UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 000-20163
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FIRST PHILSON FINANCIAL CORPORATION
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(Name of registrant as specified in its charter)
DELAWARE 25-1511866
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
534 Main Street, Berlin, PA 15530
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(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, including area code)
(814) 267-4666
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: None Name of each exchange on which
----------- registered: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $10.00 Par Value
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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) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained in this
form, and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
---
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of March 3, 1997 was
$22,086,000.
THE ISSUER WAS NOT INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS.
As of March 14, 1997, there were 435,600 shares outstanding
of the Registrant's common stock, $10.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE.
Information with respect to Directors, Management
Remuneration and Security Ownership of Certain Beneficial Owners
and Management are contained in Philson's Proxy Statement for the
1997 Annual Meeting of Stockholders, incorporated herein by
reference in Part III. The 1996 Annual Report to Shareholders
is also incorporated herein by reference in Parts I, II, III, and
IV.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
Business Development
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First Philson Financial Corporation ("Philson") is a bank holding
company organized in 1985 under the Delaware General Corporation
Law and is registered under the Bank Holding Company Act, of
1956, as amended ("Bank Holding Company Act"). First Philson
Bank, N.A. (the "Bank") is a wholly-owned subsidiary of Philson
and the surviving bank of the former National Bank of Western
Pennsylvania and The Philson National Bank, which merged on
January 1, 1991. The Bank is a national banking association
organized under the laws of the United States. Philson's
principal activities consist of owning and operating the Bank.
Philson and its subsidiary derive substantially all their income
from banking and bank-related services. Philson functions
primarily as a coordinating and servicing unit for its subsidiary
in general management, loan policies and procedures, accounting
and taxes, loan review, auditing, investment advisory,
compliance, marketing, general corporate services, and financial
and strategic planning.
Business of Issuer
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The Bank conducts general banking business through nine locations
in Somerset and Fayette Counties, Pennsylvania. The Bank is a
full-service bank offering (1) retail banking services, such as
demand, savings and time deposits, money market accounts, secured
and unsecured loans, mortgage loans, safe deposit boxes, holiday
club accounts, collection services, money orders, and traveler's
checks; (2) lending, depository and related financial services to
commercial, industrial, financial, and governmental customers,
such as real estate mortgage loans, revolving credit
arrangements, lines of credit, personal and commercial property
lease financing, real estate construction loans, business money
market and savings accounts, certificates of deposit, wire
transfers, and night depository; and (3) credit card operations
through Mastercard, VISA and Discover. The Bank also operates
five automated bank teller machines, ("ATM's").
The Bank's deposit base is such that the loss of one depositor or
a related group of depositors would not have a materially adverse
effect on its business. In addition, the loan portfolio is also
diversified so that one industry or group of related industries
does not comprise a material portion of the loan portfolio.
The Bank's business is not seasonal nor does it have any risks
attendant to foreign sources.
The Bank is federally chartered and is subject to primary
supervision by the Office of the Comptroller of the Currency
("OCC"). The Bank is also subject to the regulations of the
Board of Governors of the Federal Reserve Bank ("Federal Reserve
Board") and the Federal Deposit Insurance Corporation ("FDIC").
Its deposits are insured by the Bank Insurance Fund ("BIF") of
the FDIC.
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Supervision and Regulation - Philson
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Philson is subject to the provisions of the Bank Holding Company
Act and to supervision by the Federal Reserve Board. The Bank
Holding Company Act requires Philson to secure the prior approval
of the Federal Reserve Board before it owns or controls, directly
or indirectly, more than 5.00% of the voting shares or
substantially all of the assets of any institution, including
another bank.
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than 5.00% of the
voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has
found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
In making this determination, the Federal Reserve Board considers
whether the performance of these activities by a bank holding
company would offer benefits to the public that outweigh possible
adverse effects.
Philson is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the Bank Holding Company
Act. The Federal Reserve Board may also make examinations of
Philson and any or all of its subsidiaries. Further, under
Section 106 of the 1970 amendments to the Bank Holding Company
Act and the Federal Reserve Board's 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 provision of any property or
services. The so-called "Anti-tie-in" provisions state generally
that a bank may not extend credit, lease, sell property or
furnish any service to a customer on the condition that the
customer provide additional credit or service to the bank, to its
bank holding company or to any other subsidiary of its bank
holding company or on the condition that the customer not obtain
other credit or service from a competitor of the bank, its bank
holding company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extension
of credit to the bank holding company or any of its subsidiaries,
on investments in the stock or other securities of the bank
holding company and on taking of such stock or securities as
collateral for loans to any borrower.
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a
material effect on Philson's liquidity, capital resources or
operations other than what has been disclosed.
Legislation and Regulatory Changes
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From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance
between banks and other financial institutions. Proposals to
change the laws and regulations governing the operations and
taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various
bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might
have on Philson and its subsidiary bank. Certain changes of
potential significance to Philson which have been enacted
recently and
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others which are currently under consideration by Congress or
various regulatory or professional agencies are discussed below.
On August 9, 1989, major reform and financing legislation was
enacted into law in order to restructure the regulation of the
thrift industry, to address the financial condition of the
Federal Savings and Loan Insurance Corporation and to enhance the
supervisory powers of the federal bank and thrift regulatory
agencies. Financial Institutions Reform, Recovery and Enforce-
ment Act ("FIRREA") reorganized the FDIC by creating two deposit
insurance funds to be administered by the FDIC-- the Savings
Association Insurance Fund ("SAIF") and the BIF. FIRREA
established a new schedule for premiums to be paid by thrifts and
banks for deposit insurance coverage. The Bank became a member
of BIF. In addition, FIRREA reformed the real estate appraisal
process and required licensed or certified appraisers to be
engaged to render an appraisal on real estate loans above certain
threshold limits.
Other provisions of FIRREA include substantial changes to
enforcement powers available to regulators. The OCC, as the
primary regulator of national banks, is primarily responsible for
enforcement action, but the FDIC also has authority to impose
enforcement action independently after following certain
procedures. FIRREA also expands jurisdiction of the FDIC's
enforcement powers to all "institution-affiliated" parties,
including stockholders, attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action having or
likely to have an adverse effect on an insured institution.
FIRREA also provides regulators with far greater flexibility to
impose enforcement action on an institution that fails to comply
with its regulatory requirements, particularly with respect to
the capital requirements. Possible enforcement actions include
the imposition of a capital plan, termination of deposit
insurance and removal or temporary suspension of an officer,
director or other institution-affiliated party. The FDIC also
may recommend that the OCC take enforcement action. If action is
not taken by the OCC, the FDIC has the authority to compel such
action under certain circumstances.
The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") was enacted on December 19, 1991, and made reforms to
a variety of bank regulatory laws. Some of these reforms will
have a direct impact on the Registrant and the Bank. These new
provisions are discussed below.
Annual full-scope, on-site examinations are required for all
FDIC-insured institutions such as the Bank. For small,
well-capitalized institutions that are well managed and in
outstanding condition, and whose ownership has not changed in the
preceding year, the examinations by the OCC may be at 18-month
intervals. In 1996, federal bank regulators extended the
eligibility for 18-month examination cycles to "small"
institutions, banks and thrifts with up to $250 million in
assets, with an examination rating of at least CAMELS 2. As a
result of the new ruling, the number of national banks on the
18-month cycle should increase. However, federal bank regulators
retain the right to examine any bank any time they believe there
may be a cause.
In order to reduce losses to the deposit insurance funds, FDICIA
established a format to more closely monitor the FDIC-insured
institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins
to experience any difficulty. FDICIA established five "capital"
categories. They are: (1) well capitalized, (2) adequately
capitalized, (3)
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undercapitalized, (4) significantly undercapitalized and (5)
critically undercapitalized. The Deposit Insurance Act of 1996
("Funds Act"), passed on November 26, 1996 by the FDIC Board of
Directors, retains the existing BIF assessment schedule of 0 to
27 cents per $100 of deposits depending upon an institution's
risk classification, but eliminated the statutorily-imposed
minimum assessment amount. The Funds Act also authorizes the
Financing Corporation ("FICO") to levy assessments on BIF-
assessable deposits and stipulates that the rate must equal
one-fifth of the FICO assessment rate that is applied to deposits
assessable by the SAIF. "Capital measures", i.e., the
quantitative and qualitative criteria, imposed more scrutiny and
operational restrictions on banks as they descend the capital
categories from well capitalized to critically undercapitalized.
The most recent classification for the Bank is "well
capitalized".
At any time, an institution's primary federal supervisory agency
may reclassify it into a lower capital category. All
institutions are prohibited from declaring any dividends, making
any other capital distribution, or paying a management fee if it
would drop them down into any of the three undercapitalized
categories as a result. FDICIA provides an exception to this
requirement for stock redemptions that do not lower an
institution's capital and would improve its financial condition,
if the appropriate federal supervisory agency has consulted with
the FDIC and approved the redemption.
FDICIA requires the Bank to monitor its capital levels and notify
the OCC if its capital levels fall into a lower category. The
OCC would monitor the Bank's capital levels through call reports
and examination reports.
Pursuant to FDICIA, the OCC adopted a real estate lending rule
which set loan-to-value ("LTV") ratios for different types of
real estate loans. A LTV ratio is generally defined as the total
loan amount divided by the appraised value of the property at the
time the loan is originated. In addition to establishing the LTV
ratios as a guideline, the final ruling requires all real estate
loans to be based upon proper loan documentation and a recent
appraisal of the property.
Banks are expected to establish internal LTV limits for real
estate loans that do not exceed certain guidelines as outlined
under FDICIA. They are as follows:
1. For raw land loans, 65%;
2. For land development loans, 75%;
3. For commercial or multifamily construction loans, 80%;
4. For one-to-four family residential construction loans,
85%;
5. For improved property loans (completed commercial
properties; other income-producing property, including
farmland), 85%;
6. For owner-occupied 1-4 family and home equity loans,
< 90%. Loans can equal or exceed 90% loan-to-value with
credit enhancement in the form of mortgage insurance
or readily marketable collateral (means listed
securities, insured deposits, and gold bullion).
The rule requires each bank to adopt and maintain a comprehensive
written real estate lending policy
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developed in conformance with the following guidelines:
1. Establish limits and standards that are consistent with
safe and sound banking practices;
2. Establish prudent underwriting standards, including LTV
limits, that are clear and measurable;
3. Establish loan administration policies for its real
estate portfolio;
4. Establish documentation, approval and reporting
requirements to monitor compliance with its real estate
lending policies; and
5. Be reviewed and approved by the Bank's board of
directors at least annually.
Banks are expected to maintain a real estate lending policy
appropriate for the size of the institution and nature and scope
of its operations and markets. Real estate lending standards
must apply to loans secured by liens on (or interests in) real
estate, or loans made to finance construction or other
improvements to real estate, regardless of whether a lien has
been taken on the property.
Furthermore, the OCC must establish non-capital standards for the
Bank. These standards shall cover: (1) internal controls,
information systems and internal audit systems, (2) loan
documentation, (3) credit underwriting, (4) interest rate
exposure, (5) asset growth, (6) compensation, fees and benefits,
(7) other operational and managerial standards and (8) asset
quality, earnings and stock valuation. The Bank must develop a
plan if it fails to meet any of these standards. There are
sanctions that can be imposed for failure to meet these standards
and, if necessary, to develop a plan.
The OCC on December 20, 1992: (1) developed and prescribed
regulations which require that all assets and liabilities,
including contingent assets and liabilities, of the Bank be
reported in, or otherwise taken into account in the preparation
of, any balance sheet, financial statement, report of condition,
or other report prepared by the Bank required to be filed with
any federal bank regulatory agency; and (2) developed jointly
with the other federal bank regulatory agencies a method for the
Bank to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible
and practical, in any balance sheet, financial statement, report
of condition or other report prepared by the Bank required to be
filed with any federal bank regulatory agency.
Within the overall FDICIA is a separate subtitle called the "Bank
Enterprise Act of 1991". The thrust of this Act is to encourage
banking institutions to establish "basic transaction services for
consumers" or so-called "lifeline accounts". The FDIC assessment
rate shall be reduced for all lifeline depository accounts. This
Act establishes ten (10) factors which are the minimum
requirements to qualify as a lifeline depository account. Some
of these factors relate to minimum opening and balance amounts,
minimum number of monthly withdrawals, the absence of
discriminatory practices against low-income individuals and
minimum service charges and fees.
FDICIA also contains the Truth in Savings Act ("Regulation DD").
The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest which are payable on deposit
accounts by the Bank and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful
comparison between the competing claims of the banks with regard
to deposit accounts and products. This Act requires the Bank to
include, in a clear and conspicuous manner, the
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following information with each periodic statement of a deposit
account:
(a) the annual percentage yield earned;
(b) the amount of interest earned;
(c) the amount of any fees or charges imposed; and
(d) the number of days in the reporting period. This Act
allows for civil lawsuits to be initiated by customers
if the Bank violates any provision or regulation under
this Act.
