UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 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
incorporation or organization) Identification 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
___________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
_______________________________________ ___________________________
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
_____________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on closing sale price: $22,559,334 AT FEBRUARY 7, 1996.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 733,360 AT FEBRUARY 7, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1995, are incorporated by reference in Part II of this Annual
Report.
Page 1 of 161
Exhibit Index on Page 37
INDEX
PART I PAGE
Item 1. Business................................................. 3
Item 2. Properties............................................... 19
Item 3. Legal Proceedings........................................ 20
Item 4. Submission of Matters to a Vote of Security Holders...... *
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters...................................... 21
Item 6. Selected Financial Data.................................. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 23
Item 8. Financial Statements and Supplementary Data.............. 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... *
PART III
Item 10. Directors and Executive Officers of the Company.......... 24
Item 11. Executive Compensation................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 31
Item 13. Certain Relationships and Related Transactions........... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 33
SIGNATURES........................................................ 35
EXHIBIT INDEX..................................................... 37
*Not Applicable
COMM BANCORP, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Comm Bancorp, Inc. ("Company"), a Pennsylvania business corporation, is a bank
holding company registered with and supervised by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). The Company was organized on
May 20, 1983, and commenced operations on February 1, 1984, upon consummation of
the acquisition of all of the outstanding stock of Community National Bank,
Forest City, Pennsylvania (which has subsequently converted to a Pennsylvania
state-chartered commercial bank and renamed Community Bank and Trust Company)
("Community Bank"). On January 20, 1993, the First National Bank of Nicholson
("FNB Nicholson"), Nicholson, Pennsylvania (which was acquired on December 30,
1988), was merged with and into Community Bank and FNB Nicholson ceased to exist
as a separate legal entity. The branch facilities and related equipment
formerly used by FNB Nicholson are being used by Community Bank. The Company's
business has consisted primarily of managing and supervising Community Bank and
its principal source of income has been dividends paid by Community Bank. At
December 31, 1995, the Company had total consolidated assets, deposits and
stockholders' equity of approximately $350.9 million, $317.1 million and
$27.9 million, respectively.
Community Bank is a Pennsylvania state-chartered commercial bank and a member
of the Federal Reserve System. Community Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund
("BIF"). As of December 31, 1995, Community Bank had ten branch locations,
including its main office in Forest City, Susquehanna County, Pennsylvania.
Community Bank's branch offices are located in the Pennsylvania counties of
Lackawanna, Susquehanna, Wayne and Wyoming.
SUPERVISION AND REGULATION - COMPANY
The Company is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") and of state securities' law administrators for matters
relating to the offering and sale of its securities. The Company is currently
subject to the SEC's rules and regulations relating to periodic reporting,
insider trading reports and proxy solicitation materials in accordance with the
Securities Exchange Act of 1934 ("Exchange Act").
The Company is also subject to the provisions of the Bank Holding Company Act of
1956 ("Bank Holding Company Act") as amended, and to supervision by the Federal
Reserve Board. The Bank Holding Company Act will require the Company to secure
the prior approval of the Federal Reserve Board before it owns or controls,
directly or indirectly, more than 5.0 percent of the voting shares or
substantially all of the assets of any institution, including another bank.
The Bank Holding Company Act prohibits acquisition by the Company or more than
5.0 percent of the voting shares of, or interest in, or substantially all of the
assets of, any bank, unless such an acquisition has been specifically approved
by the Federal Reserve Board.
A bank holding company is prohibited from engaging in, or acquiring direct or
indirect control of, more than 5.0 percent of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of control of a bank
holding company, such as the Company, without prior notice to the Federal
Reserve Board. Control is defined for this purpose as the power, directly or
indirectly, to influence the management or policies of a bank holding company or
to vote 25.0 percent or 10.0 percent, if no other person or persons acting in
concert, holds a greater percentage of the common stock or more of the Company's
common stock.
The Company is required to file an annual report with the Federal Reserve
Board and any additional information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may also
make examinations of the Company and its subsidiary. Further, under Section 106
of the 1970 amendments to the Bank Holding Company Act and the Federal Reserve
Board's regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or services. The
so-called "Anti-tie-in" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any service to a customer on the
condition that the customer provide additional credit or service to the bank, to
its bank holding company or to any other subsidiary of its bank holding company
or on the condition that the customer not obtain other credit or service from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company. Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on investments in
the stock or other securities of the bank holding company and on taking of such
stock or securities as collateral for loans to any borrower.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board permits bank holding companies to engage in
non-banking activities so closely related to banking, or managing or controlling
banks as to be a proper incident thereto. While the types of permissible
activities are subject to change by the Federal Reserve Board, the principal
non-banking activities that presently may be conducted by a bank holding company
are:
1. Making, acquiring or servicing loans and other extensions of credit for its
own account or for the account of others, such as would be made by the following
types of companies: consumer finance, credit card, mortgage, commercial finance
and factoring.
2. Operating as an industrial bank, Morris Plan bank or industrial loan
company in the manner authorized by state law so long as the institution does
not accept demand deposits or make commercial loans.
3. Operating as a trust company in the manner authorized by federal or state
law so long as the institution does not make certain types of loans or
investments or accept deposits, except as may be permitted by the Federal
Reserve Board.
4. Subject to certain limitations, acting as an investment or financial
advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent, broker or advisor
in leasing property, provided that it is reasonably anticipated that the
transaction will compensate the lessor for not less than the lessor's full
investment in the property and provided further that the lessor may rely on
estimated residual values of up to 100.0 percent of the acquisition cost of the
leased property.
6. Making equity and debt investments in corporations or projects designed
primarily to promote community welfare, such as the economic rehabilitation
and development of low-income areas by providing housing, services or jobs for
residents.
7. Providing to others financially oriented data processing or bookkeeping
services.
8. Subject to certain limitations, acting as an insurance principal, agent
or broker in relation to insurance for itself and its subsidiaries or for
insurance directly related to extensions of credit by the bank holding company
system.
9. Owning, controlling or operating a savings association, if the savings
association engages only in deposit taking activities, lending and other
activities permissible for bank holding companies.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management consulting advice to
nonaffiliated banks and non-bank depository institutions.
12. Selling money orders having a face value of $1.0 thousand or less,
travelers' checks and United States savings bonds.
13. Performing appraisals of real estate and personal property, including
securities.
14. Subject to certain limitations, acting as intermediary for the financing of
commercial or industrial income-producing real estate by arranging for the
transfer of the title, control and risk of such a real estate project to one
or more investors.
15. Subject to certain limitations, providing full-service brokerage and
financial advisory activities, and selling, solely as an agent or broker for
customers, shares of investment companies advised by an affiliate of the bank
holding company or providing investment advice to customers about the purchase
and sale of shares of investment companies advised by an affiliate of the bank
holding company.
16. Underwriting and dealing in obligations of the United States, general
obligations of states and their political subdivisions and other obligations
such as bankers' acceptances and certificates of deposit.
17. Subject to certain limitations, providing by any means, general information
and statistical forecasting with respect to foreign exchange markets; advisory
services designed to assist customers in monitoring, evaluating and managing
their foreign exchange exposures; and certain transactional services with
respect to foreign exchange.
18. Subject to certain limitations, acting as a futures commission merchant
in the execution and clearance on major commodity exchanges of futures contracts
and options on futures contracts for bullion, foreign exchange, government
securities, certificates of deposit and other money market instruments.
19. Subject to certain limitations, providing commodity trading and futures
commission merchant advice, including counsel, publications, written analysis
and reports.
20. Providing consumer financial counseling that involves educational courses
and distribution of instructional materials to individuals on consumer-oriented
financial management matters, including debt consolidation, mortgage
applications, bankruptcy, budget management, real estate tax shelters, tax
planning, retirement and estate planning, insurance and general investment
management, so long as this activity does not include the sale of specific
products or investments.
21. Providing tax planning and preparation advice such as strategies designed
to minimize tax liabilities and includes, for individuals, analysis of the tax
implications of retirement plans, estate planning and family trusts. For a
corporation, tax planning includes the analysis of the tax implications of
mergers and acquisitions, portfolio mix, specific investments, previous tax
payments and year-end tax planning. Tax preparation involves the preparation of
tax forms and advice concerning liability, based on records and receipts
supplied by the client.
22. Providing check guaranty services to subscribing merchants.
23. Subject to certain limitations, operating a collection agency.
24. Operating a credit bureau that maintains files on the past credit
history of consumers and providing such information to a lender that is
considering a borrower's application for credit, provided that the credit bureau
does not grant preferential treatment to an affiliated bank in the bank holding
company system.
PENNSYLVANIA BANKING LAW
Under the Pennsylvania Banking Code of 1965 ("Code"), as amended, the Company
is permitted to control an unlimited number of banks. However, the Company
would be required, under the Bank Holding Company Act, to obtain the prior
approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than Community Bank, if, after such
acquisition, it would own or control more than 5.0 percent of the voting shares
of such bank.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"). The
following discussion describes those provisions of the Interstate Banking Act
that would pertain to the Company. It is not an exhaustive description of all
provisions of the Interstate Banking Act.
In general, the Federal Reserve Board may approve an application by the
Company to acquire control of, or acquire all or substantially all of the
assets of, a bank located outside of the Commonwealth of Pennsylvania without
regard to whether such acquisition is prohibited under the law of any state.
The Federal Reserve Board may approve such application if it finds, among other
things, that the Company is adequately capitalized and adequately managed.
Moreover, the Federal Reserve Board may not approve such acquisition if the
target bank has not been in existence for the minimum period of time, if any,
required by such target bank's "host" state. The Federal Reserve Board may,
however, approve the acquisition of the target bank that has been in existence
for at least five years without regard to any longer minimum period of time
required under the law of the "host" state of the target bank. The above
provisions took effect on September 30, 1995.
Furthermore, the Interstate Banking Act provides that, beginning June 1, 1997,
appropriate federal supervisory agencies may approve a merger of Community Bank
with another bank located in a different state or the establishment by Community
Bank of a new branch office either by acquisition or de novo, unless the
Commonwealth of Pennsylvania enacts a law prior to June 1, 1997, allowing an
interstate merger or expressly prohibiting merger with an out-of-state bank.
The Commonwealth of Pennsylvania has enacted a law to "opt-in" early to these
interstate mergers.
Moreover, the Interstate Banking Act provides that Community Bank may establish
and operate a de novo branch in any state that "opts-in" to de novo branching.
A "denovo branch" is a branch office that is originally established as a branch
and does not become a branch as a result of an acquisition or merger. The
Commonwealth of Pennsylvania has enacted a law to "opt-in" early to de novo
interstate branching.
On December 13, 1995, the Banking Commissioners of the states of Delaware,
Maryland, Pennsylvania and Virginia executed a Cooperative Agreement that
governs the manner in which state-chartered banks with branches in multiple
states will be supervised. This Cooperative Agreement was necessitated by the
Interstate Banking Act and was drafted to create a level playing field for
state-chartered banks with respect to supervision and regulation of branch
offices in a multiple state setting. Specifically, this agreement outlines
general principles for determining whether home or host state law applies,
including the following: (1) host state law applies to operational issues
relating to a branch located in a host state, including antitrust, community
reinvestment, consumer protection, usury and fair lending laws; (2) the
state law of the home state will apply to corporate structure issues, such as
charter, by-laws, incorporation, liquidation, stockholders and directors,
capital and investments; and (3) bank powers issues will be resolved with
reference to both home and host state laws. As of the filing date of this
report, the Company and Community Bank have no plans to engage in interstate
banking or branching.
LEGISLATION AND REGULATORY CHANGES
From time to time, legislation is enacted that has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes
or the impact such changes might have on the Company and Community Bank.
Certain changes of potential significance to the Company that have been enacted
or promulgated, as the case may be, by Congress or various regulatory agencies,
respectively, are discussed below.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e., FIRREA, was
enacted into law in order to restructure the regulation of the thrift industry,
to address the financial condition of the Federal Savings and Loan Insurance
Corporation and to enhance the supervisory and enforcement powers of the federal
bank and thrift regulatory agencies. The Federal Reserve Board, as the primary
federal regulator of Community Bank, is responsible for supervision of Community
Bank. The Federal Reserve Board and FDIC have far greater flexibility to impose
supervisory agreements on an institution that fails to comply with its
regulatory requirements, particularly with respect to the capital requirements.
Possible enforcement actions include the imposition of a capital plan,
termination of deposit insurance and removal or temporary suspension of an
officer, director or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels, with amounts
increasing with the severity of the violation. The first tier provides for
civil penalties of up to $5.0 thousand per day for any violation of law or
regulation. A civil penalty of up to $25.0 thousand per day may be assessed if
more than a minimal loss or a pattern of misconduct is involved. Finally, a
civil penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties
are increased to $1.0 million per violation, up to $5.0 million for continuing
violations or for the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
GENERAL
The FDICIA was enacted in December 1991 and reformed a variety of bank
regulatory laws. Some of these reforms have a direct impact on Community Bank.
