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, 1999
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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
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, 1999 were
$12,392,000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 23 was $22,621,310. As of March 23, 2000, the
Registrant had 783,807 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated herein
by reference in response to Part II hereof, and the definitive Proxy Statement
relating to the 2000 Annual Meeting of Shareholders is incorporated by reference
in response to Part III hereof.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
<PAGE>
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. In February of 2000 the
Company elected to become a financial holding company under the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). The Company's election will
become effective on April 2000. As a financial holding company, the Company will
have additional authority to engage in insurance and securities sales, as well
as a variety of other services.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
and insurance sales. The Bank has its principal banking office in Laceyville,
Pennsylvania. It also presently has four branch offices in Wyoming County,
Pennsylvania, two branch offices in Susquehanna County, Pennsylvania, three
branch offices office in Luzerne County, Pennsylvania and one branch office in
Bradford County, Pennsylvania. The Bank has four 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, 1999, the Company, on a consolidated basis, had
total assets of $169,332,000, total deposits of $140,580,000, and total
shareholder's equity of $15,962,000.
Grange National Bank
The Bank was incorporated under the laws of the United States of America as
a national bank in 1907 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Wyoming, Susquehanna, Bradford, and Luzerne Counties, Pennsylvania. The Bank is
a member of the Federal Reserve System.
As of December 31, 1999, the Bank had total assets of $168,924,000, total
deposits of $140,587,000 and total shareholders' equity of $15,469,000. 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.
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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 ten 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'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, term loans and
factoring of accounts receivable. The Bank sells life, health, disability,
homeowner's and auto insurance.
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. Although the Trust
Department has begun to grow, the Bank has recognized only minimal income from
the Trust Department during 1998 and 1999. 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, 1999 and 72% at December 31, 1998. 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 ten and twenty years. 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, 1999 mortgage loans were approximately 37% of
total interest earning assets.
The Bank has no deposits or loans directly with foreign entities, and has a
minimal amount of deposits made by persons working in foreign countries. The
Bank's assets are not invested in foreign securities, Eurodollars or foreign
loans.
Competition
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of portions of Wyoming, Bradford, Susquehanna and
Luzerne Counties, Pennsylvania with concentration in the Wyoming County area.
The Bank competes with local commercial banks as well as other commercial banks
with branches in the Bank's market area.
The Bank, 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.
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Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company and the Bank.
The Company
The Company is registered as a "bank holding company" under the Holding
Company Act, and it, therefore, is subject to regulation by the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board").
Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank that is not already majority owned by it, if after such acquisition,
it would directly or indirectly own or control more than 5% of the voting shares
of such bank.
The 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 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.
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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.
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 deposits of the Bank are insured up to regulatory limits by the FDIC
and accordingly, are subject to deposit insurance assessments to maintain the
Bank Insurance Fund (the "BIF").
The Deposit Insurance Funds Act of 1996 (DIFA) requires 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 approximatley
$18,000 in 2000.
Dividend payments by the Bank to the Company are limited to the lesser of
(i) the amount of undivided profits; and (ii) absent regulatory approval, an
amount not in excess of net income for the current year combined with retained
net income for the preceding two years.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") and its implementing regulations established five capital categories
for insured depository institutions - well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Pursuant to the authority granted under FDICIA, U.S. bank
regulatory agencies were empowered to impose progressively more restrictive
constraints on the operations, management and capital distributions of an
insured depository institution, depending on the category in which an
institution is classified. Unless a banking institution is well capitalized, it
is subject to restrictions on its ability to offer brokered deposits and on
certain other aspects of its operations. An undercapitalized banking institution
must develop a capital restoration plan and its parent bank holding company must
guarantee the bank's or thrift's compliance with the plan up to the lesser of 5%
of the bank's or thrift's assets at the time it became undercapitalized and the
amount needed to comply with the plan.
As of December 31, 1999, the Bank was well capitalized, based on the prompt
corrective action guidelines. A bank's capital category is determined solely for
the purpose of applying the OCC's, or the FDIC's, prompt corrective action
regulations, and the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.
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.
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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 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 of 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.
Gramm-Leach-Bliley Act
On November 12, 1999, legislation was enacted that allows bank holding
companies to engage in a wider range of non- banking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "GLB Act"), a bank holding company that elects to
become a financial holding company may engage in any activity that the Federal
Reserve Board, in consultation with the Secretary of the Treasury, determines by
regulation or order is (1) financial in nature, (2) incidental to any such
financial activity, or (3) complementary to any such financial system generally.
The GLB Act makes significant changes in the U.S. banking law, principally by
repealing the restrictive provisions of the 1933 Glass-Steagall Act. The GLB Act
specifies certain activities that are deemed to be financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting, dealing in or making a market
in, securities; and any activity currently permitted for bank holding companies
by the Federal Reserve Board under section 4(c)(8) of the Bank Holding Company
Act. The GLB Act does not authorize banks or their affiliates to engage in
commercial activities that are not financial in nature. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well capitalized, well
managed and have at least a satisfactory rating under the Community Reinvestment
Act. In February of 2000, the Company filed a letter with the Federal Reserve
Bank of Philadelphia electing to be treated as a financial holding company under
the GLB Act, which election will become effective in April 2000.
National banks are also authorized by the GLB Act to engage through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (1)
insurance underwriting, (2) real estate development or real estate investment
activities (unless otherwise permitted by law), (3) insurance company portfolio
investments and (4) merchant banking. The authority of a national bank to invest
in a financial subsidiary is subject to a number of conditions, including, among
other things requirements that the bank must be well managed and well
capitalized (after deducting from the bank's capital outstanding investments in
financial subsidiaries). The GLB Act provides that state banks may invest in
financial subsidiaries (assuming they have the requisite investment authority
under applicable state law) subject to the same conditions that apply to
national bank investments in financial subsidiaries.
The GLB Act also contains a number of other provisions that will affect the
Company's and Bank's operations and the operations of all financial
institutions. One of the new provisions relates to the financial privacy of
consumers, authorizing federal banking regulators to adopt rules that will limit
the ability of banks and other financial entities to disclose non-public
information about consumers to non-affiliated entities. These limitations are
expected to require more disclosure to consumers, and in some circumstances, to
require consent by the consumer before information is allowed to be provided to
a third party.
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National Monetary Policy
In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market in
United States Government securities, setting the discount rate and changes in
reserve requirements against bank deposits. These instruments are used in
varying combinations to influence overall growth and distribution of credit,
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies
upon the future business, earnings and growth of the Company and the Bank cannot
be predicted.
Employees
As of December 31, 1999, the Company had a total of 83 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 five additional properties in Pennsylvania where its other branches are
located.
o Route 267, Lawton
o The corner of U.S. Route 6 and Bridge Street, in Meshoppen Borough
o The intersection of U.S. Routes 309 and 29 in Monroe Township
o 198 E. Tioga St., Tunkhannock
o Main Street in Little Meadows
o 400 Main Street, Towanda
The Bank has an operating leases for offices at:
o 78 South Wyoming Avenue, Edwardsville
o The Back Mountain at Trucksville
o The Pine Mall in Wilkes-Barre
The Company owns a property along U.S. Route 309 in Dallas Township which
it originally purchased for a branch office. The Company has 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 also purchased 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
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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, 1999.
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, 1999.
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, 1999.
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,
1999.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 2000 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 2000 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 2000 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 2000 Annual Meeting of Shareholders filed pursuant to General Instruction
E(3) to Form 10-KSB.
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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, 1999,
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, 1999 and 1998
Consolidated Statements of Income -
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1999, 1998 and 1997
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).
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).
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*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 Employment Contract with Thomas A. McCullough dated March 25, 1998, filed
with the Commission on March 31, 1999
*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, 1999 (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, 1999.
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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, 1999 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, 1999 in not deemed "filed" with the Securities and Exchange
Commission for any purpose.
Certain portions of the Company's 2000 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.
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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 30, 2000 /s/ Robert C. Wheeler
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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 3/30/2000
- ----------------------------------- -----------------------------------
Robert C. Wheeler (Date) John W. Purtell (Date)
Chairman of the Board Vice-Chairman and Director
Director
/s/ Sally A. Steele 3/30/2000 /s/ Brian R. Ace 3/30/2000
- ----------------------------------- -----------------------------------
Sally A. Steele (Date) Brian R. Ace (Date)
Secretary and Director Director
/s/ Thomas C. Burns /s/ Russell G. Newell 3/30/2000
- ----------------------------------- -----------------------------------
Thomas C. Burns (Date) Russell G. Newell (Date)
Director Director
/s/ W. Kenneth Price 3/30/2000 /s/ Edward A. Coach 3/30/2000
- ----------------------------------- -----------------------------------
W. Kenneth Price (Date) Edward A. Coach (Date)
Director Director
/s/ Thomas A. McCullough 3/30/2000 /s/ Philip O. Farr 3/30/2000
- ----------------------------------- -----------------------------------
Thomas A. McCullough (Date) Philip O. Farr (Date)
President and Director Vice President and Comptroller
Chief Executive Officer Chief Financial Officer
Chief Accounting Officer
13
To our Shareholders,
I am pleased to report that 1999 was another extremely successful year for
Grange National Banc Corp and our subsidiary Grange National Bank. We once again
achieved record earnings with a net income of $2,404,000, representing a 29%
increase over the previous year. This was accomplished despite the pressures
created by increased competition and rising interest rates.
One of the primary reasons for our improvement in earnings was the continued
growth at our newer branch offices in Luzerne and Bradford counties. As these
offices expand we believe they will generate additional sources of revenue
without adding heavily to our operating expenses. With this in mind, our Board
of Directors has determined that further expansion of our banking network, along
with the addition of new banking products, will be necessary if we are to
continue to significantly increase profits and improve shareholder value. We are
currently evaluating several opportunities to acquire branch offices from other
institutions. At this point it is difficult to say if these acquisitions will be
accomplished, but we are optimistic about our prospects. We also expect to see
additional opportunities in the future as large banks continue to consolidate in
order to reduce expenses in what they consider to be unprofitable markets.
In addition to expanding our branch office network we are also making a
significant effort to improve our non interest income. Many banks have focused
their attention in this area in an effort to minimize the negative effects of
shrinking net interest margins resulting from customer refinancing and increased
competition for loans and deposits. During 1999 we entered into an agreement
with a group of Nationwide Insurance agents to sell their auto and homeowners
insurance. We presently have two licensed agents on staff and plan to add
additional resources when necessary. A bankwide awareness campaign has been
initiated and we expect to see some positive results by year end. The insurance
agency along with our trust department and other products should continue to
generate additional sources of revenue for our bank in the foreseeable future.
Sadly, I must report to you the recent loss of R. Levi Tyler, one of our most
dedicated directors. Levi was an outstanding Board Member who clearly understood
what the average person expected from a community bank. He represented a strong
voice in favor of customers who needed financial help and was always an advocate
of delivering our best service at the lowest possible price. Levi will be
greatly missed.