The Registrant and the Bank are not aware of, as of the filing
date of this annual report, whether FDICIA and any rules and
regulations promulgated thereunder, would cause any materially
adverse effect upon the financial condition and income of the
Registrant and the Bank.
The earnings of Philson are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the
United States government and its agencies.
The monetary policies of the Federal Reserve Board have had, and
will likely continue to have, an important impact on the
operating results of commercial banks through its power to
implement national monetary policy in order, among other things,
to curb inflation or combat a recession. The Federal Reserve
Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in
United States government securities and through its regulations
of, among other things, the discount rate on borrowings of member
banks and the reserve requirements against member bank deposits.
It is not possible to predict the nature and impact of future
changes in monetary and fiscal policies.
The primary supervisory authority that regularly examines the
Bank is the OCC. The OCC has the authority under the Financial
Institutions Supervisory Act to prevent a national bank from
engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must
maintain, loans a bank makes and collateral it takes, the
activities of a bank with respect to mergers and consolidations
and the establishment of branches. All banks in Pennsylvania are
permitted to maintain branch offices in any county of the state.
Branches may be established only after approval by the OCC. The
OCC is required to grant approval only if it finds that there is
a need for banking services or facilities such as are
contemplated by the proposed branch. The OCC may disapprove the
application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application relates to the
establishment of a branch in a county contiguous to the county in
which the applicant's principal place of business is located, and
another banking institution that has its principal place of
business in the county in which the proposed branch would be
located, has in good faith, notified the OCC of its intention to
establish a branch in the same municipal location in which the
proposed branch would be located.
The Riegle-Neal Interstate Banking and Branch Efficiency Act of
1994 ("Riegle-Neal") provides for interstate mergers and
acquisitions of banks by bank holding companies beginning on
September 29,
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1995 and interstate mergers among federally insured depository
institutions beginning June 1, 1997. Riegle-Neal does not
authorize interstate branch acquisitions, if not permitted by
state law. States may opt-in or opt-out until June 1, 1997.
States also may opt-in to de novo interstate branching or allow
acquisitions of individual branches. By legislation effective
July 6, 1995, Pennsylvania Banks are authorized to participate
fully in interstate banking and branching. A bank holding
company may control one or more Pennsylvania banks and with
consent of the Department of Banking; foreign bank holding
companies may acquire control of a bank in Pennsylvania. In
addition, banks may establish branches in Pennsylvania if their
home state would permit Pennsylvania banks or a national bank
headquartered in Pennsylvania to establish a branch in that
state. Finally, Pennsylvania banks may establish branches in
other states subject to the approval of the Department of Banking
with respect to state banks but no such approval is required for
national banks.
A subsidiary bank of a bank holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions
of credit to the bank holding company or its subsidiaries, on
investments in the stock or other securities of the bank holding
company or its subsidiaries and on taking such stock or
securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations
and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among
others, and to related interests of such principal shareholders.
In addition, such legislation and regulations may affect the
terms upon which any person becoming a principal shareholder of a
holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power,
directly or indirectly, to influence the management of policies
of the bank or bank holding company or to vote twenty-five
percent (25%) or more of any class of voting securities of the
bank holding company.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations
of, and restrictions on, the business of the Bank. It cannot be
predicted whether any such legislation will be adopted or how
such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation
and regulations that may increase the costs of doing business.
Under the Federal Deposit Insurance Act, the OCC possesses the
power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound
banking practice and in violation of the law. Moreover, the
Financial Institutions and Interest Rate Control Act of 1987
("FIRA") generally expands the circumstances under which officers
or directors of a bank may be removed by the institution's
federal supervisory agency; restricts lending by a bank to its
executive officers, directors, principal shareholders or related
interests thereof; restricts management personnel of a bank from
serving as directors or in other management positions with
certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic
area; and restricts management personnel from borrowing from
another institution that has a correspondent relationship with
their bank. Additionally, FIRA requires that no person may
acquire control of a bank unless the appropriate federal
supervisory agency has been given 60-days prior written notice
and within that time has not disapproved the acquisition or
extended the period for disapproval.
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Under the Bank Secrecy Act ("BSA"), the Bank is required to
report to the Internal Revenue Service currency transactions of
more than $10,000 or multiple transactions of which the Bank is
aware in any one day that aggregate in excess of $10,000. Civil
and criminal penalties are provided under the BSA for failure to
file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
Under the Community Reinvestment Act of 1977 ("CRA"), the OCC is
required to assess the record of all financial institutions
regulated by it to determine if these institutions are meeting
the credit needs of the community, including low and moderate
neighborhoods, which they serve and to take this record into
account in its evaluation of any application made by any such
institutions for, among other things, approval of a branch or
other deposit facility, office relocation, a merger or an
acquisition of bank shares. FIRREA amended the CRA to require,
among other things, that the OCC make publicly available an
evaluation of the Bank's record of meeting the credit needs of
its entire community including low- and moderate-income
neighborhoods. This evaluation includes a descriptive rating
("outstanding", "satisfactory", "needs to improve", or
"substantial noncompliance") and a statement describing the basis
for the rating. The most recent rating for the Bank is
"outstanding".
FIRREA changed the capital requirements applicable to national
banks. The OCC has issued risk-based capital guidelines, which
supplement existing capital requirements. The guidelines require
all United States banks and bank holding companies to maintain a
minimum risk-based capital ratio of 8.00% (of which at least
one-half must be in the form of Tier I capital since December 31,
1994). Assets will be assigned to five risk categories, with
higher levels of capital being required for the categories
perceived as representing greater risk. The required capital
ratios will represent equity and, to the extent permitted,
non-equity capital as a percentage of total risk-weighted assets.
The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies and to minimize
disincentives for holding liquid assets. On the basis of an
analysis of the guidelines and projected composition of Philson's
assets, it is not expected that such risk-based capital
guidelines will have a material effect on the Bank's business and
capital plans.
As of December 31, 1996, Philson's total risk-based capital ratio
was 20.34% of which 19.07% was Tier I capital in the form of
common stockholders' equity. This percentage exceeds the minimum
capital ratio required under the risk-based capital guidelines.
For further discussion, see the "Notes to Consolidated Financial
Statements" of the 1996 Annual Report, (Exhibit 13.b, page 16),
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the 1996 Annual Report, (Exhibit
13.c, page 30), incorporated herein by reference.
Furthermore, FDICIA mandates the federal banking regulatory
agencies to revise their respective risk-based capital standards
for banks and thrifts to ensure that those standards take
adequate account of interest-rate risk, concentration of credit
risk and the risks of nontraditional activities.
Philson nor the Bank are dependent on deposits nor exposed by
loan concentrations to a single customer or to a small group of
customers, the loss of any one or more of which would have a
materially adverse effect on the financial condition of Philson
or the Bank.
Philson faces strong competition from other commercial banks,
savings banks, savings and loan associations, and several other
financial or investment service institutions for business in the
communities they serve. Several of these institutions are
affiliated with major banking and financial
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institutions, such as Mellon Bank Corporation, PNC Financial
Corporation, BT Financial, First Commonwealth Financial
Corporation, and National City Bank, which are substantially
larger and have greater financial resources than Philson.
As the financial services industry continues to expand, the scope
of potential competition affecting the subsidiaries will also
increase. For most of the services that the subsidiaries
perform, there is also competition from credit unions and issuers
of commercial paper and money market funds. Such institutions,
as well as brokerage houses, consumer finance companies, factors,
insurance companies, and pension trusts, are important
competitors for various types of financial services. In
addition, personal and corporate trust investment counseling
services are offered by insurance companies and other firms and
individuals.
As of December 31, 1996, Philson had 105 full-time employees and
127 total employees. Philson has never experienced a work
stoppage and Philson believes that relations with its employees
are good. None of Philson's employees are covered by collective
bargaining agreements.
ITEM 2. PROPERTIES
Philson has nine branch offices located in Somerset and Fayette
Counties, Pennsylvania. All property owned or leased by Philson,
including premises and equipment, is adequately insured with
coverage reviewed annually.
The main office of Philson is located at 534 Main Street, Berlin,
Pennsylvania 15530. At December 31, 1996, Philson leased one of
its branch facilities and paid approximately $1,919 a month for
this office. All other branch offices are owned by Philson
including its main office which is used as its principal
executive office. Philson believes that the facilities are in
good condition and are sufficient for its existing activities and
potential growth.
Philson, through its Bank subsidiary, does grant real estate
mortgages. For further detail on the types of mortgages, see the
"Notes to Consolidated Financial Statements" of the 1996 Annual
Report, (Exhibit 13.b, pages 11 and 12), incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Philson's security
holders during the fourth quarter of the fiscal year ended
December 31, 1996.
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PART II
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ITEM 5. MARKET FOR PHILSON'S COMMON STOCK AND DIVIDENDS
The required information is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of
the 1996 Annual Report, (Exhibit 13.c, page 30), incorporated
herein by reference.
At December 31, 1996, Philson had approximately 621 shareholders
of record.
ITEM 6. SELECTED FINANCIAL DATA
The required information is contained in the "Financial
Highlights" of the 1996 Annual Report, (Exhibit 13.a, listed on
page 1), incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The required information is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of
the 1996 Annual Report, (Exhibit 13.c, pages 21 - 30),
incorporated herein by reference.
Capital Resources
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The required information is contained in the 1996 Annual Report
under the sections captioned "Financial Highlights", (Exhibit
13.a, listed on page 1), "Notes to Consolidated Financial
Statements", (Exhibit 13.b, page 16), and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", (Exhibit 13.c, page 30), incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Philson's Consolidated Financial Statements and notes thereto are
contained in the 1996 Annual Report, (Exhibit 13.b, pages 4 -
19), incorporated herein by reference.
Philson does not meet both of the tests under Item 302(a)(5) of
Regulation S-K, and therefore, is not required to provide
supplementary financial data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
========
ITEM 11. EXECUTIVE COMPENSATION
The required information is contained in Philson's Proxy
Statement for the 1997 Annual Meeting of Stockholders,
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The required information is contained in Philson's Proxy
Statement for the 1997 Annual Meeting of Stockholders,
incorporated herein by reference.
Section 16(a) of the Exchange Act requires Philson's officers,
directors and persons owning more than 10% of Philson's
Common Stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and such shareholders are required by
regulation to furnish Philson with copies of all Section 16(a)
forms they file. Except as stated in "Principal Holders of
Stock" of Philson's Proxy Statement for the 1997 Annual
Meeting of Stockholders, Philson knows of no person who owned
10% or more of its Common Stock.
Based upon review of copies of the forms furnished to Philson,
Philson believes that during 1996 all Section 16(a) filing
requirements were complied within a timely manner,
except Gregory A. Croner who filed a later report on Form 4
with respect to shares in his father's estate.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no material transactions, proposed or
consummated, between Philson and the Bank with any director or
executive officer, or any associate of the foregoing persons.
Philson and the Bank have had and intend to continue to have
banking and financial transactions in the ordinary course of
business with directors and officers and their associates on
comparable terms and with similar interest rates as those
prevailing from time to time for other customers. The required
information is contained in the "Notes to Consolidated Financial
Statements" of the 1996 Annual Report, (Exhibit 13.b, page 12),
incorporated herein by reference.
PART IV
=======
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A)1. The Annual Report to Shareholders of the Registrant for
the fiscal year ended December 31, 1996.
(A)2. All schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
12
<PAGE>
(A)3. Exhibits.
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- --------------------------- -----------------------------------
2 None.
3(i) Articles of Incorporation filed on
October 2, 1990, at Exhibit 3(i) to
Form S-4 (No. 33-35933), and hereby
incorporated by reference.
3(ii) By-laws of the Registrant filed on
October 2, 1990, at Exhibit 3(ii)
to Form S-4 (No. 33-35933), and
hereby incorporated by reference.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Excerpts from the Annual Report to
Shareholders for Fiscal Year Ended
December 31, 1996.
13.a "Financial Highlights", listed on
page 1 of the 1996 Annual Report to
Shareholders.
13.b "Consolidated Financial Statements
and Notes thereto", pages 4 - 19
of the 1996 Annual Report to
Shareholders.
13.c "Management's Discussion and
Analysis of Financial Condition
and Results of Operations", pages
21 - 30 of the 1996 Annual Report
to Shareholders.
16 None.
18 None.
19 None.
13
<PAGE>
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- --------------------------- -----------------------------------
22 List of Subsidiaries
Name State of Incorporation
----------- ----------------------
First Philson
Bank, N.A. Pennsylvania
23 Report of Independent Auditors.
24 None.
27 Financial Data Schedule.
REPORTS ON FORM 8-K. - None
14
<PAGE>
SIGNATURES
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.
FIRST PHILSON FINANCIAL CORPORATION
- -----------------------------------
(Registrant)
By: /s/ George W. Hay By: /s/ Theodore Deskevich
-------------------------- --------------------------
George W. Hay, Theodore Deskevich,
President and Chief Executive Vice President
Executive Officer and C.F.O.
Date: March 18, 1997 Date: March 18, 1997
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.