Certain of these provisions are discussed below.
EXAMINATIONS AND AUDITS
Annual full-scope, on-site examinations are required for all FDIC-insured
institutions with assets of $500.0 million or more. For bank holding
companies with $500.0 million or more in assets, the independent accountants of
such companies shall attest to the accuracy of management's report. Such
accountants shall also monitor management's compliance with governing laws and
regulations. Such companies are also required to select an independent audit
committee, composed of outside directors who are independent of management, to
review with management and the independent accountants the reports that must be
submitted to the appropriate bank regulatory agencies. If the independent
accountants resign or are dismissed, written notification must be given to the
FDIC and to the appropriate federal and state bank regulatory agencies.
PROMPT CORRECTIVE ACTION
In order to reduce losses to the deposit insurance funds, the FDICIA
established a format to more closely monitor FDIC-insured institutions and to
enable prompt corrective action by the appropriate federal supervisory agency if
an institution begins to experience any difficulty. The FDICIA established five
capital categories. They are: (1) well-capitalized; (2) adequately capitalized;
(3) undercapitalized; (4) significantly undercapitalized; and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on depository institutions as they
descend the capital categories from well- capitalized to critically
undercapitalized.
The FDIC, the Office of the Comptroller of the Currency, the Federal Reserve
Board and the Office of Thrift Supervision have jointly issued regulations
relating to these capital categories and prompt corrective action. These
capital measures for prompt corrective action are defined as follows:
A well-capitalized institution would be one that has a 10.0 percent or greater
total risk-based capital ratio, a 6.0 percent or greater Tier I risk-based
capital ratio, a 5.0 percent or greater Tier I Leverage capital ratio and is not
subject to any written order or final directive by the FDIC to meet and maintain
a specific capital level.
An adequately capitalized institution would be one that meets the required
minimum capital levels, but does not meet the definition of a well-capitalized
institution. The existing capital rules generally require banks to maintain a
Tier I Leverage capital ratio of at least 4.0 percent and an 8.0 percent or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4.0 percent Tier I risk-based capital ratio. Thus, an
institution would need to meet each of the required minimum capital levels in
order to be deemed adequately capitalized.
An undercapitalized institution would fail to meet one or more of the required
minimum capital levels for an adequately capitalized institution. An
undercapitalized institution must file a capital restoration plan and is
automatically subject to restrictions on dividends, management fees and asset
growth. In addition, the institution is prohibited from making acquisitions,
opening new branches or engaging in new lines of business without the prior
approval of its primary federal regulator. A number of other discretionary
restrictions also may be imposed on a case-by-case basis, and more stringent
restrictions that otherwise would apply to significantly undercapitalized
institutions may be imposed on an undercapitalized institution that fails to
file or implement an acceptable capital restoration plan.
A significantly undercapitalized institution would have a total risk-based
capital ratio of less than 6.0 percent, a Tier I risk-based capital ratio of
less than 3.0 percent or a Tier I Leverage capital ratio of less than 3.0
percent, as the case may be. Institutions in this category would be subject to
all the restrictions that apply to undercapitalized institutions. Certain other
mandatory prohibitions also would apply, such as restrictions against the ]
payment of bonuses or raises to senior executive officers without the prior
approval of the institution's primary federal regulator. A number of other
restrictions may also be imposed.
A critically undercapitalized institution would be one with a tangible equity
(Tier I capital) ratio of 2.0 percent or less. In addition to the same
restrictions and prohibitions that apply to undercapitalized and significantly
undercapitalized institutions, the FDIC's rule implementing this provision of
the FDICIA also addresses certain other provisions for which the FDIC has been
accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes critically undercapitalized is
prohibited from taking the following actions without the prior written approval
of its primary federal regulator: engaging in any material transactions other
than in the usual course of business; extending credit for highly leveraged
transactions; amending its charter or bylaws; making any material changes in
accounting methods; engaging in certain transactions with affiliates; paying
excessive compensation or bonuses; and paying interest on liabilities exceeding
the prevailing rates in the institution's market area. In addition, a
critically undercapitalized institution is prohibited from paying interest or
principal on its subordinated debt and is subject to being placed in
conservatorship or receivership if its tangible equity capital level is not
increased within certain mandated time frames.
At any time, an institution's primary federal regulator may reclassify it into a
lower capital category. All institutions are prohibited from declaring any
dividends, making any other capital distribution or paying a management fee if
it would result in downward movement into any of the three undercapitalized
categories. The FDICIA provides an exception to this requirement for stock
redemptions that do not lower an institution's capital and would improve its
financial condition, if the appropriate federal regulator has consulted with the
FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC following any material
event that would cause such institution to be placed in a lower category.
Additionally, the FDIC monitors capital levels through call reports and
examination reports.
DEPOSIT INSURANCE
On January 1, 1994, the FDIC implemented the permanent Risk Related Premium
System ("RRPS") with respect to the assessments and payments of deposit
insurance premiums. Under the RRPS, the FDIC, on a semi-annual basis, will
assign each institution to one of three capital groups (well-capitalized,
adequately capitalized or undercapitalized, in each case as these terms are
defined for purposes of prompt corrective action rules described above) and
further assign such institution to one of three subgroups within a capital
group corresponding to the FDIC's judgment of its strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.0 percent
or greater, a Tier I capital to risk-adjusted assets ratio of 6.0 percent or
greater and a Tier I Leverage ratio of 5.0 percent or greater are assigned to
the well- capitalized group.
Effective January 1, 1996, the FDIC Board of Directors has further reduced BIF
premiums. Highly-rated institutions will pay only the statutory minimum of $2.0
thousand annually for FDIC insurance. The remaining institutions will pay on a
scale ranging from 3 to 27 cents per every one hundred dollars of insured
deposits, which is down from the scale in the latter half of 1995 of 4 to 31
cents. If such lower FDIC insurance premium rates were in effect for all of
1995, then Community Bank would have paid approximately $415 thousand less in
such premiums based upon current deposit levels.
REAL ESTATE LENDING STANDARDS
Pursuant to the FDICIA, the Federal Reserve Board and other federal banking
agencies adopted real estate lending guidelines that would set loan-to-value
("LTV") ratios for different types of real estate loans. An LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated or the purchase price, whichever is
lower. If the institution does not hold a first lien position, the total loan
amount would be combined with the amount of all senior liens when calculating
the ratio. In addition to establishing the LTV ratios, the guidelines require
all real estate loans to be based upon proper loan documentation and a recent
appraisal of the property.
BANK ENTERPRISE ACT OF 1991
Within the overall FDICIA is a separate subtitle called the Bank Enterprise
Act of 1991 ("ACT"). The purpose of the Act is to encourage banking
institutions to establish "basic transaction services for consumers" or
so-called "lifeline depository accounts." The FDIC assessment rate is reduced
for all lifeline depository accounts. The Act establishes ten factors that are
the minimum requirements to qualify as a lifeline depository account. Some of
these factors relate to minimum opening and balance amounts, minimum number of
monthly withdrawals, the absence of discriminatory practices against low-income
individuals and minimum service charges and fees. Moreover, the Housing and
Community Development Act of 1972 requires that the FDIC's risk-based assessment
system include provisions regarding lifeline depository accounts. Assessment
rates applicable to lifeline depository accounts are to be established by FDIC
rule.
TRUTH IN SAVINGS ACT
FDICIA also contains the Truth in Savings Act ("TSA"). The Federal Reserve
Board has adopted Regulation DD under the TSA. The purpose of the TSA is to
require the clear and uniform disclosure of the rates of interest that are
payable on deposit accounts by depository institutions and the fees that are
assessable against deposit accounts, so that consumers can make a meaningful
comparison between the competing claims of banks with regard to deposit accounts
and products. In addition to disclosures to be provided when a customer
establishes a deposit account, the TSA requires the depository institution to
include, in a clear and conspicuous manner, the following information with each
periodic statement: (1) the annual percentage yield earned; (2) the amount of
interest earned; (3) the amount of any fees and charges imposed; and (4) the
number of days in the reporting period. The TSA allows for civil lawsuits to be
initiated by customers if the depository institution violates any provision or
regulation under the TSA.
REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
The following table presents the Company's consolidated capital ratios at
December 31, 1995:
(In Thousands)
<S> <C>
Tier I capital...................................................................................... $ 24,845
Tier II capital..................................................................................... $ 2,203
Total capital....................................................................................... $ 27,048
Adjusted total average assets....................................................................... $357,410
Total adjusted risk-weighted assets(1).............................................................. $174,578
Tier I risk-based capital ratio(2).................................................................. 14.23%
Required Tier I risk-based capital ratio............................................................ 4.00%
Excess Tier I risk-based capital ratio.............................................................. 10.23%
Total risk-based capital ratio(3)................................................................... 15.49%
Required total risk-based capital ratio............................................................. 8.00%
Excess total risk-based capital ratio............................................................... 7.49%
Tier I Leverage ratio(4)............................................................................ 6.95%
Required Tier I Leverage ratio...................................................................... 5.00%
Excess Tier I Leverage ratio........................................................................ 1.95%
<FN>
(1) Includes off-balance sheet items at credit-equivalent values less intangible assets.
(2) Tier I risk-based capital ratio is defined as the ratio of Tier I capital to total adjusted risk-weighted assets.
(3) Total risk-based capital ratio is defined as the ratio of Tier I and Tier II capital to total adjusted
risk-weighted assets.
(4) Tier I Leverage ratio is defined as the ratio of Tier I capital to adjusted total average assets. In accordance
with the Memorandum of Understanding ("MOU"), the Company was required to maintain a Tier I Leverage ratio of no
less than 5.0 percent after adjusting for market depreciation, net of applicable taxes, in securities classified
as available for sale and those high-risk securities and structured notes classified as held to maturity. At
December 31, 1995, the Company classified all securities as available for sale,
which had market appreciation, net of applicable income taxes, of $780. Accordingly, such adjustment is not
required to be included in the table.
</FN>
</TABLE>
The Company was required to implement, on January 1, 1994, Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." For financial capital reporting
purposes, SFAS No. 115 changed the composition of stockholders' equity in
financial statements prepared in accordance with generally accepted accounting
principles by including, as a separate component of equity, the amount of net
unrealized holding gains or losses on debt and equity securities that are
deemed to be available for sale.
Effective December 31, 1994, the Federal Reserve Board has issued a final rule
with respect to the implementation of SFAS No. 115 for regulatory capital
reporting purposes. Under this final rule, net unrealized holding losses on
available for sale equity securities, but not debt securities, with readily
determinable fair values will be included when calculating consolidated Tier I
capital. All other unrealized holding gains and losses on available for sale
securities will be excluded from consolidated Tier I capital.
The Company's ability to maintain the required levels of capital is
substantially dependent upon the success of its capital and business plans, the
impact of future economic events on loan customers, the ability to manage its
interest rate risk and investment portfolio and control its growth and other
operating expenses.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are, and will be, affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The monetary policies of the Federal Reserve Board have had,
and will likely continue to have, an important impact on the operating results
of commercial banks through its power to implement national monetary policy in
order to curb inflation or combat a recession, among other things. The Federal
Reserve Board has a major affect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
HISTORY AND BUSINESS - COMMUNITY BANK
Community Bank's legal headquarters is located at 521 Main Street, Forest City,
Pennsylvania 18421. As of December 31, 1995, Community Bank had total assets of
$347.1 million, total stockholders' equity of $24.8 million and total deposits
and other liabilities of $322.3 million.
Community Bank is a community bank that seeks to provide personal attention and
professional financial assistance to its customers. Community Bank is a locally
managed and oriented financial institution established to serve the needs of
individuals and small- and medium-sized businesses. Community Bank's business
philosophy includes offering direct access to its President and other officers
and providing friendly, informed and courteous service, local and timely
decision making, flexible and reasonable operating procedures and
consistently-applied credit policies.
Community Bank is a full-service commercial bank offering a range of commercial
and retail banking services to its customers. These include personal and
business checking and savings accounts, certificates of deposit and mortgage,
home equity and commercial loans. In addition, Community Bank provides safe
deposit boxes, travelers' checks, wire transfers of funds and certain personal,
corporate and pension trust services. Community Bank is a member of the MAC
system and provides customers with access to this automated teller machine
network. Community Bank also makes credit cards available to its customers.
In addition, Community Bank has a trust department that provides traditional
fiduciary services to its customers.
Community Bank solicits small- and medium-sized businesses located primarily
within its market area that typically borrow less than $100 thousand. In the
event that certain loan requests exceed Community Bank's lending limit to any
one customer, Community Bank seeks to arrange such loans on a participation
basis with other financial institutions.
