<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1995
__________________
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 0-17455
_____________
COMM BANCORP, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
____________________________________________ _________________________________
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
521 MAIN STREET, FOREST CITY, PA 18421
____________________________________________ _________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 785-3181
_____________________________
_______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 733,360 AT OCTOBER 29, 1995.
<PAGE>
COMM BANCORP, INC.
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
CONTENTS PAGE NO.
_______________________________________________________________________________
PART I. FINANCIAL INFORMATION:
ITEM 1:
Consolidated Statements of Income - For the Three Months and
Nine Months Ended September 30, 1995 and 1994............... 3
Consolidated Balance Sheets - September 30, 1995 and
December 31, 1994........................................... 4
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1995................ 5
Consolidated Statements of Cash Flows For the Nine Months
Ended September 30, 1995 and 1994........................... 6
Notes to Consolidated Financial Statements................... 7
ITEM 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Part II. Other Information:
Items 1-6:
Other Information............................................ 29
Signature Page............................................... 31
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME___________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
___________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable.......................................................... $ 4,320 $ 3,997 $12,715 $11,700
Tax-exempt....................................................... 59 59 188 129
Interest on investment securities:
Taxable.......................................................... 1,244 1,158 3,830 2,855
Tax-exempt....................................................... 296 306 895 899
Interest and dividends on investment securities available for sale:
Taxable.......................................................... 384 841 1,876 2,728
Dividends........................................................ 54 21 91 40
Interest on trading account securities............................. 15 90
Interest on deposits with banks.................................... 4 7 10 17
Interest on federal funds sold..................................... 292 1 323 4
_______ _______ _______ _______
Total interest income.......................................... 6,653 6,405 19,928 18,462
_______ _______ _______ _______
INTEREST EXPENSE:
Interest on deposits............................................... 3,695 3,104 10,444 8,947
Interest on short-term borrowings.................................. 202 677 312
Interest on long-term debt......................................... 62 42 185 146
_______ _______ _______ _______
Total interest expense......................................... 3,757 3,348 11,306 9,405
_______ _______ _______ _______
Net interest income............................................ 2,896 3,057 8,622 9,057
Provision for loan losses.......................................... 75 210 360 630
_______ _______ _______ _______
Net interest income after provision for loan losses............ 2,821 2,847 8,262 8,427
_______ _______ _______ _______
NONINTEREST INCOME:
Service charges, fees and commissions.............................. 271 294 885 841
Net investment securities gains (losses)........................... (2,508) (54) (4,393) 495
Trading account losses............................................. (10) (673)
_______ _______ _______ _______
Total noninterest income (loss)................................ (2,237) 230 (3,508) 663
_______ _______ _______ _______
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................. 998 998 3,219 2,870
Net occupancy and equipment expense................................ 304 324 912 920
Other expenses..................................................... 682 741 2,303 2,126
_______ _______ _______ _______
Total noninterest expense...................................... 1,984 2,063 6,434 5,916
_______ _______ _______ _______
Income (loss) before income taxes.................................. (1,400) 1,014 (1,680) 3,174
Provision for income tax expense (benefit)......................... (889) 224 (911) 734
_______ _______ _______ _______
Net income (loss).............................................. $ (511) $ 790 $ (769) $ 2,440
======= ======= ======= =======
PER SHARE DATA:
Net income (loss).................................................. $ (0.70) $ 1.08 $ (1.05) $ 3.33
Average common shares.............................................. 733,360 733,360 733,360 733,357
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................................... $ 7,547 $ 6,783
Interest-bearing deposits with banks............................................... 125 90
Federal funds sold................................................................. 18,500
Investment securities:
Held to maturity (market value at December 31,1994, $101,850).................... 107,666
Available for sale............................................................... 132,914 44,900
Loans, net of unearned income...................................................... 192,996 194,485
Less: allowance for loan losses.................................................. 3,814 3,576
________ ________
Net loans.......................................................................... 189,182 190,909
Premises and equipment, net........................................................ 3,475 3,293
Accrued interest receivable........................................................ 2,402 2,636
Other assets....................................................................... 4,734 6,186
________ ________
Total assets................................................................... $358,879 $362,463
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing.............................................................. $ 24,033 $ 23,462
Interest-bearing................................................................. 300,147 292,707
________ ________
Total deposits................................................................. 324,180 316,169
Short-term borrowings.............................................................. 15,956
Long-term debt..................................................................... 5,048 5,050
Accrued interest payable........................................................... 1,892 1,556
Other liabilities.................................................................. 1,185 1,043
________ ________
Total liabilities.............................................................. 332,305 339,774
________ ________
STOCKHOLDERS' EQUITY:
Common stock, par value $1, authorized 4,000,000 shares, issued 733,360 shares..... 733 733
Capital surplus.................................................................... 6,310 6,310
Retained earnings.................................................................. 19,395 20,334
Net unrealized holding gain (loss) on available for sale securities................ 136 (4,688)
________ ________
Total stockholders' equity..................................................... 26,574 22,689
________ ________
Total liabilities and stockholders' equity..................................... $358,879 $362,463
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAIN
(LOSS) ON TOTAL
COMMON CAPITAL RETAINED AVAILABLE FOR STOCKHOLDERS'
STOCK SURPLUS EARNINGS SALE SECURITIES EQUITY
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......................... $733 $6,310 $20,334 $(4,688) $22,689
Net loss............................................ (769) (769)
Dividends declared at $.23 per share................ (170) (170)
Net change in unrealized holding loss on securities. 4,824 4,824
____ ______ _______ _______ _______
BALANCE, SEPTEMBER 30, 1995......................... $733 $6,310 $19,395 $ 136 $26,574
==== ====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 1995 1994
____________________________________________________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ (769) $ 2,440
Adjustments:
Provision for loan losses............................................................... 360 630
Depreciation and amortization........................................................... 477 462
Amortization of loan fees............................................................... (133) (160)
Deferred income tax..................................................................... 1,904 (308)
Losses on sale of investment securities................................................. 4,393 178
Changes in:
Trading account securities............................................................ 2,479
Interest receivable................................................................... 234 (31)
Other assets.......................................................................... (3,231) (155)
Interest payable...................................................................... 336 199
Other liabilities..................................................................... 428 197
_______ _______
Net cash provided by operating activities........................................... 3,999 5,931
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities...................................... 27,621 18,059
Proceeds from repayments of investment securities:
Held to maturity........................................................................ 2,970 12,779
Available for sale...................................................................... 3,003 1,277
Purchases of investment securities:
Held to maturity........................................................................ (179) (18,167)
Available for sale...................................................................... (10,885) (28,789)
Net receipts (disbursements) from lending activities...................................... 1,276 (15,492)
Proceeds from sale of other real estate................................................... 357 219
Purchases of premises and equipment....................................................... (495) (731)
_______ _______
Net cash provided by (used in) investing activities................................. 23,668 (30,845)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................. (10,900) 20,938
Time deposits........................................................................... 18,911 2,655
Short-term borrowings................................................................... (15,956) 1,759
Proceeds from issuance of long-term debt................................................ 50
Payments on long-term debt.............................................................. (2) (800)
Cash dividends paid..................................................................... (456) (449)
_______ _______
Net cash provided by (used in) financing activities................................. (8,403) 24,153
_______ _______
Net increase (decrease) in cash and cash equivalents................................ 19,264 (761)
Cash and cash equivalents at beginning of year...................................... 6,783 7,181
_______ _______
Cash and cash equivalents at end of period.......................................... $26,047 $ 6,420
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 10,970 $ 9,206
Income taxes........................................................................... 114 1,161
Noncash items:
Transfer of loans to other real estate................................................. $ 224 $ 120
Transfer of investments to investments available for sale.............................. 105,799
Net unrealized loss (gain) on available for sale securities............................ (4,824) 4,147
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm Bancorp,
Inc. ("Company") have been prepared in accordance with generally accepted
accounting principals for interim financial information and with the
instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion
of management, all normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations for the periods
have been included. For additional information and disclosures required under
generally accepted accounting principles, reference is made to the Company's
Annual Report on Form 10-K for the period ended December 31, 1994.