By: /s/ Gregory A. Croner By: /s/ Lewis W. Berkley
-------------------------- --------------------------
Gregory A. Croner, Lewis W. Berkley,
Chairman of the Board Vice Chairman of the Board
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Richard P. Bulow By: /s/ Tommy R. Croner
-------------------------- --------------------------
Richard P. Bulow, Director Tommy R. Croner, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Theodore Deskevich By: /s/ George W. Hay
-------------------------- --------------------------
Theodore Deskevich, Director George W. Hay, Director
Date: March 18, 1997 Date: March 18, 1997
15
<PAGE>
By: /s/ Gary W. Sterner By: /s/ Earl K. Wahl
-------------------------- --------------------------
Gary W. Sterner, Director Earl K. Wahl, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ H. Dean White By: /s/ George R. Shafer
-------------------------- --------------------------
H. Dean White, Director George R. Shafer, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ James E. Croner
--------------------------
James E. Croner, Director
Date: March 18, 1997
16
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(Dollars in thousands)
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
- --------------------
Total assets $197,665 $198,918 $191,945 $188,717 $191,600
Total loans 100,654 92,632 89,242 90,340 100,357
Total deposits 173,480 170,858 166,700 164,717 170,346
Stockholders' equity 21,199 19,334 17,783 16,070 14,933
EARNINGS DATA
- --------------------
Net interest income 8,070 7,429 7,173 6,967 7,554
Other income 942 887 1,012 953 977
Other expense 5,779 5,789 6,170 6,564 5,728
Net income 2,390 1,943 1,800 1,137 546
PER SHARE DATA
- --------------------
Net income 5.49 4.46 4.13 2.61 1.25
Book value 48.67 44.38 40.82 36.89 34.28
Cash dividends
declared 1.25 0.90 0.20 - -
Dividend payout
ratio 22.78 20.17 4.84 - -
RATIOS
- --------------------
Return on average
assets 1.20% 0.99% 0.93% 0.59% 0.29%
Return on average
equity 11.76% 10.44% 10.57% 7.29% 3.71%
Average equity to
average assets 10.25% 9.49% 8.80% 8.12% 7.48%
Net loans to deposits 56.28% 52.53% 51.90% 53.17% 57.27%
</TABLE>
1
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,916 $ 6,587
Federal funds sold 6,500 8,800
Investment securities
available for sale 579 -
Investment securities
held to maturity (market
value of $78,750 and $88,772) 78,702 88,142
Total loans 100,654 92,632
Less allowance for loan losses 3,017 2,882
---------- ----------
Net loans 97,637 89,750
Premises and equipment, net 2,393 2,452
Accrued interest receivable 1,707 1,921
Other assets 1,231 1,266
---------- ----------
TOTAL ASSETS $ 197,665 $ 198,918
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 20,567 $ 20,181
Interest-bearing demand 25,094 23,657
Savings 35,614 35,903
Money market 12,193 12,759
Time 80,012 78,358
---------- ----------
Total deposits 173,480 170,858
Securities sold under
agreements to repurchase 1,168 7,362
U. S. Treasury demand notes 845 283
Accrued interest payable 552 590
Other liabilities 421 491
---------- ----------
TOTAL LIABILITIES 176,466 179,584
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $10 par value;
500,000 shares authorized,
435,600 shares issued and
outstanding 4,356 4,356
Capital surplus 2,354 2,354
Retained earnings 14,470 12,624
Unrealized gain on securities 19 -
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 21,199 19,334
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 197,665 $ 198,918
========== ==========
See accompanying notes to the consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans $ 8,667 $ 8,249 $ 7,664
Interest-bearing
deposits in other banks - 6 9
Federal funds sold 390 730 314
Investment securities:
Taxable interest 4,340 3,969 3,710
Tax exempt interest 662 692 683
-------- -------- --------
Total interest income 14,059 13,646 12,380
-------- -------- --------
INTEREST EXPENSE
Deposits 5,853 5,949 5,002
Securities sold under
agreements to repurchase 108 233 185
Other borrowings 28 35 20
-------- -------- --------
Total interest expense 5,989 6,217 5,207
-------- -------- --------
NET INTEREST INCOME 8,070 7,429 7,173
Provision for loan losses - - (118)
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,070 7,429 7,291
-------- -------- --------
OTHER INCOME
Service charges on
deposit accounts 555 523 510
Other income 387 364 502
-------- -------- --------
Total other income 942 887 1,012
-------- -------- --------
OTHER EXPENSE
Salaries and employee
benefits 3,007 3,044 3,220
Occupancy expense, net 462 311 294
Equipment expense 502 559 555
Deposit insurance premiums 2 218 424
Recovery from customer's
fraudulent transactions - - (410)
Other expense 1,806 1,657 2,087
-------- -------- --------
Total other expense 5,779 5,789 6,170
-------- -------- --------
Income before income taxes 3,233 2,527 2,133
Income tax expense 843 584 333
-------- -------- --------
NET INCOME $ 2,390 $ 1,943 $ 1,800
======== ======== ========
EARNINGS PER SHARE $ 5.49 $ 4.46 $ 4.13
WEIGHTED AVERAGE SHARES
OUTSTANDING 435,600 435,600 435,600
See accompanying notes to the consolidated financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<CAPTION>
Unrealized
Common Capital Retained Gain on
Stock Surplus Earnings Securities Total
------ ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31,1993 $4,356 $2,354 $ 9,360 $ - $16,070
Net income 1,800 1,800
Cash dividend
($.20 per share) (87) (87)
------ ------- -------- ---------- --------
BALANCE,
DECEMBER 31,1994 4,356 2,354 11,073 - 17,783
Net income 1,943 1,943
Cash dividends
($.90 per share) (392) (392)
------ ------- -------- ---------- --------
BALANCE,
DECEMBER 31,1995 4,356 2,354 12,624 - 19,334
Net income 2,390 2,390
Cash dividends
($1.25 per share) (544) (544)
Unrealized gain
on securities 19 19
------ ------- -------- ---------- --------
BALANCE,
DECEMBER 31,1996 $4,356 $2,354 $14,470 $ 19 $21,199
====== ======= ======== ========== ========
See accompanying notes to the consolidated financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,390 $ 1,943 $ 1,800
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for loan losses - - (118)
Depreciation, amortization
and accretion, net 315 586 771
Decrease (increase) in
accrued interest receivable 214 (197) (4)
Increase (decrease) in
accrued interest payable (38) 142 46
Deferred income tax 5 63 40
Other, net (113) (193) (17)
-------- -------- --------
Net cash provided by
operating activities 2,773 2,344 2,518
-------- -------- --------
INVESTING ACTIVITIES
Net decrease in interest-
bearing deposits in other
banks - 175 85
Proceeds from maturities
and repayments of investment
securities held to maturity 27,839 23,328 29,753
Purchase of investment
securities
Held to maturity (18,401) (24,861) (31,158)
Available for sale (551) - -
Net decrease (increase) in
loans (7,897) (3,304) 1,204
Purchase of premises and
equipment (242) (52) (273)
Proceeds from sales of
other real estate owned 62 20 76
-------- -------- --------
Net cash provided by (used
for) investing activities 810 (4,694) (313)
-------- -------- --------
FINANCING ACTIVITIES
Net increase in deposits 2,622 4,159 1,982
Increase (decrease) in
securities sold under
agreements to repurchase (6,194) 1,599 199
Increase (decrease) in
U. S. Treasury demand notes 562 (290) (685)
Cash dividends paid (544) (392) (87)
-------- -------- --------
Net cash provided by (used
for) financing activities (3,554) 5,076 1,409
-------- -------- --------
Increase in cash and cash
equivalents 29 2,726 3,614
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 15,387 12,661 9,047
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $15,416 $15,387 $12,661
======== ======== ========
See accompanying notes to the consolidated financial
statements.
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
- ------------------------------------------------------------
A summary of the significant accounting and reporting
policies applied in the presentation of the accompanying
financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
First Philson Financial Corporation (the "Company") is a
Delaware corporation and is registered under the Bank
Holding Company Act. The Company was organized to be
the holding company of First Philson Bank, N.A. (the
"Bank"). The Company and its subsidiaries derive
substantially all their income from banking and
bank-related services which include interest earnings on
commercial mortgage, residential real estate, consumer,
and commercial loan financing, as well as interest
earnings on investment securities and deposit services
to its customers. The Bank is a federally chartered
national association which provides banking services to
Berlin, Pennsylvania, and other surrounding communities
of south-central and southwestern Pennsylvania. The
Company is supervised by the Federal Reserve Board,
while the Bank is subject to regulation and supervision
by the Office of the Comptroller of the Currency.
The consolidated financial statements include the
accounts of First Philson Financial Corporation and its
subsidiaries, First Philson Bank, N.A. and Laurel
Highland Life Insurance Company ("Laurel"). Laurel was
dissolved on September 29, 1995. At the time of
dissolution, Laurel had net assets of approximately
$455,000. All intercompany items have been eliminated
in consolidation. The investment in subsidiaries on the
parent company financial statements is carried at the
parent company's equity in the underlying net assets.
The consolidated financial statements have been prepared
in conformity with generally accepted accounting
principles. In preparing the financial statements,
management is required to make certain estimates and
assumptions that affect the reported amounts of assets
and liabilities as of the balance sheet date and
revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term are the allowance
for loan losses.
Investment Securities
---------------------
The Company has classified investment securities
into two categories: Held to Maturity and Available
for Sale. Debt securities acquired with the intent and
ability to hold to maturity are stated at cost adjusted
for amortization of premium and accretion of discount
which are computed using a method which approximates a
level yield and recognized as adjustments of interest
income. Certain other securities have been classified
as available for sale to serve principally as a source
of liquidity. Unrealized holding gains and losses for
available for sale securities are reported as a separate
component of stockholders' equity, net of tax, until
realized. Equity securities at December 31, 1995,
consisted solely of the holdings in shares of the
Federal Reserve Bank which is accounted for at cost and
was classified as other securities held to maturity.
These securities were reclassified as available for sale
in 1996.
Loans
-----
Interest on all loans is recognized as interest income
on the accrual method. For loans on which interest is
90 days past due, accrual of income is discontinued, and
any previously accrued interest is reversed against
current income. Loan origination and commitment fees and
certain direct loan origination costs are being deferred
and the net amount amortized as an adjustment to the
related loan's yield. These amounts are being amortized
over the contractual life of the related loans.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Company adopted Statement
of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by
Statement No. 118. Under this Standard, the
Company estimates credit losses on impaired loans based
on the present value of expected cash flows or fair
value of the underlying collateral if the loan repayment
is expected to come from the sale or operation of such
collateral. Prior to 1995, the credit losses related to
these loans were estimated based on undiscounted cash
flows or the fair value of the underlying collateral.
Statement No. 118 amends Statement No. 114 to permit a
creditor to use existing methods for recognizing
interest income on impaired loans eliminating the income
recognition provisions of Statement No. 114. The
adoption of these statements did not have a material
effect on the Company's financial position or results of
operations.
Impaired loans are commercial and commercial real estate
loans for which it is probable that the Company will not
be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and
does not aggregate by loans by major risk
classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans,"
although the two categories overlap. The Company may
choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while
not classifying the loan as impaired if the loan is not
a commercial or commercial real estate loan. Factors
considered by management in determining impairment
include payment status and collateral value. The amount
of impairment for
8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(Continued)
- ------------------------------------------------------------
these types of impaired loans is determined by the
difference between the present value of the expected
cash flows related to the loan, using the original
interest rate, and its recorded value, or as a practical
expedient in the case of collateralized loans, the
difference between the fair value of the collateral and
the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value
of the collateral.
Mortgage loans on one-to-four family properties and all
consumer loans are large groups of smaller balance
homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less,
generally are not classified as impaired. Management
determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower,
including the length of the delay, the borrower's prior
payment record, and the amount of shortfall in relation
to the principal and interest owed.
The allowance for loan losses represents the amount
which management estimates is adequate to provide for
potential losses in its loan portfolio. The allowance
method is used in providing for loan losses.
Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The
allowance for loan losses is established through a
provision for loan losses charged to operations. The
provision for loan losses is based on management's
periodic evaluation of individual loans, economic
factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the
adequacy of the allowance for loan losses, including the
amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes
in the near term.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation
is computed on the straight-line method over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs are charged against income as
incurred. Costs of major additions and improvements are
capitalized.
Employee Benefit Plans
----------------------
Employee benefits include contributions, determined
actuarially, to a retirement plan covering the eligible
employees of the Bank. Contributions to the employee
savings plans are made at the discretion of
the Board of Directors.
Income Taxes
------------
Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities
are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for
income taxes. Deferred income tax expenses or benefits
are based on the changes in the deferred tax asset or
liability from period to period.
Earnings Per Share
------------------
Earnings per share computations are based upon the
weighted number of shares outstanding which was 435,600
for all reported periods.