We believe that our future prospects remain very strong and we look forward to
the many challenges which our industry will face in the new millennium. Please
be assured that our outstanding staff, dedicated board members and committed
management team are more than capable of meeting these challenges. It is a
pleasure to serve as the CEO of your bank.
Best regards
Thomas A. McCullough,
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
Grange National Banc Corp. and Subsidiary
Selected Financial Data
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
SUMMARY OF OPERATIONS:
Gross interest income.................. $11,401 $10,116 $8,798 $7,655 $6,599
Gross interest expense................. 5,082 4,452 3,788 3,245 2,858
---------------------------------------------------------------------
Net interest income.................... 6,319 5,664 5,010 4,410 3,741
Loan loss provision.................... 220 270 190 125 115
---------------------------------------------------------------------
Net interest income after
loan loss provision................. $6,099 $5,394 $4,820 $4,285 $3,626
=====================================================================
Income before income taxes............. $3,082 $2,570 $2,292 $2,158 $1,697
Provision for income taxes............ 678 710 684 660 518
---------------------------------------------------------------------
Net income............................. $2,404 $1,860 $1,608 $1,498 $1,179
=====================================================================
PER SHARE DATA:
Net income basic....................... $3.09 $2.45 $2.12 $1.98 $1.56
Net income diluted.................... $2.77 $2.27 $2.07 $1.99 $1.62
Cash dividends......................... $0.10
Stock dividends........................ $0.97 $0.71 $0.44 $0.37 $0.07
AVERAGE SHARES OUTSTANDING............... 779 744 742 740 740
FINANCIAL CONDITION AT YEAR END:
Total assets......................... $169,332 $149,953 $124,417 $104,199 $91,622
Total loans.......................... 102,317 90,499 76,995 62,033 52,538
Allowance for loan losses............ 1,092 940 767 623 532
Total deposits....................... 140,580 129,891 108,789 91,055 79,866
Stockholders' equity................. 15,962 14,767 12,638 10,940 9,522
RATIOS:
Based on Average Balances:
Return on assets..................... 1.49% 1.37% 1.39% 1.51% 1.40%
Return on equity..................... 15.56 13.68 13.80 14.73 13.32
Equity to assets..................... 9.56 10.04 10.15 10.30 10.51
Primary capital to assets............ 10.19 10.71 10.67 10.63 11.09
Internal capital generation rate..... 15.36 13.47 13.50 14.56 12.43
At Year End:
Equity to assets..................... 9.42 9.84 10.16 10.50 10.39
Primary capital to assets............ 10.07 10.47 10.77 11.10 10.97
BOOK VALUE/SHARE......................... $20.36 $19.65 $17.40 $15.40 $13.22
</TABLE>
Note: share and per share amounts have been restated to give effect to stock
dividends and stock splits.
-2-
<PAGE>
Grange National Banc Corp. and Subsidiary
Grange National Banc Corp. (Company) is a Pennsylvania financial holding
company, headquartered in Laceyville, Pennsylvania, with Grange National Bank
(Bank) as its only subsidiary. The Bank was established in 1907 and 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:
o checking
o savings
o money market accounts
o certificates of deposit
o Individual Retirement Accounts
o MAC automated teller machine cards
Internet banking will be introduced during 2000. This newest service will
enable our customers to view balances and histories of their deposit and loan
accounts, as well as transfer funds between accounts, and pay bills online.
Loan services include:
o personal loans
o business loans
o municipal loans
o residential mortgages
o commercial mortgages
o Small Business Administration loans
o personal lines of credit
o commercial lines of credit
o letters of credit.
Through Northeast Abstract, a limited liability partnership, formed by us
and Mountain Laurel Abstract, we offer title searches and title insurance for
real estate transactions.
We now offer our customers a variety of insurance products at the Bank.
Insurance products with American General Financial Group and Nationwide
Insurance include:
o Old Line Life whole life insurance
o Old Line Life universal life insurance
o Old Line Life term life insurance
o Provident disability insurance
o Nationwide homeowner's insurance
o Nationwide Auto insurance
o Nationwide personal liability insurance
-3-
<PAGE>
Our trust department offers:
o personal and investment trusts
o trusts under will
o estate administration services
o estate planning
o living trusts
o Individual Retirement Accounts.
Grange's other services include discount brokerage services, safe deposit
boxes and payroll processing.
Highlights
Grange reported record net income of $2,404,000 in 1999 compared to
$1,860,000 in 1998, an increase of 29% for the period. The return on average
assets was 1.49% and the return on average equity was 15.56% in 1999. In 1998
the return on average assets was 1.37% and the return on average equity was
13.68%. Deposits increased by 8% from the end of 1998 to the end of 1999. Loans
increased by 13% from the end of 1998 to the end of 1999. Total assets increased
by 13% from the end of 1998 to the end of 1999.
Basic net income increased from $2.45 per share for 1998, to $3.09 per
share for 1999, an increase of 26%. Dividends to stockholders increased from
$0.71 (payable in stock) in 1998, to $0.97 (payable in stock dividend) in 1999,
an increase of 37%. 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 our stockholder's point of view, they do not pay tax on
the stock they receive, and have the option of selling the stock if they do want
the cash.
Concerns over Y2K proved to be more hype than reality. We took all the
prudent steps of testing and replacing or upgrading computer hardware and
software which indicated any possible problems reading the year 2000. We also
increased our supply of cash on hand to accommodate an anticipated increase in
demand. Fortunately none of the dire predictions materialized. Customers did not
take out large amounts of cash, computers did not crash, the electricity did not
go out, and the phones continued to work just fine. All of the Bank's
computerized systems worked as expected. Bank officers were on hand at the bank
during the century date change to deal with any possible problems. Balances and
transactions were checked after the year end, and the beginning of 2000
processing to make sure there were no problems related to Y2K. February 29, 2000
as leap day was considered a critical date for Y2K problems as well. Our systems
did not have any Y2K problems with the year change or leap day 2000.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Be sure to read the consolidated financial statements and selected
financial data presented in other parts of this report to obtain a complete
understanding of the discussion and analysis.
FINANCIAL CONDITION
Grange's primary source of profits is by 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 our net interest yield. For the last three years
ended December 31, net interest yields have ranged from 4.44% in 1999 to 4.72%
in 1998 and 4.79% in 1997.
Interest rate risk management requires us to maintain an appropriate
balance between
o interest sensitive assets
o interest sensitive liabilities
o liquidity to meet loan demand
o depositor's withdrawals
o operating expenses
o providing an adequate capital base for expansion and unforeseen losses
A discussion of each of these factors relating to our financial condition
follows.
LIQUIDITY AND RATE SENSITIVITY
Liquidity management requires us to maintain adequate cash resources to
meet our short and long term operating needs. This includes funding for loans
for our customers, funding to take advantage of prudent investment strategies,
and funding for operations expansion. We are continuing our strategy of relying
on access to our line of credit at the Federal Home Loan Bank of Pittsburgh to
fund daily cash needs, enabling us to be more fully invested in higher yielding
investments. Maturing investments and time deposits provide funding for the
longer term, while our line of credit funds short term fluctuations. Grange's
"borrowing capacity" at the Federal Home Loan Bank is $64,798,000, which had a
$9,002,000 balance at December 31, 1999. The Bank's deposit balance at FHLB was
approximately $2,227,000. Investments maturing or expected to be called in 1999
include $951,000 in bonds classified as held to maturity, and $4,005,000 in
bonds available for sale. In addition, we have $39,152,000 in bonds, maturing in
more than one year, classified as available for sale, which can be sold to meet
liquidity needs. Stable growth of core deposits provides additional liquidity.
-5-
<PAGE>
Our earnings are dependent on maintaining adequate net interest yield or
spread between rates earned on assets and the cost of interest bearing
liabilities. We must manage our interest rate sensitivity to maintain an
adequate spread during both rising and declining rate environments. This way we
can respond within a reasonable time, to changing interest rates and, or
changing balances in loans and investments as compared to deposits and debt.
Occasionally we have opportunities to increase income by taking advantage of
mismatches in maturing assets and liabilities. We are very selective in taking
advantage of these opportunities because this increases interest rate risk.
Decisions about which bonds to purchase include whether to buy short-term
or long term bonds. Investing in short-term bonds enhance rate sensitivity but
usually have lower yields, while long-term bonds reduce rate sensitivity but
usually have higher yields. We will invest in bonds with 10 - 20 year maturities
when their yields are high enough to compensate for their greater interest rate
risk. Additionally, we manage the risk by the use of a "trigger" strategy to
sell certain long term bonds before their value goes too low in order to
minimize losses. The money will then be reinvested in bonds at the new interest
rates.
Our loan portfolio has more variables than our bond portfolio. Competition
from other lenders as well as consumers's demand for particular loan products
greatly influence our decisions regarding the types and rates of loans we hold.
We are able to create loan products which adjust to interest rate changes, but
consumers demand features which will make them attractive before they will
accept these loans. While convenience and service are important to our
customers, pricing is also important. Consumers generally require more favorable
pricing when interest rate risk is shifted from us to them. Certain products
such as fixed rate mortgages are expected by our customers. These loans have
more interest rate risk because of their long term and need to be priced higher.
(In pricing these loans, such as long term mortgages, interest rate risk is in
addition to other factors such as collateral risk, credit risk, and repayment
risks.) Competition from other lenders has a big impact on our choices of
pricing and terms of the loans we offer.
Having a similar amount of assets repricing, or maturing, at or about the
same time as our liabilities re-price or mature reduces our interest rate risk.
We measure our assets and liability positions by using a rate sensitivity report
which categorizes our assets and liabilities according to re-pricing
opportunities and maturity dates. Rate sensitive balances are defined as those
balances that mature or can be repriced within one year. However, we recognize
certain trends and historical experiences for some products. For example, the
Bank has a number of deposit accounts, including savings, interest checking, and
money market accounts which may have withdrawals. We know that while all
customers in these account categories could withdraw their money on any day,
they do not do so, even with interest rate changes. These accounts are core
deposits and do not react the same from interest rate changes as time deposits
do. Checking and savings accounts tend to change according to cash flow and
transaction needs of our customers, as well as other non-interest rate reasons
such as account charges and customer service. We believe these deposits will not
fluctuate more than 10% within three months, not more than an
-6-
<PAGE>
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 our interest rate sensitivity positions as of December 31,
1999. The time periods we use refer to the earliest possible repricing period
(with the exception of checking and savings deposits), not maturity.
