870 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 prices at time of grant.
PREFERRED STOCK:
The Company authorized 1,000,000 of preferred stock at $5 par value. At
December 31, 1998 and September 30, 1999, no shares were issued nor
outstanding.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION:
Net income for the three months ending September 30, 1999 totaled $615,000 which
is a 33% increase over the $463,000 reported for the same period in 1998. Net
income for the nine months ending September 30, 1999 totaled $1,700,000 which is
a 30% increase over the $1,308,000 reported for the same period in 1998. Net
interest income for the three months ending September 30, 1999 increased by
$187,000 to $1,621,000 compared to $1,434,000 for the same period in 1998. This
constitutes an increase of 13% over the previous year. Net interest income for
the nine months ending September 30, 1999 increased by $562,999 to $4,683,000
compared to $4,121,000 for the same period in 1998. This constitutes an increase
of 14% over the previous year. Interest income for three months ending September
30, 1999 increased by $324,000 or 13% compared to 1998, and interest expense
increased as well by $137,000 or 12% compared to 1998. Interest income for the
nine months ending September 30, 1999 increased by $1,004,000 or 14% compared to
1998.
The increase in interest income has been principally from interest on investment
securities which increased $213,000 or 35% for the three months, and $539,000 or
31% for the nine months ending September 30, 1999, compared to the same periods
last year. Interest income from loans increased by $164,000 or 9%, and $487,000
or 9% compared to the same three and nine month periods last year. Interest
rates on loans have trended steadily down from June of 1997 until the end of
June 1999, however during the third quarter interest rates began to rise.
Although the New York prime rate had not changed from March of 1997 until July
1, 1999, competitive pressures reduced the Bank's spread to the prime on new
loans until the third quarter. New loan volume began to increase during the
third quarter of 1999. Management increased its purchases of longer term
municipal bonds and mortgage-backed bonds to increase the yield of the bond
portfolio during the first and second quarters of 1999, but has not purchased
securities during the third quarter due to loan demand and the need to build up
cash for the end of the year. The municipal bonds purchased recently, mostly
have maturities of around ten years and a few with twenty year maturities, and
are classified as "available for sale". If interest rates increase sufficiently
these bonds can be sold. During the third quarter, interest on deposits in banks
decreased by $53,000 from $63,000 to $9,000 due to lower balances, and for the
year, decreased by $21,000 from $142,000 to $121,000, also due to lower
balances.
The increase in interest expense is due to the increase in borrowed funds during
the third quarter of 1999 as compared to the third quarter of 1998. The Bank has
borrowed approximately $8,000,000 from the Federal Home Loan Bank (FHLB) as part
of a leveraging strategy and against bonds maturing next year. For the nine
months ending September 30, 1999, interest expense on borrowed funds increased
$250,000, from $68,000 last year to $318,000, due to borrowings from the FHLB.
The average total sources to fund earning assets increased by $23,021,000, from
$130,882,000 in 1998 to $153,903,000 in 1999, while the average interest rate
decreased from 3.51% to 3.34%.
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The increase in deposits continues to provide funds for loans and liquidity.
Loan demand during the third quarter was strong. Loans increased by $9,838,000
or 11% from $90,499,000 in at December 31, 1998 to $100,337,000 at September 30,
1999. Loan demand remains strong and is expected to continue through the fourth
quarter. The steady decline in interest rates for the last two years appears to
have turned around and started on an upward trend. This has basically ended most
refinancing of loans due to rates. Balances of investment securities increased
by $8,222,000 or 18% since December 31, 1998. Management has borrowed $4,000,000
from the Federal Home Loan Bank (FHLB) in term advances, during 1999, and used
the funds to purchase long term municipal bonds. The bank will have a guaranteed
interest spread until the call dates on the FHLB term advances, at which time
the bank can payback the advances if the FHLB adjusts the rates or pay the new
rates. Management will plan for sufficient liquidity to pay the advances when it
expects the FHLB will change the rates. This arbitrage accounts for part of the
increase in the interest income from investment securities. The bank also
borrowed $1,000,000 from the FHLB to fund the purchase of bonds to replace other
bonds maturing in one year. Interest bearing deposits at banks decreased by
$3,232,000 to $2,378,000 from $5,610,000 due to management investing in
securities and building up cash for the year end.
