10-Q 1 grange_10q.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-13664 GRANGE NATIONAL BANC CORP PENNSYLVANIA 23-2314065 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 198 E. Tioga St., Tunkhannock, Pennsylvania ------------------------------------------- (Address of principal executive offices) (570) 836-2100 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: 1,620,591 Transitional Small Business Disclosure Format (Check one): Yes ____; No X GRANGE NATIONAL BANC CORP. AND SUBSIDIARY PART I. FINANCIAL INFORMATION ITEM 1. Unaudited Financial Statements

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY Consolidated Statements of Financial Position, September 30, 2002 and December 31, 2001

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY Consolidated Statements of Income and Comprehensive Income (Unaudited)

See Notes to Consolidated Financial Statements See Notes to Consolidate Financial Statements GRANGE NATIONAL BANC CORP. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

See Notes to Consolidated Financial Statements GRANGE NATIONAL BANC CORP AND SUBSIDIARY Consolidated Statements of Cash Flow (Unaudited)

See Notes to Consolidated Financial Statements GRANGE NATIONAL BANC CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS COMBINATION AND PRINCIPLES OF COMBINATION: Grange National Banc Corp. (Company) was organized and incorporated under the laws of the Commonwealth of Pennsylvania on October 2, 1984, for the purpose of becoming a bank holding company. On April 30, 1985 the Company acquired the Grange National Bank of Wyoming County (Bank) pursuant to a plan of reorganization and merger. The Bank became a wholly owned subsidiary of the Company, and each outstanding share of Bank common stock was converted into one share of Company common stock. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary (Bank) with the reorganization accounted for as a pooling of interests. 2. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements have been prepared in conformity with the accounting principles and practices reflected in the annual financial statements, and reflect all adjustments which are normal and recurring and, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. The results of operations reported in interim financial statements are not necessarily indicative of results to be expected for the year. 3. PREFERRED STOCK: The Company authorized 1,000,000 of preferred stock at $5 par value. At December 31, 2001 and September 30, 2002, no shares were issued nor outstanding. 4. STOCK SPLIT Common stock, Retained earnings and earnings per share for prior periods have been adjusted to reflect the 2 for 1 stock split effective July 31, 2002. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION: Our net income for the three and nine months ending September 30, 2002 totaled $1,005,000 and $2,767,000, which is 37% and 28% higher than the $732,000 and $2,157,000 of net income for the same periods last year. Net interest income for the three and nine months ending September 30, 2002 increased by $476,000 to $2,370,000, and $1,444,000 to $6,744,000 compared to $1,894,000 and $5,300,000 for the same periods in 2001, increases of 25% and 27%. Interest income during these same time periods increased by $266,000 or 7% for the three month period and $866,000 or 8% for the nine month period, compared to 2001, while interest expense decreased by $210,000 or 12% for the three month period, and $578,000 or 11% for the nine month period compared to 2001. The increase in interest income on loans was $250,000 or 10% for the third quarter, and $564,000 or 8% for the nine months ended September 30, as compared to the same time last year. Interest income from investment securities increased by $32,000 or 3% for the third quarter, and $399,000 or 12% for the nine months ended September 30, as compared to the same time last year. The Federal Reserve has dramatically reduced interest rates for the last eighteen months, subsequently putting pressure on loan rates. For over a year financial institutions, including ours, have been refinancing mortgages at lower interest rates. The New York prime rate has dropped to rates lower than we have seen in a generation. Many of our loans are tied to the prime rate, and this as well has reduced our interest income. Overall our interest income is up due to higher volumes of loans. Competition for mortgages and other loans requires us to keep lowering our rates. We continue to lower the rates we pay on deposits in order to preserve our net interest margin. We believe that interest rates are near the bottom of their cycle, but do not anticipate rates to rise very soon or very fast. Interest income on deposits in banks decreased by $15,000 from $42,000 to $27,000 during the third quarter and decreased by $97,000 from $170,000 to $73,000 for the nine months ending September 30, 2002, as compared to the same times last year. We are receiving substantially lower interest on our balances this year as compared to last year. The decrease in interest expense is due to lower interest rates paid to customers, offset by higher balances for the third quarter and the nine months ending September 30, 2002 as compared to the same times in 2001. For the nine months ending September 30, the average total sources to fund earning assets increased $35,422, from $190,644 to $226,066 in 2002, while the average interest rate decreased from 3.70% to 2.78%. Deposit growth continues to provide funds for loans and liquidity. Loan demand during the year has been very strong as loans increased $22,796,000 or 19% from $122,705,000 at December 31, 2001 to $145,501,000 at September 30, 2002. Loan demand is steady as the fourth quarter begins. Balances of investment securities increased by $12,367,000 since December 31, 2001. Interest bearing deposits at banks increased by $949,000, to $6,847,000 from $5,898,000. Deposit growth has been strong during the year, increasing $23,221,000, or nearly 14%. Our Scranton office is generating substantial deposits for the bank, having surpassed $11,000,000 in deposits by September 30. The provision for loan loss during the three and nine months ending September 30, 2002 was $50,000 and $205,000, as compared to $40,000 and $100,000 for the same periods in 2001. The allowance for loan losses was $1,371,000 and $1,228,000 at September 30, 2002 and December 31, 2001, respectively. This represents 0.94% and 1.00% of total loans, 220% and 523% of non-performing loans, and 179% and 250% of non-performing assets, respectively. The provision for loan losses and related allowance for loan losses are based upon our continued evaluation of the current loan portfolio considering things such as general economic conditions, adequacy of collateral on past due loans, past and expected loan loss experience, composition of the loan portfolio, any unusual risk concentrations, allowance as a percentage of total loans and any other relevant factors. The reserve is not divided to provide for any individual loan or loan classification. The total allowance balance is available to absorb losses from all loans included in the portfolio. The following sets forth loans past due 90 days or more on which interest has continued to be accrued for September 30, 2002 and December 31, 2001. September 2002 December 2001 (In thousands) Real estate mortgages $338 $28 Commercial 154 109 Consumer 28 11 ------------ ------------- Total $520 $148 ============ ============= Non-accrual loans increased from $87,000 at Decemberon 31, 2001 to $108,000 at September 30, 2002. The overall quality remains very good, and management expects non-performing assets to remain at substantially the same levels as a proportion of loans. Investments in securities increased by $12,367,000 or 16% from December 31, 2001 to September 30, 2002. The average rate earned on available for sale, held to maturity and deposits in banks were 6.11%, 6.29% and 2.13% for the three months ended September 30, 2002, as compared to 6.65%, 6.88% and 4.49% for the three months ended September 30, 2001. For the nine months ended September 30, 2002 the average rates were 6.11%, 6.62% and 2.26%, as compared to 6.63%, 6.81% and 4.90% for the nine months ended September 30, 2001. As of September 30, 2002, the fair value of the Company's investments classified as held to maturity exceeded their amortized value by $560,000, and the fair value of investments classified as available for sale exceeded their amortized value by $3,209,000. Earlier in the year, we sold approximately $5,000,000 of mortgaged backed securities to avoid extension risk in those securities when interest rates rise. Our loss was approximately $14,000 on these securities. The increase in the value of our securities available for sale is reflected as an increase in the Company's equity of approximately $1,814,000, net of deferred income tax. Interest rates are expected to rise sometime within the next twelve months but there is much debate regarding when. The Federal Reserve lowered them again in November by 50 basis points. To guard against significant market value losses in the portfolio, due to rising interest rates, we are purchasing investments with short to moderate maturities, generally three to five years for fixed rate taxable securities, and ten to twelve years for tax exempt securities. Generally, longer maturities will provide higher returns, but during this low interest rate environment, we want to avoid buying the longer maturity bonds at these low yields. We are still purchasing only high quality investments to minimize credit risk to the value of our investments. There have been no adverse credit valuations on any of our investments. Although investment opportunities exist which will produce higher yields, they generally contain higher credit risk. For the three months ending September 30, 2002, as compared to the same period in 2001, salaries and employee benefits increased by $126,000 or 22% from $580,000 to $706,000 and occupancy expense increased $24,000 or 16% from $147,000 to $171,000. Equipment expense stayed essentially the same, and other operating expenses increased $42,000 or 11% from $368,000 to $410,000. For the nine months ending September 30, 2002, as compared to the same period in 2001, salaries and employee benefits increased by $344,000 or 20% from $1,704,000 to $2,048,000 and occupancy expense increased $43,000 or 11% from $400,000 to $443,000. Equipment expense increased $40,000 or 15% from $271,000 to $311,000, and other operating expenses increased $210,000 or 21% from $988,000 to $1,198,000. These increased costs are due to costs of adding our new Scranton office, additional ATMs and an ATM card conversion and adding a loan analyst, as well as hiring a new bank officer to manage and develop business for our western offices. Monthly we perform an interest rate and liquidity analysis to monitor the Bank's interest rate sensitivity gap and liquidity needs. These reports are reviewed by the Board of Directors and used to formulate ways to improve the Bank's interest rate gap. We place a great emphasis on adjustable rate loan products, such as variable rate home equity loans and annually adjustable mortgage loans as well as adjustable rate and short term investments, in order to minimize interest rate risk. The Comptroller of the Currency requires all national banks to meet certain "Risk Based Capital" standards. These standards weight certain assets based on the risk of the asset, and also includes certain off-balance sheet items. The table below sets forth the Bank's Tier 1 and Tier 2 capital, risk adjusted assets (including off-balance sheet items) and the Bank's risk-based capital ratios under the guidelines, for September 30, 2002 and December 31, 2001.