<TABLE>
<CAPTION>
Repricing
---------
Less than Three to One to After
three twelve five five
(In thousands) months months years year
-------------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
Assets:
Interest bearing deposits.... $2,227 $99 $200
Investment securities:
Available for sale.......... 2,001 1,996 11,848 $24,192
Held to maturity............ 369 827 11,245 776
Loans........................ 8,804 10,487 28,673 54,522
-----------------------------------------------
Total..................... 13,401 13,409 51,966 79,490
-----------------------------------------------
Liabilities:
Time deposits................ 19,397 23,196 29,411
Checking and savings deposits 4,640 6,959 13,919 20,879
Borrowed funds............... 4,484 7,302
-----------------------------------------------
Total......................... 28,521 30,155 50,632 20,879
-----------------------------------------------
Gap:
By period.................... ($15,120) ($16,746) $1,334 $58,611
===============================================
By cumulative................ ($15,120) ($31,866) ($30,532) $28,079
===============================================
Cumulative Gap as
Percentage of total assets...... -8.93% -18.82% -16.03% 16.58%
</TABLE>
According to the table we have a negative gap position, which means our
liabilities will reprice faster than our assets. When interest rates are rising
this will reduce our interest spread and our net interest income. We expect
rates to continue to rise at an even pace during most of 2000, and probably
level off near the end of the year. Because interest rates on deposit accounts
usually do not change as quickly as bond or loan rates we believe our interest
spread will not go down very much.
When we take advantage of repricing gaps to enhance portfolio yield, we
have plans to sell bonds with longer maturities if they reach specific prices.
This should minimize losses if interest rates become volatile and rise too
quickly. When we buy longer term bonds we are prepared to accept greater
volatility in their values. This provides us with higher yields and helps
control interest rate risk in our bond portfolio. We will continue to take
advantage of temporary volatility as buying opportunities improve our bond
portfolio's yield.
-7-
<PAGE>
Adjustable rate loans and mortgages will continue as part of our loan mix
in order to reduce imbalances in our longer term GAP positions. We purchase
bonds in our available for sale category with maturities ranging from five to
twenty years. These maturities, along with our credit line at the Federal Home
Loan Bank and our ability to sell bonds in our "available for sale" portion of
our portfolio, provides adequate cash flow to respond to changing interest rates
and liquidity needs. We constantly monitor our gap position so we can adjust
loan pricing or deposit pricing when interest rates change.
LOAN PORTFOLIO
Our total loans outstanding at December 31, 1999 increased by $11,818,000
or 13% to $102,317,000 from the December 31, 1998 total of $90,499,000. This is
less than the 18% increase in 1998 less than the 24% increase in 1997. The
average loan balance for 1999 was $95,512,000 compared to $82,532,000 for 1998.
Primarily growth occurred in tax exempt loans and one-to-four family mortgages.
Tax exempt loans increased by $4,813,000 or 236% to $6,856,000 at the end of
1999, from $2,043,000 at the end of 1998. Most of the increase was due to a few
large tax anticipation loans to local governments. These loans are for only one
year and usually are put out for bid every year. One-to-four family mortgages
increased by $3,423,000 or 7% to $52,154,000 at the end of 1999 from $48,731,000
at the end 1998. Our Back Mountain office continues to have most of the
commercial loan growth. Our newest office at the Pine Mall in Wilkes-Barre has
had very good consumer loan demand with $1,575,000 of consumer loans as of
December 31, 1999. These offices are generally competing with very large banks
and is an indication of the consumer and businessman's need for the service of a
community bank. The average interest rate on total loans decreased slightly from
9.24% for 1998 to 8.69% for 1999.
The breakdown of our loans at December 31, 1999 and 1998 are as follows:
(In thousands) 1999 1998
---- ----
Real estate mortgages:
Agricultural.............................. $ 1,217 $ 1,323
Residential, 1 - 4 family................. 52,154 48,731
Residential, multi-family................. 1,703 747
Nonfarm, nonresidential properties........ 15,348 14,076
----------------------
Total real estate mortgages.......... 70,422 64,877
Agricultural loans.......................... 279 268
Commercial loans............................ 13,856 13,653
Municipal loans............................. 6,856 2,043
Consumer loans.............................. 11,003 10,086
----------------------
Total....................................... 102,486 90,927
Unearned income............................. 169 428
----------------------
Total....................................... $102,317 $90,499
======================
-8-
<PAGE>
Final loan maturities and the rate sensitivity of the loan portfolio at
December 31, 1999 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........ $16,118 $25,759 $28,545 $70,422
Agricultural loans........... 140 139 279
Commercial loans............. 4,010 3,391 6,525 13,926
Municipal loans.............. 3,899 411 2,546 6,856
Consumer loans............... 1,175 6,226 3,602 11,003
---------------------------------------------------------
Total.............. $25,342 $35,926 $41,218 $102,486
=========================================================
Loans at fixed interest rates. $5,765 $19,466 $29,839 $55,070
Loans at variable interest
rates 19,577 16,460 11,379 47,416
----------------------------- ---------------------------
Total............... $25,342 $35,926 $41,218 $102,486
=========================================================
</TABLE>
We discontinue accruing interest on a loan when we believe that we probably
will not be able to collect the balance. This decision is made after considering
various factors including attempts to collect the loan, the customer's financial
condition and future prospects. Any payments made on non-accrual loans are
applied to reduce the principal balance on the loan. Our non-accrual loans at
December 31, 1999 were $103,000 and $205,000 in 1998. Interest that would have
been included in income if the loans were not classified as non-accrual was
approximately $9,000 in 1999 and $19,000 in 1998.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses and related allowance for loan losses are
based upon our continued evaluation of the current loan portfolio considering
such things as 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 any
other relevant factors. The reserve is not divided to provide for any individual
loan or loan classification. The total allowance balance is available to absorb
losses from all loans included in the portfolio.
Our charge-offs minus our recoveries during 1999 were $68,000 and $97,000
during 1998, an decrease of 30%. Average loans increased from $82,532,000 in
1998 to $95,512,000 in 1999. At December 31 the balance in our allowance for
loan losses had increased from $940,000 in 1998 to $1,092,000 in 1999, and the
ratio of loan loss allowance to loans was 1.04% in 1998 and 1.07% for 1999. We
believe the quality of the loan portfolio remains strong, but expect our losses
will increase as the size of the loan portfolio increases. We will continue to
build the loan loss reserve to keep up with the size of the loan portfolio and
to cover other potential losses which we may identify.
-9-
<PAGE>
The following table shows loans past due 90 days or more on which interest
has continued to be accrued, at December 31:
(In thousands) 1999 1998
---- ----
Real estate mortgages........ $0 $1
Demand....................... 0 9
Installment.................. 9 0
---------------------
TOTAL........................ $9 $10
=====================
This table summarizes our loan loss experience for the years ended December
31:
(In thousands) 1999 1998
---- ----
Balance at beginning of period.............. $940 $767
-------------------
Charge-offs:
Commercial, consumer and agricultural..... 33 59
Real estate mortgages..................... 8 40
Installment............................... 38 3
-------------------
TOTAL....................................... 79 102
-------------------
Recoveries:
Commercial, consumer and agricultural..... 9 1
Real estate mortgages..................... 0 0
Installment................................ 2 4
-------------------
TOTAL....................................... 11 5
-------------------
Net charge-offs............................. 68 97
-------------------
Provision charged to operations............. 220 270
-------------------
Balance at end of period.................... $1,092 $940
===================
Average loans outstanding................... $95,512 $82,532
Loans outstanding, December 31.............. $102,317 $90,499
Loan reserve ratios:
Net loan charge-offs - average loans...... 0.07% 0.12%
Reserve - loans, December 31.............. 1.07% 1.04%
Our loan losses continue to be low, which is a result of the high quality
of the loan portfolio, close monitoring of marginal loans and persistent
collection efforts on past due accounts.
INVESTMENT PORTFOLIO
The investment portfolio increased by $7,929,000 or 17% during 1999 to
$54,635,000 at the end of the year. The increase was due to deposit growth. If
not for the continued strong loan
-10-
<PAGE>
demand, investment growth would have been greater. Available for sale securities
increased by $1,167,000 or 37% to $41,418,000 and held to maturity securities
decreased by $3,238,000, or 20% to $13,217,000, from December 31, 1998 to
December 31, 1999, as we have designated all but new corporate bond purchases as
available for sale.
During 1999 we purchased mostly longer term bonds for our
available-for-sale portfolio because we believe we need to invest in longer term
bonds to get higher returns. Although the value of many of these bonds declined
due to rising interest rates, we believe the higher yield is worth the
volatility in the market values. We may sell some bonds if their values fall far
enough, in order to minimize losses. Credit quality remains a high priority when
purchasing bonds, and we continue to buy high quality bonds.
The Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" requires us to classify our
debt and equity securities into three categories: held to maturity, available
for sale, or trading. Available for sale bonds are evaluated quarterly, and
their carrying values adjusted to reflect their market values, with the
resulting adjustment entered as an adjustment, net of tax, to our net worth. The
market value of investments available for sale as of December 31, 1999, reflect
a change from an unrealized gain of $260,000 at the end of 1998 to an unrealized
loss of $1,149,000. As interest rates continue to go up during 2000, this
unrealized loss will increase. We will continue to monitor the market values of
our bonds and may selectively sell bonds if we need to stop further losses.
However, we expect these kinds of changes in market values on long term bonds
and have the ability to continue to hold them if we believe it is in our best
interest to do so.
The carrying value of our investment securities both available for sale,
and held to maturity at December 31, are summarized in the table below:
(In thousands) 1999 1998
---- ----
Available for sale:
U.S. Treasury securities..................... $4,509 $5,886
U.S. government agencies and corporations.... 23,747 15,551
State and municipal securities............... 11,781 8,134
Other securities............................. 1,381 680
------- -------
Total..................................... $41,418 $30,251
======= =======
Held to maturity:
U.S. Treasury securities.....................
U.S. government agencies and corporations.... $5,019 $10,728
State and municipal securities............... 2,414 2,985
Other securities............................. 5,784 2,741
------- -------
Total............................ $13,217 $16,454
======= =======
-11-
<PAGE>
The following table shows the maturities of our investment and debt
securities as of December 31, 1999 and the weighted average yields (tax-exempt
securities on tax equivalent basis assuming 34% tax rate) of the securities:
<TABLE>
<CAPTION>
Due after Due after
Due within one year five years
(In thousands) one year or through through Due after
less five years ten years ten years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury
securities............. $3,004 5.49% $1,492 6.76%
U.S. government
agencies and
corporations............. 1,001 5.11% 8,711 6.15% $6,039 6.35% $8,989 6.10%
State and municipal
securities............. 1,895 6.83% 4,873 6.66% 5,871 7.25%
Other securities........... $1,283
------ ------- ------- -------
Total...................... $4,005 5.39% $12,098 6.33% $10,912 6.49% $16,143 6.55%
====== ======= ======= =======
Held to maturity:
U.S. government
agencies and
corporations............. $4,167 6.47% $528 6.76% $324 7.63%
State and municipal
securities............... 951 6.92% 1,463 6.99%
Other securities........... 5,536 6.31% 248 7.10%
------ ------- ------- -------
Total...................... $951 6.92% $11,166 6.46% $528 6.76% $572 7.40%
====== ======= ======= =======
</TABLE>
As you can see from the table, longer maturity bonds provide higher yields.