The provision for loan loss during the three months ending September 30, 1999
was $20,000 compared to $75,000 for the same period in 1998. For the nine months
ending September 30, 1999, the provision was $170,000, compared to $200,000 for
1998. Management has been able to minimize loan losses during 1999, so larger
provisions to the allowance for loan losses have not been necessary to keep the
allowance in line with the size of the loan portfolio. The allowance for loan
losses was $1,063,000 and $940,000 at September 30, 1999 and December 31, 1998,
respectively. This represents 1.06% and 1.04% of total loans, 223% and 437% of
non-performing loans, and 159% and 291% of non-performing assets, respectively.
Management performs a quarterly analysis of the Bank's potential loan losses on
a "worst case" basis. A loan review process is performed by an independent loan
review officer on a continuing basis. This information is closely reviewed by
the Board of Directors and used to evaluate the adequacy of the loan loss
reserve in order to provide coverage for identifiable losses, provide coverage
for unexpected losses, and to keep the size of the reserves in proportion to the
growing size of the loan portfolio.
The following sets forth loans past due 90 days or more on which interest has
continued to be accrued for September 30, 1999 and December 31, 1998.
September 1998 December 1998
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(In thousands)
Real estate mortgages $ 1
Commercial
Installment $3 9
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Total $3 $10
== ===
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Non-accrual loans decreased from $205,000 at December 31, 1998 to $191,000 at
September 30, 1999. The overall quality remains very good, and management
expects non-performing assets to remain at substantially the same levels as a
proportion of loans. Other real estate owned increased from $108,000 at December
1998 to $232,000 at September 1999. The Bank has a signed sales agreement for
one property and expects to close on the sale during the fourth quarter. Several
of the remaining properties are unique in nature and may require a longer
holding period in order to liquidate them at a reasonable price.
Investments in securities and deposits in banks increased by $4,990,000 or 10 %
from December 31, 1998 to September 30, 1999. The average rate earned on
available for sale, held to maturity and deposits in banks were 6.63%, 6.59% and
6.50% for the three months ended September 30, 1999, as compared to 6.31%, 6.46%
and 5.67% for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, average rates earned on available for sale, held for
maturity and deposits in banks were 6.19%, 6.55%, and 5.38%, compared to 6.31%,
6.50%, and 5.65% for the same period in 1998. As of September 30, 1999, the
amortized value of the Bank's investments classified as held to maturity
exceeded their fair value by $543,000, and the amortized value exceeded the fair
value of investments classified as available for sale by $1,558,000. This is
reflected as an decrease in the Bank's equity of approximately $1,006,000, net
of deferred tax effects.
Higher interest rates at September 30, 1999 account for the unrealized loss on
the available for sale securities reflected on the balance sheet. Rates are
expected to continue their slow but steady decline. This will result in moderate
increases of the fair value of securities available for sale. Because the Bank
has extended the length of the securities it purchases, interest rate changes
have a greater impact on the fair value of those securities. The amount of
increased interest rate risk is offset by higher yields on the securities. The
Bank has been purchasing slightly longer term investments, generally tax-free
bonds with ten to twenty year maturities and mortgage pools with stated final
maturities of up to 15 years.
Management continues to purchase only high quality investments to minimize
credit risk to the value of the Bank's investments. There have been no adverse
credit valuations on any of the investments. Although investment opportunities
exist which will produce higher yields, they generally contain higher credit or
interest rate risk.
The addition of employees for the Pine Mall office, Trust Department and back
office, along with annual raises contributed to the increase in salary expense.