2. LOANS, NET OF UNEARNED INCOME:
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure". A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. Currently, this category consists of all nonaccrual and restructured
loans. Impairment is measured based on the present value of expected future
cash flows discounted at a loan's effective interest rate, or as a practical
expedient, the observable market price or, if the loan is collateral dependent,
the fair value of the underlying collateral. When the measure of an impaired
loan is less than the recorded investment in the loan, the impairment is
recorded in the allowance for loan losses established through a charge to
earnings in the form of a provision for loan losses. Losses of principal are
charged directly to the allowance when the loss actually occurs or when a
determination is made that a loss is probable. Subsequent recoveries, if
any, are added back to the allowance.
The average recorded investment in impaired loans for the three months and
nine months ended September 30, 1995, was $1,704 and $1,786, respectively.
The recorded investment in impaired loans at September 30, 1995, was $1.5
million. The recorded investment, for which there is a related allowance for
loan losses, was $900 at September 30, 1995, and the related allowance was
$500. The recorded investment, for which there is no related allowance for
loan losses, was $600. When a loan is considered impaired, interest accruals
discontinue and uncollected accrued interest is reversed against income in
the current period. Interest collections after a loan has been considered
impaired are credited to income when received unless the collectibility of
principal is in doubt causing all collections to be applied as principal
reductions. An impaired loan is not returned to performing status until
such loan is current as to principal and interest, and has performed with the
contractual terms for a reasonable period of time. The amount of interest
income recognized on impaired loans, using the cash-basis method of
accounting, was $61 and $83 for the three months and nine months ended
September 30, 1995.
<PAGE>
REVIEW OF FINANCIAL POSITION:
The Company's liquidity, capital adequacy and interest sensitivity continued
to improve as compared to December 31, 1994, as a result of action taken with
respect to the investment portfolio. The Company reported a net short-term
borrowings position of $16.0 million at December 31, 1994, as compared to a net
short-term investing position of $18.5 million at September 30, 1995. Capital
adequacy, as evidenced by the Tier I Leverage ratio calculated pursuant to the
Memorandum of Understanding ("MOU") with the Federal Reserve Bank
("Reserve Bank"), improved from 5.5 percent at December 31, 1994, to 6.8 percent
at September 30, 1995. The Company's interest sensitive position improved
during the nine months ended September 30, 1995, as the cumulative one year
rate sensitive assets to rate sensitive liabilities ratio neared 1.0. A
ratio of 1.0 indicates the Company is matched to the amount of interest
sensitive assets and interest sensitive liabilities repricing within one year,
effectively mitigating its exposure to interest rate fluctuations. Management
is unaware of any current regulatory recommendation, other than the disclosures
presented in this Form 10-Q regarding the MOU, that will have or that are
reasonably likely to have a material effect on the Company's liquidity,
capital resources or operations.
Total assets increased $4.0 million during the third quarter of 1995 from
$354.9 million at June 30, 1995, to $358.9 million at September 30, 1995.
The Company's investment in overnight funds increased $6.5 million as the
investment and loan portfolios remained relatively unchanged during the third
quarter of 1995. Increased demand for retail certificates of deposit was
primarily responsible for funding the improvement in assets. Stockholders'
equity increased slightly as earnings from operations and a recovery in the
net unrealized holding loss were partially offset by the recognition of
losses on securities sold during the final quarter of 1995.
INVESTMENT PORTFOLIO:
As mentioned in the June 30, 1995, quarterly report on Form 10-Q, management
completed the planned disposition of the remaining high-risk collateralized
mortgage obligations ("CMOs") in the available for sale portfolio during the
third quarter of 1995. Such sale consisted of six CMOs having a par value of
approximately $5.7 million. The $320 loss on the sale was recognized in the
second quarter of 1995, the period in which the decision to sell was made,
pursuant to guidance in the Financial Accounting Standards Board Emerging
Issues Task Force Topic D-44 "Recognition of Other-Than-Temporary Impairment
upon the Planned Sale of a Security Whose Cost Exceeds Fair Value".
Moreover, as stated in the latest quarterly filing, management completed in
the third quarter of 1995, a comprehensive analysis of the held to
maturity investment portfolio aimed at reducing the Company's exposure to
various risk elements inherent
<PAGE>
throughout the portfolio. The Board of Directors, after reviewing such
analysis, decided to reassess the appropriateness of its classification of
held to maturity securities and transferred the entire held to maturity
portfolio to available for sale. In conjunction with its review of the
analysis, the Board of Directors made the decision to sell certain securities
that were transferred from the held to maturity portfolio to the available
for sale portfolio, which it did in the beginning of October, 1995. The
resulting loss of $2.5 million on the sale was recognized in earnings for the
third quarter of 1995, the period in which the decision to sell was made.
Such securities had an amortized cost of $59.5 million and a fair value of
$57.0 million. Such sale consisted of all investment securities that were
criticized by regulators and those that demonstrated a high degree of
volatility. Management performs quarterly stress tests on the investment
portfolio to determine what effects interest rate changes will have
on its value. These tests indicate the investment portfolio would lose
approximately 1.4 percent of its value with a 100 basis point increase in
general market rates as compared to a loss of approximately 4.0 percent on the
portfolio prior to the sales. The weighted average life of the investment
portfolio after the sale was decreased to 3.1 years, approximately one-fifth
of the year end 1994 level. Management does not expect to sell any
additional securities in the near term as it has accomplished its goal of
eliminating the regulatory criticism and substantially mitigated the risk in
the portfolio.
Although such action has benefitted the Company by reducing its risk posture,
management will be unable to classify any new purchases as held to maturity
or to transfer any securities into the held to maturity portfolio until it has
reestablished the creditibility of its classification policy. Such penalty
could have a material adverse impact on the Company's book value if interest
rates were to rise significantly as management would be required to report the
resulting unrealized losses as a separate component of stockholders' equity.
On October 18, 1995, the Financial Accounting Standards Board ("FASB") voted to
temporarily suspend the rule that penalizes an entity that transferred
securities from the held to maturity portfolio to the available for sale
portfolio. Management was unaware that FASB would change such rule at the
time it decided to transfer securities from held to maturity to available for
sale. Accordingly, the Company must prove it has the intent and ability to
hold securities until maturity prior to being allowed to make such
classification, unlike entities that will be afforded the opportunity of
transferring securities unchallenged during the temporary dispensation period.