Because of this, we are purchasing more longer term bonds than we did before. We
believe we have enough capital to tolerate the larger market price variations of
longer term bonds.
DEPOSITS
Our deposit growth slowed to 8% in 1999. Deposits at year end 1999 were
$140,580,000, an increase of $10,689,000 from the 1998 year end balance of
$129,891,000. Non-interest bearing deposits increased $1,470,000 or 7%, to
$22,180,000 and interest bearing deposits increased $9,220,000 or 8% to
$118,401,000. The percentage of non-interest bearing deposits to average total
deposits for 1999 increased to 16% from 15% for 1998. The percentage of average
non-interest bearing deposits to average total deposits is important to our
profitability because it decreases our overall interest expense.
Average time deposits increased by $7,013,000 during 1999 to $66,243,000
from $59,230,000 during 1998. Their proportion of total average deposits
increased to 58% in 1999
-12-
<PAGE>
from 50% in 1998. This is important because time deposits cost us more than
other deposits and react to rising or falling interest rates sooner than other
deposit accounts. However, the average interest rate does not rise as fast,
because only new or variable certificates of deposit will have the new rates.
When interest rates change on other deposit accounts, such as money market or
savings, all of the accounts' rates change. Average deposits in savings and
money market accounts increased by $2,583,000 from 1998 to 1999, and average
deposits in NOW and Super- NOW accounts increased by $3,512,000 during the same
period. We expect continued strong growth in deposits from the office in
Towanda, the Back Mountain office at Trucksville and the bank's newest at the
Pine Mall in Wilkes-Barre.
The average balance of deposits and average rates paid on those deposits
during the years ended December 31 are displayed in the following table:
<TABLE>
<CAPTION>
1999 1998
---- ----
Average Average Average Average
(In thousands) Balance Rate Balance Rate
------- ------- ------- ----
<S> <C> <C> <C> <C>
Demand deposits:
Noninterest bearing................. $21,587 $17,505
Interest bearing.................... 16,185 1.94% 12,673 2.11%
Savings and money market deposits..... 31,578 2.49% 28,995 2.68%
Time deposits......................... 66,243 5.29% 59,230 5.57%
-------- --------
TOTAL................................. $135,593 $118,403
======== ========
</TABLE>
Maturities of certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1999 are shown below:
<TABLE>
<CAPTION>
Certificates Other
of Time
(In thousands) Deposits Deposits Total
-------- -------- -----
<S> <C> <C> <C>
3 months or less........................ $4,136 $4,136
3 to 6 months........................... 2,052 2,052
6 to 12 months.......................... 1,918 1,918
Over 12 months.......................... 5,006 5,006
No set maturity, state deposit.......... $200 200
------------------------------------------
TOTAL......................... $13,112 $200 $13,312
==========================================
</TABLE>
CAPITAL
Having adequate capital is necessary to support continued growth and
earnings, to meet the needs of our depositors and borrowers, and to maintain a
reasonable rate of return for stockholders. Stockholders' equity increased by
$1,195,000 or 8% from $14,767,000 at December 31, 1998 to $15,962,000 at
December 31, 1999. This is less than the 17% increase
-13-
<PAGE>
during 1998. The main reason for the lower increase in equity is the decline in
market value of securities available for sale, which amounts to a decrease of
$1,409,000 after taxes. Our average equity to assets ratio was still 9.56% due
to our strong earnings in 1999. For 1998 our average equity ratio was 10.04% and
10.15% for 1997.
Our 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. Conserving capital is also much less expensive than raising new
capital. The stock dividend is popular with stockholders because it is not
taxable until the shares are sold. We need to continue to build our capital to
keep pace with the deposit growth we have experienced, and which we expect will
continue as a result of the new offices we have opened over the past several
years.
In 1989 the Federal Reserve Board issued risk-based capital guidelines,
which require banking organizations such as ours 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. To calculate "risk-weighted
assets", we apply certain risk percentages, as specified by the Federal Reserve
Board to particular categories of both on and off-balance sheet assets. These
guidelines require us to 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 us of any specific minimum Tier 1 leverage ratio
applicable to us.
The next table indicates our Tier 1 and Tier 2 capital, risk adjusted
assets, our risk-based capital ratios, and Tier 1 leverage ratios. At the end of
1999 and 1998, we exceeded all regulatory capital requirements.
-14-
<PAGE>
<TABLE>
<CAPTION>
Risk-Based Capital
December 31, (in thousands, except ratios) 1999 1998
<S> <C> <C>
Tier I capital:
Shareholders' equity.................................. $16,911 $14,369
----------------------
Tier II capital:
Loan loss reserve and adjustment for unrealized gains
on equity securities available for sale................. 1,136 940
----------------------
Total Qualifying Capital................................ $18,047 $15,309
======================
Risk-adjusted assets, net of allowances
(Including off-balance sheet items)................... $99,658 $95,881
Tier I Capital Ratio (4.00% required)................... 16.97% 15.40%
Total Capital Ratio (8.00% required).................... 18.11% 15.97%
Tier I Leverage Ratio................................... 10.11% 10.55%
</TABLE>
RESULTS OF OPERATIONS
Our net income for 1999 totaled $2,404,000 ($3.09 basic per share, based on
779,140 weighted average common shares) as compared to 1998's net income of
$1,860,000 ($2.45 per share based on 741,616 weighted average common shares),
and 1997's net income of $1,608,000 ($2.12 per share based on 757,277 weighted
average common shares).
Net interest income or the spread between total interest income and
interest expense directly impacts the results of operation. Net interest yield
for 1999 declined to 4.44% from 4.72% in 1998. Our average rate on interest
earning assets fell from 8.25% to 7.76%, while average rate on total sources to
fund the earning assets only decreased from 3.53% to 3.32%. Our interest rate
spread declined primarily due to lower rates on new loans and many existing
loans being refinanced by customers. Average rates on loans declined from 9.24%
in 1998 to 8.69% in 1999, while average rates on investments declined from 6.44%
in 1998 to 6.38% in 1999. Interest income on loans for 1999 increased by
$675,000 (on a tax equivalent basis) or 14% similar to an increase of $767,000
or 15% for 1998 over 1997. Overall, the increased volume of loans increased
interest income by $1,146,000 but lower rates reduced interest income by
$471,000, for a net increase of $675,000.
Greater volume investment securities increased interest income by $890,000,
but lower yields reduced interest income by $24,000, for a net increase of
$866,000. If we had not been purchasing longer term bonds our yields would have
been much lower. Interest on investments (on a tax equivalent basis), was up 33%
to $3,460,000 in 1999 from $2,594 in 1998.
We need to continue to increase the size of our loan portfolio to
compensate for our shrinking net interest yield. The loan to deposit ratio at
1999 year end was 73% up from 70% at 1998 year end. Loan growth is expected to
continue, and the loan to deposit ratio should
-15-
<PAGE>
continue to increase slightly, as loan demand is experienced at the Tunkhannock,
Edwardsville, Little Meadows, Towanda, Back Mountain, and Pine Mall office. Our
provision expense for loan losses declined $50,000, from $270,000 in 1998 to
$220,000 in 1999, as we resolved a few large problem loans without suffering
losses.
Salaries and employee benefits increased by $162,000 or 9% in 1999 as
compared to 1998. This increase is due primarily to annual salary increases and
only a slight increase in the number of employees. We had several branch
managers retire during 1999. Edward O'Malley, on December 31, 1998 from the
Tunkhannock office, Alice Carr from the Lawton office, Bonnie Brodhun from the
Laceyville office, and Lee Posten from the Back Mountain office, announced his
retirement for January 2000.
Occupancy expense increased by $29,000 or 7% in 1999 as compared to 1998.
Furniture and equipment expense was $36,000 or 11% higher in 1999 than it was in
1998. Most of the increase was due to purchasing various additional equipment
and replacing old equipment which no longer worked properly. We incurred some
minimal expense to make sure our equipment was Y2K ready. Most of the testing we
were able to do ourselves, but the mainframe and related systems had to be
tested by Jack Henry Inc., our software supplier.
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 $18,000
in 2000. The Federal Deposit Insurance Corporation (FDIC) premium on deposit
insurance remains at zero for 2000.
IMPACT OF INFLATION
The majority of our assets and liabilities are monetary in nature and
therefore differ greatly from most industrial companies that have significant
investments in fixed assets or inventories. We believe that the biggest impact
on net income is changes in interest rates and our ability to react to those
changes. Our discussion of liquidity and rate sensitivity explained the
importance of monitoring our balanced position in 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 adequate 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.
-16-
<PAGE>
YEAR 2000 IMPACT
After spending the last couple of years preparing for the century date
change, our New Year's weekend was pleasantly uneventful. Midnight came and went
without problems, as did the first processing day of 2000. All of our senior and
middle management was on hand to check on possible malfunctions and problems.
Prior to the year end we had throughly tested software and hardware and made a
few changes to correct or prevent some possible problems. One of the biggest
issues we were concerned about was public perception of possible problems, and a
possible large customer demand for cash that perception might cause. As part of
our preparations we significantly increased our supply of cash and constantly
reassured our customers that we and the rest of the banking industry was ready
for Y2K. In the end there were no unusual demands for cash, nor were there more
than a very few highly isolated cases of computer failures. None of our vendors
suffered problems that had any effect on us. Similarly, leap day 2000 passed
without incident. Our expenses for Y2K preparations were no more than $40,000,
nearly half of which was increased borrowing expense due to the extra cash we
kept on hand.
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 is available to the public. We are proud of our
Community Reinvestment activities and our efforts to meet the credit needs of
people of all income levels, race, religions or national origins. The Office of
the Comptroller or the Currency awarded us a "Satisfactory" rating after their
most recent examination of the Bank's CRA practices. The OCC has implemented new
examination procedures for Community Reinvestment activities and under these new
procedures, nearly all the Bank's efforts to improve the communities in which it
operates are no longer considered. Only very specific activities targeted only
to low and low-to- moderate income households are considered CRA activities.
Activities that help a community as a whole do not qualify, except under
extremely limited circumstances.
In accordance with our goal to develop products which are affordable and
accessible to all segments of our marketplace, we have worked with one of our
correspondent banks, the Atlantic Central Banker's Bank, to offer a mortgage
product to our 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.
OTHER ACTIVITIES
We have also taken a leadership role in the ongoing Laceyville Boro
Revitalization effort.