MARKET AREA
Community Bank's primary market area comprises the counties of Lackawanna,
Susquehanna, Wayne and Wyoming that are located in the Northeast corner of the
Commonwealth of Pennsylvania. The largest municipality in this market area is
the city of Scranton with a population of approximately 82 thousand inhabitants
based upon 1990 census data. None of Community Bank's branches are within the
city of Scranton. All of the branches are located well outside of Scranton in
rural or small-town settings. See Item 2 hereof for a description of the
location of each branch office.
Community Bank competes with twenty-one other commercial banks and two thrift
institutions in its market area. In terms of assets and liabilities, Community
Bank is smaller than its major competitors.
SUPERVISION AND REGULATION - COMMUNITY BANK
The operations of Community Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the Pennsylvania
Department of Banking ("Department"), the Federal Reserve Board and the FDIC.
The primary federal supervisory authority that regularly examines Community Bank
is the Federal Reserve Board. The Federal Reserve Board has the authority under
the Financial Institutions Supervisory Act to prevent a state member bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business; the investments a bank may make; the reserves
against deposits a bank must maintain; loans a bank makes and the collateral it
takes; the activities of a bank with respect to mergers and consolidations; and
the establishment of branches. All banks in Pennsylvania are permitted to
maintain branch offices in any county of the state. Branches of state-chartered
banks may be established only after approval by the Department. The Department
is required to grant approval only if it finds that there is a need for banking
services or facilities such as are contemplated by the proposed branch. The
Department may disapprove the application if the bank does not have the capital
and surplus deemed necessary by the Department.
Multi-bank holding companies are permitted in Pennsylvania within certain
limitations. See sections entitled "Pennsylvania Banking Law" and "Interstate
Banking and Branching."
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries and on taking such
stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal stockholders of its
parent holding company, among others, and to related interests of such principal
stockholders. In addition, such legislation and regulations may affect the
terms upon which any person becoming a principal stockholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulations of, and restrictions on,
the business of Community Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
Community Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, Community Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business. Under the Federal
Deposit Insurance Act, the Federal Reserve Board possesses the power to prohibit
institutions regulated by it (such as Community Bank) from engaging
in any activity that would be an unsafe and unsound banking practice and in
violation of the law. Moreover, the Financial Institutions and Interest Rate
Control Act of 1987 ("FIRA") generally expands the circumstances under which
officers or directors of a bank may be removed by the institution's federal
regulator; restricts lending by a bank to its executive officers, directors,
principal stockholders or related interests thereof; restricts management
personnel of a bank from serving as directors or holding other management
positions with certain depository institutions whose assets exceed a specified
amount or that have an office within a specified geographic area: and
restricts management personnel from borrowing from another institution that
has a correspondent relationship with their bank. Additionally, FIRA requires
that no person may acquire control of a bank unless the appropriate federal
regulator has been given 60 days prior written notice and within that time has
not disapproved the acquisition or extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), Community Bank is required to report to the
Internal Revenue Service currency transactions of more than $10 thousand or
multiple transactions of which it is aware in any one day that aggregate in
excess of $10 thousand. Civil and criminal penalties are provided under the BSA
for failure to file a required report, failure to supply information required by
the BSA or filing a false or fraudulent report.
The Garn-St. Germain Depository Institutions Act of 1982 ("1982 Act"), removes
certain restrictions on the lending powers and liberalizes the depository
abilities of Community Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal stockholders or related interests thereof, and by
relaxing certain reporting requirements. However, the 1982 Act strengthened
FIRA provisions respecting management interlocks and correspondent bank
relationships by management personnel.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA"), as amended, and the regulations
promulgated to implement the CRA are designed to create a system for bank
regulatory agencies to evaluate a depository institution's record in meeting the
credit needs of its community. Until May 1995 a depository institution was
evaluated for CRA compliance based upon 12 assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to establish new
performance-based standards for use in examining a depository institution's
compliance with the CRA. The revised CRA regulations establish new tests for
evaluating both small and large depository institutions' investment in the
community. A small bank is defined as a depository institution that has total
assets of less than $250 million and is independent or is an affiliate of a
holding company with less than $1 billion in assets. Pursuant to the revised
CRA regulations, a depository institution that qualifies as a small bank will be
examined under a streamlined procedure that emphasizes lending activities. The
streamlined examination procedures for a small bank became effective on
January 1, 1996.
A large depository institution is one that does not meet the small bank
definition above. A large depository institution can be evaluated under one of
two tests: (1) a three-part test evaluating the institution's lending, service
and investment performance; or (2) a "strategic plan" designed by the
institution with community involvement and approved by the appropriate federal
bank regulator. A large depository institution must choose one of these options
prior to July 1997, but may opt to be examined under one of these two options
prior to that time. Effective January 1, 1996, a large depository institution
that opts to be examined pursuant to a strategic plan may submit its strategic
plan to the bank regulators for approval. In addition, the revised CRA
regulations include separate rules regarding the manner in which "wholesale
banks" and "limited purpose banks" will be evaluated for compliance.
The new CRA regulations will be phased in over a two-year period, beginning
July 1, 1995, with a final effective date of July 1, 1997. Until the applicable
test is phased-in, institutions may be examined under the prior CRA regulations.
On December 27, 1995, the federal banking regulators issued a joint final rule
containing technical amendments to the revised CRA regulations. Specifically,
the recent technical amendments clarify the various effective dates in the
revised CRA regulations, correct certain cross references and state that once an
institution becomes subject to the requirements of the revised CRA regulations,
it must comply with all aspects of the revised CRA regulations, regardless of
the effective date of certain provisions. Similarly, once an institution is
subject to the revised CRA regulations, the prior CRA regulations do not apply
to that institution.
For the purposes of the revised CRA regulations, Community Bank is a small
depository institution, based upon financial information as of December 31,
1995. In the future, Community Bank will be evaluated for CRA compliance using
the streamlined procedures for a small bank. Under the 12 assessment factors
contained in the prior CRA regulations, Community Bank received an "outstanding"
rating in 1995. Community Bank expects to receive a rating under the revised
CRA regulations that is consistent with its rating last year.
CONCENTRATION
The Company and Community Bank are not dependent for deposits nor exposed by
loan concentrations to a single customer or to a small group of customers, the
loss of any one or more of which would have a materially adverse effect on the
financial condition of the Company or Community Bank.
ITEM 2. PROPERTIES
The Company owns no property other than through Community Bank as follows:
Type of Approximate
Property Location Ownership Square Footage Use
________ ________ _________ ______________ ___
1 521 Main Street Owned 7,100 Banking services.
Forest City, PA
2 528 Main Street Leased 4,250 Administrative
Forest City, PA offices.
3 347 Main Street Owned 5,500 Banking services.
Simpson, PA
4 37 Dundaff Street Leased 4,300 Banking services.
Carbondale, PA
5 Route 370 Leased 900 Banking services.
Lakewood, PA
6 57 Main Street Owned 6,000 Banking services.
Nicholson, PA
7 Route 6 Owned 3,500 Banking services.
Tunkhannock, PA
8 Route 106 Owned 1,300 Banking services.
Clifford, PA
9 61 Church Street Owned 3,500 Banking services.
Montrose, PA
10 Route 29 Leased 2,175 Banking services.
Eaton Township, PA
11 Route 307 Leased 1,250 Banking services.
Lake Winola, PA
The administrative offices, located at 528 Main Street, Forest City, have a
property lease that expires in 1997 and contains an option that allows for an
additional term of five years. The Carbondale property lease expires in 1998
and contains an option that allows Community Bank to purchase the property at
fair market value or renew the lease for two additional terms of five years
each. The Lakewood property lease expires in 1998 and contains an option to
renew the lease for three additional terms of five years each. The Route 29
Eaton Township property lease and Lake Winola property lease expire in 2009.
For information with respect to obligations for lease rentals, refer to Note 5
of the Notes to Consolidated Financial Statements in the Company's Annual
Report to Stockholders filed at Exhibit 13 hereto and incorporated
in its entirety by reference.
It is management's opinion that the facilities currently utilized are suitable
and adequate for current and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The nature of the Company's and Community Bank's business generates a certain
amount of litigation involving matters arising in the ordinary course of
business. However, in the opinion of management of the Company and Community
Bank, there are no proceedings pending to which the Company and Community Bank
are a party or to which their property is subject, which, if determined
adversely, would be material in relation to the Company's and Community Bank's
undivided profits or financial position, nor are there any proceedings pending
other than ordinary routine litigation incident to the business of the Company
and Community Bank. In addition, no material proceedings are pending or are
known to be threatened or contemplated against the Company and Community Bank by
government authorities or others.
ENVIRONMENTAL ISSUES
There are several federal and state statutes that govern the obligations of
financial institutions with respect to environmental issues.
Besides being responsible for its own conduct under such statutes, a bank also
may be held liable under certain circumstances for actions of borrowers or other
third parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, Community Bank is not a party to any pending legal proceedings
under any environmental statute nor is Community Bank aware of any circumstances
that may give rise to liability of Community Bank under any such statute.
MEMORANDUM OF UNDERSTANDING
On May 24, 1995, the Boards of Directors of the Company and Community Bank
entered into a MOU with the Federal Reserve Bank of Philadelphia ("FRB") in
recognition of their common goals to restore and maintain the financial
soundness of the Company and Community Bank and to improve the overall financial
condition of Community Bank. Under the terms of the MOU, the Company and
Community Bank were required to: (I) obtain the prior written approval of the
FRB to declare or pay any dividends; (II) obtain the prior written approval of
the FRB before the Company incurs any debt other than normal operating expenses;
(III) obtain the prior written approval of the FRB before the Company redeems
its own stock; (IV) submit to the FRB a written plan to maintain capital ratios
well in excess of minimum regulatory guidelines; (V) submit to the FRB a written
plan to ensure appropriate authority over and oversight of Community Bank's
investment practices; (VI) prohibit Community Bank from additional purchases
of high-risk securities and structured notes as well as securities not in
compliance with the Federal Reserve Board's Supervisory Policy Statement on
Securities Activities; (VII) retain an independent consultant to review
Community Bank's securities activities and investments in the context of its
overall interest rate risk and liquidity position and provide a written report
to the FRB thereon; (VIII) submit to the FRB revised investment policies and
procedures to correct deficiencies cited in the FRB's examinations with respect
to prior investment practices involving the investment portfolio; (IX) submit to
the FRB a written liquidity plan to provide for an adequate level of assets to
fund operations and meet customer needs; (X) submit quarterly progress reports
to the FRB to assure compliance with the MOU; and (XI) submit the written plans,
policies and procedures to the FRB for review and approval. As a result of the
Company's substantial compliance with the terms, conditions and provisions of
the MOU and its overall improved financial condition, the FRB terminated the MOU
effective February 16, 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's common stock are traded in the over-the-counter market
and "bid" and "asked" quotations regularly appear on the Over-the-Counter
Electronic Bulletin Board system under the symbol "CCBP." As of March 1, 1996,
two firms were listed on the Over-the-Counter Electronic Bulletin Board system
as market makers for the Company's common stock. The following table sets
forth: (1) the quarterly average bid and asked prices for a share of the
Company's common stock during the periods indicated as reported by Rutherford
Brown and Catherwood, Inc. of Clarks Summit, Pennsylvania, one of the market
makers of the Company's common stock and (2) dividends on a share of the common
stock with respect to each dividend payment since January 1, 1994. The
following quotations represent prices between buyers and sellers and do not
include retail markup, markdown or commission. They may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Average Stock Prices
____________________ Dividends
Bid Asked Declared
___ _____ _________
1995:
<S> <C> <C> <C>
First quarter........................ $40.00 $40.00 ----
Second quarter....................... $40.00 $40.00 ----
Third quarter........................ $40.00 $40.00 $.23
Fourth quarter....................... $40.00 $42.00 $.40
1994:
First quarter........................ $30.00 $32.00 ----
Second quarter....................... $32.00 $35.00 $.23
Third quarter........................ $35.00 $40.00 ----
Fourth quarter....................... $40.00 $40.00 $.39
</TABLE>
As of February 6, 1996, the Company had 702 stockholders of record.
Since its formation in 1984 as the parent holding company of Community Bank, the
Company has paid cash dividends. It is the present intention of the Company's
Board of Directors to continue the dividend payment policy, although the payment
of future dividends must necessarily depend upon earnings, financial condition,
appropriate restrictions under applicable law and other factors relevant at the
time the Board of Directors considers any declaration of dividends. Cash
available for the payment of dividends must initially come from dividends paid
by Community Bank to the Company. Therefore, the restrictions on Community
Bank's dividend payments are directly applicable to the Company.
During 1995 under the MOU, the Company and Community Bank could not declare or
pay any dividends without the prior written approval of the FRB. The dividends
declared and paid during 1995 did receive such prior written approval.