Costs associated with the Pine Mall Office also attributed to the increased
occupancy expense. For the three months ending September 30, 1999, salaries and
employee benefits increased $38,000 or 8% from $469,000 to $507,000, and
occupancy expense increased $12,000 or 12% from $117,000 to 129,000. Equipment
expense decreased $1,000 and other other operating expense increased $59,000 or
23% from $260,000 to $319,000. For the nine months ending September 30, 1999,
salaries and employee benefits have increased by $150,000 or 11% from $1,346,000
to $1,496,000 and occupancy expense increased $53,000 or 18% from $289,000 to
$342,000. Equipment expense
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increased $25,000 or 12% from $214,000 to $239,000, and other operating expenses
increased $106,000 or 14% from $762,000 to $868,000. Although these increases
are significant, management believes that they are in line with the Bank's
overall increase in assets and profitability. Management also believes that the
investment in additional personnel and the opening of the Pine Mall office will
insure continued growth and increased profitability in the future.
Management performs an interest rate and liquidity analysis on a monthly basis
to monitor the Bank's interest rate sensitivity gap and liquidity needs. These
reports are reviewed by the Board of Directors and used to formulate ways to
improve the Bank's interest rate gap. The Bank continues to place great emphasis
on adjustable rate loan products, such as variable rate home equity loans and
annually adjustable mortgage loans as well as adjustable rate and short term
investments, in order to minimize interest rate risk.
Since 1991 the Comptroller of the currency has required all national banks to
meet certain "Risk Based Capital" standards. These standards weight certain
assets based on the risk of the asset, and also includes certain off-balance
sheet items. The table below sets forth the Bank's Tier 1 and Tier 2 capital,
risk adjusted assets (including off-balance sheet items) and the Bank's
risk-based capital ratios under the guidelines, for September 30, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
(In thousands, except ratios) 1999 1998
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<S> <C> <C>
Tier I capital:
Shareholders' equity.................................... $ 14,122 $14,369
Tier II capital:
Loan loss reserve....................................... 1,063 940
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Total Qualifying Capital..................................... $ 15,185 $15,309
======== =======
Risk-adjusted assets (including off balance sheet items).............. $112,891 $95,881
Tier I Capital Ratio (4.00% required)................................. 13.52% 15.41%
Total Capital Ratio (8.00% required).................................. 13.45% 15.97%
</TABLE>
Year 2000 Impact
The Bank has a Year 2000 policy addressing the "Year 2000" Issue concerning
computers and equipment using computer chips and their ability to recognize and
process information based on dates in the year 2000 and beyond. If the computer
chips do not recognize the dates in the Year 2000 accurately, certain problems
may result, particularly those concerning calculations based on dates.
Inaccuracies in interest accruals, payment and due dates or other unanticipated
results such as computer shut downs or crashes may occur if the computers or
equipment with computer chips can not properly recognize dates after December
31, 1999. The Bank's policy requires testing of all "mission critical" systems
to determine if they will operate correctly in the year 2000. The Bank's policy
also requires it to test systems (hardware and software) used to interface with
other
11
<PAGE>
systems, as well as to determine the Year 2000 readiness of systems of its
partners which provide mission critical services to the Bank.
The Bank's policy addresses five major components: (1) Awareness; (2)
Assessment; (3) Renovation; (4) Validation and Testing; and (5) Implementation.
The Bank has completed all phases, and tested all mission critical systems. Test
results of all mission critical systems have been validated.
The Bank has developed a contingency plan in the event vendors of mission
critical systems fail to be Year 2000 ready in time, or unexpected problems
occur. The contingency plan has been reviewed and approved by the Board of
Directors, but it will be continually revised and updated throughout the
remainder of the year. At this time the Bank can not estimate the cost, if any,
that might be required to implement such contingency plans.
The Bank anticipates that its total Year 2000 related costs will not exceed
$30,000. This estimate is based on current information and includes costs for
review and testing by third parties. The estimate may change as the Bank
progresses with its Year 2000 program and obtains additional information with
and conducts further testing with third parties. Lost interest income may be the
Bank's largest Year 2000 expense, as it builds its cash holdings in anticipation
of customer demand. At this time, no significant problems have arisen concerning
Year 2000 issues.
The Office of the Comptroller of the Currency, which is the bank's primary
regulator, has been conducting Year 2000 compliance examinations. The failure to
implement an adequate Year 2000 program can be identified as an unsafe and
unsound banking practice. The OCC has established an examination procedure which
contains three categories of ratings: "Satisfactory", "Needs Improvement", and
"Unsatisfactory". Banks that receive a Year 2000 rating of Unsatisfactory may be
subject to formal enforcement action, supervisory agreements, cease and desist
orders, civil money penalties, or the appointment of a conservator. In addition,
the OCC will be taking into account Year 2000 compliance programs when reviewing
applications and may deny an application based on Year 2000 related issues.