-17-
<PAGE>
The Borough received a grant from the Commonwealth of Pennsylvania in order to
develop a site master plan to include concepts which may solve some of the
issues affecting the downtown area. A Comprehensive Planner has been hired to
provide plans for streetscape improvement and to identify other possible
business opportunities for the community. Monthly meetings are held at our
office in Laceyville and several of our bank officers take an active role on the
revitalization committee.
The community has made application to the state for a matching grant for
the streetscape improvements, and will soon be submitting another application to
fund building facade improvements.
INSURANCE ACTIVITIES
In 1997 we obtained authorization from the OCC and the Pennsylvania
Department of Insurance to sell insurance products. Two employees have obtained
licenses to sell life, health, disability insurance, as well as property and
casualty and liability insurance. We offer Old Line Life and Provident
disability insurance products from American General Financial Group, and
Homeowners, Auto and Personal umbrella liability insurance from Nationwide
Insurance. Both companies are solid and have excellent reputations. Under our
agreement with Nationwide, our agents are associate agents with a group of local
Nationwide agents. This provides our insurance customers with a great company,
competitive rates and what we believe is the best local service.
We just recently formed an agency along with Mountain Laurel Abstract,
called Northeast Abstract to provide title insurance and provide "one stop
shopping" for our mortgage customers. Now customers can apply for a mortgage and
get their title insurance and homeowner's insurance all with just one stop. We
believe our customers will like this convenience.
TRUST DEPARTMENT
Our Trust Department continues to grow and expand. We plan to do more
advertising this year emphasizing the trust department. Offering personal
trusts, irrevocable trusts, insurance trusts, trusts under will, estate
management services and IRAs. Plans to expand the department include soliciting
accounts under $1,000,000, a segment large banks no longer pursue. Management
does not expect the Trust Department to be profitable for at least the next few
years.
-18-
<PAGE>
Grange National Banc Corp and Subsidiary
Average Balances, Interest Income/Expense and Rates
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
(1) Interest Average (1) Interest Average
Average Income/ Interest Average Income/ Interest
Years Ended Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Mortgages.......................... $56,971 $4,762 8.36% $53,533 $4,681 8.74%
Installment........................ 2,275 278 12.22 4,505 484 10.74
Commercial......................... 36,266 3,257 8.98 24,494 2,457 10.03
--------------------- ---------------------
Total loans...................... 95,512 8,297 8.69 82,532 7,622 9.24
--------------------- ---------------------
Securities available for sale:
U.S. Treasury securities........... 5,108 303 5.93 6,812 405 5.95
U.S. government agencies........... 22,236 1,362 6.13 7,399 462 6.24
Municipal bonds.................... 11,112 782 7.04 4,771 331 6.94
Other securities................... 998 63 6.31 577 37 6.41
--------------------- --------------------
Total available for sale......... 39,454 2,510 6.36 19,559 1,235 6.31
--------------------- --------------------
Securities held to maturity:
U.S. government agencies........... 7,182 466 6.49 15,035 980 6.52
Municipal bonds.................... 3,081 202 6.56 3,404 230 6.76
Other securities................... 4,500 282 6.27 2,282 149 6.53
--------------------- --------------------
Total held to maturity........... 14,763 950 6.44 20,721 1,359 6.56
--------- ----------- --------------------
Total investment securities.... 54,217 3,460 6.38 40,280 2,594 6.44
--------------------- --------------------
Deposits in banks................... 3,320 126 3.80 3,193 179 5.61
--------------------- --------------------
TOTAL.......................... $153,049 $11,883 7.76 $126,005 $10,395 8.25
===================== ====================
INTEREST BEARING
LIABILITIES:
Deposits:
NOW and super-NOW.................. $16,185 $314 1.94 $12,673 $268 2.11
Savings and money market........... 31,578 785 2.49 28,995 777 2.68
Certificates of deposit............ 66,043 3,494 5.29 59,030 3,286 5.57
Other time deposits................ 200 10 5.00 200 11 5.50
--------------------- --------------------
Total deposits................... 114,006 4,603 4.04 100,898 4,342 4.30
Other borrowed funds................ 9,729 479 4.92 2,405 111 4.62
--------------------- --------------------
TOTAL.......................... 123,735 5,082 4.11 103,303 4,453 4.31
Non-interest bearing funds, net (2).. 29,314 22,702
--------------------- --------------------
TOTAL SOURCES TO FUND
EARNING ASSETS....................... $153,049 5,082 3.32 $126,005 4,453 3.53
========= ----------- ======== -----------
NET INTEREST/YIELD................... $6,801 4.44% $5,942 4.72%
=========== ===========
</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%.
-19-
<PAGE>
Grange National Banc Corp. And Subsidiary
Net Interest Income
Changes Due to Volume and Rate
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
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................................ $675 $1,146 ($471) $1,107 $1,212 ($105)
Investment securities................ 866 890 (24) 324 302 22
Deposits in other banks.............. (53) 7 (60) 2 2 0
------------------------------------------------------------------------
TOTAL........................... 1,488 2,043 (555) 1,433 1,516 (83)
------------------------------------------------------------------------
INTEREST EXPENSE:
Now/Super-Now deposits............... 46 69 (23) 31 38 (7)
Savings/Money market deposits........ 8 65 (57) 60 75 (15)
Time deposits........................ 207 377 (170) 498 471 27
Other Borrowings..................... 368 361 7 77 71 6
------------------------------------------------------------------------
TOTAL............................ 629 872 (243) 666 655 11
------------------------------------------------------------------------
NET INTEREST INCOME.................... $859 $1,171 ($312) $767 $861 ($94)
========================================================================
</TABLE>
Changes in interest due to volume and due to rate have 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%.
-20-
<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, 1999 and 1998 and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years ended December
31, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Daniel Kenia, P.C.
Tunkhannock, Pennsylvania
January 17, 2000
-21-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks......................................... $4,353,347 $2,615,466
Interest bearing deposits....................................... 2,526,347 5,610,125
Investment securities (Note 2):
Available for sale........................................ 41,417,763 30,251,442
Held to maturity, (market value
1999, $12,481,000; 1998, $16,678,000)................... 13,217,040 16,454,603
-------------------------------
Loans (Note 3).................................................. 102,486,198 90,927,128
Less: unearned interest income................................. 168,908 427,967
Less: allowance for loan losses................................ 1,092,170 940,150
-------------------------------
Loans, net............................................... 101,225,120 89,559,011
Bank premises and equipment, net (Note 4)....................... 2,899,382 3,135,784
Accrued interest and other assets............................... 3,341,951 2,080,598
Intangible assets............................................... 119,863 138,384
Other real estate............................................... 231,601 107,789
-------------------------------
TOTAL ASSETS...................................................... $169,332,414 $149,953,202
===============================
LIABILITIES:
Deposits:
Non-interest bearing deposits................................. $22,179,696 $20,710,241
Interest bearing deposits..................................... 118,400,773 109,181,088
-------------------------------
Total deposits.............................................. 140,580,469 129,891,329
Borrowed funds (Note 5).......................................... 11,786,255 4,471,214
Accrued interest and other liabilities.......................... 1,003,690 823,343
-------------------------------
Total liabilities........................................... 153,370,414 135,185,886
-------------------------------
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,
783,809 and 751,558 shares issued in 1999 and 1998,
respectively.................................................. 3,919,045 3,757,790
Additional paid-in capital...................................... 1,516,874 731,661
Retained earnings............................................... 11,675,129 10,017,937
-------------------------------
Total....................................................... 17,111,048 14,507,388
Accumulated other comprehensive income
(net of deferred income taxes) (Note 6)......................... (1,149,000) 260,000
Treasury stock, at cost (Note 1)................................ (48) (72)
-------------------------------
Total stockholders' equity.................................. 15,962,000 14,767,316
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $169,332,414 $149,953,202
===============================
</TABLE>
See Notes to Consolidated Financial Statements
-22-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans......................................... $ 8,148,308 $7,531,903 $6,462,812
Interest on investment securities:
U.S. Treasury securities......................................... 303,401 405,229 583,566
Obligations of other U.S. government
agencies and corporations...................................... 1,828,219 1,442,403 1,271,288
Obligations of states and political subdivisions (tax-exempt).... 649,464 370,571 216,027
Other securities................................................. 344,977 187,208 87,259
Interest on deposits in banks...................................... 126,377 179,432 177,211
------------------------------------------
Total interest income...................................... 11,400,746 10,116,746 8,798,173
------------------------------------------
Interest Expense:
Interest on deposits............................................... 4,602,280 4,341,667 3,753,657
Interest on borrowed funds......................................... 479,402 110,656 34,145
------------------------------------------
Total interest expense..................................... 5,081,682 4,452,323 3,787,802
------------------------------------------
Net interest income.......................................... 6,319,064 5,664,423 5,010,371
Provision for loan losses (Note 3)............................. 220,000 270,000 190,000
------------------------------------------
Net interest income after provision for loan losses.......... 6,099,064 5,394,423 4,820,371
Other Income (Note 7)................................................ 991,011 784,864 676,731
Other Expenses (Note 8).............................................. (4,008,282) (3,608,956) (3,205,301)
------------------------------------------
Income before taxes.................................................. 3,081,793 2,570,331 2,291,801
------------------------------------------
Provision for income taxes (Notes 1 and 6)........................... 678,000 710,000 684,000
------------------------------------------
Net income........................................................... $2,403,793 $1,860,331 $1,607,801
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising during period............. ($1,409,000) $176,000 $81,000
------------------------------------------
Comprehensive income................................................. $994,793 $2,036,331 $1,688,801
==========================================
Earnings per share (Notes 1, 11 and 12):
Basic................................................................ $3.09 $2.45 $2.12
==========================================
Diluted.............................................................. $2.77 $2.27 $2.07
==========================================
Basic shares outstanding............................................. 779,140 760,114 757,277
==========================================
Diluted shares outstanding........................................... 866,979 820,613 775,249
==========================================
</TABLE>
See Notes to Consolidated Financial Statements
-23-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................ $2,403,793 $ 1,860,331 $ 1,607,801
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................... 340,933 329,912 284,748
Provision for loan losses ............................................... 220,000 270,000 190,000
Increase (decrease) in deferred income taxes ............................ (791,000) (100,000) 58,000
Changes in operating assets and liabilities:
Increase (decrease) in accrued interest income and other assets .......... (528,353) (350,299) (380,868)
Increase (decrease) in accrued interest expense and other liabilities .... 238,347 170,486 119,884
-------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................................................... 1,883,720 2,180,430 1,879,565
-------------------------------------------
INVESTING ACTIVITIES:
Purchase bank premises and equipment ...................................... (86,010) (393,241) (615,241)
Decrease (increase) in other real estate .................................. (123,812) 42,006 (149,795)
Purchase of securities "available for sale" ............................... (11,099,470) (16,664,841) (3,723,722)