Cash Flow Information
---------------------
The Company has defined cash and cash equivalents as
those amounts included in the balance sheet captions
Cash and due from banks and Federal funds sold. Cash
payments for interest in 1996, 1995, and 1994 were
$6,027,000, $6,075,000, and $5,161,000, respectively.
Cash payments for income taxes in 1996, 1995, and 1994
were $815,000, $405,000, and $388,000, respectively.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative amounts for prior years have been
reclassified to conform to current year presentations.
Such reclassifications did not effect net income.
9
<PAGE>
2. INVESTMENT SECURITIES
- ------------------------------------------------------------
The amortized cost and estimated market values of
investment securities available for sale and held to
maturity are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR
SALE
Equity
securities $ 551 $ 30 $ (2) $ 579
--------- ---------- ---------- ---------
Total $ 551 $ 30 $ (2) $ 579
========= ========== ========== =========
<CAPTION>
1996
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO
MATURITY
U. S. Treasury
securities $ 11,987 $ 4 $ (62) $ 11,929
U. S.
Government
agency
securities 38,961 149 (280) 38,830
Obligations
of states and
political
subdivisions 12,214 186 (14) 12,386
Corporate notes 14,664 44 (24) 14,684
Mortgage-backed
securities 876 45 - 921
--------- ---------- ---------- ---------
Total $ 78,702 $ 428 $ (380) $ 78,750
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO
MATURITY
U. S. Treasury
securities $ 12,072 $ 53 $ (24) $ 12,101
U. S.
Government
agency
securities 43,299 355 (210) 43,444
Obligations
of states and
political
subdivisions 11,018 260 (16) 11,262
Corporate notes 20,777 163 (16) 20,924
Mortgage-backed
securities 775 65 - 840
--------- ---------- ---------- ---------
Total debt
securities 87,941 896 (266) 88,571
Equity security 201 - - 201
--------- ---------- ---------- ---------
Total $ 88,142 $ 896 $ (266) $ 88,772
========= ========== ========== =========
</TABLE>
10
<PAGE>
2. INVESTMENT SECURITIES (Continued)
- ------------------------------------------------------------
The amortized cost and estimated market value of debt
securities held to maturity at December 31, 1996, by
contractual maturity, are shown below (dollars in
thousands). 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>
Estimated
Amortized Market
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 18,512 $ 18,531
Due after one year through
five years 49,557 49,410
Due after five years through
ten years 5,854 5,964
Due after ten years 3,903 3,924
--------- ---------
77,826 77,829
Mortgage-backed securities 876 921
--------- ---------
Total $ 78,702 $ 78,750
========= =========
</TABLE>
Investment securities with an amortized cost of
$25,760,000 and $28,788,000 and an estimated market
value of $25,751,000 and $29,026,000 were pledged to
secure public deposits and other purposes as required by
law at December 31, 1996 and 1995, respectively.
3. LOANS
- ------------------------------------------------------------
Major classifications of loans are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Commercial,
financial,and
agricultural $ 17,891 17.77% $ 13,631 14.71%
Term federal funds - - 1,000 1.08
Real estate -
construction - - 237 0.26
Real estate -
mortgage 69,713 69.26 62,868 67.87
Installment loans
to individuals 13,050 12.97 14,896 16.08
-------- --------- -------- ---------
Total loans 100,654 100.00% 92,632 100.00%
========= =========
Less allowance
for loan losses 3,017 2,882
-------- --------
Net loans $ 97,637 $ 89,750
======== ========
</TABLE>
Loan maturities and rate sensitivity of the loan
portfolio, exclusive of real estate mortgage loans, and
consumer installment loans, at December 31, 1996, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Within One to After
One Year Five Years Five Years Total
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Commercial,
financial,and
agricultural $ 10,745 $ 4,875 $ 2,271 $17,891
======== ========== ========== =======
Loans at fixed
interest rates $ 2,574 $ 4,875 $ 2,271 $ 9,720
Loans at variable
interest rates 8,171 - - 8,171
-------- ---------- ---------- -------
$ 10,745 $ 4,875 $ 2,271 $17,891
======== ========== ========== =======
</TABLE>
Included in the table above are loans at fixed interest
rates of $7,146,000 that mature or reprice after one
year. Generally, loans with maturities of one year or
less consist of funds drawn on commercial lines of
credit, short-term notes written with maturities of
90 to 180 days, and demand notes written without
alternative maturity schedules. All lines of credit and
demand loans are subject to an annual review where the
account may be approved for up to one year. Short-term
notes are generally permitted two renewals, prior to
being placed on a fixed payment schedule.
11
<PAGE>
3. LOANS (Continued)
- ------------------------------------------------------------
Loans of $60,000 or more extended to executive officers,
directors, and corporations in which they are
beneficially interested as stockholders, executive
officers, or directors were $724,000 at December 31,
1996. These loans were made on substantially the same
terms including interest rates and collateral as those
prevailing at the time for comparable transactions with
other persons. An analysis of these related party loans
for 1996 follows (dollars in thousands):
December 31, Amounts December 31,
1995 Additions Collected 1996
------------ --------- ---------- ------------
$ 841 $ 38 $ 155 $ 724
The Company's primary business activity is with
customers located within its local trade area.
Commercial, residential, personal, and agricultural
loans are granted. The Company also selectively funds
residential loans originated outside of its trade area
provided such loans meet the Company's credit policy
guidelines. Although the Company has a diversified loan
portfolio at December 31, 1996 and 1995, loans
outstanding to individuals and businesses are dependent
upon the local economic conditions in its immediate
trade area.
The Company has nonaccrual loans of $676,000 and
$102,000 at December 31, 1996 and 1995, which in
management's opinion did not meet the definition of
impaired in accordance with Statement No. 114. Interest
income on loans would be increased by $17,000 and $1,000
in 1996 and 1995 if these loans had performed in
accordance with their original terms.
4. ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------
Changes in the allowance for loan losses for the years
ended December 31, 1996, 1995, and 1994 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, January 1 $ 2,882 $ 2,727 $ 2,754
Add:
Provisions charged
to operations - - (118)
Recoveries 379 404 417
Less loans charged off 244 249 326
-------- -------- --------
Balance, December 31 $ 3,017 $ 2,882 $ 2,727
======== ======== ========
</TABLE>
5. PREMISES AND EQUIPMENT, NET
- ------------------------------------------------------------
Major classifications of premises and equipment are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and land improvements $ 145 $ 145
Premises 3,164 3,150
Furniture and equipment 3,296 3,129
-------- --------
6,605 6,424
Less accumulated depreciation 4,212 3,972
-------- --------
Total $ 2,393 $ 2,452
======== ========
</TABLE>
Depreciation expense amounted to $301,000, $388,000, and
$401,000 in 1996, 1995, and 1994, respectively.
12
<PAGE>
6. DEPOSITS
- ------------------------------------------------------------
Time deposits include certificates of deposit in
denominations of $100,000 or more. Such deposits
aggregated $6,505,000 and $5,478,000 at December 31,
1996 and 1995, respectively. Interest expense on
certificates of deposit $100,000 or more was $315,000,
$248,000, and $193,000 in 1996, 1995, and 1994,
respectively.
Maturities on time deposits of $100,000 or more are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Three months or less $ 1,036 $ 818
Three to twelve months 3,585 3,555
Over one year 1,884 1,105
-------- --------
Total $ 6,505 $ 5,478
======== ========
</TABLE>
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- ------------------------------------------------------------
The outstanding balances and related information for
securities sold under agreements to repurchase are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------- -------------
Amount Rate Amount Rate
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at year end $1,168 4.03% $7,362 3.33%
Average balance
outstanding during
the year 3,483 3.11 6,378 3.65
Maximum amount
outstanding at any
month end 8,173 8,697
</TABLE>
Average amounts outstanding during the year represent
daily average balances and average interest rates
represent interest expense divided by the related
average balance.
Investment securities with an amortized cost of
approximately $4,803,000 and $10,815,000 and an
estimated market value of $4,776,000 and $10,813,000 at
December 31, 1996 and 1995 have been pledged for the
securities sold under agreements to repurchase.
8. INCOME TAXES
- ------------------------------------------------------------
The provision for income taxes consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Currently payable $ 838 $ 521 $ 433
Deferred 5 63 40
Reduction in
valuation allowance - - (140)
-------- -------- --------
Total provision $ 843 $ 584 $ 333
======== ======== ========
</TABLE>
The components of the net deferred tax asset at December
31, 1996 and 1995, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 698 $ 698
Premises and equipment, net 2 -
Deferred loan origination
fees, net - 2
Other, net 16 16
-------- --------
Total deferred tax assets 716 716
-------- --------
Deferred Tax Liabilities:
Tax leases 2 9
Deferred loan origination
fees, net 8 -
Unrealized gain on securities 10 -
Employee benefit plans 21 -
Premises and equipment, net - 13
Other, net 2 6
-------- --------
Total deferred tax liabilities 43 28
-------- --------
Net deferred tax asset $ 673 $ 688
======== ========
</TABLE>
13
<PAGE>
8. INCOME TAXES (Continued)
- ------------------------------------------------------------
The reconciliation of the statutory rate and the
effective income tax rate is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------ ------- ------ -------
<S> <C> <C> <C> <C>
Provision at statutory
rate $1,099 34.0% $ 859 34.0%
Effect of tax free income (290) (9.0) (290) (11.5)
Decrease in valuation
allowance - - - -
Other 34 1.1 15 0.6
------ ------- ------ -------
Actual tax expense and
effective rate $ 843 26.1% $ 584 23.1%
====== ======= ====== =======
<CAPTION>
1994
--------------
% of
Pre-tax
Amount Income
------ -------
<S> <C> <C>
Provision at statutory
rate $ 725 34.0%
Effect of tax free income (251) (11.8)
Decrease in valuation
allowance (140) (6.6)
Other (1) -
------ -------
Actual tax expense and
effective rate $ 333 15.6%
====== =======
</TABLE>
9. EMPLOYEE BENEFITS
- ------------------------------------------------------------
Defined Benefit Pension Plan
----------------------------
The Bank sponsors a trusteed, non-contributory benefit
pension plan covering all eligible Bank employees and
officers. The Plan calls for benefits to be paid to
eligible employees at retirement based primarily upon
years of service and compensation rates near retirement.
The Bank's funding policy is to make annual
contributions, if needed, based upon the funding formula
developed by the Plan's actuary.
Pension expense includes the following components
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service costs of the current
period $ 67 $ 67 $ 69
Interest cost on projected
benefit obligation 29 36 24
Actual return on plan assets (23) (49) 6
Net amortization and deferral (18) 58 52
------ ------ ------
Net periodic pension cost $ 55 $ 112 $ 151
====== ====== ======
</TABLE>
The actuarial present value of accumulated benefit
obligations at December 31, 1996 and 1995, was $287,000
and $243,000 including vested benefit obligations of
$254,000 and $197,000, respectively. The following
table sets forth the funded status and amounts
recognized in the balance sheet at December 31, 1996 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Plan assets at fair value $ 504 $ 382
Projected benefit obligation 514 390
------ ------
Projected benefit obligation in excess
of plan assets (10) (8)
Unrecognized gain from past experience
different from that assumed 94 41
Unrecognized net transition asset (46) (50)
------ ------
Prepaid (accrued) pension cost $ 38 $ (17)
====== ======
</TABLE>
The Plan assets are invested in U. S. Government agency
securities, obligations of states and political
subdivisions, and corporate notes under the control of
the Plan's trustees as of December 31, 1996.
The weighted discount rate used to measure the projected
benefit obligation is 7.00% for 1996, 1995, and 1994.
The rate of increase in future compensation levels is
4.00% and the long-term rate of return on assets is
8.25% for 1996, 1995, and 1994. The Plan utilizes the
straight-line method of amortization for unrecognized
gains and losses.
During 1995 and 1994, the Bank offered an Employee
Voluntary Separation Plan ("Separation Plan"). The
Separation Plan was offered to all full-time employees
who met certain combined age and years of service
criteria. The cost of the Separation Plan as related to
future pension benefits amounted to $48,000 and $90,000
and is included in salary and employee benefit expense
for 1995 and 1994, respectively.
14
<PAGE>
9. EMPLOYEE BENEFITS (Continued)
- ------------------------------------------------------------
Savings and Investment Plans
----------------------------
The Bank currently sponsors a Section 401(k) employee
savings and investment plan for substantially all
employees and officers of the Bank. The Bank's
contribution to the plan is based on 50% matching of
voluntary contributions of up to 8% of individual
compensation. Employee contributions are vested at all
times, and Bank contributions are fully vested after
seven years. The 1996, 1995, and 1994 expense related
to this plan was $68,000, $62,000, and $63,000,
respectively.
Employee Stock Ownership Plan
-----------------------------
The Company sponsors an Employee Stock Ownership Plan
which enables qualifying employees to acquire shares of
the Company's common stock. At December 31, 1996,
41,212 shares or 9.46% of the Company's stock were held
by the plan. Contributions to the plan are made at the
discretion of the Board of Directors. The Company made
no contribution for the years ended December 31, 1996,
1995, and 1994.