Failure of the Bank to adequately prepare for Year 2000 issues could negatively
impact the Bank's operations, including the impositions of restrictions on its
operations by the OCC. The Federal Deposit Insurance Corporation (FDIC) has
reported that 99.9% of all banks in the United States are ready for Year 2000.
Although the Bank has no reason to believe that it will suffer systems
disruptions due to the Year 2000 issue, and is confident that it will not, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect on the Bank's business, financial condition, results of operations, and
business prospects.
12
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
(1) Interest Average (1) Interest Average
Average Income/ Interest Average Income/ Interest
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages ................... $ 46,157 $ 981 8.50% $ 46,253 $ 990 8.56%
Installment ................. 1,992 63 12.65 4,629 117 10.11
Commercial .................. 49,871 1,081 8.67 33,876 828 9.78
Total loans ............... 98,020 2,125 8.67 84,758 1,935 9.13
Securities available for sale:
U.S. Treasury securities .... 5,258 68 5.17 7,000 103 5.89
U.S. government agencies .... 23,645 369 6.24 8,274 131 6.33
Municipal bonds ............. 10,674 215 8.06 5,992 105 7.01
Other securities ............ 816 18 8.82 654 7 4.28
Total available for sale 40,393 670 6.63 21,920 346 6.31
Securities held to maturity:
U.S. government agencies .... 7,476 122 6.53 14,356 228 6.35
Municipal bonds ............. 2,903 48 6.61 3,083 53 6.88
Other securities ............ 4,496 75 6.67 2,317 38 6.56
Total held to maturity .... 14,875 245 6.59 19,756 319 6.46
Deposits in banks ............ 615 10 6.50 4,448 63 5.67
TOTAL ................... $153,903 3,050 7.93 $130,882 2,663 8.14
INTEREST BEARING LIABILITIES:
Deposits:
NOW and super-NOW ........... $ 17,421 79 1.81 $ 13,382 76 2.27
Savings and money market .... 32,055 200 2.50 29,896 202 2.70
Certificates of deposit ..... 65,086 855 5.25 60,450 833 5.51
Other time deposits ......... 200 3 6.00 200 3 6.00
Total deposits ............ 114,762 1,137 3.96 103,928 1,114 4.29
Other borrowed funds ......... 9,086 147 6.47 2,787 33 4.74
TOTAL ................... 123,848 1,284 4.15 106,715 1,147 4.30
Non-interest bearing
funds, net (2) ............... 30,055 24,167
TOTAL SOURCES TO FUND
EARNING ASSETS ................ $153,903 1,284 3.34 $130,882 1,147 3.51
NET INTEREST/YIELD ............ $ 1,766 4.59% $ 1,516 4.63%
</TABLE>
(1) Average balances are daily averages.
(2) Demand deposits, stockholders's equity and other non-interest bearing
liabilities less non-interest earning assets.
Non-accrual loans are reflected in the loan balances, but contributing
no interest income.
NOTE - Tax exempt interest income has been converted to a tax equivalent
basis at the U.S. federal income tax rate of 34%.