GRANGE NATIONAL BANC CORP. AND SUBSIDIARY Average Balances, Interest Income/Expense and Rates ------------------------------------------------------------

(1)Average balances are daily averages. (2) Demand deposits, stockholders' equity and other non-interest bearing liabilities less non-earning assets. (3) Non-accrual loans are reflected in the loan balances, but contributing no interest income. (4) Tax exempt interest income has been converted to a tax equivalent basis at the US Federal income tax rate of 34%. See Notes to Consolidated Financial Statements ITEM 3. CONTROLS AND PROCEDURES The Company carried out an evaluation of the effectiveness of its disclosure controls and procedures within 90 days prior to filing of this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company's President and Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have not been any significant changes in the Company's internal controls, or in other factors which would significantly affect internal controls subsequent to the date the Company carried out its evaluation, or any corrective actions taken with regard to significant deficiencies or material weaknesses. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (i) Sarbanes-Oxley Act of 2002 Section 906 Certification of Chief Executive Officer I, Thomas A. McCullough, Chief Executive Officer of Grange National Banc Corp. certify that: 1. I have read this quarterly report on Form 10-QSB of Grange National Banc Corp; 2. To my knowledge, the information in this report is true in all important respects as of September 30, 2002; 3. This report, containing the Company's financial statements, fully complies with the requirements of section 13(a) and 15(d) of the Securities and Exchange Act of 1934 and that information contained in this report fairly presents, in all material respects, the financial condition and results of operation of the Company; and 4. This report contains all information about the Company of which I am aware that I believe is important to a reasonable investor, in light of the subjects required to be addressed in this report, as of September 30, 2002. For purposes of this certification, information is "important to a reasonable investor" if: (a) There is a substantial likelihood that a reasonable investor would view the information in the report; and (b) The report would be misleading to a reasonable investor if the information is omitted from the report. Date: November 14, 2002 /s/ Thomas A. McCullough --------------------- -------------------------- Chief Executive Officer (ii) Sarbanes-Oxley Act of 2002 Section 906 Certification of Chief Financial Officer I, Philip O. Farr, Chief Financial Officer of Grange National Banc Corp. certify that: 1. I have read this quarterly report on Form 10-QSB of Grange National Banc Corp; 2. To my knowledge, the information in this report is true in all important respects as of September 30, 2002; 3. This report, containing the Company's financial statements, fully complies with the requirements of section 13(a) and 15(d) of the Securities and Exchange Act of 1934 and that information contained in this report fairly presents, in all material respects, the financial condition and results of operation of the Company; and 4. This report contains all information about the Company of which I am aware that I believe is important to a reasonable investor, in light of the subjects required to be addressed in this report, as of September 30, 2002. For purposes of this certification, information is "important to a reasonable investor" if: (a) There is a substantial likelihood that a reasonable investor would view the information in the report; and (b) The report would be misleading to a reasonable investor if the information is omitted from the report. Date: November 14, 2002 /s/ Philip O. Farr --------------------- ----------------------- Chief Financial Officer (iii) (b) Reports on Form 8-K (ii) Statement re: computation of earnings per share: Primary earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the quarter. Stock options are considered common stock equivalents and are included in the computation of the number of shares outstanding using the treasury stock method. The number of shares used to calculate earnings per share for the periods presented are as indicated in each period. During the current fiscal quarter, there have been no events of a nature required to be filed on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRANGE NATIONAL BANC CORP. (Registrant) Date November 14, 2002 /s/ Thomas A. McCullough ------------------------------------- --------------------------- Thomas A. McCullough President Chief Executive Officer Date November 14, 2002 /s/ Philip O. Farr ------------------------------------- --------------------------- Philip O. Farr Vice President and Comptroller Chief Financial Officer Chief Accounting Officer

GRANGE NATIONAL BANC CORP 10-Q