As required under the MOU, management submitted a completely rewritten
investment policy to the Reserve Bank on August 21, 1995. Such policy was deemed
acceptable by the Reserve Bank on September 21, 1995, as it addressed the
deficiencies cited in the most recent Report of Examination and requirements set
forth in the MOU. The policy effectively prohibits
<PAGE>
prior investment practices, which exposed the Company to excessive risk, from
reoccurring. Specifically, prohibited practices include those that are
referred to as unsuitable as defined in the Reserve Bank's Supervisory
Policy Statement on Securities Activities along with option and derivative
transactions. In addition, the policy establishes limitations to the quality,
quantity and maximum maturity for each type of security and strengthened
procedures for monitoring and controlling the investment function.
The following table sets forth the major classifications of securities as they
relate to the total investment portfolio at September 30, 1995, and
December 31, 1994:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES
SEPTEMBER 30, DECEMBER 31,
1995 1994
AMOUNT % AMOUNT %
_________________________________________________________________________________________
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities............................ $ 12,042 7.89%
U.S. Government agencies............................ 36,993 24.25
State and municipals................................ 20,616 13.51
Mortgage backed securities.......................... 38,015 24.92
________ ______
Total held to maturity............................ 107,666 70.57
________ ______
Available for sale:
U.S. Treasury securities............................ $ 25,750 19.37% 3,366 2.21
U.S. Government agencies............................ 36,655 27.58 7,283 4.77
State and municipals................................ 20,915 15.74
Mortgage backed securities.......................... 44,803 33.71 29,444 19.30
Other securities.................................... 4,791 3.60 4,807 3.15
________ ________
Total available for sale.......................... 132,914 100.00 44,900 29.43
________ ______ ________ ______
Total........................................... $132,914 100.00% $152,566 100.00%
======== ====== ======== ======
</TABLE>
The following table sets forth the maturity distribution of the book and
market values and weighted average tax equivalent yields of the available for
sale portfolio at September 30, 1995. The weighted average yield has been
computed on a tax equivalent basis using the statutory tax rate of 34.0 percent.
The distributions are based on contractual maturity with the exception of
mortgage backed securities and CMOs that have been presented based upon
estimated cash flows, assuming no change in the current interest rate
environment. Expected maturities will differ from contracted maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE FOR SALE PORTFOLIO
AFTER ONE AFTER ONE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
SEPTEMBER 30, 1995 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities..... $ 4,016 6.09% $15,923 5.66% $ 3,930 6.13% $ 1,905 6.16% $ 25,774 5.84%
U.S. Government agencies..... 3,499 4.88 26,928 5.00 6,789 6.46 37,216 5.26
State and municipals......... 255 6.15 4,149 6.82 5,724 8.72 10,207 9.44 20,335 8.66
Mortgage backed securities... 306 6.70 4,476 6.08 4,023 6.09 36,077 6.30 44,882 6.26
Other securities............. 4,502 5.68 4,502 5.68
_______ _______ _______ _______ ________
Total...................... $ 8,076 5.59% $51,476 5.45% $20,466 6.95% $52,691 6.85% $132,709 6.25%
======= ======= ======= ======= ========
Fair value:
U.S. Treasury securities..... $ 4,023 $15,892 $ 3,930 $ 1,905 $ 25,750
U.S. Government agencies..... 3,477 26,389 6,789 36,655
State and municipals......... 256 4,125 5,905 10,629 20,915
Mortgage backed securities... 306 4,468 4,016 36,014 44,803
Other securities............. 4,791 4,791
_______ _______ _______ _______ ________
Total...................... $ 8,062 $50,874 $20,640 $53,339 $132,914
======= ======= ======= ======= ========
</TABLE>
LOAN PORTFOLIO:
In the third quarter of 1995, the Company witnessed a slight decline in loans,
net of unearned income of $900 from $193.9 million at June 30, 1995, to $193.0
million at September 30, 1995. For the nine months ended September 30, 1995,
the average volume of loans totaled $197.0 million compared to $186.1 million
for the same period of 1994. During the first three quarters of 1995, the tax
equivalent yield on the loan portfolio showed an increase from 8.5 percent at
September 30, 1994, to 8.8 percent for the comparable period of 1995. The loan
portfolio's yield has remained constant as compared to that of the first six
months of 1995 due to decreased market rates coupled with competition for loan
demand. Based on these trends, management expects loan yields to remain level
or to decline in future periods.
The Company plans to continue its pursuit for growth in its loan portfolio based
on its current liquidity position. Management will foster such loan growth by
implementing competitive pricing strategies in line with trends in general
market rates. Funding for such demand is expected to be facilitated through the
elimination of excess short-term investments, loan payments and core deposit
increases.
<PAGE>
The following table sets forth the major categories of the loan portfolio at
September 30, 1995, and December 31, 1994:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
1995 1994
AMOUNT % AMOUNT %
________________________________________________________________________________________
<S> <C> <C> <C> <C>
Commercial, financial and others.......... $ 22,936 11.88% $ 29,419 15.13%
Real estate:
Construction............................ 1,500 0.78 2,771 1.42
Mortgage................................ 149,770 77.60 138,379 71.15
Consumer, net............................. 18,790 9.74 23,916 12.30
________ ______ ________ ______
Loans, net of unearned income........... 192,996 100.00% 194,485 100.00%
====== ======
Less: allowance for loan losses........... 3,814 3,576
________ ________
Net loans............................... $189,182 $190,909
======== ========
</TABLE>
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in attempting to avoid interest rate risk and
liquidity strains. Approximately 35.7 percent of the loan portfolio will
reprice within the next twelve months as management attempts to reduce the
average term on fixed rate loans while increasing its holdings of variable rate
loans to avoid future interest rate risks. Such rate surpasses the 33.7 percent
recorded on June 30, 1995, and the 30.3 percent recorded at December 31, 1994.
This change results from increased demand for short-term funding coupled with
$2.9 million in variable rate loan originations during the third quarter of
1995.
The following table sets forth the maturity and repricing schedule of the loan
portfolio at September 30, 1995:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
SEPTEMBER 30, 1995 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others...... $ 4,489 $ 7,797 $ 10,650 $ 22,936
Real estate:
Construction........................ 1,500 1,500
Mortgage............................ 3,057 17,461 129,252 149,770
Consumer, net......................... 3,007 10,825 4,958 18,790
_______ _______ ________ ________
Total............................. $12,053 $36,083 $144,860 $192,996
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates.......... $29,632 $54,040 $ 70,018 $153,690
Floating or adjustable interest rate.. 39,306 39,306
_______ _______ ________ ________
Total............................. $68,938 $54,040 $ 70,018 $192,996
======= ======= ======== ========
</TABLE>
<PAGE>
ASSET QUALITY:
Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonaccrual and restructured loans as well as loans past due ninety days or more
are included in nonperforming loans.
Nonperforming assets showed a slight improvement from $3,928 or 2.03 percent of
loans, net at June 30, 1995, to $3,617 or 1.87 percent at September 30, 1995.
Reductions in loans past due ninety days or more combined with the disposition
of two properties held in other real estate provided the main sources of such
decrease. Interest income related to nonaccrual loans would have been $106 for
the first nine months of 1995 if such payments were made at contracted rates and
in accordance with original terms. Interest recognized on nonperforming loans
totaled $83 for the first nine months of 1995.