See Notes to Consolidated Financial Statements
13
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND RATES
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(1) Interest Average (1) Interest Average
Average Income/ Interest Average Income/ Interest
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ---------------------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages ................... $ 46,162 $ 2,940 8.49% $ 44,762 $ 2,940 8.76%
Installment ................. 2,496 226 12.07 5,245 382 9.71
Commercial .................. 45,263 2,935 8.65 31,194 2,242 9.58
Total loans ............... 93,921 6,101 8.66 81,201 5,564 9.14
Securities available for sale:
U.S. Treasury securities .... 5,300 223 5.61 7,059 315 5.95
U.S. government agencies .... 21,435 959 5.97 5,551 265 6.37
Municipal bonds ............. 10,643 555 6.95 3,867 203 7.00
Other securities ............ 883 40 6.04 619 26 5.60
Total available for sale 38,261 1,777 6.19 17,096 809 6.31
Securities held to maturity:
U.S. government agencies .... 7,910 410 6.91 16,165 782 6.45
Municipal bonds ............. 3,279 151 6.14 3,529 177 6.69
Other securities ............ 4,128 191 6.17 2,242 110 6.54
Total held to maturity .... 15,317 752 6.55 21,936 1,069 6.50
Deposits in banks ............ 2,996 121 5.38 3,351 142 5.65
TOTAL ................... $150,495 8,751 7.75 $123,584 7,584 8.18
INTEREST BEARING LIABILITIES:
Deposits:
NOW and super-NOW ........... $ 16,449 242 1.96 $ 12,094 194 2.14
Savings and money market .... 31,756 588 2.47 28,635 582 2.71
Certificates of deposit ..... 65,266 2,564 5.24 58,226 2,424 5.55
Other time deposits ......... 200 7 4.67 200 8 5.33
Total deposits ............ 113,671 3,401 3.99 99,155 3,208 4.31
Other borrowed funds ......... 8,880 318 4.77 1,898 68 4.78
TOTAL ................... 122,551 3,719 4.05 101,053 3,276 4.32
Non-interest bearing
funds, net (2) ............... 27,944 22,531
TOTAL SOURCES TO FUND
EARNING ASSETS ................ $150,495 3,719 3.29 $123,584 3,276 3.53
NET INTEREST/YIELD ............ $ 5,032 4.46% $ 4,308 4.65%
</TABLE>
(1) Average balances are daily averages.
(2) Demand deposits, stockholders's equity and other non-interest bearing
liabilities less non-interest earning assets.
Non-accrual loans are reflected in the loan balances, but contributing no
interest income.
NOTE - Tax exempt interest income has been converted to a tax equivalent basis
at the U.S. federal income tax rate of 34%.
See Notes to Consolidated Financial Statements
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
(ii) Statement re: computation of earnings per share:
Primary earnings per share is computed by dividing net income
by the weighted average number of shares of common stock and
common stock equivalents outstanding during the quarter. Stock
options are considered common stock equivalents and are
included in the computation of the number of shares
outstanding using the treasury stock method. The number of
shares used to calculate earnings per share for the periods
presented are as indicated in each period.
During the current fiscal quarter, there have been no events of a nature
required to be filed on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRANGE NATIONAL BANC CORP.
--------------------------
(Registrant)
Date November 12, 1999 /s/ Thomas A. McCullough
-------------------------------- ------------------------
Thomas A. McCullough
President
Chief Executive Officer
Chief Financial Officer
Date November 12, 1999 /s/ Philip O. Farr
--------------------------------- ------------------------
Philip O. Farr
Chief Accounting Officer
15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR
SEPTEMBER 30, 1999 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,650
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 42,155
<INVESTMENTS-HELD-FOR-SALE> 12,773
<INVESTMENTS-CARRYING> 12,230
<INVESTMENTS-MARKET> 100,337
<LOANS> 1,063
<ALLOWANCE> 165,682
<TOTAL-ASSETS> 138,793
<DEPOSITS> 2,562
<SHORT-TERM> 918
<LIABILITIES-OTHER> 7,000
<LONG-TERM> 0
0
5,156
<COMMON> 10,352
<OTHER-SE> 165,682
<TOTAL-LIABILITIES-AND-EQUITY> 2,078
<INTEREST-LOAN> 825
<INTEREST-INVEST> 10
<INTEREST-OTHER> 2,913
<INTEREST-TOTAL> 1,145
<INTEREST-DEPOSIT> 1,292
<INTEREST-EXPENSE> 1,621
<INTEREST-INCOME-NET> 20
<LOAN-LOSSES> (27)
<SECURITIES-GAINS> 1,027
<EXPENSE-OTHER> 801
<INCOME-PRETAX> 801
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> (312)
<NET-INCOME> 615
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 4.59
<LOANS-NON> 191
<LOANS-PAST> 3
<LOANS-TROUBLED> 108
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1051
<CHARGE-OFFS> 15
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1063
<ALLOWANCE-DOMESTIC> 1063
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