DIVIDEND RESTRICTIONS ON COMMUNITY BANK
Federal Reserve Board Regulation H restricts state member banks from paying a
dividend if the total of all dividends declared by the bank in any calendar year
exceeds the total of its net profits for that year combined with its retained
net profits of the preceding two calendar years, less any required transfers to
surplus, unless the bank has received the prior approval from the Federal
Reserve Board. Accordingly, Community Bank, without prior approval of bank
regulators, may declare dividends to the Company in 1996 totaling $1,612
thousand plus net profits earned by Community Bank for the period from
January 1, 1996, through the date of declaration, less dividends previously paid
in 1996.
In addition, the Code provides that cash dividends may be declared and paid by
Community Bank only out of accumulated net earnings. Prior to the declaration
of any dividend, if the surplus of Community Bank is less than the amount of its
capital, Community Bank shall, until surplus is equal to such amount, transfer
to surplus an amount that is at least 10.0 percent of the net earnings of
Community Bank for the period since the end of the fiscal year or for any
shorter period since the declaration of a dividend. If the surplus of Community
Bank is less than 50.0 percent of the amount of the capital, no dividend may be
declared or paid without prior approval of the Department until such surplus is
equal to 50.0 percent of Community Bank's capital.
DIVIDEND RESTRICTIONS ON THE COMPANY
Under the Pennsylvania Business Corporation Law of 1988 ("BCL"), as amended, the
Company may not pay a dividend if, after giving effect thereto, either (a) the
Company would be unable to pay its debts as they become due in the usual course
of business or (b) the Company's total assets would be less than its total
liabilities. The determination of total assets and liabilities may be based
upon: (I) financial statements prepared on the basis of generally accepted
accounting principles; (II) financial statements that are prepared on the basis
of other accounting practices and principles that are reasonable under the
circumstances; or (III) a fair valuation or other method that is reasonable
under the circumstances.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto are filed at
Exhibit 13 hereto and are incorporated in their entirety by reference under this
Item 8.
The Company does not meet both of the tests under Item 302(a)(5) of Regulation
S-K, and therefore, is not required to provide supplementary financial data.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Each director of the Company is elected for a one-year term and until his
successor is duly elected and qualified. Current directors were elected at the
1995 Annual Meeting of Stockholders, which was held on September 15, 1995. The
following table contains certain information with respect to the directors and
executive officers of the Company:
DIRECTOR
OF
PRINCIPAL OCCUPATION FOR PAST COMPANY/
AGE AS OF FIVE YEARS AND POSITION HELD COMMUNITY
MARCH 1, WITH THE COMPANY BANK SINCE
NAME 1996 AND COMMUNITY BANK
____ _________ ____________________________ __________
David L. Baker 50 President and Chief Executive 1988/1993
Officer ("CEO") of the Company and
Community Bank (as of April 26,
1995); Senior Vice President of
Community Bank (as of January 20,
1993); President of FNB Nicholson
(1987-1992) prior to its merger
with Community Bank
Donald R. Edwards, Sr.(1) 52 Owner, Mountain View Inn 1988/1993
William F. Farber, Sr. 59 President, Farber's Restaurants; 1983/1970
Chairman of the Boards of Directors
of the Company and Community Bank
Judd B. Fitze 44 Partner, Farr, Davis & Fitze 1995/1992
(attorney-at-law)
Michael T. Goskowski(2) 73 President, Kartri Sales Mfg. 1984/1984
(manufacturing); Secretary of
the Company and Community Bank
John P. Kameen 54 Publisher, Forest City News 1983/1979
William B. Lopatofsky 64 Owner, Northeast Distributors 1983/1982
and Equipment
J. Robert McDonnell 60 Owner, McDonnell's Restaurant; 1983/1979
Vice President of the Company
Joseph P. Moore, Jr. 69 President, Moore Motors Inc. 1988/1992
(automobile dealership); President
Elk Mountain Ski Resort, Inc.
Eric Stephens(1) 44 Auto Dealer, H.L. Stephens and Son 1988/1993
(automobile dealership)
[FN]
(1) Eric Stephens is married to the niece of Donald R. Edwards, Sr.
(2) In accordance with Article 10 of the Amended Articles of
Incorporation of the Company, Mr. Goskowski served as a director of
the Corporation until December 31, 1995, the completion of the
year in which he attained 72 years of age. Mr. Goskowski continues
to serve as a director of Community Bank.
PRINCIPAL OFFICERS OF THE COMPANY
The following table sets forth selected information about the principal officers
of the Company, each of whom is elected by the Board of Directors and each of
whom holds office at the discretion of the Board of Directors:
COMPANY
HELD EMPLOYEE NUMBER OF SHARES AGE AS OF
NAME AND POSITION SINCE SINCE BENEFICIALLY OWNED MARCH 1, 1996
- - ----------------- ----- ---------- ------------------ -------------
William F. Farber, Sr. 1983 (1) 62,440 59
Chairman of the Board
David L. Baker 1995 1992(2) 3,768(3) 50
President and CEO
Scott A. Seasock 1987 1992(4) 915(5) 38
Senior Vice President and
Chief Financial Officer
Thomas E. Sheridan 1989 1985 588(6) 39
Senior Vice President and
Chief Operating Officer
J. Robert McDonnell 1983 (1) 10,848(6) 60
Vice President
Michael T. Goskowski 1984 (1) 7,032(7) 73
Secretary
[FN]
(1) Messrs. Farber, McDonnell and Goskowski are not employees of
Community Bank.
(2) Prior to the merger of FNB Nicholson with Community Bank, Mr.
Baker was employed by FNB Nicholson from 1987 to 1992 as the
President.
(3) Includes 1,680 shares held individually; 1,600 shares held
jointly with his spouse; 244 shares held under his IRA; and 244
shares held under his spouse's IRA.
(4) Prior to the merger of FNB Nicholson with Community Bank, Mr.
Seasock was employed by FNB Nicholson from 1987 to 1992 as Senior
Vice President and Chief Financial Officer.
(5) Includes 220 shares held under his IRA; 275 shares held jointly
with his spouse; 20 shares held jointly with his spouse and son;
and 400 shares held jointly with his spouse and sons.
(6) Held jointly with his spouse.
(7) Includes 3,180 shares held jointly with his spouse; 412 shares
held in trust for his granddaughter; and 3,440 shares held
jointly with his spouse and daughter.
PRINCIPAL OFFICERS OF COMMUNITY BANK
The following table sets forth selected information about the principal officers
of Community Bank, each of whom is elected by the Board of Directors of
Community Bank and each of whom holds office at the discretion of Community
Bank's Board of Directors:
Community
Bank
Held Employee Number of Shares Age as of
Name and Position Since Since Beneficially Owned March 1, 1996
- - ----------------- ----- --------- ------------------ -------------
David L. Baker 1995 1993(1) 3,768 50
President and CEO
Scott A. Seasock 1992 1992(2) 915 38
Senior Vice President and
Chief Financial Officer
Thomas E. Sheridan 1989 1985 588 39
Senior Vice President and
Chief Operating Officer
Thomas M. Chesnick 1989 1952 9,300(3) 61
Vice President, Cashier and
Assistant Secretary
[FN]
(1) See footnote (2) above under the caption entitled "Principal
Officers of the Company" as to the employment history of
Mr. Baker.
(2) See footnote (4) above under the caption entitled "Principal
Officers of the Company" as to the employment history of Mr.
Seasock.
(3) Includes 5,960 shares held jointly with his spouse; and 3,340
shares held jointly with various relatives.
Section 16(a) of the Exchange Act, as amended, requires the Company's officers
and directors, and persons who own more than 10.0 percent of the registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the SEC. Officers, directors and persons who own more
than 10.0 percent of the Company's stock are required by the SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Form 5 was required for
any of those persons, the Company believes that during the period January 1,
1995, through December 31, 1995, its officers and directors were in
compliance with all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for services in
all capacities to the Company and Community Bank for the fiscal years ended
December 31, 1995, 1994 and 1993, to the present and former President and CEO of
the Company and Community Bank. No other officers' total annual salary and
bonus exceeded $100,000 during the fiscal years reported:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
Other
Name and Annual Restricted All Other
Principal Compens- Stock Option LTIP Compensa-
Position Year Salary($) Bonus($) ation($)(1) Award(s) /SARs Payouts tion($)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David L. Baker 1995 84,666 6,000 0 0 0 0 1,379(2)
President and CEO
Gerald B. 1995 31,785 0 0 0 0 0 207,472(4)
Franceski(3) 96,374 26,500 4,020(2)
93,044 30,000 4,131(2)
- - ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) The amount of perquisites and other personal benefits was less than 10.0
percent of the salary and bonus reported, and, therefore, need not be
presented.
(2) Represents the contribution Community Bank made on behalf of Messrs. Baker
and Franceski pursuant to the profit sharing plan.
(3) The Company and Community Bank terminated the employment agreement with Mr.
Franceski on April 26, 1995.
(4) Represents the lump-sum payment at termination required by the employment
agreement with Mr. Franceski.
</FN>
</TABLE>
PENSION PLAN
The Company has a profit sharing plan ("Plan"), which covers all employees who
have completed 1,000 hours of service, attained 21 years of age and have been
employed by the Company for at least one year. The entry date of an employee
into the Plan is January 1 of the year following the satisfaction of the
eligibility requirements. Normal retirement age is sixty-five (65). The normal
retirement benefit is the accumulated account balance of annual contributions,
investment income and forfeitures. The annual contribution is determined by the
Board of Directors each year. Contributions are allocated to each participant
based on a pro-rata share of compensation covered under the Plan. Investment
income is allocated to each participant based on a pro-rata share of the account
balances accumulated at the beginning of the year. Forfeitures are allocated to
each participant based on a pro-rata share of compensation covered under the
Plan. If a participant separates from service prior to retirement, the
participant will be entitled to a portion of the profit sharing account based
on years of service according to the following schedule:
Years of Service Vested Interest
---------------- ---------------
Less than 1 0%
1 10
2 20
3 30
4 40
5 60
6 80
7 or more 100%
A participant is always 100.0 percent vested in pension plan transferred
balances.
During 1995, $113,728 was allocated among the participants' accounts of the
Plan. The amount contributed by Community Bank in 1995 to the Plan for Mr.
Franceski, the then President and CEO of the Company was $3,000. Mr. Franceski
had sixteen (16) years of credited service under the Plan. The amount
contributed by Community Bank in 1995 to the Plan for Mr. Baker, the President
and CEO of the Company was $4,296. Mr. Baker had nine (9) years of credited
service under the Plan.
COMPENSATION OF DIRECTORS
During 1995, Messrs. Franceski and Baker, officers of the Company and Community
Bank, sat on the Company's and Community Bank's Board of Directors and various
committees of the Company and Community Bank. Messrs. Baker and Franceski
received no fees for their services on such committees. Messr. Franceski
received $620 in fees for his services as a director on the Company's Board and
no fees for his services on Community Bank's Board. Messr. Baker received no
fees for his services on the Company's or Community Bank's Board.
Except for Mr. Farber, members of Community Bank's Board of Directors received
a fee of $800 per month. Mr. Farber, as the Chairman of Community Bank,
received a fee of $1,300 per month. Aggregate directors' fees paid by Community
Bank in 1995 were $140,400. All members of the Company's Board of Directors,
including Mr. Farber, the Chairman of the Company, received a fee of $400 per
quarter. Aggregate directors' fees paid by the Company in 1995 were $24,520.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Company is responsible for the governance of the
Company and its subsidiary, Community Bank. In fulfilling its fiduciary duties,
the Board of Directors acts in the best interests of the Company's stockholders,
customers and the communities served by the Company and Community Bank. To
accomplish the strategic goals and objectives of the Company, the Board of
Directors engages competent persons who undertake to accomplish these objectives
with integrity and in a cost-effective manner. The compensation of these
individuals is part of the Board of Directors' fulfillment of its duties to
accomplish the Company's strategic mission. Community Bank provides
compensation to the employees of the Company and Community Bank.
The fundamental philosophy of the Company's and Community Bank's compensation
program is to offer competitive compensation opportunities for all employees
based on the individual's contribution and personal performance. The
compensation program is administered by the Executive Compensation Committee
("Committee") comprised of four outside directors, and a member of Community
Bank's Board of Directors listed in the section "Executive Officers," thereto.
The objectives of the Committee are to establish a fair compensation policy to
govern executive officers' base salaries and incentive plans to attract and
motivate competent, dedicated and ambitious managers whose efforts will enhance
the products and services of the Company, the results of which will be
improved profitability, increased dividends to our stockholders and
subsequent appreciation in the market value of our stock.
The compensation of the Company's and Community Bank's top executives is
reviewed and approved annually by the Board of Directors. The top executives
whose compensation is determined by the Committee include the CEO and all other
Vice Presidents. As guidance for review in determining base salaries, the
Committee uses information composed of a Pennsylvania bank peer group. This
bank peer group is different than the peer group utilized for the performance
chart. Pennsylvania peer group banks have been utilized because of common
industry issues and competition for the same executive talent group.