Decrease (increase) in mortgage-backed securities "available for sale" .... (6,349,048) (2,769,115) (3,731,563)
Sales of securities "available for sale" .................................. 2,903,735 3,755,046
Redemptions of securities "available for sale" ............................ 1,969,462 2,360,237 2,512,206
Purchase of securities "held to maturity" ................................. (3,559,228) (2,213,060) (9,703,703)
Redemptions of securities "held to maturity" .............................. 6,319,096 10,458,545 7,747,916
Decrease (increase) in mortgage-backed securities "held to maturity" ...... 477,694 505,749 (980,226)
Net Increase in loans to customers ........................................ (11,886,109) (13,601,058) (15,007,728)
Net Increase (decrease) in interest bearing deposits in banks ............. 3,083,779 (3,192,139) (443,345)
-------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES .................................................... (18,349,911) (25,466,917) (20,340,155)
-------------------------------------------
FINANCING ACTIVITIES:
Increase in deposits before interest credited ............................. 6,811,841 17,454,097 14,567,265
Increase (decrease) in borrowed funds ..................................... 7,315,041 2,191,920 666,134
Interest credited to deposits ............................................. 3,877,299 3,648,553 3,166,016
Cash in lieu of fractional shares ......................................... (30,626) (29,370) (23,094)
Proceeds of sale of treasury stock ........................................ 24 120 244
Issuance of common stock ................................................. 230,493 122,432 31,995
-------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES .................................................... 18,204,072 23,387,752 18,408,560
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................................................... 1,737,881 101,265 (52,030)
CASH AND CASH EQUIVALENTS, January 1 ....................................... 2,615,466 2,514,202 2,566,232
-------------------------------------------
CASH AND CASH EQUIVALENTS, December 31 ..................................... $4,353,347 $ 2,615,466 $ 2,514,202
===========================================
SUPPLEMENTARY SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................................. $1,065,783 $ 996,759 $ 993,280
Income taxes ............................................................. $ 817,000 $ 780,000 $ 765,553
Non-cash investing and financing activities:
Unrealized gains (losses) on securities .................................. ($1,409,000) $ 176,000 $ 81,000
Stock dividend ........................................................... 715,975 498,337 292,284
</TABLE>
See Notes to Consolidated Financial Statements
-24-
<PAGE>
GRANGE NATIONAL BANC CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional Other
Treasury Stock Paid-in Retained Comprehensive
Stock $5 Par Capital Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $0.44 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
Net income ........................ 1,860,331 1,860,331
Stock dividend $0.71 per
share, plus cash in lieu of
fractional shares ............... 52,570 445,767 (527,707) (29,370)
Stock split ....................... 1,841,240 (1,841,240) 0
Issuance of common stock .......... 47,455 74,976 122,431
Sale of stock from treasury ....... 120 120
Unrealized holding gains
on investment securities ........ 265,000 265,000
Deferred tax liability ............ (89,000) (89,000)
----------------------------------------------------------------------------------
Balance, December 31, 1998 ........ ($72) $3,757,790 $731,661 $10,017,937 $260,000 $14,767,316
Net income ........................ 2,403,793 2,403,793
Stock dividend $0.97 per
share, plus cash in lieu of
fractional shares .............. 80,875 635,100 (746,601) (30,626)
Issuance of common stock .......... 80,380 150,113 230,493
Sale of stock from treasury ...... 24 24
Unrealized holding gains (losses)
on investment securities ........ (2,134,000) (2,134,000)
Deferred tax asset ................ 725,000 725,000
----------------------------------------------------------------------------------
Balance, December 31, 1999 ........ ($48) $3,919,045 $1,516,874 $11,675,129 ($1,149,000) $15,962,000
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
-25-
<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) provides a variety of banking services to individual and corporate
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"). In accordance with
SFAS No. 115 the Company classifies each debt and equity security as held to
maturity or available for sale. Investments classified as held to maturity are
reflected at amortized cost. Investments classified as available for sale are
reflected at fair market value. Realized gains or losses on securities are
included in earnings. Unrealized gains and losses on available for sale
securities are excluded from earnings and reflected, net of income taxes as
other comprehensive income and in a separate component of stockholders' equity
as accumulated other comprehensive income until realized. These unrealized gains
and losses are the only component of comprehensive income. Upon purchase of
securities the Company specifically designates which securities are classified
as "available for sale" and "held to maturity".
-26-
<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, 1999 was within the approved 50% limit and no regulations have been
violated.
-27-
<PAGE>
Advertising Costs:
The Company follows the policy of charging advertising cost to expense as
incurred. During 1999, 1998 and 1997, advertising costs amounted to $82,000,
$103,000 and $129,000 each.
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
1999 was $18,520, and 1998 and 1997 were $17,025 each.
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 was two shares of common stock in 1999
and six shares of common stock in 1998.
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 $15,077, $16,848
and $12,982 as matching contribution to employee deferrals during 1999, 1998 and
1997. The Company also made an Employer Optional Contribution to the Plan of
$83,343, $77,820 and $71,139 during 1999, 1998 and 1997, which represents 6% of
gross salaries for each year.
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.
-28-
<PAGE>
Income Taxes:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently payable and deferred
taxes related primarily to the temporary differences between the financial
reporting and tax basis of an asset or liability. The temporary differences
relate principally to the use of different depreciation methods for financial
statement and income reporting purposes, resulting in differences in asset basis
due to accumulated depreciation on bank premises and equipment, accretion of
discounts on financial basis of securities, allowances for loan losses and
unrealized holding gains and losses on available for sale securities which are
not included in taxable income. 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, 1999 was approximately $45,000.
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.
-29-
<PAGE>
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.
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 1999 or 1998.
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
Financial instruments whose contract 1999 1998
---- ----
amounts represent credit risk:
Commitments to extend credit........... $5,455 $4,020
Standby letters of credit.............. $1,412 $ 463
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
-30-
<PAGE>
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.
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 $2,350,000, 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, 1999 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 16.97% and 18.11% respectively. The Bank's leverage ratio at December
31, 1999 was 10.11%. 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
-31-
<PAGE>
of December 31, 1999, the Bank had retained earnings of $11,675,000 of which
under federal regulations, the Bank's extension of credit to its parent company
must be on the same terms and conditions as extensions of credit to
nonaffilliates. The maximum amount the Bank can loan to the Company is limited
to 20% of its capital and surplus. Such extensions of credit, with limited
exceptions, must be fully collateralized.
Line of Credit:
At December 31, 1999 the Company had unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh in the amount of $55,950,000 at a variety
of available terms.
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
displaying 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.
Recent Accounting Pronouncements:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued by the Financial Accounting Standards Board in June 1998.
The statement establishes accounting and reporting standards for derivative
instruments embedded in other contracts and hedging activities. SFAS N. 137 was
issued to defer the effective date of SFAS No. 133 to apply to all financial
statements for years beginning after June 15, 2000. Due to the Company's limited
use of derivatives, management does not anticipate the adoption of SFAS No. 133
will have a material effect on the financial condition of the Company.
2. Investment Securities:
The amortized cost and estimated fair value of investments in debt
securities are as follows:
-32-
<PAGE>
<TABLE>
<CAPTION>
1999
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.......................... $4,496 $14 ($1) $4,509
U.S. government agencies and corporations.. 24,740 ($993) 23,747
Municipal bonds.............................. 12,639 4 ($862) 11,781
Other securities............................. 1,283 98 1,381
-----------------------------------------------------
Total available for sale.................. $43,158 $116 ($1,856) $41,418
=====================================================
Held to maturity:
U.S. government agencies and corporations... $5,019 $10 ($83) $4,496
Municipal bonds............................. 2,414 5 (8) 2,411
Other securities............................. 5,784 (160) 5,624
-----------------------------------------------------
Total held to maturity.................... $13,217 $15 ($251) $12,981
=====================================================
1998
Available for sale:
U.S. Treasury notes.......................... $5,762 $124 $5,886
U.S. government agencies and corporations.... 15,469 92 ($10) 15,551
Municipal bonds............................ 7,965 169 8,134
Other securities............................. 662 18 680
-----------------------------------------------------
Total available for sale.................. $29,858 $403 ($10) $30,251
=====================================================
Held to maturity:
U.S. government agencies and corporations.. $10,728 $178 ($68) $10,838
Municipal bonds............................ 2,985 50 3,035
Other securities............................. 2,741 68 (5) 2,804
-----------------------------------------------------
Total held to maturity.................... $16,454 $296 ($73) $16,677
=====================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1999 by contractual maturity, are shown in the next table. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available For Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing in one year or less................. $ 4,005 $ 3,997 $ 951 $ 952
Maturing after one through five years........ 12,098 11,848 11,166 10,974
Maturing after five through ten years........ 10,912 10,426 528 511
Maturing after ten years..................... 14,860 13,766 572 544
No set maturity.............................. 1,283 1,381
-----------------------------------------------------------------
TOTAL................................... $43,158 $41,418 $13,217 $12,981
=================================================================
</TABLE>
-33-
<PAGE>
3. Loans and Allowance for Loan Losses:
Major classifications of loans at December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----- ----
<S> <C> <C>
Real estate mortgages:
Agricultural.................................... $1,217 $ 1,323
Residential, 1 - 4 family....................... 52,154 48,731
Residential, multi-family....................... 1,703 747
Nonfarm, nonresidential properties.............. 15,348 14,076
--------------------------
Total real estate mortgages................ 70,422 64,877
Agricultural loans................................ 279 268
Commercial loans.................................. 13,926 13,653
Municipal loans................................... 6,856 2,043
Consumer loans.................................... 10,824 9,950
Overdrafts........................................ 179 136
--------------------------
Gross loans.................................. 102,486 90,927
Less: Unearned income............................ 169 428
Allowance for loan losses.................. 1,092 940
--------------------------
Loans, net............................ $101,225 $89,559
==========================
</TABLE>
Nonaccrual loans at December 31, 1999 and 1998, were $103,000 and $205,000,
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, 1999 and 1998 the recorded
investment in loans that were considered impaired under SFAS No. 114 was
$337,000 and $514,000, respectively. No transfers to loan loss were made in 1999
or 1998 for any impaired loans. The average recorded investment in impaired
loans during the years ended December 31, 1999 and 1998 was approximately
$524,000 and $301,000 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, 1999 and 1998, the Company recognized
interest income on impaired loans of $28,000 and $27,000. The interest that
would have been earned in accordance with the original terms is approximately
$40,000 and $44,000 respectively.