Although the volume of accruing loans contractually past due ninety days or more
declined to $1,995 or 1.03 percent of loans, net at September 30, 1995, compared
to $2,146 or 1.11 percent at June 30, 1995, such volume has increased compared
to the $1,424 or 0.73 percent recorded at December 31, 1994. Such increase can
be attributed to a group of two mortgage loans and two commercial loans totaling
$655. Foreclosure proceedings have been initiated on such loans with confidence
that full restitution will be received on these loans. Management expects a
reduction in nonperforming loan levels based on increased collection efforts,
unless local economic conditions deteriorate, thus reducing the ability of
borrowers to repay loans on a timely basis.
The following table sets forth information concerning nonperforming assets and
contractually past due loans at September 30, 1995, and December 31, 1994. The
table includes all credits classified by regulatory agencies. Also included are
all material credits that cause management to have serious doubts as to the
borrowers' ability to comply with present loan repayment terms.
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
SEPTEMBER 30, DECEMBER 31,
1995 1994
______________________________________________________________________________________
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others.............................. $ 136 $ 45
Real estate:
Construction................................................
Mortgage.................................................... 1,115 1,352
Consumer, net.................................................
______ ______
Total nonaccrual loans.................................... 1,251 1,397
______ ______
Loans past due 90 days or more:
Commercial, financial and others.............................. 341 33
Real estate:
Construction................................................
Mortgage.................................................... 1,502 1,194
Consumer, net................................................. 152 197
______ ______
Total loans past due 90 days or more...................... 1,995 1,424
______ ______
Restructured loans............................................ 277 236
______ ______
Total nonperforming loans................................. 3,523 3,057
Other real estate............................................. 94 226
______ ______
Total nonperforming assets................................ $3,617 $3,283
====== ======
Ratios:
Nonperforming assets as a percentage of loans, net............ 1.87% 1.69%
Loans past due 90 days or more as a percentage of loans, net.. 1.03% 0.73%
</TABLE>
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Loans, or portfolios of loans, determined
to be uncollectible are charged against the allowance account with any
subsequent recoveries being credited to the account. Management believes the
current level of the account to be adequate to absorb potential credit losses.
While historical loss experience provides a reasonable base in assessing the
adequacy of the allowance account, management considers several other relevant
factors likely to cause estimated credit losses associated with the Company's
current portfolio to differ from historical loss experience. Changes in lending
policies and procedures, economic conditions, nature and volume of the loan
portfolio, loan review system, volumes of classified and past due loans, loan
concentrations, borrowers' financial status and collateral values are some of
the factors taken into consideration in assessing reserve adequacy.
Additionally, various regulatory agencies, as an integral part of their routine
annual examination process, review the Company's allowance for loan losses.
Based on judgements made from information provided at the time of their
examination, these agencies may require additions be made to the allowance
account.
In general, the allowance for loan losses is available to absorb losses
throughout the loan portfolio, although in some instances allocation is made for
specific loans or groups of loans. Accordingly, the following
<PAGE>
table attempts to allocate this reserve among the major categories. However,
it should not be interpreted as an indication that charge-offs in future periods
will occur in these amounts or proportions or that the allocation indicates
future charge-off trends:
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
1995 1994
_______________________ ________________________
% OF LOANS % OF LOANS
FOR CATEGORY FOR CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
______________________________________________________________________________________
<S> <C> <C> <C> <C>
Commercial, financial and others.. $1,303 11.88% $1,188 15.13%
Real estate:
Construction.................... 0.78 1.42
Mortgage........................ 1,384 77.60 1,251 71.15
Consumer, net..................... 1,127 9.74 1,137 12.30
______ ______ ______ ______
Total......................... $3,814 100.00% $3,576 100.00%
====== ====== ====== ======
</TABLE>
The following table sets forth a reconciliation of the allowance for loan losses
and illustrates the charge-offs and recoveries by major loan category for the
nine months ended September 30, 1995:
<TABLE>
<CAPTION>
QUARTERLY RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30,
1995
_______________________________________________________________________________________
<S> <C>
Allowance for loan losses at beginning of period................................ $3,576
Loans charged-off:
Commercial, financial and others................................................ 136
Real estate:
Construction..................................................................
Mortgage...................................................................... 147
Consumer, net................................................................... 52
______
Total....................................................................... 335
______
Loans recovered:
Commercial, financial and others................................................ 77
Real estate:
Construction..................................................................
Mortgage...................................................................... 79
Consumer, net................................................................... 57
______
Total....................................................................... 213
______
Net loans charged-off........................................................... 122
______
Provision for loan losses....................................................... 360
______
Allowance for loan losses at end of period...................................... $3,814
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding.............. 0.07%
Allowance for loan losses as a percentage of period end loans................... 1.99%
</TABLE>
<PAGE>
The Company analyzes the adequacy of its allowance for loan losses account
quarterly in conjunction with its internal loan review and classified asset
identification system. The allowance account at September 30, 1995, was $3,814
or 1.99 percent of total loans as compared to $3,824 or 1.97 percent of total
loans at June 30, 1995. For the nine months ended September 30, 1995, this
figure increased $238 or 6.7 percent from $3,576 at December 31, 1994. Improved
success rates in loan collections coupled with making monthly provisions to the
allowance account provided the greatest influences to this increase. The
Company analyzes the reasonableness of its allowance for loan losses through
utilizing the federal banking agency analytical tool that compares such account
against the sum of specified percentages, based on industry averages, applied to
certain loan classifications. Based on the results of this regulatory
calculation, management considered its loan loss account to be adequate to
absorb potential losses.
Past due loans not satisfied through repossession, foreclosure or related
actions are evaluated individually to determine what portion, if any, should be
charged against the allowance for loan losses account. Loan charge-offs
exceeded recoveries by $122 during the nine month period ended September 30,
1995.
The allowance account covered 108.3 percent of nonperforming loans at September
30, 1995. Such level represents an increase from the 102.1 percent at June 30,
1995.
DEPOSITS:
Total deposits increased $8.0 million from $316.2 million at December 31, 1994,
to $324.2 million at September 30, 1995. Average deposits totaled $316.6
million for the nine months ended September 30, 1995, compared to $307.2 million
for the same period of 1994. For the quarter ended September 30, 1995, the
Company experienced an increase in total deposits of $3.6 million from $320.6
million at June 30, 1995. Such increase resulted primarily from an increase of
$4.4 million in retail time deposits with stated maturities of two years. The
average cost of deposits increased from 4.2 percent at September 30, 1994, to
4.8 percent at September 30, 1995. Such increase came as the result of increased
costs of time deposits. Competitive pricing and offering a new certificate of
deposit product during the second quarter of 1995 were the main factors for the
increased costs. The introduction of this new product helped to eliminate the
Company's reliance on short-term borrowings. Due to the Company's improved
liquidity position, it was management's decision to discontinue offering such
product and become less aggressive in competing for funds at the end of the
third quarter of 1995.