10. OTHER EXPENSES
- ------------------------------------------------------------
Other expenses for the years ended December 31, 1996,
1995, and 1994 consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Professional fees $ 184 $ 113 $ 184
Pennsylvania bank shares tax 163 156 151
Postage 166 145 156
Other 1,293 1,243 1,596
------ ------ ------
Total $1,806 $1,657 $2,087
====== ====== ======
</TABLE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------------------
Commitments
-----------
In the normal course of business, there are various
outstanding commitments and certain contingent
liabilities which are not reflected in the accompanying
consolidated financial statements. These commitments
and contingent liabilities represent financial
instruments with off-balance-sheet risk. The contract
or notional amounts of those instruments reflect the
extent of involvement in particular types of financial
instruments which were comprised of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Commitments to extend credit $12,459 $12,531
Standby letters of credit 869 973
------- -------
Total $13,328 $13,504
======= =======
</TABLE>
The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount
recognized in the balance sheet. The same credit
policies are used in making commitments and conditional
obligations as for on-balance-sheet instruments.
Generally, collateral is required to support financial
instruments with credit risk. The terms are typically
for a one year period with an annual renewal option
subject to prior approval by management.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any
condition established in the loan agreement. These
commitments are comprised primarily of available
commercial and personal lines of credit and unfunded
real estate loans. Standby letters of credit written
are conditional commitments issued to guarantee the
performance of a customer to a third party.
The exposure to loss under these commitments is limited
by subjecting each commitment to credit approval and
monitoring procedures. Substantially all of the
commitments to extend credit are contingent upon
customers maintaining specific credit standards at the
time of the loan funding. Management assesses the
credit risk associated with certain commitments to
extend credit in determining the level of the
allowance for loan losses. Since many of the
commitments are expected to expire without being drawn
upon, the contractual amounts do not necessarily
represent future funding requirements.
15
<PAGE>
12. REGULATORY MATTERS
- ------------------------------------------------------------
The approval of the Comptroller of the Currency is
required before any dividends are declared if the total
of all dividends declared by a national bank in any
calendar year would exceed net profits, as defined for
that year, combined with its retained net profits for
the two preceding calendar years less any required
transfers to surplus. Under this formula, the amount
available for payment of dividends by the Bank to the
Company in 1997, without the approval of the
Comptroller, is $3,127,000 plus 1997 profits retained up
to the date of the dividend declaration.
Included in cash and due from banks are required federal
reserves of $1,126,000 and $1,031,000 at December 31,
1996 and 1995, respectively, for facilitating the
implementation of monetary policy by the Federal Reserve
System. The required reserves are computed by applying
prescribed ratios to the classes of average deposit
balances. These are held in the form of cash on hand
and/or balances maintained directly with the Federal
Reserve Bank.
13. REGULATORY CAPITAL REQUIREMENTS
- ------------------------------------------------------------
The Company (on a consolidated basis) and the Bank are
subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary actions
by the regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's
financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting
practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by the regulation to
ensure capital adequacy require the Company and the Bank
to maintain minimum amounts and ratios of total and Tier
I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital
to average assets (as defined). Management believes, as
of December 31, 1996, that the Company and the Bank meet
all capital adequacy requirements to which they are
subject.
As of December 31, 1996, the most recent notification
from the Federal Reserve Board and the Office of the
Comptroller of the Currency have categorized the Company
and the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be
categorized as well capitalized they must maintain
minimum total risk-based, Tier I risk-based and Tier I
leverage ratios of at least 100 to 200 basis points
above those ratios set forth in the table. There have
been no conditions or events since that notification
that management believes have changed the Company's and
the Bank's category.
The following table reflects the Company's capital
ratios and minimum requirements at December 31 (dollars
in thousands). The Bank's capital ratios are
substantially the same as the Company.
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
<S> <C> <C> <C> <C>
TOTAL CAPITAL (TO
WEIGHTED ASSETS)
------------------
Actual $ 22,588 20.34% $ 20,751 18.55%
For Capital
Adequacy Purposes 8,884 8.00 8,952 8.00
TIER I CAPITAL (TO
WEIGHTED ASSETS)
------------------
Actual $ 21,180 19.07% $ 19,334 17.28%
For Capital
Adequacy Purposes 4,442 4.00 4,476 4.00
TIER I CAPITAL (TO
AVERAGE ASSETS)
------------------
Actual $ 21,180 10.58% $ 19,334 9.65%
For Capital
Adequacy Purposes 8,006 4.00 8,014 4.00
</TABLE>
14. RECOVERY OF CUSTOMER'S FRAUDULENT TRANSACTIONS
- ------------------------------------------------------------
During 1994, the Bank received recoveries of $410,000 as
a reimbursement of a 1991 loss resulting from a
customer's fraudulent transactions. The recovery is
reflected in operations in the 1994 consolidated
financial statements.
16
<PAGE>
15. FAIR VALUE DISCLOSURE
- ------------------------------------------------------------
The estimated fair values of the Company's financial
instruments are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due
from banks and
federal funds
sold $ 15,416 $ 15,416 $ 15,387 $ 15,387
Investment
securities 79,281 79,329 88,142 88,772
Net loans 97,637 100,074 89,701 93,280
Accrued interest
receivable 1,707 1,707 1,921 1,921
-------- --------- -------- ---------
Total financial
assets $194,041 $ 196,526 $195,151 $ 199,360
======== ========= ======== =========
FINANCIAL
LIABILITIES
Deposits $173,480 $ 173,167 $170,858 $ 171,279
Securities sold
under agreements
to repurchase 1,168 1,168 7,362 7,362
U. S. Treasury
demand notes 845 845 283 283
Accrued interest
payable 552 552 590 590
-------- --------- -------- ---------
Total financial
liabilities $176,045 $ 175,732 $179,093 $ 179,514
======== ========= ======== =========
</TABLE>
Financial instruments are defined as cash, evidence of
an ownership interest in an entity, or a contract which
creates an obligation or right to receive or deliver
cash or another financial instrument from/to a second
entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction
between willing parties other than in a forced or
liquidation sale. If a quoted market price is available
for a financial instrument, the estimated fair value
would be calculated based upon the market price per
trading unit of the instrument.
If no readily available market price exists, the fair
value estimates for financial instruments should be
based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash
flows and future estimated losses, and other factors
as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result
from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated
fair values may not be indicative of the amount
realizable in the sale of a particular financial
instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a
significant impact on the resulting estimated fair
values.
As certain assets and liabilities such as deferred tax
assets and premises and equipment are not considered
financial instruments, the estimated fair value of
financial instruments would not represent the full value
of the Company.
The Company employed simulation modeling in determining
the estimated fair value of financial instruments for
which quoted prices were not available based upon the
following assumptions:
Cash and Due From Banks, Federal Funds Sold, Accrued
-----------------------------------------------------
Interest Receivable, Securities Sold Under Agreements to
--------------------------------------------------------
Repurchase, U. S. Treasury Demand Notes, and Accrued
----------------------------------------------------
Interest Payable
----------------
The fair value is equal to the current book value.
Investment Securities
---------------------
The fair value of investment securities available for
sale and held to maturity are equal to the available
quoted market price. If no quoted market price is
available, fair value is estimated using the quoted
market price for similar securities.
Loans and Deposits
------------------
The fair value of loans is estimated by discounting the
future cash flows using a simulation model which
estimates future cash flows and constructs discount
rates that consider reinvestment opportunities,
operating expenses, non-interest income, credit quality,
and prepayment risk. Demand, savings, and money market
deposit accounts are valued at the amount payable on
demand as of year end. Fair values for time deposits
are estimated using discounted cash flow calculations
that apply contractual cost currently being offered in
the existing portfolio to current market rates being
offered for deposits of similar remaining maturities.
17
<PAGE>
16. CONDENSED FINANCIAL INFORMATION OF FIRST PHILSON
FINANCIAL CORPORATION (Parent Company Only)
- ------------------------------------------------------------
<TABLE>
CONDENSED BALANCE SHEET
(Dollars in thousands)
<CAPTION>
December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Interest-bearing deposits in
subsidiary $ 6 $ 161
Time deposits in subsidiary 310 210
Securities available for sale 378 -
U. S. Treasury security - 99
Investment in bank subsidiary 20,514 18,868
Other assets - 1
-------- --------
TOTAL ASSETS $ 21,208 $ 19,339
======== ========
LIABILITIES
Other liabilities $ 9 $ 5
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $10 par value;
500,000 shares authorized,
435,600 shares issued and
outstanding 4,356 4,356
Capital surplus 2,354 2,354
Retained earnings 14,470 12,624
Unrealized gain on securities 19 -
-------- --------
TOTAL STOCKHOLDERS' EQUITY 21,199 19,334
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 21,208 $ 19,339
======== ========
</TABLE>
<TABLE>
CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $ 755 $ 432 $ 87
Interest income 31 24 -
Other income - 35 -
-------- -------- --------
Total income 786 491 87
-------- -------- --------
EXPENSE
Other expense 42 29 31
-------- -------- --------
Total expense 42 29 31
-------- -------- --------
Income before equity in
undistributed earnings
of subsidiaries 744 462 56
Equity in undistributed
earnings of subsidiaries 1,646 1,481 1,744
-------- -------- --------
NET INCOME $ 2,390 $ 1,943 $ 1,800
======== ======== ========
</TABLE>
18
<PAGE>
16. CONDENSED FINANCIAL INFORMATION OF FIRST PHILSON
FINANCIAL CORPORATION (Parent Company Only) (Continued)
- ------------------------------------------------------------
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,390 $ 1,943 $ 1,800
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Undistributed earnings
in subsidiaries (1,646) (1,481) (1,744)
Other, net (4) 4 -
-------- -------- --------
Net cash provided by
operating activities 740 466 56
-------- -------- --------
INVESTING ACTIVITIES
Purchase of securities
available for sale (350) - -
Maturity of investment
securities 99 - -
Purchase of time deposits
in subsidiary (100) - -
Proceeds from dissolution
of non-bank subsidiary, net - 85 -
-------- -------- --------
Net cash provided by (used
for) investing activities (351) 85 -
-------- -------- --------
FINANCING ACTIVITIES
Cash dividends paid (544) (392) (87)
-------- -------- --------
Net cash used for
financing activities (544) (392) (87)
-------- -------- --------
Increase (decrease) in
cash and cash equivalents (155) 159 (31)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 161 2 33
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6 $ 161 $ 2
======== ======== ========
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
First Philson Financial Corporation ("Philson") is a bank holding
company organized in 1985 under the Delaware General Corporation
Law and is registered under the Bank Holding Company Act, of
1956, as amended ("Bank Holding Company Act"). First Philson
Bank, N.A. (the "Bank") is a wholly-owned subsidiary of Philson
and the surviving bank of the former National Bank of Western
Pennsylvania and The Philson National Bank, which merged on
January 1, 1991. The Bank is a national banking association
organized under the laws of the United States. Philson's
principal activities consist of owning and operating the Bank.
Philson and its subsidiary derive substantially all their income
from banking and bank-related services. Philson functions
primarily as a coordinating and servicing unit for its subsidiary
in general management, loan policies and procedures, accounting
and taxes, loan review, auditing, investment advisory,
compliance, marketing, general corporate services, and financial
and strategic planning.
The Bank conducts general banking business through nine locations
in Somerset and Fayette Counties, Pennsylvania. The Bank is a
full-service bank offering (1) retail banking services, such as
demand, savings and time deposits, money market accounts, secured
and unsecured loans, mortgage loans, safe deposit boxes, holiday
club accounts, collection services, money orders, and traveler's
checks; (2) lending, depository and related financial services to
commercial, industrial, financial, and governmental customers,
such as real estate mortgage loans, revolving credit
arrangements, lines of credit, personal and commercial property
lease financing, real estate construction loans, business money
market and savings accounts, certificates of deposit, wire
transfers, and night depository; and (3) credit card operations
through Mastercard, VISA and Discover. The Bank also operates
five automated bank teller machines ("ATM's").
The Bank's deposit base is such that the loss of one depositor or
a related group of depositors would not have a materially adverse
effect on its business. In addition, the loan portfolio is also
diversified so that one industry or group of related industries
does not comprise a material portion of the loan portfolio.
The Bank's business is not seasonal nor does it have any risks
attendant to foreign sources.
The Bank is federally chartered and is subject to primary
supervision by the Office of the Comptroller of the Currency
("OCC"). The Bank is also subject to the regulations of the
Board of Governors of the Federal Reserve Bank ("Federal Reserve
Board") and the Federal Deposit Insurance Corporation ("FDIC").
Its deposits are insured by the Bank Insurance Fund ("BIF") of
the FDIC.
The following is a more detailed discussion of certain
significant factors that affected Philson's consolidated
operating results, interest rate sensitivity, financial
condition, liquidity, and capital resources for the years ended
December 31, 1996, 1995, and 1994. Reference should be made to
pages 4 - 19 of the Consolidated Financial Statements and Notes
thereto as well as the Financial Highlights presented on page 1
for a complete understanding of the following discussion and
analysis. All increases, decreases and related ratios represent
comparisons to the previous year-end. Certain comparative
amounts for 1995 and 1994 have been reclassified to conform to
1996 presentations.