Changes in the allowance for loan losses for the years ended December 31
were as follows:
(In thousands) 1999 1998 1997
---- ---- ----
Balance, January 1................................. $940 $767 $623
Provision charged to operations.................... 220 270 190
Loans charged off.................................. (79) (102) (51)
Recoveries......................................... 11 5 5
----------------------
Balance, December 31............................... $1,092 $940 $767
======================
-34-
<PAGE>
4. Premises and Equipment:
Premises and equipment are summarized as follows:
Accumulated
Gross Book Amortization Net Book
December 31, 1999: Value & Depreciation Value
----------- -------------- --------
Land.......................... $440,082 $440,082
Buildings..................... 2,674,263 $876,355 1,797,908
Furniture and equipment....... 2,353,139 1,691,747 661,392
--------------------------------------------
Total.................... $5,467,484 $2,568,102 $2,899,382
============================================
December 31, 1998:
Land.......................... $440,082 $ 440,082
Buildings..................... 2,660,782 $780,539 1,880,243
Furniture and equipment....... 2,279,561 1,464,102 815,459
--------------------------------------------
Total.................... $5,380,425 $2,244,641 $3,135,784
============================================
Depreciation and amortization were applied as follows:
1999 1998 1997
----- ----- ----
Premises............................ $ 94,767 $ 89,840 $ 80,364
Furniture and equipment............. 227,645 240,072 187,359
------------------------------------
Total.......................... $322,412 $329,912 $267,723
====================================
The Bank has non-cancelable operating leases on buildings for its
Edwardsville, Back Mountain and Pine Mall Offices. The aforementioned leases
have been treated as operating leases in the accompanying financial statements.
Rental expense for 1999 was $163,000, and 1998's expense was $134,000, and
1997's was $108,000. Minimum future obligations under non-cancelable operating
leases in effect at December 31, 1999 are as follows:
2000 $ 149,200
2001 153,300
2002 160,000
2003 142,500
2004 and thereafter 1,000,750
----------
Total $1,605,750
==========
5. Borrowed Funds
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 $949,000 in 1999
and $104,000 in 1998.
-35-
<PAGE>
The Bank enters into repurchase agreements with customers which amounted to
$1,835,000 in 1999 and $1,024,000 in 1998.
The Bank has a line of credit with the Federal Home Loan Bank for
$10,000,000 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 $700,000 at
December 31, 1999.
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 Bank has also borrowed
five term loans for a total of $8,000,000, with maturities from one to fifteen
years, and calls ranging from five to seven years. The interest rates on these
loans range form 4.76% to 5.97%. At the call date and thereafter, the FHLB has
the option to convert the loan to a variable rate. The Bank can pay the loan off
without penalty if the FHLB decides to convert the loan to a variable rate. The
year end balance due the Federal Home Loan Bank was $9,001,721 in 1999 and
$3,342,649 in 1998. The FHLB loans mature as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2003 and beyond
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
$1,013,159 $12,118 $304,495 $3,000,000 $4,000,000
</TABLE>
6. Income Taxes:
The components of the federal income tax provisions are as follows:
1999 1998 1997
---- ---- ----
Currently payable...................... $744,000 $810,000 $749,000
Deferred tax (benefits)................ (66,000) (100,000) (65,000)
----------------------------------
Total............................. $678,000 $710,000 $684,000
==================================
The sources of the net deferred income tax liability (asset) in other
liabilities (assets) for the years ended at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Depreciation........................................................... $92,000 $96,000
Accretion of discounts on securities................................... 20,000 15,000
Unrealized gains (losses) on available for sale investment securities.. (592,000) 133,000
Accrued employee stock incentive....................................... (42,000) (26,000)
Allowance for loan losses.............................................. (321,000) (270,000)
------------------------
Net deferred tax (asset).......................................... ($843,000) ($52,000)
========================
</TABLE>
-36-
<PAGE>
A reconciliation of income tax expense at the federal statutory rate and the
effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate.. $1,051,000 34.00% $874,000 34.00% $779,000 34.00%
Tax-exempt income
from investments........... (190,000) (6.15) (112,000) (4.36) (64,000) (2.79)
Tax-exempt income
from loans................. (85,000) (2.75) (42,000) (1.63) (30,000) (1.31)
Effect of nonqualified
exercised options.......... (81,000) (2.63)
Other........................ (17,000) (0.55) (10,000) (0.39) (1,000) (0.05)
----------------------------------------------------------------------
Total................... $678,000 21.92% $710,000 27.62% $684,000 29.85%
======================================================================
</TABLE>
7. Other Income:
Other income for the years ended December 31, consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service charges and fees............................. 294,619 $225,564 $163,813
Service charges on deposit accounts.................. 472,939 387,629 366,050
Gain on sale of securities........................... (18,681) 23,118
Gain (loss) on sale of real estate................... 27,584 (24,961)
Other................................................ 214,550 196,632 123,750
-----------------------------------
Total other income.............................. $991,011 $784,864 $676,731
===================================
</TABLE>
8. Other Expenses:
Other expenses for the years ended December 31, consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits.................... $1,996,696 $1,835,224 $1,622,546
Occupancy expenses................................ 436,589 408,073 363,422
Furniture and equipment expenses.................. 362,540 326,283 275,013
Other operating expenses.......................... 1,212,457 1,039,376 944,320
--------------------------------------
Total other expenses......................... $4,008,282 $3,608,956 $3,205,301
======================================
</TABLE>
9. Related Party Transactions:
During the ordinary course of business, loans are made to officers,
directors, and their related interests. These transactions are made on
substantially the same terms and at those rates prevailing at the time for
comparable transactions with others. A summary of this loan activity is listed
in the following table. Prior years balances have been restated to account for
new directors added to the board.
-37-
<PAGE>
1999 1998 1997
---- ---- ----
Balance, January 1................ $2,722,375 $1,423,252 $ 997,070
Additions......................... 1,638,784 1,451,024 583,289
Amounts collected................. (1,551,836) (151,901) (157,107)
Balance, December 31.............. $2,809,323 $2,722,375 $1,423,252
=========================================
10. Grange National Banc Corp. (Parent Company Only) Financial Statements:
BALANCE SHEETS, DECEMBER 31 1999 1998
---- ----
ASSETS
Cash...................................... $ 6,320 $ 10,587
Investment in bank subsidiary............. 15,549,481 14,398,938
Securities "available for sale"........... 124,400 44,400
Land and buildings........................ 515,146 519,683
---------------------------
TOTAL ASSETS..................... $16,195,347 $14,973,608
===========================
LIABILITIES
Notes payable, bank subsidiary............ $198,192 $198,192
Other liabilities......................... 35,100 8,100
---------------------------
Total liabilities.................. $233,292 $206,292
---------------------------
STOCKHOLDERS' EQUITY
Preferred stock authorized 1,000,000
shares of $5 par: None issued...........
Common stock authorized 5,000,000 shares
of $5 par; 783,809 and 751,552 shares
issued and outstanding in 1999 and 1998,
respectively............................ 3,919,045 3,757,790
Additional paid-in capital................ 1,516,874 731,661
Retained earnings......................... 11,675,129 10,017,937
Unrealized holding gains (losses) on
investment securities (net of deferred
income taxes)........................... (1,149,000) 260,000
Less: Treasury stock, at cost............ (48) (72)
----------------------------
Stockholders' equity.............. 15,962,000 14,767,316
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... $16,195,347 $14,973,608
===========================
-38-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE YEARS ENDED, DECEMBER 31 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary..................... $35,626 $74,370 $133,094
Dividends from other securities.................... 1,070 982 832
Other income....................................... 10,250 4,221 600
-------------------------------------
Total income.......................... 46,946 79,573 134,526
-------------------------------------
OPERATING EXPENSES:
Interest expense................................... 15,924 17,229 8,996
Other operating expense............................ 9,225 8,082 2,789
-------------------------------------
Total operating expenses.............. 25,149 25,311 11,785
-------------------------------------
Income before undistributed income of subsidiary..... 21,797 54,262 122,741
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY......................................... 2,381,996 1,806,069 1,485,060
-------------------------------------
NET INCOME........................................... $2,403,793 $1,860,331 $1,607,801
=====================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED, DECEMBER 31 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $2,403,793 $1,860,331 $1,607,801
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation.................. 9,202 7,827 2,023
Equity in undistributed income of subsidiary..... (2,381,996) (1,806,069) (1,485,060)
----------------------------------------
Net cash provided by operating activities..... 30,999 62,089 124,764
----------------------------------------
INVESTING ACTIVITIES:
Increase in buildings and land.................... (4,664) (28,677) (194,845)
Purchase securities "available for sale".......... (19,900)
Investment in Bank subsidiary..................... (230,493) (122,431) (31,995)
----------------------------------------
Net cash used in investing activities........... (235,157) (151,108) (246,740)
----------------------------------------
FINANCING ACTIVITIES:
Proceeds from notes payable....................... 265 116,860
Increase in other liabilities..................... 1,500 600
Cash in lieu of fractional shares................. 24 120 244
Issuance of common stock.......................... 230,493 122,431 31,995
Dividends to stockholders......................... (30,626) (29,370) (23,094)
----------------------------------------
Net cash provided by (used in) financing
activities................................... 199,891 94,946 126,605
----------------------------------------
INCREASE (DECREASE) IN CASH......................... (4,267) 5,927 4,629
CASH BALANCE, JANUARY 1............................ 10,587 4,660 31
----------------------------------------
CASH BALANCE, DECEMBER 31........................... $ 6,320 $ 10,587 $ 4,660
========================================
</TABLE>
-39-
<PAGE>
11. Stockholder's Equity
Stock Split - Retroactive Effect on Financial Statements:
In July 1998, the Board of Directors of the Company voted a two-for-one
split of the Company's common stock, to be effected in the form of a stock
distribution, payable to shareholders of record as of July 30, 1998. The
financial statements have been revised to give retroactive effect of the stock
split as if the additional shares had been outstanding for all periods.
Stock Options:
In January 1994, the Board of Directors adopted an Employee Stock Option
Plan in which stock options may be granted to all officers and key employees of
the Company. The aggregate number of shares which may be issued upon exercise of
the options under the plan is 20,000. Options are exercisable up to one-third in
the second year after the date of grant, up to two-thirds in the third year
after the date of grant and up to 100% in the fourth year after the date of
grant, with options expiring at the end of ten years after the date of grant.
The Board of Directors also adopted a Stock Option Plan for non-employee
Directors which will be available to all non-employee members of the Board of
Directors. The aggregate number of shares which may be issued upon exercise of
the options under the Director Plan is 20,000 shares and are exercisable in part
from time to time beginning one year after the date of grant and expiring ten
years thereafter. Effective April 1, 1994, options to purchase 1,000 shares of
stock were automatically granted to each non-employee Director under this plan
expiring April 1, 2004.
The Board of Directors adopted an additional Stock Option Plan (the "Plan")
in November 1995, subject to shareholder approval, covering the employees and
directors. The Plan authorizes the grant of options to purchase not more than
55,000 shares of common stock under the Plan. Options granted under the Plan are
intended to be either incentive stock options or nonstatutory stock options. As
of February 29, 1996, options for 50,160 shares of common stock having an
exercise price of $32.50 were outstanding and 4,840 shares of common stock were
available for future option grants under the Plan. Of the 50,160 shares of
common stock outstanding for options, 36,320 shares of common stock were issued
as incentive stock options. The remaining shares outstanding for options were
granted to each non-employee director equally as nonstatutory stock options.