<PAGE>
The following table sets forth the average amount of and the rate paid on the
major classifications of deposits for the nine months ended September 30, 1995,
and September 30, 1994:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
_________________ _________________
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 22,342 3.52% $ 23,432 3.18%
NOW accounts................................ 15,445 1.97 15,111 1.96
Savings accounts............................ 72,617 3.27 83,582 3.10
Time deposits less than $100................ 152,745 5.70 138,895 4.89
Time deposits $100 or more.................. 29,785 5.99 24,607 6.22
________ ________
Total interest-bearing.................... 292,934 4.76% 285,627 4.18%
Noninterest-bearing......................... 23,666 21,529
________ ________
Total deposits............................ $316,600 $307,156
======== ========
</TABLE>
Average volumes on noninterest-bearing deposits at September 30, 1995, increased
$2.1 million compared to 1994 levels. Average volumes of noninterest-bearing
deposits as a percentage of average assets improved from 6.2 percent at
September 30, 1994, to 6.5 percent at September 30, 1995. Despite such
improvement over 1994 levels, such volumes as a percentage of average assets
still lag behind the local peer group average of 12.9 percent, which effectively
increases the Company's cost of funds.
Volatile liabilities, time deposits in denominations of $100 or more, declined
slightly from $29.5 million at June 30, 1995, to $28.1 million at September 30,
1995. Such decline came as management chose not to make an aggressive effort to
obtain these deposits based on their higher cost and improvements in the
Company's liquidity position. The following table sets forth maturities of time
deposits of $100 or more for September 30, 1995, and December 31, 1994:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
SEPTEMBER 30, DECEMBER 31,
1995 1994
____________ ____________
<S> <C> <C>
Within three months......................................... $ 8,159 $ 7,861
After three months but within six months.................... 7,889 4,200
After six months but within twelve months................... 2,716 10,740
After twelve months......................................... 9,342 7,410
_______ _______
Total..................................................... $28,106 $30,211
======= =======
</TABLE>
INTEREST RATE SENSITIVITY:
Interest rate sensitivity management attempts to limit, and to the extent
possible, control the effects interest rate fluctuations have on net
<PAGE>
interest income. The responsibility of such management has been delegated to
the Asset Liability Management Committee ("ALCO"). Specifically, ALCO
utilizes several computerized modeling techniques to monitor and attempt to
control influences market changes have on the Company's rate sensitive assets
and liabilities. One such technique utilizes a static gap report, which
attempts to measure the Company's interest rate exposure by calculating the
net amount of rate sensitive assets ("RSA") and rate sensitive liabilities
("RSL") that reprice within specific time intervals. A positive gap, indicated
by a RSA/RSL ratio greater than 1.0, means that earnings will be affected
favorably if interest rates rise and adversely if interest rates fall during
the period. A negative gap tends to indicate that earnings will be affected
inversely to interest rate changes.
The following table sets forth the Company's interest rate sensitivity gap
position. The distributions in the table are based on a combination of
maturities, call provisions, repricing frequencies and prepayment patterns.
Variable rate assets and liabilities are distributed based on the repricing
frequency of the instrument. Mortgage instruments are distributed in accordance
with estimated cash flows assuming no change in the current interest rate
environment.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
SEPTEMBER 30, 1995 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities.............. $ 51,839 $ 13,279 $ 32,069 $ 35,727 $132,914
Loans, net of unearned income...... 51,862 17,076 54,040 70,018 192,996
Interest-bearing balances.......... 35 90 125
Federal funds sold................. 18,500 18,500
________ ________ ________ ________ ________
Total............................ $122,236 $ 30,445 $ 86,109 $105,745 $344,535
======== ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts.............. $ 21,430 $ 21,430
NOW accounts....................... 15,814 15,814
Savings accounts................... $ 287 $ 69,869 70,156
Time deposits less than $100....... 49,932 48,623 66,071 $ 15 164,641
Time deposits $100 or more......... 11,192 9,172 7,742 28,106
Other borrowings................... 3,000 2,000 48 5,048
________ ________ ________ ________ ________
Total............................ $ 61,411 $ 98,039 $145,682 $ 63 $305,195
======== ======== ======== ======== ========
Rate sensitivity gap:
Period........................... $ 60,825 $(67,594) $(59,573) $105,682
Cumulative....................... $ 60,825 $ (6,769) $(66,342) $ 39,340 $ 39,340
RSA/RSL ratio:
Period........................... 1.99 0.31 0.59 1,678.49
Cumulative....................... 1.99 0.96 0.78 1.13 1.13
</TABLE>
Management has effectively mitigated the Company's exposure to changing
interest rates as represented by a matched ratio of interest sensitive assets
to interest sensitive liability repricing within one year of 1.0. Based upon
the guidelines set forth in the Company's Asset and Liability Management Policy,
this ratio falls within the 0.7 and the 1.3 deemed by management to be
acceptable. Such improvement was influenced by the Company's disposal of
long-term mortgage backed investments. The disposal
<PAGE>
of such investments combined with long term deposit acquisitions created
excess funds that were used to purchase short-term U.S. Treasury securities and
federal funds for the third quarter of 1995. The three month ratio declined
from 4.92 at June 30, 1995 to 1.99 at September 30, 1995.
Based on the static gap model at September 30, 1995, the Company appears to be
properly positioned in the near term to benefit should interest rates rise.
However, management is aware that an occurrence of fluctuating interest rates
may cause depositors to shift funds from transaction accounts to retail time
deposits thus increasing fund costs. Such shift would neutralize some of the
positive influence of floating rate loans and investments.
Although understanding the Company's gap position is important in determining
interest rate exposure, an interest rate sensitivity table does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes will not equally or simultaneously affect all categories of assets
and liabilities. Second, assets and liabilities that can contractually reprice
within the same period may not do so at the same time or to the same magnitude.
Third, the table presents a one day position; variations occur daily as the
Company adjusts its interest sensitivity throughout the year. Finally, in
creating such a table assumptions must be made. For example, the conservative
nature of the Company's Asset and Liability Management Policy assigns money
market and NOW accounts to the due within twelve months pricing interval. In
reality, these items may reprice less frequently and in different magnitudes
than changes in general interest rate levels.
As a result of the gap report's failure to address the dynamic changes in the
balance sheet composition or prevailing interest rates, the Company enhances
its asset/liability management by using a simulation model. Such model creates
proforma net interest income scenarios under various interest rate assumptions
("shocks"). Model results from September 30, 1995, indicate a departure from
the expected results of the static gap model. A decline in net interest income
of 13.9 percent is expected should interest rates rise 100 basis points.
Conversely, a similar decline in interest rates would result in a 13.9 percent
increase in net interest income.
Inflation impacts financial institutions differently than it does commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of the Company's assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
measure precisely the impact of inflation on the Company, however management
believes that its exposure to interest rate changes has been limited through
asset/liability management.
<PAGE>
LIQUIDITY:
In accordance with the requirement of the MOU with the Reserve Bank, the Company
developed a liquidity plan during the third quarter of 1995. Such plan was
submitted to the Reserve Bank on August 21, 1995, and was deemed acceptable on
September 21, 1995. The mission of the liquidity plan is to ensure the Company
has the ability to generate cash at a reasonable cost in order to satisfy
commitments to borrowers as well as to meet the demands of depositors and
debtholders. Principal sources of liquidity are found in core deposits and loan
and investment payments and prepayments. Management considers the Company's
available for sale portfolio as a secondary source of liquidity. As a final
source of liquidity, the Company has the ability to exercise existing credit
arrangements. As specified in the Company's Asset and Liability Management
Policy, such borrowings will only be used on a contingency basis. The reliance
on these borrowings to fund temporary deficiencies is limited to a maximum of
five consecutive business days before management is required to take appropriate
action to remedy the shortfall through normal operations.