CEO COMPENSATION
The Board of Directors has determined that the CEO's 1995 compensation of
$90,666 (which represents Mr. Baker's annual salary and bonus) was appropriate
in light of the Company's 1995 performance accomplishments. There is no direct
correlation, however, between the President and CEO's compensation and the
Company's performance, nor is there any weight given by the Committee to any
specific individual criteria. Such 1995 compensation was based on the
Committee's subjective determination after review of all information that it
deemed relevant.
EXECUTIVE OFFICERS
Compensation for Community Bank's executive officers is determined by the
Committee based on its subjective analysis of the individual's contribution to
the Company's strategic goals and objectives. In determining whether strategic
goals have been achieved, the Board of Directors considers, among numerous other
factors, the following: the Company's performance as measured by earnings,
revenues, return on assets, return on equity, market share, total assets and
nonperforming loans. Although the performance and increases in compensation are
measured in light of these factors, there is no direct correlation between any
specific criterion and the employees compensation, nor is there any specific
weight provided to any such criteria in the Committee's analysis. The
determination by the Committee is subjective after review of all information,
including the above, it deems relevant.
Total compensation opportunities available to the employees of Community Bank
are influenced by general labor market conditions, the specific responsibilities
of the individual and the individual's contributions to the Company's success.
Individuals are reviewed annually on a calendar year basis. Community Bank
strives to offer compensation that is competitive with that offered by employers
of comparable size in the banking industry. Through these compensation
policies, the Company strives to meet its strategic goals and objectives to its
constituents and provide compensation that is fair and meaningful to its
employees.
Submitted by the Executive Compensation Committee
-------------------------------------------------
William F. Farber, Sr.
Michael T. Goskowski
John P. Kameen
Joseph P. Moore, Jr.
Judd B. Fitze
Stock Performance Graph and Table
- - ---------------------------------
The following graph and table compare the cumulative stockholder return on the
Company's Common Stock during the period January 1, 1990, through and including
December 31, 1995, with (I) a Peer Group Index(1) and (II) the Standard & Poor's
500 Index. The comparison assumes $100 was invested on January 1, 1990, in the
Company's Common Stock and in each of the below indices and assumes further the
reinvestment of dividends into the applicable securities.
<TABLE>
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
(In Dollars)
<S> <C> <C> <C> <C> <C> <C>
Peer Group Index(1) $100.00 $ 95.06 $105.90 $146.10 $177.51 $202.19
Comm Bancorp, Inc. 100.00 88.59 90.73 112.13 158.80 169.26
Standard & Poor's 500 Index $100.00 $126.31 $131.95 $141.25 $139.08 $186.52
<FN>
(1) The Peer Group Index, for which information appears above, includes the
following companies:
CNB Financial Corporation, Citizens & Northern Corporation, Heritage
Bancorp, Inc., Penn Security Bank & Trust Company, Penns Woods Bancorp,
Inc., Pioneer American Holding Company and Wayne Bank. These companies were
selected based on four criteria: total assets between $150 million and $600
million; market capitalization greater than $20 million; headquarters
located in Pennsylvania; and not quoted on the NASDAQ Stock Market.
</FN>
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Owners
The following table sets forth, as of February 7, 1996, the name and address of
each person who owns of record or who is known by the Board of Directors to be
the beneficial owner of more than 5.0 percent of the outstanding Common Stock,
the number of shares beneficially owned by such person and the percentage of the
outstanding Common Stock so owned.
Percent of Outstanding
Shares Beneficially Common Stock
Name and Address Owned(1) Beneficially Owned
- - ---------------- ------------------- ----------------------
Joseph P. Moore, Jr. 72,420(2) 9.88%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 62,440 8.51%
Crystal Lake Road
R.R. 1, Box 1281
Carbondale, PA 18407
Gerald B. Franceski 51,350(3) 7.00%
Lewis Lake, P.O. Box 88
Union Dale, PA 18470
Robert T. Seamans 43,120(4) 5.88%
P.O. Box 462
Factoryville, PA 18419
[FN]
(1) The securities "beneficially owned" by an individual are
determined in accordance with the definitions of "beneficial
ownership" set forth in the General Rules and Regulations of the
SEC and may include securities owned by or for the individual's
spouse and minor children and any other relative who has the same
home, as well as securities to which the individual has or shares
voting or investment power or has the right to acquire beneficial
ownership within sixty (60) days after February 7, 1996.
Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Includes 10,080 shares held individually; 2,100 shares held in
the Moore Motors, Inc. Profit Sharing Plan, an automobile
dealership of which he is President; and 60,240 shares held
beneficially by Moore & Company, which are held in trust for his
various relatives.
(3) Includes 34,350 shares held jointly with his spouse; and 17,000
shares held jointly in various combinations with his spouse,
sons, brother, sister and aunt.
(4) Includes 42,675 shares held individually; and 445 shares held
individually by his spouse.
Beneficial Ownership by Executive Officers and Directors
The following table sets forth as of February 7, 1996, the amount and percentage
of the Common Stock beneficially owned by each director and all officers and
directors of the Company as a group.
NAME OF INDIVIDUAL AMOUNT AND NATURE OF PERCENT
OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1)(2)(3) OF CLASS(4)
- - -------------------- ----------------------------- -----------
David L. Baker 3,768(5) ----
Donald R. Edwards, Sr. 17,272(6) 2.36%
William F. Farber, Sr. 62,440 8.51%
Judd B. Fitze 3,400(7) ----
Michael T. Goskowski 7,032(8) ----
John P. Kameen 6,760(9) ----
William B. Lopatofsky 8,470(9) 1.15%
J. Robert McDonnell 10,848(9) 1.48%
Joseph P. Moore, Jr. 72,420(10) 9.88%
Scott A. Seasock 915(11) ----
Thomas E. Sheridan 588(9) ----
Eric Stephens 2,320(12) ----
All Executive Officers and Directors
of the Company as a Group
(9 Directors, 6 Officers,
12 Persons in Total) 196,233 26.76%
[FN]
(1) Does not include any Common Stock held in fiduciary accounts
under the control of the Trust Department of Community Bank.
(2) See footnote (1) under the above caption entitled "Principal
Owners" for the definition of "beneficial ownership."
(3) Information furnished by the directors and the Company.
(4) Less than 1.0 percent unless otherwise indicated.
(5) See footnote (3) under the above caption entitled "Principal
Officers of the Company."
(6) Includes 14,940 shares held individually; 1,860 shares held
individually by his spouse; 300 shares held jointly with his
daughter; 100 shares held jointly by his spouse and daughter; 36
shares held under his IRA; and 36 shares held under his spouse's
IRA.
(7) Includes 400 shares held under his IRA; and 3,000 shares held
jointly with his spouse.
(8) See footnote (7) under the above caption entitled
"Principal Officers of the Company."
(9) Held jointly with his spouse.
(10) See footnote (2) under the above caption entitled "Principal
Owners."
(11) See footnote (5) under the above caption entitled "Principal
Officers of the Company."
(12) Includes 1,780 shares held individually; 300 shares held
individually by his spouse; and 240 shares held individually by
his children.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described in the paragraphs below, there have been no material
transactions between the Company and Community Bank, nor any material
transactions proposed, with any director or executive officer of the Company and
Community Bank, or any associate of the foregoing persons. The Company and
Community Bank have had financial transactions in the ordinary course of
business with directors and officers of the Company and Community Bank. The
Company and Community Bank intend to continue to have banking and financial
transactions in the ordinary course of business with directors and officers
of the Company and Community Bank and their associates on substantially the
same terms, including interest rates and collateral, as those prevailing
from time to time for comparable transactions with other persons.
Total loans outstanding from Community Bank as of December 31, 1995, to the
Company's and Community Bank's executive officers and directors as a group and
members of their immediate families and companies in which they had an ownership
interest of 10.0 percent or more was $3,157,222 or approximately 11.3 percent of
the total equity capital of the Company. Loans to such persons were made in the
ordinary course of business and were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Community Bank leases its Carbondale branch office from William F. Farber, Sr.,
the Chairman of the Boards of Directors of the Company and Community Bank. The
lease, which commenced in October 1988, expires in 1998 and contains an option
that allows Community Bank to purchase the property at fair market value or
renew the lease for two additional terms of five years each. In 1995, lease
payments to Mr. Farber were $6,020 per month or $72,240 annually.
Community Bank has extended credit to Joseph P. Moore, Jr., a director of the
Company and Community Bank, who is President of Elk Mountain Ski Resort, Inc.
("Elk Mountain"). As of December 31, 1995, the Bank had outstanding balances
with Elk Mountain of $540.0 thousand, secured by a first lien mortgage on all
real property and equipment, and of $750.0 thousand, secured by a second lien
mortgage on all real property and equipment. The interest rate on these
mortgages was, and is, Community Bank's prime rate of interest.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The Company's consolidated financial statements and notes
thereto as well as the applicable reports of the independent certified public
accountants are filed at Exhibit 13 hereto and are incorporated in their
entirety by reference under this Item 14(a)1.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. The exhibits required by Item 601 of Regulation S-K are included
under Item 14(c) hereto.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the quarter ended
December 31, 1995.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- - -------------------------- ----------------------
2 None.
3 Bylaws of the Company, amended as
of December 31, 1995.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended
December 31, 1995.
16 None.
18 None.
21 List of Subsidiaries of the
Company.
22 None.
23 None.
24 None.
27 None.
28 None.
Comm Bancorp, Inc.
521 Main Street
Forest City, Pennsylvania 18421
Telephone: (717) 785-3181
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
COMM BANCORP, INC.
(Registrant)
BY:/s/ David L. Baker March 10, 1996
---------------------------------
David L. Baker, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Capacity Date
/s/ David L. Baker March 10, 1996
- - ---------------------------------- ---
David L. Baker, President and
Chief Executive Officer/Director
/s/ Donald R. Edwards, Sr. March 10, 1996
- - ---------------------------------- ---
Donald R. Edwards, Sr., Director
/s/ William F. Farber, Sr. March 10, 1996
- - ---------------------------------- ---
William F. Farber, Sr.,
Chairman of the Board/Director
/s/ Judd B. Fitze March 10, 1996
- - ---------------------------------- ---
Judd B. Fitze, Director
/s/ Michael T. Goskowski March 10, 1996
- - ---------------------------------- ---
Michael T. Goskowski,
Secretary/Director
/s/ John P. Kameen March 10, 1996
- - ---------------------------------- ---
John P. Kameen, Director
/s/ William B. Lopatofsky March 10, 1996
- - ---------------------------------- ---
William B. Lopatofsky, Director
/s/ J. Robert McDonnell March 10, 1996
- - ---------------------------------- ---
J. Robert McDonnell,
Vice President/Director
/s/ Joseph P. Moore, Jr. March 10, 1996
- - ---------------------------------- ---
Joseph P. Moore, Jr., Director
/s/ Scott A. Seasock March 10, 1996
- - ---------------------------------- ---
Scott A. Seasock, Chief Financial
Officer (Principal Financial Officer)
/s/ Eric Stephens March 10, 1996
- - ---------------------------------- ---
Eric Stephens, Director
EXHIBIT INDEX
Item Number Description Page
- - ----------- ----------- ----
3 Bylaws of the Company, amended as of
December 31, 1995 38
13 Portions of the Annual Report to
Stockholders for the
Fiscal Year Ended December 31, 1995 52
21 List of Subsidiaries of the Company 161
EXHIBIT 3
BYLAWS OF THE COMPANY, AMENDED DECEMBER 31, 1995
BYLAWS
------
OF
--
COMM BANCORP, INC.
------------------
These Bylaws are supplemental to the Pennsylvania Business Corporation Law and
other applicable provisions of law, as the same shall from time to time be in
effect.
ARTICLE I. MEETINGS OF SHAREHOLDERS.
- - ---------- -------------------------
Section 101. Place of Meetings. All meetings of the shareholders shall be
- - ------------ ------------------
hed at such place or places, within or without the Commonwealth of Pennsylvania,
as shall be determined by the Board of Directors from time to time.
Section 102. Annual Meetings. The annual meeting of the shareholders for the
- - ------------ ----------------
election of Directors and the transaction of such other business as may properly
come before the meeting shall be held at such date or hour as may be fixed by
the Board of Directors. Any business which is a proper subject for shareholder
action may be transacted at the annual meeting, irrespective of whether the
notice of said meeting contains any reference thereto, except as otherwise
provided by applicable law.
Section 103. Special Meetings. Special meetings of the shareholders may be
- - ------------ -----------------
called at any time by the Board of Directors, or by any three or more
shareholders owning, in the aggregate, not less than ten percent of the stock of
this association.