Pursuant to Section 422 of the Internal Revenue Code, shareholder approval is
required for the incentive stock options to qualify for favorable tax treatment.
Exercise prices of options granted under all plans are current market prices at
time of grant.
-40-
<PAGE>
<TABLE>
<CAPTION>
Weighted
Non-Employee average
Employee Director Exercise
Year ended December 31, 1997 Stock Options Stock Options Prices
------------- ------------- ------
<S> <C> <C> <C>
Outstanding 1996..................... 94,588 41,176 $14.68
Granted.............................. 16,720
Exercised............................ (686) (2,058)
Adjustment for stock dividend........ 1,864 658
Outstanding.......................... 95,766 56,622 $15.13
Year ended December 31, 1998
Outstanding 1997..................... 95,766 56,622 $15.13
Granted.............................. 3,000
Exercised............................ (11,361) (500)
Adjustment for stock dividend........ 1,961 1,133
Outstanding.......................... 89,366 57,255 $15.00
Year ended December 31, 1999
Outstanding 1998..................... 89,366 57,255 $15.00
Granted.............................. 6,000
Exercised............................ (13,662) (2,414)
Lapsed............................... (500)
Adjustment for stock dividend........ 3,251 1,233
Outstanding.......................... 84,455 56,074 $16.63
</TABLE>
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 1999 and 1998 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income - as reported $2,404,000 $1,860,000 $1,608,000
Net income - pro forma $2,344,000 $1,822,000 $1,481,000
Basic income per share - as reported $ 3.09 $ 2.50 $ 2.17
Basic income per share - pro forma $ 3.01 $ 2.45 $ 2.00
Diluted income per share - as reported $ 2.77 $ 2.25 $ 2.04
Diluted income per share - pro forma $ 2.70 $ 2.20 $ 1.86
</TABLE>
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 2.17% for 1999, 1998 and 1997, respectively;
risk-free interest rate of 7.03%, 5.96% and 6.34% for 1999, 1998
-41-
<PAGE>
and 1997 respectively; expected lives of 10 years for 1999, 1998 and 1997, which
is the option term; and volatility of 24.34%, 23.00% and 5.00% for 1999, 1998
and 1997, respectively.
Stock Dividends:
The Company has declared stock dividends in December and June of 1999,
December and June of 1998 at the following rates $0.50, $0.47, $0.40, $0.31,
respectively, with fractional shares paid in cash. The Company issued 16,175 and
7,141 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.
12. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $2,403,793 $1,860,331 $1,607,801
----------------------------------------
Denominator:
Denominator for basic earnings
per share - weighted average shares 779,141 744,247 731,347
Effect of dilutive securities:
Employee stock options 87,838 76,366 43,902
----------------------------------------
Dilutive potential common shares
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 866,979 820,613 775,249
========================================
Basic earnings per share $3.09 $2.45 $2.12
Diluted earnings per share $2.77 $2.27 $2.07
</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.
-42-
<PAGE>
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, 1999 and 1998:
Cash and Due From Banks:
The carrying amounts of cash and due from banks approximate fair value.
Interest Bearing Deposits:
Carrying amounts of variable rate or demand deposits approximate fair
value. The fair value of fixed rate or fixed term interest bearing deposits are
estimated based on discounting future cash flows using current rates.
Securities:
Fair values of securities are based on quoted market prices.
Loans:
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values for
mortgage, consumer, commercial real estate and commercial loans are estimated by
discounting future cash flows using interest rates currently being offered with
similar terms to borrowers with similar credit quality.
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.
-43-
<PAGE>
The following table presents the carrying amounts and estimated fair values
of financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
-----------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.......................... $4,353 $ 4,353 $ 2,615 $ 2,615
Interest bearing deposits........................ 2,526 2,526 5,610 5,610
Investment securities............................ 54,635 53,889 46,706 46,886
Loans, net....................................... 101,225 100,284 89,559 94,078
Accrued interest receivable and other assets..... 3,342 3,342 2,081 2,081
Financial liabilities:
Deposit liabilities.............................. 140,580 140,390 129,891 131,202
Other borrowed funds............................. 11,786 11,090 4,471 4,477
Accrued interest payable and other liabilities.. 1,004 1,004 823 823
</TABLE>
Summary of Quarterly Results of Operations
(Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
In thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
1999
Interest income........................................ $2,679 $2,817 $2,913 $2,992
Net interest income.................................... 1,489 1,573 1,621 1,636
Provision for loan losses.............................. 90 60 20 50
Other income........................................... 207 296 227 261
Other expenses......................................... 926 992 1,027 1,063
Net income............................................. 494 590 615 705
Net income per share:
Basic............................................. $ 0.64 $ 076 $ 0.79 $ 0.90
Diluted........................................... $ 0.57 $ 0.68 $ 0.71 $ 0.81
1998
Interest income........................................ $2,359 $2,457 $2,589 $2,712
Net interest income.................................... 1,320 1,367 1,434 1,543
Provision for loan losses.............................. 75 50 75 70
Other income........................................... 189 170 201 229
Other expenses......................................... 830 862 920 1,002
Net income............................................. 414 430 463 553
Net income per share:
Basic............................................. $ 0.54 $ 0.57 $ 0.61 $ 0.73
Diluted........................................... $ 0.51 $ 0.53 $ 0.56 $ 0.67
</TABLE>
The above gives retroactive effect to stock dividends and stock splits
-44-
<PAGE>
Price Range of Common Stock and Dividends:
The Company's Common Stock is traded in the market under the symbol GRGN.
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 firms are known to make a market in the
Common Stock of Grange National Banc Corp.
<TABLE>
<S> <C> <C>
Tucker Anthony & Co., Inc. Gruntal & Co., LLC F.J. Morrissey & Co.
1825 Oregon Pike Liberty Center 1700 Market St.
Lancaster, PA 17601 1001 Liberty Ave., Suite 102 Philadelphia, PA 19103
(800) 456-9234 Pittsburgh, PA 15222-3715 (800) 842-8928
(800) 223-8162
</TABLE>
As of March 17, 1999 there were approximately 900 shareholders of record.
<TABLE>
<S> <C> <C> <C> <C>
1999 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Bid................................. $43.00 $42.00 $46.50 $47.52
Ask................................. $43.25 $43.00 $47.50 $48.52
Stock Dividends per Share........... $ 0.50 None $ 0.47 None
1998 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Bid................................. $43.50 $38.00 $30.00 $30.62
Ask................................. $47.50 $39.00 $31.00 $31.00
Stock Dividends per Share........... $0.405 None $ 0.31 None
1997 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Bid................................. $27.50 $21.25 $20.75 $20.00
Ask................................. $28.00 $21.75 $21.25 $21.00
Stock Dividends per Share........... $ 0.23 None $ 0.21 None
</TABLE>
The above are historical amounts as adjusted for the effects of a two for one
stock split on July 30, 1998.
<TABLE>
<S> <C>
Stock Transfers: Shareholder Services:
Mildred Grose, Assistant Vice-President Philip O. Farr, Vice President and Comptroller
P.O. Box 40 198 E. Tioga St.
Meshoppen, Pa. 18630 Tunkhannock, Pa. 18657
(570) 833-2131 (570) 836-2100
</TABLE>
-45-
<PAGE>
Offices
<TABLE>
<S> <C>
Laceyville Lawton
Kevin Huyck, Branch Manager Yvonne Nuss, Branch Manager
(570) 869-1522 (570) 934-2178
Meshoppen Bowman's Creek
Mildred Grose, AVP and Br. Mgr. Connie Learn, Branch Manager
(570) 833-2131 (570) 298-2163
Tunkhannock Edwardsville
Richard D. Stark, Vice President and Br. Mgr. Donald Werts, Asst. Cashier and Br. Mgr.
(570) 836-2100 (570) 283-4462
Little Meadows Towanda
Brian Burd, Branch Manager Karen Glossenger, Branch Manager
(570) 623-2297 (570) 265-4711
Back Mountain Pine Mall
John P. Petersen, Asst. Cashier and Br. Mgr. Debra Kinney, Branch Manager
(570) 696-6958 (570) 208-1500
</TABLE>
On the Internet
www.grangebank.com E-Mail: [email protected]
Officers
Robert C. Wheeler, Chairman of the Board
John W. Purtell, Vice Chairman
Thomas A. McCullough, President
Sally A. Steele, Secretary of the Corporation
Melvin E. Milner, Vice President
Joseph I. Killeen, Vice President
Richard D. Stark, Vice President
Philip O. Farr, Vice President and Comptroller
-46-
<PAGE>
Directors
Brian R. Ace,
Owner, Laceyville Hardware
Thomas C. Burns
Retired; Dentist until 1994
Edward A. Coach
Certified Public Accountant
Thomas A. McCullough
President and Chief Executive Officer
of the Bank and the Company since 1991
Russell G. Newell
Owner of Newell Fuel Service
W. Kenneth Price
Co-owner of Ken Mar Home Furnishings
John W. Purtell
President, S.F. Williams Inc.,
automobile dealership
Sally A. Steele
Attorney
Robert C. Wheeler
Retired; Chief Executive Officer of
The Bank and Company until 1990
-47-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM OUR DECEMBER 31, 1999 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 4,353
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,418
<INVESTMENTS-CARRYING> 13,217
<INVESTMENTS-MARKET> 12,481
<LOANS> 102,319
<ALLOWANCE> 1,092
<TOTAL-ASSETS> 169,332
<DEPOSITS> 140,580
<SHORT-TERM> 4,786
<LIABILITIES-OTHER> 1,004
<LONG-TERM> 7,000
0
0
<COMMON> 5,536
<OTHER-SE> 10,526
<TOTAL-LIABILITIES-AND-EQUITY> 169,332
<INTEREST-LOAN> 8,148
<INTEREST-INVEST> 3,127
<INTEREST-OTHER> 126
<INTEREST-TOTAL> 11,401
<INTEREST-DEPOSIT> 4,602
<INTEREST-EXPENSE> 5,082
<INTEREST-INCOME-NET> 6,319
<LOAN-LOSSES> 220
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 4,008
<INCOME-PRETAX> 3,082
<INCOME-PRE-EXTRAORDINARY> 3,082
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,404
<EPS-BASIC> 3.09
<EPS-DILUTED> 2.77
<YIELD-ACTUAL> 4.44
<LOANS-NON> 103
<LOANS-PAST> 9
<LOANS-TROUBLED> 105
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 940
<CHARGE-OFFS> 79
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1092
<ALLOWANCE-DOMESTIC> 1092
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