Summary of Earnings
- -------------------
Philson's net income increased by $447,000 in 1996, $143,000 in
1995, and $663,000 in 1994. The net income for 1994 reflected a
recovery from a customer's fraudulent transaction of $410,000.
Net income per share was $5.49, $4.46, and $4.13 respectively,
for the same time periods.
Philson's Return on Average Assets ("ROA") was 1.20% for 1996,
.99% for 1995, and .93% for 1994, while the Return on Average
Equity ("ROE") was 11.76%, 10.44%, and 10.57%, respectively.
Net Interest Income
- -------------------
Net interest income is the difference between the interest earned
on loans and investment securities ("Interest-earning assets")
and the interest paid on deposits and borrowings ("Interest-
bearing liabilities"). Net interest income is affected
principally by the spread between the yield on interest-earning
assets and the cost of interest-bearing liabilities and by the
relative dollar amounts of such assets and liabilities.
Since the earnings provided by tax-exempt securities such as
investments in obligations of state and political subdivisions,
and loans such as those to counties, municipalities and school
districts, are a significant component of net interest income, it
is more meaningful to analyze net interest income on a
tax-equivalent basis, shown on pages 23 and 24. The tax-
equivalent adjustment is based upon the federal corporate income
tax rate of 34%.
On a fully tax-equivalent basis, net interest income increased
$643,000 in 1996, $314,000 in 1995, and $302,000 in 1994.
Average interest-earning assets increased $2,273,000 in 1996,
$4,560,000 in 1995, and $2,704,000 in 1994. Average interest-
bearing liabilities decreased $1,074,000 in 1996, increased
$473,000 in 1995, and decreased $1,360,000 in 1994.
The net interest margin, which is a ratio of the net interest
income on a tax-equivalent basis divided by the average earning
assets, was 4.50% for 1996, 4.21% for 1995, and 4.14% for 1994.
As a percentage of average total assets, average earning assets
were 95.39% in 1996, 95.31% in 1995 and 94.62% in 1994.
Philson's Asset/Liability Committee ("ALCO") continually strives
to effectively manage interest rate risk and to minimize the
impact of interest rate fluctuations on the net interest margin.
Philson continues to focus its efforts on generating quality loan
growth and investing in highly rated securities.
21
<PAGE>
1996
- ----
Net interest income increased in 1996 due to an increase in
interest income of $415,000 and a decrease in interest expense of
$228,000. The increase in interest income resulted from
increases in interest on loans and investment securities, offset
by a decrease in interest on federal funds sold. The increase in
interest on loans was attributable to an increase in the average
outstanding balance of mortgage loans, primarily fixed rate
residential mortgages, home equity, and commercial real estate
loans. The increase in interest on investment securities was
attributable to increases in both the average outstanding balance
and net yield. The decrease in interest on federal funds sold is
due to decreases in both the average outstanding balance and net
yield.
The decrease in interest expense resulted from decreases in the
cost of interest-bearing liabilities and the average outstanding
balance of securities sold under agreements to repurchase, due
primarily to the loss of a repurchase customer. Interest expense
on time deposits increased primarily from an increase in the
average outstanding balance as a result of instituting, in August
1996, a 15-month single maturity time deposit.
The increase in the margin was a direct result of higher
interest-earning assets and lower interest-bearing deposits. To
meet the goals set forth in Philson's Strategic Plan for business
development, Management held regular meetings to review and
enhance the sales call program implemented in prior years to
promote new business and to meet the needs of the communities for
which it serves. Management was able to increase the interest
rate spread from 1995 through the continual pursuit of
noninterest-bearing business deposits, higher yielding
investments, residential mortgage and home equity loans, and
small business loans.
1995
- ----
Net interest income increased in 1995 from a combination of
increases in interest income of $1,324,000 and interest expense
of $1,010,000. The increase in interest income resulted from
increases in most categories. The increase in interest on loans
and federal funds sold was due to both higher average outstanding
balances and respective net yields. The net yield on loans was
affected by increases in the prime rate and other key lending
rates. While the average balance of investment securities
declined, the net yield on investment securities increased
because higher yielding securities were purchased throughout
1994, which also provided an overall higher net yield in 1995.
The volume of investment securities declined as a result of
maturities and calls, and primarily funded the increase in
federal funds sold. Management temporarily places the funds in
federal funds sold until either purchases of securities can be
made that meet the criteria specified in the investment policy,
or funds are needed to meet increases in loan demand or deposit
withdrawals. With yields on federal funds sold being comparable
to investment security yields, Management continued to obtain a
comparable return while maintaining liquidity.
The increase in interest expense resulted from an increase in the
cost of interest-bearing liabilities. The average outstanding
balance increased primarily in time deposits as a result of funds
transferred from interest-bearing demand, savings and money
market accounts. The primary reason for the increase in time
deposits was the result of instituting a One Year 7 Day Access
time deposit in October 1994, which permits depositors to access
their funds after a notification of seven days.
The increase in the margin was a direct result of higher
interest-earning assets. While the net yields on interest-
earning assets and the cost of interest-bearing liabilities
increased, Management was able to effectively manage the interest
rate spread through pursuing noninterest-bearing business
deposits, higher yielding investments, residential mortgage and
home equity loans, and small business loans. This was in
accordance with Philson's Strategic Plan which included a call
program instituted by Management to promote new business and to
meet the needs of the communities for which it serves.
22
<PAGE>
The following is an analysis of the average balance sheet and net
interest income for the three years ended December 31, 1996, 1995
and 1994 (dollars in thousands).
<TABLE>
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<CAPTION>
1996
------------------------
Average Yield/
Balance Interest Rate
<F1>
-------- -------- ------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable <F2> <F3> <F4> $ 96,898 $ 8,767 9.05%
Investment securities available
for sale 393 24 6.11%
Investment securities held to maturity:
Taxable 73,125 4,316 5.90%
Tax-exempt <F4> 11,639 1,003 8.62%
Interest-bearing deposits in other
banks - - -
Federal funds sold 7,237 390 5.39%
-------- -------- ------
Total interest-earning assets 189,292 14,500 7.66%
-------- -------- ------
Noninterest-earning assets:
Cash and due from banks 6,595
Other assets 5,525
Less allowance for loan losses 2,962
--------
Total noninterest-earning assets 9,158
--------
TOTAL ASSETS $198,450
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $ 25,378 $ 377 1.49%
Savings deposits 36,515 1,054 2.89%
Money market deposits 12,365 315 2.55%
Time deposits 79,074 4,107 5.19%
Securities sold under agreements
to repurchase 3,309 108 3.26%
Other borrowings 551 28 5.08%
-------- -------- ------
Total interest-bearing liabilities 157,192 5,989 3.81%
-------- -------- ------
Noninterest-bearing liabilities
and stockholders' equity:
Noninterest-bearing demand deposits 19,705
Other liabilities 1,220
Stockholders' equity 20,333
--------
Total noninterest-bearing liabilities
and stockholders' equity 41,258
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $198,450
========
Net interest income; interest rate
spread $ 8,511 3.85%
======== ======
Net yield on earning assets (Margin) 4.50%
======
<CAPTION>
1995
------------------------
Average Yield/
Balance Interest Rate
<F1>
-------- -------- ------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable <F2> <F3> <F4> $ 90,948 $ 8,331 9.16%
Investment securities available
for sale - - -
Investment securities held to maturity:
Taxable 71,685 3,969 5.54%
Tax-exempt <F4> 11,912 1,049 8.81%
Interest-bearing deposits in other
banks 101 6 5.94%
Federal funds sold 12,373 730 5.90%
-------- -------- ------
Total interest-earning assets 187,019 14,085 7.53%
-------- -------- ------
Noninterest-earning assets:
Cash and due from banks 6,249
Other assets 5,859
Less allowance for loan losses 2,905
--------
Total noninterest-earning assets 9,203
--------
TOTAL ASSETS $196,222
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $ 24,168 $ 400 1.66%
Savings deposits 36,913 1,104 2.99%
Money market deposits 13,775 362 2.63%
Time deposits 76,379 4,083 5.35%
Securities sold under agreements
to repurchase 6,378 233 3.65%
Other borrowings 653 35 5.36%
-------- -------- ------
Total interest-bearing liabilities 158,266 6,217 3.93%
-------- -------- ------
Noninterest-bearing liabilities
and stockholders' equity:
Noninterest-bearing demand deposits 18,047
Other liabilities 1,281
Stockholders' equity 18,628
--------
Total noninterest-bearing liabilities
and stockholders' equity 37,956
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $196,222
========
Net interest income; interest rate
spread $ 7,868 3.60%
======== ======
Net yield on earning assets (Margin) 4.21%
======
<CAPTION>
1994
------------------------
Average Yield/
Balance Interest Rate
<F1>
-------- -------- ------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable <F2> <F3> <F4> $ 88,180 $ 7,693 8.72%
Investment securities available
for sale - - -
Investment securities held to maturity:
Taxable 75,378 3,710 4.92%
Tax-exempt <F4> 11,525 1,035 8.98%
Interest-bearing deposits in other
banks 215 9 4.19%
Federal funds sold 7,161 314 4.38%
-------- -------- ------
Total interest-earning assets 182,459 12,761 6.99%
-------- -------- ------
Noninterest-earning assets:
Cash and due from banks 7,085
Other assets 6,172
Less allowance for loan losses 2,876
--------
Total noninterest-earning assets 10,381
--------
TOTAL ASSETS $192,840
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $ 24,715 $ 397 1.61%
Savings deposits 40,606 1,068 2.63%
Money market deposits 16,263 403 2.48%
Time deposits 69,718 3,134 4.50%
Securities sold under agreements
to repurchase 5,953 185 3.11%
Other borrowings 538 20 3.72%
-------- -------- ------
Total interest-bearing liabilities 157,793 5,207 3.30%
-------- -------- ------
Noninterest-bearing liabilities
and stockholders' equity:
Noninterest-bearing demand deposits 16,798
Other liabilities 1,272
Stockholders' equity 16,977
--------
Total noninterest-bearing liabilities
and stockholders' equity 35,047
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $192,840
========
Net interest income; interest rate
spread $ 7,554 3.69%
======== ======
Net yield on earning assets (Margin) 4.14%
======
<FN>
<F1> Average balances are computed using daily average balances.
<F2> Non-accrual loans are included in the average balances.
<F3> Interest on loans includes fee income.
<F4> Interest on earning assets has been computed on a tax
equivalent basis using the federal income tax statutory
rate of 34%.
</FN>
</TABLE>
23
<PAGE>
The following analysis shows the effects of the changes in
volumes and rates on interest income and interest expense
(dollars in thousands).
<TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<CAPTION>
1996 vs. 1995
--------------------------------
Net Due to changes in
Increase ---------------------
(Decrease) Volume <F1> Rate <F4>
---------- ----------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable <F2> <F3> $ 436 $ 545 $ (109)
Investment securities
available for sale 24 24 -
Investment securities held
to maturity:
Taxable 347 80 267
Tax-exempt <F2> (46) (24) (22)
Interest-bearing deposits
in other banks (6) (6) -
Federal funds sold (340) (303) (37)
---------- ----------- ---------
Total interest income 415 316 99
---------- ----------- ---------
INTEREST EXPENSE:
Deposits (96) 82 (178)
Borrowings (132) (121) (11)
---------- ----------- ---------
Total interest expense (228) (39) (189)
---------- ----------- ---------
NET INTEREST INCOME $ 643 $ 355 $ 288
========== =========== =========
<CAPTION>
1995 vs. 1994
--------------------------------
Net Due to changes in
Increase ---------------------
(Decrease) Volume <F1> Rate <F4>
---------- ----------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable <F2> <F3> $ 638 $ 241 $ 397
Investment securities
available for sale - - -
Investment securities held
to maturity:
Taxable 259 (182) 441
Tax-exempt <F2> 14 35 (21)
Interest-bearing deposits
in other banks (3) (4) 1
Federal funds sold 416 229 187
---------- ----------- ---------
Total interest income 1,324 319 1,005
---------- ----------- ---------
INTEREST EXPENSE:
Deposits 947 (2) 949
Borrowings 63 17 46
---------- ----------- ---------
Total interest expense 1,010 15 995
---------- ----------- ---------
NET INTEREST INCOME $ 314 $ 304 $ 10
========== =========== =========
<FN>
<F1> Average volume information was computed using daily average
balances.
<F2> Interest on earning assets has been computed on a tax
equivalent basis using the federal income tax statutory
rate of 34%.
<F3> Non-accrual loans are included in the average balances.
<F4> Changes in interest income or expense, not arising solely
as a result of volume or rate variances, are allocated to
rate variances due to the interest sensitivity of assets
and liabilities.