Section 104. Conduct of Shareholders' Meetings. The Chief Executive Officer
- - ------------ ----------------------------------
shall preside at all shareholders' meetings. In the absence of the Chief
Executive Officer, the Chairman of the Board shall preside or, in his/her
absence, any Officer designated by the Board of Directors. The Officer
presiding over the shareholders' meeting may establish such rules and
regulations for the conduct of the meeting as he/she may deem to be reasonably
necessary or desirable for the orderly and expeditious conduct of the meeting.
Unless the Officer presiding over the shareholders' meeting otherwise requires,
shareholders need not vote by ballot on any question.
ARTICLE II. DIRECTORS AND BOARD MEETINGS.
- - ----------- -----------------------------
Section 201. Management by Board of Directors. The business and affairs of
- - ------------ ---------------------------------
the Corporation shall be managed by its Board of Directors. The Board of
Directors may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute, regulation, the Articles of Incorporation
or these Bylaws directed or required to be exercised or done by the
shareholders.
Section 202. Nomination for Directors. Nominations for directors to be
- - ------------ -------------------------
elected at an annual meeting of shareholders must be submitted to the Secretary
of the Corporation in writing not later than the close of business on the
sixtieth (60th) day immediately preceding the date of the meeting. Such
notification shall contain the following information to the extent known to the
notifying shareholder: (a) name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the number of shares owned in
the name of each proposed nominee; (d) the total number of shares of capital
stock of the Corporation that will be voted for each proposed nominee; (e) the
name and residence address of the notifying shareholder; and (f) the number of
shares of capital stock of the Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith shall be disregarded by the
Presiding Officer of the meeting, and upon his/her instruction, the vote
tellers shall disregard all votes cast for each such nominee. In the event
the same person is nominated by more than one shareholder, the nomination shall
be honored, and all shares of capital stock of the Corporation shall be counted
if at least one nomination for that person complies herewith.
Section 203. Directors Must be Shareholders. Every Director must be a
- - ------------ -------------------------------
shareholder of the Corporation and shall own in his/her own right the number of
shares (if any) required by law in order to qualify as such Director. Any
Director shall forthwith cease to be a Director when he/she no longer holds such
shares, which fact shall be reported to the Board of Directors by the Secretary,
whereupon the Board of Directors shall declare the seat of such Directors
vacated.
Section 204. Resignations. Any Director may resign at any time. Such
- - ------------ -------------
resignation shall be in writing, but the acceptance thereof shall not be
necessary to make it effective.
Section 205. Compensation of Directors. No Director shall be entitled to any
salary as such; but the Board of Directors may fix, from time to time, a
reasonable annual fee for acting as a Director and a reasonable fee to be paid
each Director for his/her services in attending meetings of the Board and
meetings of committees appointed by the Board. The Corporation may reimburse
Directors for expenses related to their duties as a member of the Board.
Section 206. Regular Meetings. Regular meetings of the Board of Directors
- - ------------ -----------------
shall be held on such day, at such hour, and at such place, consistent with
applicable law, as the Board shall from time to time designate or as may be
designated in any notice from the Secretary calling the meeting. The Board of
Directors shall meet for reorganization at the first regular meeting following
the annual meeting of shareholders at which the Directors are elected. Notice
need not be given of regular meetings of the Board of Directors which are held
at the time and place designated by the Board of Directors. If a regular
meeting is not to be held at the time and place designated by the Board of
Directors, notice of such meeting, which need not specify the business to be
transacted thereat and which may be either verbal or in writing, shall be
given by the Secretary to each member of the Board at least twenty-four
(24) hours before the time of the meeting.
A majority of the members of the Board of Directors shall constitute a quorum
for the transaction of business. If at the time fixed for the meeting,
including the meeting to organize the new Board following the annual meeting of
shareholders, a quorum is not present, the directors in attendance may adjourn
the meeting from time to time until a quorum is obtained.
Except as otherwise provided herein, a majority of those directors present and
voting at any meeting of the Board of Directors, shall decide each matter
considered. A director cannot vote by proxy, or otherwise act by proxy at a
meeting of the Board of Directors.
Section 207. Special Meetings. Special meetings of the Board of Directors may
- - ------------ -----------------
be called by the Chairman of the Board, the President or at the request of three
(3) or more members of the Board of Directors. A special meeting of the Board
of Directors shall be deemed to be any meeting other than the regular meeting of
the Board of Directors. Notice of the time and place of every special meeting,
which need not specify the business to be transacted thereat and which may be
either verbal or in writing, shall be given by the Secretary to each member of
the Board at least twenty-four (24) hours before the time of such meeting
excepting the Organization Meeting following the election of Directors.
Section 208. Chairman of the Board. The Board of Directors shall elect a
- - ------------ ----------------------
Chairman of the Board at the first regular meeting of the Board following each
annual meeting of shareholders at which Directors are elected. The Chairman of
the Board shall be a member of the Board of Directors and shall preside at the
meetings of the Board and perform such other duties as may be prescribed by the
Board of Directors.
Section 209. Vice President of the Board. The Board of Directors may elect
- - ------------ ----------------------------
one (1) or more Vice Presidents of the Board as the Board of Directors may from
time to time deem advisable. The Vice President of the Board shall have such
duties as are prescribed by the Board of Directors or the Chairman of the Board.
Section 210. Reports and Records. The reports of Officers and Committees and
- - ------------ --------------------
the records of the proceedings of all Committees shall be filed with the
Secretary of the Corporation and presented to the Board of Directors, if
practicable, at its next regular meeting. The Board of Directors shall keep
complete records of its proceedings in a minute book kept for that purpose.
When a Director shall request it, the vote of such Director upon a particular
question shall be recorded in the minutes.
ARTICLE III. COMMITTEES.
- - ------------ -----------
Section 301. Committees. The following two (2) Committees of the Board of
- - ------------ -----------
Directors shall be established by the Board of Directors in addition to any
other Committee the Board of Directors may in its discretion establish:
Executive, Discount Committees.
Section 302. Executive Committee. The Executive Committee shall consist of
- - ------------ --------------------
any five (5) or more Directors. A majority of the members of the Executive
Committee shall constitute a quorum, and actions of a majority of those present
at a meeting at which a quorum is present shall be actions of the Committee.
Meetings of the Committee may be called at any time by the Chairman or Secretary
of the Committee, and shall be called whenever two (2) or more members of the
Committee so request in writing. The Executive Committee shall have and
exercise the authority of the Board of Directors in the management of the
business of the Corporation between the dates of regular meetings of the Board.
Section 303. Appointment of Committee Members. The Board of Directors shall
- - ------------ ---------------------------------
elect the members of the Committees and the Chairman and Vice Chairman of each
such Committee to serve until the next annual meeting of shareholders. The
President shall appoint or shall establish a method of appointing, subject to
the approval of the Board of Directors, the members of any other Committees
established by the Board of Directors, and the Chairman and Vice Chairman of
such Committee, to serve until the next annual meeting of shareholders.
The Board of Directors may appoint, from time to time, other committees, for
such purposes and with such powers as the Board may determine.
Section 304. Organization and Proceedings. Each Committee of the Board of
- - ------------ -----------------------------
Directors shall effect its own organization by the appointment of a Secretary
and such other Officers, except the Chairman and Vice Chairman, as it may deem
necessary. A record of proceedings of all Committees shall be kept by the
Secretary of such Committee and filed and presented as provided in Section 210
of these Bylaws.
SECTION IV. OFFICERS.
- - ----------- ---------
Section 401. Officers. The Officers of the Corporation shall be a President,
- - ------------ ---------
one (1) or more Vice Presidents, a Secretary, a Treasurer, and such other
Officers and Assistant Officers as the Board of Directors may from time to time
deem advisable. Except for the President, Secretary, and Treasurer, the Board
may refrain from filling any of the said offices at any time and from time to
time. The same individual may hold any two (2) or more offices except both the
offices of President and Treasurer. The following Officers shall be elected by
the Board of Directors at the time, in the manner and for such terms as the
Board of Directors from time to time shall determine: President, Executive Vice
President, Senior Vice President, Administrative Vice President, Secretary, and
Treasurer. The President may, subject to change by the Board of Directors,
appoint such Officers and Assistant Officers as he/she may deem advisable
provided such Officers or Assistant Officers have a title not higher than Vice
President, who shall hold office for such periods as the President shall
determine. Any Officer may be removed at any time, with or without
cause, and regardless of the term for which such Officer was elected, but
without prejudice to any contract right of such Officer. Each Officer shall
hold his office for the current year for which he was elected or appointed by
the Board unless he shall resign, becomes disqualified, or be removed at the
pleasure of the Board of Directors.
Section 402. President. The President shall have general supervision of all of
- - ------------ ----------
the departments and business of the Corporation and shall prescribe the duties
of the other Officers and Employees and see to the proper performance thereof.
The President shall be responsible for having all orders and resolutions of the
Board of Directors carried into effect. The President shall execute on behalf
of the Corporation and may affix or cause to be affixed a seal to all authorized
documents and instruments requiring such execution, except to the extent that
signing and execution thereof shall have been delegated to some other Officer or
Agent of the Corporation by the Board of Directors or by the President. The
President shall be a member of the Board of Directors. In the absence or
disability of the Chairman of the Board or his/her refusal to act, the President
shall preside at meetings of the Board. In general, the President shall perform
all the duties and exercise all the powers and authorities incident to such
office or as prescribed by the Board of Directors.
Section 403. Vice Presidents. The Vice Presidents shall perform such duties,
- - ------------ ----------------
do such acts and be subject to such supervision as may be prescribed by the
Board of Directors or the President. In the event of the absence or disability
of the President or his/her refusal to act, the Vice Presidents, in the order of
their rank, and within the same rank in the order of their authority, shall
perform the duties and have the powers and authorities of the President, except
to the extent inconsistent with applicable law.
Section 404. Secretary. The Secretary shall act under the supervision of the
- - ------------ ----------
President or such other Officers as the President may designate. Unless a
designation to the contrary is made at a meeting, the Secretary shall attend all
meetings of the Board of Directors and all meetings of the shareholders and
record all of the proceedings of such meetings in a book to be kept for that
purpose, and shall perform like duties for the standing Committees when required
by these Bylaws or otherwise. The Secretary shall give, or cause to be given,
notice of all meetings of the shareholders and of the Board of Directors. The
Secretary shall keep a seal of the Corporation, and, when authorized by the
Board of Directors or the President, cause it to be affixed to any documents and
instruments requiring it. The Secretary shall perform such other duties as may
be prescribed by the Board of Directors, President, or such other Supervising
Officer as the President may designate.
Section 405. Treasurer. The Treasurer shall act under the supervision of the
- - ------------ ----------
President or such other Officer as the President may designate. The Treasurer
shall have custody of the Corporation's funds and such other duties as may be
prescribed by the Board of Directors, President or such other Supervising
Officer as the President may designate.
Section 406. Assistant Officers. Unless otherwise provided by the Board of
- - ------------ -------------------
Directors, each Assistant Officer shall perform such duties as shall be
prescribed by the Board of Directors, the President or the Officer to whom
he/she is an Assistant. In the event of the absence or disability of an Officer
or his/her refusal to act, his/her Assistant Officer shall, in the order of
their rank, and within the same rank in the order of their seniority, have the
powers and authorities of such Officer.
Section 407. Compensation. Unless otherwise provided by the Board of
- - ------------ -------------
Directors, the salaries and compensation of all Officers and Assistant Officers,
except the President shall be fixed by or in the manner designated by the
President.
Section 408. General Powers. The Officers are authorized to do and perform
- - ------------ ---------------
such corporate acts as are necessary in the carrying on of the business of the
Corporation, subject always to the direction of the Board of Directors.
ARTICLE V. SHARES OF CAPITAL STOCK.
- - ---------- ------------------------
Section 501. Authority to Sign Share Certificates. Every share certificate of
- - ------------ -------------------------------------
the Corporation shall be signed by the Secretary or Assistant Secretary and
President, Chairman of the Board or Senior Vice President-Chief Financial
Officer of the Corporation. Certificates may be signed by a facsimile signature
of the Secretary or Assistant Secretary and President, Chairman of the Board or
Senior Vice President-Chief Financial Officer of the Corporation.
Section 502. Lost or Destroyed Certificates. Any person claiming a share
- - ------------ -------------------------------
certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if such person shall have: (a) requested such
replacement certificate before the Corporation has notice that the shares have
been acquired by a bona fide purchaser; (b) provided the Corporation with an
indemnity agreement satisfactory in form and substance to the Board of
Directors, or the President or the Secretary; and (c) satisfied any other
reasonable requirements (including providing an affidavit and
a surety bond) fixed by the Board of Directors, or the President or the
Secretary.
ARTICLE VI. GENERAL.