The plan consisted of an assessment of the Company's current liquidity position
and included determining appropriate standards for the volume, mix price and
maturity of loans, investments and deposits. In addition, management was to
ascertain the appropriate level of short-term assets required to fund normal day
to day operations and to ensure the Company's ability to meet off-balance sheet
commitments and unanticipated deposit withdrawals. The plan developed control
and monitoring procedures for evaluating the Company's daily liquidity
positions. Finally, the plan introduced strategies to assure future liquidity.
Management took steps in implementing such strategies by receiving unanimous
approval on September 27, 1995, from the Board of Directors to reconstitute the
entire investment portfolio. Such action will significantly improve the
liquidity of the Company by eliminating certain securities having long average
lives that exhibit high degrees of market price volatility and those securities
that are exposed to extension risk. The reconstituted portfolio will consist of
securities that are of significantly higher quality with lower average lives and
that demonstrate more stable cash flows. This type of portfolio will assure the
Company of a secondary source of liquidity without incurring material losses in
market value even in an aggressively increasing interest rate environment.
Other strategies outlined in the plan, which the Company considers proprietary
in nature, included the maintenance of a minimum net federal funds sold cushion,
a capital contingency strategy and enhanced strategies on loan and deposit
pricing.
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. Cash
<PAGE>
and cash equivalents, consisting of cash and due from banks and federal funds
sold, increased $19.3 million during the first nine months of 1995. Net cash
provided by operating activities totaled $4.0 million primarily due to the
change in deferred income taxes and the adjustment of securities losses to
net income. Net cash provided by investing activities amounted to $23.7 million
at September 30, 1995. Such increase was primarily a result of recording sales
of $27.6 million in high-risk CMOs and structured notes for the nine months
ended September 30, 1995. Net cash used in financing activities aggregated $8.4
million for the first nine months of 1995. The decrease came as a result of the
Company reducing its short-term borrowings by $16.0 million for the first nine
months of 1995 offset partially by a net increase in deposits of $8.0 million
for the same period as management implemented competitive product pricing and
new and enhanced product offerings.
CAPITAL ADEQUACY:
As aforementioned, the Company and the Reserve Bank entered into an MOU. Under
the MOU, the Company is required to include in its regulatory calculations any
unrealized holding gains or losses on available for sale securities and
unrealized holding gains or losses on any high-risk CMOs or structured notes
that are classified as held to maturity. Financial institutions not under a
written directive can exclude such gains and losses from regulatory capital
calculations based on an amendment made on December 31, 1994, by the Reserve
Bank in the risk-based capital guidelines. Based on the calculations under the
MOU, the Company's stockholders' equity improved $4.4 million during the first
nine months of 1995. Such increase was primarily attributable to a recovery of
the net unrealized loss on available for sale securities. The Company reported
an unrealized holding loss adjustment of $5,632 on available for sale securities
and high-risk CMOs and structured notes held to maturity securities at December
31, 1994, as compared to a $136 unrealized holding gain adjustment at September
30, 1995.
The Company significantly exceeded all the relevant regulatory capital
measurements at September 30, 1995, and would have been considered "well
capitalized" if not under the MOU directive. Under the Federal Deposit
Insurance Corporation ("FDIC") Improvement Act of 1991, regulatory agencies
define institutions not under a written agreement as "well capitalized" if they
exceed the following: Tier I risk-based ratio of 6.0 percent, Total risk-based
ratio of 10.0 percent and Leverage ratio, defined as Tier I capital to total
average assets less goodwill, of 5.0 percent. Management has made improvements
toward eliminating risk exposure in the investment portfolio that may adversely
affect the value of stockholders' investment in the Company. In order to
determine the effects of a rise in interest rates on capital measurements, the
Company calculated its capital ratios using an immediate parallel shift in the
yield curve of 300 basis points.
<PAGE>
The results of such calculations show that the Company will maintain well
capitalized ratios should such rate increases occur. At September 30, 1995,
the Tier I risk-based, Total risk-based and Leverage ratios would have been
12.0 percent, 13.3 percent and 6.0 percent, respectively.
The following table sets forth the risk-adjusted core and total capital
calculations at September 30, 1995, and December 31, 1994. For comparative
purposes the ratios for December 31, 1994, have been adjusted to include the net
unrealized holding loss on available for sale securities of $4,688 and the net
unrealized holding loss on held to maturity high-risk CMOs and structured notes
of $944 pursuant to the guidance in the MOU:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
SEPTEMBER 30, DECEMBER 31,
1995 1994
____________________________________________________________________________________________________________
<S> <C> <C>
Tier I capital........................................................................ $ 24,640 $ 19,207
Tier II capital....................................................................... 2,269 3,338
________ ________
Total capital....................................................................... $ 26,909 $ 22,545
======== ========
Risk-adjusted assets.................................................................. $175,157 $175,093
Risk-adjusted off-balance sheet items................................................. $ 4,849 $ 4,632
Tier I capital as a percentage of risk-adjusted assets and off-balance sheet items.... 13.7% 10.7%
Total of Tier I and Tier II capital as a percentage of risk-adjusted assets........... 14.9 12.5
Tier I capital as a percentage of average total assets less goodwill.................. 6.8% 5.5%
</TABLE>
REVIEW OF FINANCIAL PERFORMANCE:
The Company reported a net loss of $769 or $1.05 per share for the first nine
months of 1995 compared to net income of $2,440 or $3.33 per share for the
comparable period of 1994. Such decrease was attributable to reporting net
losses of $4,393 on available for sale securities for the nine months ended
September 30, 1995, compared to net losses of $178 for the same period of 1994.
Greater levels of noninterest expenses and lower volumes of net interest income
also affected the earnings reduction. For the quarter ended September 30, 1995,
a net loss of $511 or $0.70 per share was reported as compared to net income of
$790 or $1.08 per share for the same period of 1994. Such reduction can be
explained by the same reasons given for the year to date decline.
NET INTEREST INCOME:
The Company's largest source of operating income is derived from net interest
income. The definition of net interest income is the amount of interest and
fees on loans and other investments in excess of interest expenses incurred on
deposits and other funding sources used to support such assets. Net interest
margin is defined as the percentage of net interest income on a tax equivalent
basis in relation to average earning assets. The primary influences on net
interest income are volume and rate changes to earning assets and
interest-bearing liabilities in response to
<PAGE>
changes in the general market rates. Other factors influencing the level of
net interest income include the composition of earning assets and
interest-bearing liabilities as well as nonperforming asset levels.
Net interest income on a tax equivalent basis showed a slight decline from
$9,586 at September 30, 1994, to $9,180 at September 30, 1995, a 4.3 percent
decrease. Such reduction resulted from a decline in the Company's net interest
margin offset partially by growth in earning assets exceeding that of
interest-bearing liabilities. For the first nine months of 1995, the Company's
net interest margin was 3.47 percent as compared to 3.79 percent for the
comparable period of 1994. Such decline resulted from earning asset yields
rising at a slower pace than cost of funds. Earning asset yields increased from
7.5 percent to 7.8 percent while fund costs rose from 4.2 percent to 4.9 percent
over the comparable periods of 1994 and 1995, respectively. The cost of funds
increase resulted from aggressive deposit product pricing in light of prior
liquidity strains. These factors created a negative rate variance of $641.