</FN>
</TABLE>
24
<PAGE>
Interest Sensitivity
- --------------------
One of the principle functions of Philson's asset/liability
management program is to measure the risk to net income which may
result from changes in interest rates. This is accomplished
through management of the relationship between interest
rate-sensitive assets and liabilities, and attempts to minimize
the fluctuations in net interest margins and thereby achieve
consistent growth of net interest income in periods of changing
interest rates while maintaining a balance between interest
rate-sensitive assets and liabilities.
The difference between interest rate-sensitive assets and
liabilities within any specific time frame is the measurement of
interest sensitivity. This is referred to as "gap". A positive
gap means Philson's assets will reprice more frequently than its
liabilities. This position is more advantageous if interest
rates rise. Conversely, a negative gap means Philson's
liabilities will reprice more frequently than its assets and is
more beneficial when interest rates fall.
The following table reflects the gap for various time intervals
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
0-90 91-180 181-365 1 to 5 Over
Days Days Days Years 5 Years Total
-------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
RATE-
SENSITIVE
ASSETS:
Loans $22,870 $ 9,503 $18,800 $28,955 $20,526 $100,654
Investment
securities
available
for sale 579 - - - - 579
Investment
securities
held to
maturity 3,754 5,092 9,666 49,557 10,633 78,702
Federal funds
sold 6,500 - - - - 6,500
-------- -------- -------- ------- -------- --------
Total rate-
sensitive
assets 33,703 14,595 28,466 78,512 31,159 186,435
-------- -------- -------- ------- -------- --------
RATE-
SENSITIVE
LIABILITIES:
Deposits 34,608 20,019 29,636 68,534 116 152,913
Borrowings 2,013 - - - - 2,013
-------- -------- -------- ------- -------- --------
Total rate-
sensitive
liabilities 36,621 20,019 29,636 68,534 116 154,926
-------- -------- -------- ------- -------- --------
Interest
sensitivity
gap $(2,918) $(5,424) $(1,170) $ 9,978 $31,043 $ 31,509
Cumulative
interest
sensitivity
gap $(2,918) $(8,342) $(9,512) $ 466 $31,509
Cumulative
interest
sensitivity
gap ratio
to total
assets -1.48% -4.22% -4.81% 0.24% 15.94%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
0-90 91-180 181-365 1 to 5 Over
Days Days Days Years 5 Years Total
-------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
RATE-
SENSITIVE
ASSETS:
Loans $25,927 $ 8,799 $19,056 $23,607 $15,243 $ 92,632
Investment
securities
held to
maturity 3,804 9,388 9,036 54,616 11,298 88,142
Federal funds
sold 8,800 - - - - 8,800
-------- -------- -------- ------- -------- --------
Total rate-
sensitive
assets 38,531 18,187 28,092 78,223 26,541 189,574
-------- -------- -------- ------- -------- --------
RATE-
SENSITIVE
LIABILITIES:
Deposits 32,460 19,258 28,088 70,743 128 150,677
Borrowings 7,645 - - - - 7,645
-------- -------- -------- ------- -------- --------
Total rate-
sensitive
liabilities 40,105 19,258 28,088 70,743 128 158,322
-------- -------- -------- ------- -------- --------
Interest
sensitivity
gap $(1,574) $(1,071) $ 4 $ 7,480 $26,413 $ 31,252
Cumulative
interest
sensitivity
gap $(1,574) $(2,645) $(2,641) $ 4,839 $31,252
Cumulative
interest
sensitivity
gap ratio
to total
assets -0.79% -1.33% -1.33% 2.43% 15.71%
</TABLE>
25
<PAGE>
Provision for Loan Losses
- -------------------------
In providing for loans to customers, banks are subject to the
risk of loan losses as one of the costs of lending. While
Management recognizes and charges the allowance for loan losses
for loan accounts which are determined to be uncollectible,
experience indicates that at any point in time, possible losses
may exist in the loan portfolio which are not specifically
identifiable. Therefore, based upon Management's evaluation of
the loan portfolio and the related allowance, an amount is
determined and charged to earnings to maintain the allowance for
loan losses at a level adequate to recognize the potential risks.
The amount charged to earnings is based upon several factors such
as, quarterly reviews of all significant loans and commitments
outstanding, a continuing review of problem or non-performing
loans and overall loan portfolio quality. In addition,
Management exercises judgment with respect to economic conditions
and the potential impact on the existing loan portfolio.
Management believes that based on its evaluation of the loan
portfolio, the allowance for loan losses is adequate for all
known and potential loan losses. Fewer charge offs and
continuing recoveries of loan losses resulted in a net recovery
position for 1996 and 1995, thus no provision for loan losses was
reflected in 1996 or 1995 as compared to a credit of $118,000 for
1994.
Other Income
- ------------
Other income contributed 6.28% for 1996, 6.10% for 1995, and
7.56% for 1994 to total income.
1996
- ----
The increase in 1996 resulted from increases in service charges
and other income. Service charges, the largest component of
total other income, increased from a growth in the number of
deposit accounts while other income increased as Philson
implemented fees for non-customer usage of Philson ATM's,
accepted Discover Card and increased commissions from the sale of
more life and accident and health insurance on consumer loans.
Management continually reviews and refines other income sources
in order to improve efficiency and increase revenues where
possible.
1995
- ----
The decrease in 1995 was primarily due to the dissolution of
Laurel, resulting in a reduction of $114,000 of Laurel's fee
income. The increase in service charges on deposit accounts
resulted from an increase in the fee assessed for overdrawn
accounts and Management's decision to enforce the policy on
service charges.
Other Expense
- -------------
Other expense decreased $10,000 or .17% in 1996, $381,000 or
6.18% in 1995 and $394,000 or 6.00% in 1994.
1996
- ----
The decrease in 1996 resulted from decreases in salaries and
employee benefits of $37,000, equipment expense of $57,000 and
deposit insurance premiums of $216,000 which were offset by
increases in occupancy expense, net of $151,000 and other expense
of $149,000.
The decrease in salaries and benefits was affected by declines in
pension expense of $57,000 and medical insurance of $59,000.
Offsetting the decrease was an increase in salaries of $80,000.
In 1995, pension expense included benefits granted under an early
retirement program. Medical insurance costs were lowered as the
result of Philson changing their insurance plan in December 1995
and requiring that covered employees pay for 10% of the plan's
premium costs.
The decrease in equipment expense resulted from the mainframe
computer system being fully depreciated in 1996. Deposit
insurance premiums decreased in 1996 as the result of the Bank
having the highest classification for deposit premium purposes
resulting in the statutory $500 minimum per quarter being
assessed in 1996.
Occupancy expense increased as Philson repaired several offices
in 1996 to improve the delivery of customer service. The
increase in other expense resulted primarily from Philson's
contract with outside consultants to assist with the research and
development of its 3 - 5 year Strategic Business Plan and
Strategic Technology Plan.
1995
- ----
The decrease in 1995 resulted from declines in salaries and
employee benefits of $176,000, deposit insurance premiums of
$206,000, and all other expenses of $409,000, exclusive of a
$410,000 recovery recorded in 1994 as a credit to other expense
from a loss on a customer's fraudulent transaction.
Salaries in 1995 decreased $109,000 primarily due to an early
retirement program. Five employees took advantage of the early
retirement program and the Bank absorbed the duties of these
former employees with existing personnel. Pension expense
decreased $39,000 in 1995 which was directly related to the early
retirements.
Deposit insurance premiums decreased as the result of the FDIC
reducing their assessment on bank deposits. Philson's assessment
rate per $100 of deposits dropped from $.26 in 1994 to $.04 in
1995. The assessment amount is based on the FDIC's
classification for banks. Philson is classified as a "well
capitalized" bank, which is the highest classification. The
lower assessment was made retroactive to June 1, 1995 resulting
in Philson receiving a $104,000 refund from the FDIC for the
period June 1, 1995 to September 15, 1995. Philson enjoyed the
lower rate for the balance of 1995.
The decrease in all other expenses in 1995 was primarily due to a
$141,000 reduction related to the dissolution of Laurel, a
$91,000 reduction in check imprinting fees and a $52,000
reduction in contributions. The reduction in Laurel's expense
resulted from signing a retrocession agreement with the
insurance carrier effective March 1, 1995, thereby eliminating
further expense in 1995 by Philson. The reduction in check
imprinting fees resulted from customers being billed directly for
their checks, rather than the Bank paying for the checks and then
billing customers. The reduction in contributions was the result
of a contribution made in 1994 for the start up of a local
community college and the donation of a building to a local non-
profit medical facility. The remaining decrease of $125,000 in
all other expense categories was primarily due to Management
continually monitoring and reducing costs where necessary.
26
<PAGE>
Due to the sensitivity of the operating expense ratio to changes
in the size of the balance sheet, Management looks at trends in
the efficiency ratio to assess the changing relationship between
operating expenses and income. The efficiency ratio measures the
amount of cost expended by the Bank to generate a given level of
revenues in the normal course of business. The lower the ratio,
the better the Bank is utilizing its operating expenses.
Philson's efficiency ratios were 61.13% for 1996, 66.11% for
1995, and 73.30% for 1994.
Income Taxes
- ------------
Income tax expense represented 26.07% for 1996, 23.11% for 1995,
and 15.61% for 1994 as a percentage of pretax income. The
increase of $259,000 in 1996 was a result of higher earnings and
the application of an alternative minimum tax credit which
lowered taxes in 1995. In 1994, income tax expense was reduced
by the utilization of the deferred tax asset valuation allowance
of $140,000. See pages 13 and 14 of the Notes to Consolidated
Financial Statements for more discussion.
FINANCIAL CONDITION
Investment Securities Portfolio
- -------------------------------
Investment securities held to maturity decreased $9,440,000 in
1996 and increased $1,372,000 in 1995. The decrease in
investment securities held to maturity resulted from maturities
and calls which were utilized to fund the loan growth.
Utilizing the investment policy, Management closely monitors
concentration and diversification levels of the investment
portfolio. Exceptions are reported on a quarterly basis to the
ALCO and Investment Committee. As of December 31, 1996, Philson
holds no securities from any single issuer that were greater than
10% of stockholders' equity as outlined in the investment policy.
The market value of the investment securities held to maturity at
December 31, 1996 and 1995 was $78,750,000 and $88,772,000,
respectively. See pages 10, 11 and 17 of the Notes to
Consolidated Financial Statements for further discussion on the
investment securities portfolio.
The amortized cost of investment securities held to maturity are
shown below by concentration and maturity distribution at
December 31, 1996 (dollars in thousands):
<TABLE>
INVESTMENT SECURITIES MATURITY DISTRIBUTION
<CAPTION>
Within 1 Year 1 Year to 5 Years
------------------- -----------------
<F*> <F*>
Weighted Weighted
Amount Yield Amount Yield
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 6,011 5.67% $ 5,976 5.42%
U.S. Government agency
securities 5,798 5.97% 33,163 5.86%
Obligations of states
and political subdivisions - - 2,457 6.19%
Other securities 6,703 6.08% 7,961 6.38%
-------- ---------- -------- --------
Total $ 18,512 5.91% $ 49,557 5.90%
======== ========== ======== ========
<CAPTION>
5 Years to 10 Years Over 10 Years
------------------- -----------------
<F*> <F*>
Weighted Weighted
Amount Yield Amount Yield
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - - $ - -
U.S. Government agency
securities - - - -
Obligations of states and
political subdivisions 5,854 5.64% 3,903 5.47%
Other securities 465 7.66% 411 9.83%
-------- ---------- -------- --------
Total $ 6,319 5.79% $ 4,314 5.88%
======== ========== ======== ========
<CAPTION>
Total
-------------------
<F*>
Weighted
Amount Yield
-------- ----------
<S> <C> <C>
U.S. Treasury securities $ 11,987 5.55%
U.S. Government agency
securities 38,961 5.87%
Obligations of states and
political subdivisions 12,214 5.70%
Other securities 15,540 6.38%
-------- ----------
Total $ 78,702 5.90%
======== ==========
<FN>
<F*> The weighted average yield has not been computed on a tax
equivalent basis.
</FN>
</TABLE>
27
<PAGE>
Loan Portfolio
- --------------
Total loans increased by $8,022,000 or 8.66% in 1996 and
$3,390,000 or 3.80% in 1995. Consumer lending fueled the growth
in 1995 and 1996, primarily in the residential mortgage and home
equity areas. As in 1995 and 1996, Management intends to
concentrate on consumer and small business lending in 1997. This
will permit Philson to meet the needs of the communities for
which it serves. The call program instituted in 1994 and further
refined in 1995 and 1996 provides Management with a method to
monitor the progress made by officers in meeting the needs of
consumers and small businesses. For further discussion on loan
composition, see pages 11 and 12 of the Notes to Consolidated
Financial Statements.