- - ----------- --------
Section 601. Fiscal Year. The fiscal year of the Corporation shall begin on
- - ------------ ------------
the first (1st) day of January in each year and end on the thirty-first (31st)
day of December in each year.
Section 602. Record Date. The Board of Directors may fix any time whatsoever
- - ------------ ------------
(whether or not the same is more than fifty (50) days) prior to the date of any
meeting of shareholders, or the date for the payment of any dividend or
distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or will go into effect,
as a record date for the determination of the shareholders entitled to notice
of, or to vote at, any such meetings, or entitled to receive payment of any such
dividend or distribution, or to receive any such allotment of rights, or to
exercise the rights in respect to any such change, conversion or exchange of
shares.
Section 603. Absentee Participation in Meetings. One (1) or more Directors
- - ------------ -----------------------------------
may participate in a meeting of the Board of Directors, or of a Committee of the
Board, by means of a conference telephone or similar communications equipment,
by means of which all persons participating in the meeting can hear each other.
Section 604. Emergency Bylaws. In the event of any emergency resulting from a
- - ------------ -----------------
nuclear attack or similar disaster, and during the continuance of such
emergency, the following Bylaw provisions shall be in effect, notwithstanding
any other provisions of the Bylaws:
(a) A meeting of the Board of Directors or of any Committee thereof may be
called by any Officer or Director upon one (1) hour's notice to all persons
entitled to notice whom, in the sole judgment of the notifier, it is feasible to
notify;
(b) The Director or Directors in attendance at the meeting of the Board of
Directors or of any Committee thereof shall constitute a quorum; and
(c) These Bylaws may be amended or repealed, in whole or in part, by a majority
vote of the Directors attending any meeting of the Board of Directors, provided
such amendment or repeal shall only be effective for the duration of such
emergency.
Section 605. Severability. If any provision of these Bylaws is illegal or
- - ------------ -------------
unenforceable as such, such illegality or unenforceability shall not affect any
other provision of these Bylaws and such other provisions shall continue in full
force and effect.
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND EMPLOYEES.
- - ------------ ------------------------------------------
Section 701. The Corporation shall indemnify any officer and/or employee, or
- - ------------
any former officer and/or employee, who was or is a party to, or is threatened
to be made a party to, or who is called to be a witness in connection with, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that such person is or was an
officer and/or employee of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
Section 702. The Corporation shall indemnify any officer and/or employee, who
- - ------------
was or is a party to, or is threatened to be made a party to, or who is called
as a witness in connection with, any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, and/or
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against amounts paid in settlement and expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of, or serving as a witness in, such action or suit if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation and except that no
indemnification shall be made in respect of any such claim, issue or matter as
to which such person shall have been adjudged to be liable for misconduct
in the performance of his duty to the Corporation.
Section 703. Except as may be otherwise ordered by a court, there shall be a
- - ------------
presumption that any officer and/or employee is entitled to indemnification as
provided in Sections 701 and 702 of this Article unless either a majority of the
directors who are not involved in such proceedings ("disinterested directors")
or, if there are less than three disinterested directors, then the holders of
one-third of the outstanding shares of the Corporation determine that the person
is not entitled to such presumption by certifying such determination in writing
to the Secretary of the Corporation. In such event the disinterested
director(s) or, in the event of certification by shareholders, the Secretary of
the Corporation shall request of independent counsel, who may be the outside
general counsel of the Corporation, a written opinion as to whether or not the
parties involved are entitled to indemnification under Sections 701 and 702 of
this Article.
Section 704. Expenses incurred by an officer and/or employee in defending a
- - ------------
civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized in the manner provided under Section 703 of this Article upon receipt
of an undertaking by or on behalf of the officer and/or employee to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation.
Section 705. The indemnification provided by this Article shall not be deemed
- - ------------
exclusive of any other rights to which a person seeking indemnification may be
entitled under any agreement, vote of shareholders or disinterested directors,
or otherwise, both as to action in his official capacity while serving as an
officer and/or employee and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be an officer and/or
employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 706. The Corporation may create a fund of any nature, which may, but
- - ------------
need not be, under the control of a trustee, or otherwise secure or insure in
any manner its indemnification obligations arising under this Article.
Section 707. The Corporation shall have the power to purchase and maintain
- - ------------
insurance on behalf of any person who is or was an officer and/or employee of
the Corporation, or is or was serving at the request of the Corporation as an
officer and/or employee of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article.
Section 708. Indemnification under this Article shall not be made in any case
- - ------------
where the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
ARTICLE VIII. INDEMNIFICATION OF DIRECTORS.
- - ------------- -----------------------------
Section 801. A director of this Corporation shall stand in a fiduciary
- - ------------
relation to the Corporation and shall perform his duties as a director,
including his duties as a member of any committee of the board upon which he may
serve, in good faith, in a manner he reasonably believes to be in the best
interests of the Corporation, and with such care, including reasonable inquiry,
skill and diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director shall be entitled to rely
in good faith on information, opinions, reports or statements, including
financial statements and other financial data, in each case prepared or
presented by any of the following:
(a) One or more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters presented.
(b) Counsel, public accountants or other persons as to matters which the
director reasonably believes to be within the professional or expert competence
of such person.
(c) A committee of the board upon which he does not serve, duly designated in
accordance with law, as to matters within its designated authority, which
committee the director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause his reliance to be
unwarranted.
Section 802. In discharging the duties of their respective positions, the
- - ------------
board of directors, committees of the board, and individual directors may, in
considering the best interests of the Corporation, consider the effects of any
action upon employees, upon suppliers and customers of the Corporation and upon
communities in which offices or other establishments of the Corporation are
located, and all other pertinent factors. The consideration of those factors
shall not constitute a violation of Section 801.
Section 803. Absent a breach of fiduciary duty, lack of good faith or self-
- - ------------
dealing, actions taken as a director or any failure to take any action shall be
presumed to be in the best interests of the Corporation.
Section 804. A director of this Corporation shall not be personally liable for
- - ------------
monetary damages as such for any action taken or for any failure to take any
action, unless:
(a) the director has breached or failed to perform the duties of his office
under the provisions of Sections 801 and 802, and
(b) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Section 805. The provisions of Section 804 shall not apply to:
- - ------------
(a) the responsibility or liability of a director pursuant to a criminal
statute, or
(b) the liability of a director for the payment of taxes pursuant to local,
state or federal law.
Section 806. The Corporation shall indemnify any director, or any former
- - ------------
director who was or is a party to, or is threatened to be made a party to, or
who is called to be a witness in connection with, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgment, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Section 807. The Corporation shall indemnify any director who was or is a
- - ------------
party to, or is threatened to be made a party to, or who is called as a witness
in connection with, any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer and/or employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against amounts paid in settlement and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of, or serving as a witness in, such action or suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation and except that no
indemnification shall be made in respect of any such claim, issue or matter as
to which such person shall have been adjudged to be liable for misconduct in the
performance of his duty to the Corporation.
Section 808. Except as may be otherwise ordered by a court, there shall be a
- - ------------
presumption that any director is entitled to indemnification as provided in
Sections 806 and 807 of this Article unless either a majority of the directors
who are not involved in such proceedings ("disinterested directors") or, if
there are less than three disinterested directors, then the holders of one-third
of the outstanding shares of the Corporation determine that the person is not
entitled to such presumption by certifying such determination in writing to the
Secretary of the Corporation. In such event the disinterested director(s) or,
in the event of certification by shareholders, the Secretary of the Corporation
shall request of independent counsel, who may be the outside general counsel of
the Corporation, a written opinion as to whether or not the parties involved are
entitled to indemnification under Sections 806 and 807 of this Article.
Section 809. Expenses incurred by a director in defending a civil or criminal
- - ------------
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding as authorized in the manner
provided under Section 808 of this Article upon receipt of an undertaking by or
on behalf of the director, officer and/or employee to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized by this Article.
Section 810. The indemnification provided by this Article shall not be deemed
- - ------------
exclusive of any other rights to which a person seeking indemnification may be
entitled under any agreement, vote of shareholders or disinterested directors,
or otherwise, both as to action in his official capacity while serving as a
director and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 811. The Corporation may create a fund of any nature, which may, but
- - ------------
need not be, under the control of a trustee, or otherwise secure or insure in
any manner its indemnification obligations arising under this Article.
Section 812. The Corporation shall have the power to purchase and maintain
- - ------------
insurance on behalf of any person who is or was a director or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article.
Section 813. Indemnification under this Article shall not be made in any case
- - ------------
where the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
ARTICLE IX. AMENDMENT OR REPEAL.
- - ----------- --------------------
Section 901. Amendment or Repeal by the Board of Directors. These Bylaws may
- - ------------
be amended or repealed, in whole or in part, by a majority vote of members of
the Board of Directors at any regular or special meeting of the Board duly
convened. Notice need not be given of the purpose of the meeting of the Board
of Directors at which the amendment or repeal is to be considered.
Section 902. Recording Amendments and Repeals. The text of all amendments and
- - ------------
repeals to these Bylaws shall be attached to the Bylaws with a notation of the
date and vote of such amendment or repeal.
ARTICLE X. APPROVAL OF AMENDED BYLAWS AND RECORD OF AMENDMENTS AND REPEALS.
- - ---------- ----------------------------------------------------------------
Section 1001. Approval and Effective Date. These Bylaws have been approved as
- - ------------- ----------------------------
the Bylaws of the Corporation this 15th day of June, 1983, and shall be effected
as of said date.
Section 1002. Amendments or Repeals.
- - ------------- ----------------------
Section Involved Date Amended or Repealed Approved By
- - ---------------- ------------------------ -----------
Article VII May 5, 1987 Shareholders
Article VIII May 5, 1987 Shareholders
Article IX (renumbered) May 5, 1987 Board of Directors
Article X (renumbered) May 5, 1987 Board of Directors
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
Comm Bancorp, Inc.
CONTENTS
INTRODUCTION MANAGEMENT'S DISCUSSION AND
ANALYSIS 1994 VERSUS 1993
54 Consolidated Financial Highlights
141 Overview
55 Dedication
142 Review of Financial Position
56 President's Message to Stockholders
149 Review of Financial Performance
58 Community Perspectives
61 Consolidated Selected Financial Data
DIRECTORS AND OFFICERS
154 Board of Directors and
Corporate Officers
MANAGEMENT'S DISCUSSION AND ANALYSIS
155 Advisory Boards
62 Overview
156 Officers
65 Review of Financial Position
157 Glossary of Terms
98 Review of Financial Performance
160 Stockholder Information
CONSOLIDATED FINANCIAL STATEMENTS
109 Report of Kronick Kalada Berdy & Company
Independent Auditors
110 Consolidated Statements of Income
111 Consolidated Balance Sheets
112 Consolidated Statements of Changes in
Stockholders' Equity
113 Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
114 Summary of significant accounting policies
120 Cash and cash equivalents
121 Investment securities
125 Loans and allowance for loan losses
128 Premises and equipment, net
128 Other assets
129 Deposits
129 Short-term borrowings
130 Long-term debt
131 Employee benefit plans
131 Commitments, concentrations and contingent
liabilities
133 Fair value of financial instruments
135 Income taxes
137 Parent Company financial statements
138 Regulatory matters
CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
______________________________________________________________________________________
<S> <C> <C> <C>
FINANCIAL POSITION:
Assets................................................... $350,948 $362,463 $339,007
Investment securities.................................... 108,706 152,566 145,400
Net loans................................................ 209,932 190,909 173,313
Deposits................................................. 317,099 316,169 297,235
Stockholders' equity..................................... $ 27,895 $ 22,689 $ 24,507
FINANCIAL PERFORMANCE:
Interest income.......................................... $ 26,467 $ 24,991 $ 24,094
Interest expense......................................... 14,994 12,942 12,000
Net interest income...................................... 11,473 12,049 12,094
Net income............................................... 200 3,325 4,150
Cash dividends declared.................................. $ 462 $ 455 $ 444
FINANCIAL RATIOS:
Return on average total assets........................... 0.06% 0.95% 1.30%
Return on average stockholders' equity................... 0.77 14.26 17.91
Tier I capital ratio..................................... 14.23 13.82 13.52
Total capital ratio...................................... 15.49 15.68 15.49
Leverage ratio........................................... 6.95 7.13 6.84
Allowance for loan losses to loans, net.................. 1.83% 1.84% 1.80%
PER SHARE DATA:
Net income............................................... $ 0.27 $ 4.53 $ 5.66
Cash dividends declared.................................. 0.63 0.62 0.61
Stockholders' equity..................................... $ 38.04 $ 30.94 $ 33.42
</TABLE>
Comm Bancorp, Inc. is a bank holding company
incorporated under the laws of Pennsylvania.
Headquartered in Forest City, Pennsylvania, Comm
Bancorp, Inc. serves four counties through ten
community banking offices. Each office interdependent
with the community offers a comprehensive array of
financial products and services to individuals,
businesses, not-for-profit organizations and
government entities.