Partially offsetting the negative rate variance was a positive volume variance
of $235. Average earning assets increased $14.9 million to $353.2 million while
interest-bearing liabilities grew $10.6 million to $311.3 million. Increased
levels of federal funds sold and taxable loans offset by a greater level of time
deposits provided the major components in such variance.
For the quarter ended September 30, 1995, net interest income on a tax
equivalent basis decreased $166 compared to the same period of 1994. This
negative variance occurred for similar reasons as those given for the nine month
period. A reduced net interest margin caused by earning asset yields rising at
a slower pace than costs of funds offset partially by higher volumes of earning
assets with respect to interest-bearing liabilities provided the foundation for
the reduction over the comparable three month periods of September 30, 1995, and
September 30, 1994, respectively.
Management analyzes interest income and interest expense through the segregation
of rate and volume components of earning assets and interest-bearing
liabilities. The following table illustrates the impact of changes in volumes
of earning assets and interest-bearing liabilities coupled with changes in the
interest rate environment. Nonaccrual loans are included in average earning
assets. Investment securities and loans have been adjusted to a tax equivalent
basis using a 34.0 percent tax rate. The net change attributable to the
combined impact of rate and volume has been proportionately allocated between
the change due to rate and the change due to volume.
<PAGE>
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONHTS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 vs. 1994 1995 vs. 1994
_____________________ _____________________
Increase (decrease) Increase (decrease)
attributable to attributable to
_____________________ _____________________
Total Total
Change Rate Volume Change Rate Volume
______ ____ ______ ______ ____ ______
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Taxable............................... $ 323 $ 248 $ 75 $1,015 $ 418 $ 597
Tax-exempt............................ 44 (44) 90 (15) 105
Investments:
Taxable............................... (353) 105 (458) 84 284 (200)
Tax-exempt............................ (16) (1) (15) (6) (4) (2)
Interest-bearing deposits with banks.... (3) (2) (1) (7) (1) (6)
Federal funds sold...................... 324 2 322 319 3 316
_____ _____ _____ ______ ______ _____
Total interest income............... 275 396 (121) 1,495 685 810
_____ _____ _____ ______ ______ _____
Interest expense:
Money market accounts................... (29) (11) (18) 31 70 (39)
NOW accounts............................ 4 4 6 1 5
Savings accounts........................ (86) 128 (214) (162) 153 (315)
Time deposits less than $100............ 633 347 286 1,431 893 538
Time deposits $100 or more.............. 69 47 22 191 (68) 259
Short-term borrowings................... (202) (202) 365 239 126
Long-term debt.......................... 20 20 39 38 1
_____ _____ _____ ______ ______ _____
Total interest expense.............. 409 531 (122) 1,901 1,326 575
_____ _____ _____ ______ ______ _____
Net interest income................. $(134) $(135) $ 1 $ (406) $ (641) $ 235
===== ===== ===== ====== ====== =====
</TABLE>
<PAGE>
The following table sets forth a summary of net interest income for major
categories of earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
___________________________ ___________________________
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
_______ _______ ________ _______ ________ ________
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $191,920 $12,715 8.86% $182,762 $11,700 8.56%
Tax-exempt.................................. 5,100 285 7.47 3,328 195 7.83
Investments:
Taxable..................................... 127,884 5,797 6.06 131,255 5,713 5.82
Tax-exempt.................................. 20,539 1,356 8.83 20,595 1,362 8.84
Interest-bearing deposits with banks.......... 175 10 7.64 278 17 8.18
Federal funds sold............................ 7,601 323 5.68 147 4 3.64
________ _______ ________ _______
Total earning assets...................... 353,219 20,486 7.75% 338,365 18,991 7.50%
Less: allowance for loan losses.............. 3,798 3,472
Other assets.................................. 12,669 11,396
________ ________
Total assets.............................. $362,090 $346,289
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 22,342 589 3.52% $ 23,432 558 3.18%
NOW accounts.................................. 15,445 227 1.97 15,111 221 1.96
Savings accounts.............................. 72,617 1,777 3.27 83,582 1,939 3.10
Time deposits less than $100.................. 152,745 6,516 5.70 138,895 5,085 4.89
Time deposits $100 or more.................... 29,785 1,335 5.99 24,607 1,144 6.22
Short-term borrowings......................... 13,340 677 6.79 10,065 312 4.20
Long-term debt................................ 5,049 185 4.90 5,000 146 3.80
________ _______ ________ _______
Total interest-bearing liabilities........ 311,323 11,306 4.86% 300,692 9,405 4.18%
Noninterest-bearing deposits.................. 23,666 21,529
Other liabilities............................. 723 1,315
Stockholders' equity.......................... 26,378 22,753
________ _______ ________ _______
Total liabilities and Stockholders' equity $362,090 11,306 $346,289 9,405
======== _______ ======== _______
Net interest/income spread................ $ 9,180 2.89% $ 9,586 3.32%
======= =======
Net interest margin....................... 3.47% 3.79%
Tax equivalent adjustments:
Loans......................................... $ 97 $ 66
Investments................................... 461 463
_______ _______
Total adjustments......................... $ 558 $ 529
======= =======
Note: Average balance was calculated using average daily balances and includes nonaccrual loans. Available for sale securities,
included in investment securities, are stated at amortized cost with the related average unrealized holding loss of
$1,733 at September 30, 1995, and $730 at September 30, 1994, included in other assets. Tax equivalent adjustment was
calculated using the prevailing statutory rate of 34.0 percent.
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSSES:
The Company's provision for loan losses was $360 for the nine months ended
September 30, 1995, a decrease of $270 compared to the same period of 1994. This
reduction came in response to recording a lower amount of net charge- offs in
1995 compared to 1994. The reduced level of net charge-offs combined with
additions from monthly provisions strengthened the Company's allowance for loan
losses as a percentage of period end loans from 1.84 percent at December 31,
1994, to 1.99 percent at September 30, 1995. For the quarter ended September
30, 1995, the provision totaled $75 compared to $210 for the same period of
1994. Management will continue to monitor its asset quality making
corresponding monthly provisions to build the allowance account as a guard
against any unforeseen losses caused by economic uncertainties.
NONINTEREST INCOME:
Noninterest income showed a substantial decline from $663 for the first nine
months of 1994 to a loss of $3,508 for the same period of 1995. The majority of
the decrease resulted from recognizing securities losses of $4,393 during the
first nine months of 1995 compared to losses totaling $118 for the same period
of 1994. Partially offsetting the loss were increases in service charges, fees
and commissions. Service charges, fees and commissions rose $44 or 5.2 percent
from September 30, 1994, to September 30, 1995. Such increase was primarily
attributable to fees recognized during the first six months of 1995 from
forfeitures on certificates of deposit as customers took advantage of higher
yields offered on longer term instruments. For the quarter ended September 30,
1995, noninterest income showed a loss of $2,237 compared to income of $230 for
the same period of 1994. Such marked reduction resulted from net losses on
investments equaling $2,508 being recorded for the third quarter of 1995 as
opposed to losses of $64 being recorded for the same period of 1994.