Non-Performing Assets and Risk Elements
- ---------------------------------------
Reviews of the loan portfolio are conducted by an internal
committee quarterly and annually by an outside consultant. The
results of the outside consultant are then compared to the
internal reviews with detailed explanations of differences, if
any. Commercial loans and residential mortgages are placed on a
non-accrual status when principal and interest become 90 days
past due. Delinquent loans are reviewed monthly by senior
management and the Loan Committee of the Board. Generally, all
consumer loans and commercial loans less than $100,000 and not
secured by real estate, will be charged off at 90 days past due,
while all loans secured by real estate and in the process of
foreclosure will be charged off at 180 days past due. All
commercial loans greater than $100,000 and not secured by real
estate, will be subject to the conditions of the action plan
between the Bank and the customer to correct the default.
A loan remains on a non-accrual status until principal and
interest become current and a consistent track record of payments
is established, or it is determined to be uncollectible and is
charged off against the allowance for loan losses. A loan would
be classified as restructured when the terms have been modified,
because of deterioration in the financial position of the
borrowers, to provide for a reduction of either interest or
principal. It is Management's opinion that Philson did not have
any loans that met the definition of a restructured loan for 1996
and 1995.
It is Management's opinion that Philson did not have any loans
that met the definition of an impaired loan as of December 31,
1996 and 1995. See pages 11 and 12 of the Notes to Consolidated
Financial Statements for more discussion.
The following table presents information concerning non-
performing loans and assets at December 31, 1996 and 1995
(dollars in thousands):
<TABLE>
NON-PERFORMING LOANS AND OTHER NON-PERFORMING ASSETS
<CAPTION>
December 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Loans on non-accrual status $676 $102
Loans past due 90 days or more 23 52
------ ------
TOTAL NON-PERFORMING LOANS 699 154
------ ------
Other real estate 1 31
------ ------
TOTAL NON-PERFORMING ASSETS $700 $185
====== ======
Non-performing loans as
a percent of total loans 0.69% 0.17%
Non-performing assets as
a percent of total loans 0.70% 0.20%
Non-performing assets as
a percent of total assets 0.35% 0.09%
</TABLE>
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased due to net recoveries of
$135,000 in 1996 and $155,000 in 1995. Net recoveries as a
percent of average loans outstanding were .14% at December 31,
1996 and .17% for December 31, 1995. For December 31, 1996 and
1995, the allowance for loan losses represents 3.00% and 3.11% of
total loans, respectively.
The allowance for loan losses is maintained at a level sufficient
to provide for estimated loan losses based on evaluating known
and inherent risks in the loan portfolio. The allowance is based
on Management's continuing analysis of the pertinent factors
underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan
portfolio, actual loan loss experience, current and anticipated
economic conditions, and detailed analysis of individual loans
and credits for which full collectability may not be assured.
The detailed analysis includes estimates of the fair market value
of collateral and the existence of potential alternative sources
of repayment. The appropriate allowance level is estimated based
upon factors and trends identified by Management on a continuing
basis.
The ultimate recovery of all loans is susceptible to future
market factors beyond Philson's control. These factors may
result in losses or recoveries differing significantly from those
provided by Management's estimates of the allowance for loan
losses.
The Bank has a Resource Recovery Department which continually
pursues and monitors delinquent and charged off loans. This
department assists Management in maintaining low levels of both
non-performing and charged-off loans and is primarily responsible
for the recoveries of previously charged-off loans. See page 26
of Management's Discussion and Analysis for discussion on the
Provision for Loan Losses.
28
<PAGE>
The following tables present analyses of the allowance for loan
losses for the two years ended December 31, 1996 and 1995
(dollars in thousands). In the table, Allocation of the
Allowance for Loan Losses, a portion of the allowance for loan
losses is specifically allocated or restricted to individual
loans or a group of loans. Any remaining allowance for loan
losses would be available to absorb losses on other loans.
<TABLE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
LOANS OUTSTANDING AT END OF PERIOD $100,654 $ 92,632
AVERAGE LOANS OUTSTANDING $ 96,898 $ 90,948
ALLOWANCE FOR LOAN LOSSES:
BALANCE AT BEGINNING OF PERIOD $ 2,882 $ 2,727
CHARGE-OFFS:
Commercial, financial and
agriculture - 37
Real estate - mortgage 191 127
Installment loans to individuals 53 85
---------- ----------
Total charge-offs 244 249
RECOVERIES:
Commercial, financial and
agriculture - 32
Real estate - mortgage 321 261
Installment loans to individuals 58 111
---------- ----------
Total recoveries 379 404
Net recoveries 135 155
---------- ----------
BALANCE AT END OF PERIOD $ 3,017 $ 2,882
========== ==========
Ratio of net recoveries during
the period to average loans
outstanding during the period 0.14% 0.17%
Allowance for loan losses as a
percent of total loans outstanding 3.00% 3.11%
</TABLE>
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Commercial, financial and
agriculture $ 1,882 $ 1,650
Real estate - mortgage 556 590
Installment loans to individuals 319 389
Off-balance-sheet risk 260 253
---------- ----------
Total $ 3,017 $ 2,882
========== ==========
</TABLE>
Deposits
- --------
At December 31, 1996 and 1995, total deposits increased
$2,622,000 or 1.53% and $4,158,000 or 2.49%, respectively. Time
deposits increased $1,654,000 or 2.11% in 1996 and $5,539,000 or
7.61% in 1995 as the result of instituting, in August 1996, a 15-
month single maturity time deposit and a One Year 7 Day Access
time deposit in 1994. Part of the increase was attributed to
decreases in savings and money market accounts with the balance
of the increase from new account relationships. See page 13 of
the Notes to Consolidated Financial Statements for maturities on
time deposits of $100,000 or more.
The following table sets forth the average amounts and average
rates paid on each of the following deposit categories at
December 31, 1996 and 1995 (dollars in thousands).
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
----------------- -----------------
Average Average Average Average
Balance Rate Balance Rate
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 19,705 - $ 18,047 -
Interest-bearing demand 25,378 1.49% 24,168 1.66%
Savings 36,515 2.89% 36,913 2.99%
Money market 12,365 2.55% 13,775 2.63%
Time 79,074 5.19% 76,379 5.35%
--------- ------- --------- -------
Total $173,037 3.38% $169,282 3.51%
========= ======= ========= =======
</TABLE>
Liquidity and Cash Flows
- ------------------------
To ensure that the Bank can satisfy customer credit needs for
current and future commitments and depository withdrawal
requirements, the Bank manages the liquidity position by ensuring
that there are adequate short-term funding sources available for
those needs. Liquid assets consist of cash and due from banks,
federal funds sold, investment securities available for sale and
investment securities held to maturity maturing in one year or
less. The following table shows these liquidity sources, minus
short-term borrowings, as of the years ended 1996 and 1995
(dollars in thousands). Management feels that the liquidity
position is strong and adequate to cover any potential customer
withdrawals and credit needs.
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash and due from banks $ 8,916 $ 6,587
Federal funds sold 6,500 8,800
Investment securities
available for sale 579 -
Investment securities held to
maturity maturing in one year
or less 18,512 22,027
---------- ----------
Total 34,507 37,414
Less short-term borrowings 2,013 7,645
---------- ----------
Net liquidity position $ 32,494 $ 29,769
========== ==========
As a percent of total assets 16.44% 14.97%
========== ==========
</TABLE>
29
<PAGE>
Inflation and Changing Prices
- -----------------------------
Management is aware of the impact inflation has on interest rates
and therefore, the impact it can have on the Bank's performance.
The ability of a financial institution to cope with inflation can
only be determined by analysis and monitoring of its asset and
liability structure. The Bank does monitor its asset and
liability position, with particular emphasis on the mix of
interest rate-sensitive assets and liabilities in order to reduce
the effect of inflation upon its performance. However, it must
be remembered that the asset and liability structure of a
financial institution is substantially different from that of an
industrial corporation in that virtually all assets and
liabilities are monetary in nature, meaning that they have been
or will be converted into a fixed number of dollars regardless of
changes in prices. Examples of monetary items include cash,
loans and deposits. Non-monetary items are those assets and
liabilities which do not gain or lose purchasing power solely as
a result of general price level changes. Examples of
non-monetary items are premises and equipment.
Inflation can have a more direct impact on categories of
noninterest expenses such as salaries and wages, employee benefit
costs and supplies. These expenses normally fluctuate more in
line with changes in general price level and are very closely
monitored by Management for both the effects of inflation and
increases relating to such items as staffing levels, usage of
supplies and occupancy costs.
Capital Resources
- -----------------
Capital management is an ongoing process that consists of
providing equity for both current and future financial
positioning. Philson manages its capital to execute its
strategic business plans and support its growth and investments.
During 1996, Philson increased its capital base $1,865,000 or
9.65%, primarily through retained earnings. For 1995, the
capital increased $1,551,000 or 8.72%.
Bank regulatory agencies have capital adequacy and risk-based
capital adequacy guidelines by which they monitor the capital
adequacy of financial institutions and holding companies.
Philson has complied with the regulatory requirements and expects
to remain in compliance in the future.
The first measure is risked-based capital which measures the
relationship between capital, segregated between Tier 1 and Tier
2 capital, and risk-weighted assets, as defined.
Tier 1 capital generally consists of stockholders' equity, non-
cumulative perpetual preferred stock and minority interest in
consolidated subsidiaries. Tier 2 capital includes the allowance
for loan losses up to 1.25% of risk-weighted assets, cumulative
preferred stock, term subordinated debt and other hybrid capital
instruments. Total capital is reduced by such items as goodwill
and other certain intangible assets. Additionally, Tier 2
capital cannot exceed 50% of the minimum capital requirements,
which is 8% for 1996. Risk-weighted assets are derived by
applying certain predetermined percentages, ranging from 0 to
100% to on-balance sheet assets and off-balance sheet items based
upon their defined measure of credit risk.
The secured measure is the leverage capital ratio which evaluates
capital adequacy based upon Tier 1 capital in relation to
quarterly average assets, adjusted for the allowance for loan
losses, goodwill and certain other intangible assets. The
minimum leverage capital ratio for the highest rated institutions
is 3%, with all other institutions expected to maintain higher
ratios.
Furthermore, pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the Federal
Banking Regulators have set the minimum risk-based capital ratios
for a well capitalized banking institution at 6% Tier 1 capital,
10% total capital and 5% leverage capital ratio. Philson has
exceeded all these capital ratios and expects to exceed these
ratios in the future to continue to be classified as a well
capitalized bank. See page 16 of the Notes to Consolidated
Financial Statements for more discussion.
Market for Philson's Common Stock and Dividends
- -----------------------------------------------
Philson's Common Stock is traded locally. The following table
sets forth: (1) the quarterly high and low prices for a share of
Philson's Common Stock during the periods indicated as reported
by the Management of Philson and (2) quarterly dividends on a
Common Share with respect to each quarter since January 1, 1995.
The following quotations represent the process between buyers and
sellers and do not include retail markup, markdowns or
commission. They may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
STOCK PRICES
-------------------------------
Dividends
Low High Declared
------- -------- ----------
<S> <C> <C> <C>
1996:
- -----
First Quarter $46.00 $46.00 $.30
Second Quarter 50.00 51.50 .30
Third Quarter 48.75 52.00 .30
Fourth Quarter 50.00 54.00 .35
------- -------- ----------
1995:
- -----
First Quarter $45.00 $46.00 $.20
Second Quarter 43.50 51.50 .20
Third Quarter 44.50 50.00 .20
Fourth Quarter 45.00 46.25 .30
</TABLE>
30
<PAGE>
SNODGRASS
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Philson Financial Corporation
We have audited the accompanying consolidated balance sheet of
First Philson Financial Corporation and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating
the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of First Philson Financial Corporation and subsidiaries
as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As explained in the notes to the consolidated financial
statements, effective January 1, 1995, the Company adopted a new
method of accounting for impairment of loans and related
allowance for loan losses and effective January 1, 1994, changed
its method of accounting for investment securities.
/s/S.R. Snodgrass
Wexford, PA
January 31, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,916
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 579
<INVESTMENTS-CARRYING> 78,702
<INVESTMENTS-MARKET> 78,750
<LOANS> 100,654
<ALLOWANCE> 3,017
<TOTAL-ASSETS> 197,665
<DEPOSITS> 173,480
<SHORT-TERM> 2,013
<LIABILITIES-OTHER> 973
<LONG-TERM> 0
0
0
<COMMON> 4,356
<OTHER-SE> 16,843
<TOTAL-LIABILITIES-AND-EQUITY> 197,665
<INTEREST-LOAN> 8,667
<INTEREST-INVEST> 5,002
<INTEREST-OTHER> 390
<INTEREST-TOTAL> 14,059
<INTEREST-DEPOSIT> 5,853
<INTEREST-EXPENSE> 5,989
<INTEREST-INCOME-NET> 8,070
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,779
<INCOME-PRETAX> 3,233
<INCOME-PRE-EXTRAORDINARY> 3,233
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,390
<EPS-PRIMARY> 5.49
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.66
<LOANS-NON> 676
<LOANS-PAST> 23
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,882
<CHARGE-OFFS> 244
<RECOVERIES> 379
<ALLOWANCE-CLOSE> 3,017
<ALLOWANCE-DOMESTIC> 3,017
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