NONINTEREST EXPENSE:
For the nine months ended September 30, 1995, noninterest expense totaled
$6,434, an increase of $518 or 8.8 percent compared to the same period last
year. Despite this increase the Company's net overhead to average assets ratios
at September 30, 1995, and September 30, 1994, remained constant at 2.0 percent.
Such ratio continues to outperform the 2.5 percent of the Company's peer group.
Productivity is also measured by the operating efficiency ratio. Such ratio is
defined as noninterest expense excluding other real estate expense as a
percentage of net interest income and noninterest income less nonrecurring gains
and losses. The Company's 1995 operating ratio for the first nine months of
1995 was 67.3 percent compared to a 59.1 ratio for the same period 1994.
<PAGE>
Salaries and benefits represented 50.0 percent of noninterest expenses for the
first nine months of 1995 and amounted to $3,219, a $349 or 12.2 percent
increase over the same period 1994. The majority of such increase was
attributable to the Company's Board of Directors exercising its termination
option of the President and Chief Executive Officer's written employment
agreement during the second quarter of 1995.
Net occupancy and equipment expenses totaled $912 for the first nine months of
1995 representing a slight decrease compared to the same period 1994. Such
decrease is attributable to reduced costs associated with the maintenance of
bank facilities offset partially by greater costs related to the maintenance of
equipment used in normal bank operations.
Other expenses amounted to $2,303 for the first nine months of 1995, a $177 or
8.3 percent increase over the same period 1994. Increased legal and consulting
services accounted for the majority of such increase. Legal and consulting
services are expected to remain at an elevated level as a direct result of the
Company's compliance with the MOU.
Effective August 8, 1995, the FDIC's Board of Directors put into effect its
proposal to lower bank deposit insurance premiums. This reduction came in
response to the recapitalization of the Bank Insurance Fund during the second
quarter of 1995. Under such plan, rates ranging from 4 to 31 cents per every
one hundred dollars of insured deposits will be assessed dependent upon risk
characteristics of each institution. Based upon an evaluation of its risk
characteristics, the Company's insurance rate has been reassessed from 26 cents
per one hundred dollars of deposits to 7 cents per one hundred dollars of
deposits.
The Company experienced a $79 decrease in noninterest expenses for the
comparable third quarters of 1995 and 1994. The majority of such decline can be
attributed to the Company's FDIC premium reassessment that went into effect
retroactive to the second quarter of 1995.
<PAGE>
The following table sets forth the major components of noninterest expenses for
the three months and nine months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
1995 1994 1995 1994
SALARIES AND EMPLOYEE BENEFITS:
Salaries and payroll taxes..................... $ 803 $ 796 $2,644 $2,249
Employee benefits.............................. 195 202 575 621
______ ______ ______ ______
Salaries and employee benefits............... 998 998 3,219 2,870
______ ______ ______ ______
NET OCCUPANCY AND EQUIPMENT EXPENSES:
Net occupancy.................................. 167 202 515 587
Equipment expense.............................. 137 122 397 333
______ ______ ______ ______
Net occupancy and equipment expenses......... 304 324 912 920
______ ______ ______ ______
OTHER EXPENSES:
Marketing expense.............................. 90 58 195 150
Other taxes.................................... 50 48 155 144
Stationery and supplies........................ 84 75 203 209
Contractual services........................... 158 189 655 490
Insurance including FDIC assessment............ 154 199 546 536
Other.......................................... 146 172 549 597
______ ______ ______ ______
Other expenses............................... 682 741 2,303 2,126
______ ______ ______ ______
Total expenses............................. $1,984 $2,063 $6,434 $5,916
====== ====== ====== ======
INCOME TAXES:
The Company recorded a provision for income tax benefit of $889 and $911 for
the three and nine month periods ending September 30, 1995, respectively,
compared to a provision for income tax expense of $224 and $734 for the
comparable 1994 periods. The income tax benefits arose due to the net
realized losses on the disposition of certain investment securities, which
resulted in the Company recognizing a loss from operations before income taxes
for the three and nine months ended September 30, 1995, respectively. The
income tax benefits as a per cent of loss before income taxes are greater than
the federal statutory rate due to the tax exempt revenue increasing the taxable
loss for financial statement purposes.
The effective tax rates for the three and nine months ended September 30, 1994,
were 25.2 percent and 28.4 percent, respectively. These rates were less than
the federal statutory rate due to the tax exempt revenue being excluded from
taxable income for financial statement purposes.
<PAGE>
COMM BANCORP, INC.
OTHER INFORMATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on
September 15, 1995, for which proxies were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934, the
following matters were voted upon by stockholders.
1. To fix the number of directors to be elected at ten (10);
2. To elect ten (10) directors to serve for a one-year term and
until their successors are duly elected and qualified;
3. To ratify the selection of Kronick Kalada Berdy & Co. of
Kingston, Pennsylvania, Certified Public Accountants, as the
independent auditors for the Company for the year ending
December 31, 1995.
All nominees of the Board of Directors were elected. The number of
votes cast for or opposed to each of the nominees for election to the
Board of Directors were as follows:
Nominee For Against
__________________ _________ _________
David L. Baker 543,946 6,260
Donald R. Edwards, Sr. 544,356 6,260
William F. Farber, Sr. 542,446 6,260
Judd B. Fitze 538,896 6,260
Michael T. Goskowski 544,796 5,820
John P. Kameen 544,796 5,820
William B. Lopatofsky 544,796 5,820
J. Robert McDonnell 544,796 5,820
Joseph P. Moore, Jr. 543,416 6,060
Eric Stephens 544,596 6,020
<PAGE>
Matters numbers one and three were approved by stockholders at the
meeting. The votes cast on each of those matters were as follows:
Matter For Against
_________ _________ _________
1 563,268 86,954
3 636,808 13,214
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE
(b) NONE
<PAGE>
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
______________
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date November 10, 1995 /s/ David L. Baker
__________________________ ____________________________________
David L. Baker
Chief Executive Officer
Date November 10, 1995 /s/ Scott A. Seasock
__________________________ ____________________________________
Scott A. Seasock
Chief Financial Officer
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS FOUND
ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 7,547
<INT-BEARING-DEPOSITS> 125
<FED-FUNDS-SOLD> 18,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,914
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 192,996
<ALLOWANCE> 3,814
<TOTAL-ASSETS> 358,879
<DEPOSITS> 324,180
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,077
<LONG-TERM> 5,048
<COMMON> 733
0
0
<OTHER-SE> 25,841
<TOTAL-LIABILITIES-AND-EQUITY> 358,879
<INTEREST-LOAN> 12,903
<INTEREST-INVEST> 6,692
<INTEREST-OTHER> 333
<INTEREST-TOTAL> 19,928
<INTEREST-DEPOSIT> 10,444
<INTEREST-EXPENSE> 11,306
<INTEREST-INCOME-NET> 8,622
<LOAN-LOSSES> 360
<SECURITIES-GAINS> (4,393)
<EXPENSE-OTHER> 6,434
<INCOME-PRETAX> (1,680)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,251
<LOANS-PAST> 1,995
<LOANS-TROUBLED> 277
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,576
<CHARGE-OFFS> 335
<RECOVERIES> 213
<ALLOWANCE-CLOSE> 3,814
<ALLOWANCE-DOMESTIC> 3,814
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