DEDICATION
" THE FINAL TEST OF A LEADER IS THAT HE LEAVES BEHIND HIM IN OTHER MEN
THE CONVICTION AND THE WILL TO CARRY ON"
- Walter Lippmann
It is with great appreciation and sadness that the many customers,
employees and stockholders bid farewell to Allan A. Hornbeck and Michael
T. Goskowski upon their retirement from the Board of Directors of Comm
Bancorp, Inc.
Albert Einstein once advised, "Try not to become a man of success, but
rather a man of value," Allan and Mike have managed to become both.
Throughout his life, Allan Hornbeck has worked diligently and graciously.
He and wife, Velma, are the parents of four children and eleven
grandchildren. He is the owner of Allan Hornbeck Chevrolet, the second
oldest Chevrolet dealership in the United States owned and operated by
the family who founded it. As a distinguished contributor to the
community, Allan has set a standard of service excellence that is such a
vital part of Comm Bancorp, Inc. and Community Bank and Trust Company.
Mike Goskowski, secretary of Comm Bancorp, Inc., is president and founder
of Kartri Sales, Inc. He and wife, Josephine, are the parents of two
daughters and one granddaughter. He oversees the daily operation of M.G.
Manufacturing Co., Inc., and Mi-Jo Enterprises, Inc. His companies
manufacture shower curtains as well as accessories such as robes,
bedspreads, slippers and embroidery products as well as screen printed
items.
Mike has been very active in our community and has served on several
community boards. He is chairman of the Carbondale Area Advisory
Council, director and past president of Marian Community Hospital
Foundation, director and past vice-president of Northeastern Pennsylvania
Boy Scouts of America, director and past president of Tri-County Human
Services, a former director/trustee of the St. Joseph's Hospital
executive board and holds memberships in several community organizations.
The directors, officers and employees of Comm Bancorp, Inc. and Community
Bank and Trust company would like to extend our best wishes and heartfelt
thanks to Allan and Mike for their efforts. We wish them continued
success and good health in the years to come.
PRESIDENT'S MESSAGE TO STOCKHOLDERS
This past year has been one of transition and challenge for Comm Bancorp,
Inc. and its subsidiary, Community Bank and Trust Company (collectively,
the "Company"). Management, consisting of the Board of Directors and
executive officers had to make many difficult but necessary decisions
during 1995.
As you are aware on May 24 1995, the Board of Directors of the Company
entered into a Memorandum of Understanding ("MOU") with the Federal
Reserve Bank of Philadelphia ("FRB") to reach a common goal of restoring
and maintaining financial security for the Company. To accomplish this
it was necessary to radically change direction from recent years.
Restructuring the investment portfolio was our first priority. This
task, completed during the fourth quarter of 1995, significantly reduced
interest rate risk while eliminating regulatory criticism. However, the
action resulted in the Company reporting security losses of $4.4 million.
Action taken in 1995 involving the investment portfolio was the major
factor in the restoration of the Company's financial condition.
Due to the sale of securities and the resulting costs of the MOU,
earnings per share dropped from $4.53 in 1994 to $.27 in 1995. In a
positive light, stockholders equity influenced by the recovery of the
unrealized loss on investments increased $5.2 million ending the year at
$27.9 million. Book value of your stock increased $7.10 to $38.04 in
1995.
In addition, Management felt that the Company needed to enhance its
presence in the market areas therefore, marketing efforts intensified.
These efforts emphasized our desire to return to a "Traditional Community
Bank". The Company's loans grew approximately $19.3 million, or 10.0
percent. Residential mortgages for the communities we serve increased
7.6 percent in 1995. Average deposits of our customers grew $8.2 million
to $317.9 million during 1995. Management took a less competitive stance
in deposit pricing during the latter part of 1995 as a result of our
improved liquidity position. Management was able to reduce total
borrowings to $3.0 million at December 31, 1995, down significantly from
its peak of $34.6 million during the second quarter of 1995.
I am pleased to inform you that we will be implementing a document
imaging system in 1996. This state of the art technology will allow us
to better serve our customers and will enhance profitability by reducing
costs in many areas. Few other banks are currently utilizing this
technology.
Please note, this annual statement is dedicated to Mr. Allan A. Hornbeck
and Mr. Michael T. Goskowski who have retired from the Board of Comm
Bancorp, Inc. but will continue to serve on the Bank Board. I would like
to thank them for their years of faithful service and wish them
prosperity and good health in all future endeavors.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)
Effective February 16, 1996, the MOU was withdrawn by the FRB. I would
like to take this opportunity to thank Mr. William F. Farber, Chairman,
for his unwavering dedication and efforts, and the Board of Directors,
along with the entire staff for their support during a most difficult
period for the Company as these accomplishments could not have been
completed without that support. And to the stockholders, a special word
of appreciation for your patience and understanding and pledge to you
that we will make every effort to enhance the value of your investment
and look forward to a very profitable 1996.
Sincerely,
David L. Baker
President and
Chief Executive Officer
COMMUNITY PERSPECTIVES
Community Bank and Trust Company is nestled in the heart of Northeastern
Pennsylvania's Endless Mountains. The natural beauty of the community is
reflected within the hearts and souls of its local residents. Recent
trends have brought many big banks into our community, thus making
personal service a thing of the past. This is not so at Community Bank
and Trust Company. Customers are the reason we are in business and that
is why the bank provides our friends and neighbors with the kind of
service that can only come from a community bank. In today's banking
environment this is no small feat.
People often ask, "Why does the bank spend so much time promoting its
community?". The answer is that it has made a commitment to putting the
community first and keeping the local economy strong by reinvesting in
its people and future. Our community, like the bank, was built on the
idea of individuals working together for a better place to live.
Community Bank and Trust Company will continue to work with you to
nourish and support the beauty of our hometown.
The bank is proud to demonstrate its commitment to the community every
day and continues to maintain its "Outstanding" Community Reinvestment
Act rating. This rating is given annually to a small percentage of banks
for meeting the credit needs of the communities they serve. This rating,
as outlined by the Federal Reserve Bank, is given to a bank only when it
has maintained a record of, and provided leadership in, ascertaining and
helping to meet the credit needs of its entire delineated community,
including low- and moderate-income neighborhoods, in a manner consistent
with its resources and capabilities.
The U.S. Small Business Administration in Washington, D.C., recently
notified management that Community Bank and Trust Company has been ranked
as one of the leading banks in Pennsylvania in lending to small
businesses. The bank continues to make available to community members,
governmentally- supported lending programs, such as the U.S. Small
Business Administration's Low Documentation Program, better known as the
Low Doc Program, as an alternative to traditional financing. The Low Doc
Program has enabled area businesses to grow.
In March, the bank had the honor of being the first lender in
Pennsylvania to close a FmHA subsidized loan under a new arrangement with
the Farmers Home Administration. Ron Smith, the Montrose office manager,
had the privilege of closing this loan. The Carbondale office is
currently working with the FmHA Subsidized Loan Program in conjunction
with the Rural Economic Community Development Agency. The program helps
low income families purchase homes with moderate downpayment
requirements. Two such loans were processed in November.
The Carbondale office is a part of a participation loan in conjunction
with other area banks for the relocation and expansion of the Carbondale
Public Library, which is a one million dollar project. Bank officials
met with from the Susquehanna County Planning Commission and a consultant
from the Office of Community Affairs concerning a homeowners'
rehabilitation program for low- and moderate-income families in eastern
Susquehanna county. The program was approved in early 1995 and will be
administered from the Clifford office. Also, the Nicholson office has
worked with the Lackawanna County Redevelopment Authority to help finance
part of the NatWest project to develop the Montage Mountain industrial
area.
In the spring, Susan Faye Mancuso was appointed to the Simpson office
advisory board. Mrs. Mancuso is a self-employed public accountant who
resides in Carbondale and is active in many community organizations. In
May, Thomas M. Chesnick was appointed to the position of Forest City
office manager and Valerie Hite was promoted to the position of Simpson
office manager.
In June, bank employees participated in the Geisinger Children's Miracle
Network Telethon fundraiser. By making a monetary donation to the
hospital, employees had the privilege of "dressing down" and wearing
their "Caring for Kids" t-shirts to work.
At the annual stockholders meeting held in September, the bank's holding
company honored retiring board member, Allan A. Hornbeck. Mr. Hornbeck
provided twelve years of dedicated service to Community Bank and Trust
Company and Comm Bancorp, Inc.
The bank has been involved with countless community service and volunteer
projects such as Lackawanna County's Upper Valley Project Hope, the
Riverside Park Project in Tunkhannock and the Forest City Rotary Miners
Memorial. Community Bank and Trust Company provides financial support
for activities of youth groups within the communities it serves such as
the Nicholson Athletic Association, B & M Little League, Fairdale
Baseball Association and Carbondale Miss C Softball, to name a few. The
bank also supports activities and participates in fundraisers at local
school districts like Carbondale Area, Elk Lake, Forest City Regional,
Hancock Central, Lackawanna Trail, Montrose, Mountain View, Sacred Heart
and Tunkhannock Area. In addition, Community Bank and Trust Company
encourages excellence in education by annually providing U.S. Savings
Bonds as awards to local high school seniors.
The bank and its staff hold memberships in the Chambers of Commerce
located in Carbondale Area, Hancock Area, Wyoming County and the newly
formed Susquehanna County Chamber. This active participation helps
maintain a solid relationship with community business leaders and
encourages the development of new business within the bank's service
areas.
Directors, officers and staff volunteer their time and support to local
community projects by involving themselves in charitable events such as
Area "P" Special Olympics, the Fourth of July races in Montrose, Marian
Community Hospital Charity Ball, Forest City Old Home Week, March of
Dimes Walk-A-Thon and the Wyoming County Chamber of Commerce Annual
Auction. Dedicated employees continued to participate in local community
events by maintaining booths at Forest City Old Home Week, Wyoming County
Fair, "Three for the Fourth" Celebration in Montrose, the Blueberry
Festival, Nicholson Heritage Days, Endless Mountains Builders Show and
Susquehanna County Dairy Days. Other community activities included the
Carbondale Pioneer Days, Fell Township's 150th Anniversary celebration
and the Great American Race in Thompson.
Community Bank and Trust Company would not have been able to provide
these fine services and contributions without the commitment of the
employees. They are the true life blood of Community Bank and Trust
Company. Accordingly, we would like to recognize the following employees
who reached milestones with the bank during 1995: Mary Ann Musho and
Betty Oleniacz-25 years of service; Mary Anderson and Marie
Maciejewski-15 years of service; Joan Harvey, Annette Lynch, Janice Nesky
and Tom Sheridan-10 years of service; Diane Conboy, John B. Errico, Carol
Gacha, Lisa Goerlitz, Gloria Hancock, Faith Kramer, Charlene Martin,
Patty Seaman and Amy Trago-5 years of service.
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
____________________________________________________________________________________________________________
<S> (C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income......................................... $ 26,467 $ 24,991 $ 24,094 $ 24,022 $ 23,512
Interest expense........................................ 14,994 12,942 12,000 13,514 15,345
________ ________ ________ ________ ________
Net interest income................................... 11,473 12,049 12,094 10,508 8,167
Provision for loan losses............................... 435 800 1,080 1,285 820
________ ________ ________ ________ ________
Net interest income after provision for loan losses... 11,038 11,249 11,014 9,223 7,347
Noninterest income...................................... (3,196) 1,005 2,571 1,961 524
Noninterest expense..................................... 8,194 7,949 7,852 7,252 6,101
________ ________ ________ ________ ________
Income before income taxes............................ (352) 4,305 5,733 3,932 1,770
Provision for income taxes.............................. (552) 980 1,583 1,137 407
________ ________ ________ ________ ________
Net income............................................ $ 200 $ 3,325 $ 4,150 $ 2,795 $ 1,363
======== ======== ======== ======== ========
CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities................................... $123,922 $152,656 $149,672 $129,480 $103,919
Net loans............................................... 209,932 190,909 173,313 160,146 157,265
Other assets............................................ 17,094 18,898 16,022 19,654 17,159
________ ________ ________ ________ ________
Total assets.......................................... $350,948 $362,463 $339,007 $309,280 $278,343
======== ======== ======== ======== ========
Deposits................................................ $317,099 $316,169 $297,235 $280,826 $255,819
Short-term borrowings................................... 15,956 9,141 2,000
Long-term debt.......................................... 3,048 5,050 5,800 3,200 1,400
Other liabilities....................................... 2,906 2,599 2,324 2,454 2,697
Stockholders' equity.................................... 27,895 22,689 24,507 20,800 18,427
________ ________ ________ ________ ________
Total liabilities and stockholders' equity............ $350,948 $362,463 $339,007 $309,280 $278,343
======== ======== ======== ======== ========
PER SHARE DATA:
Net income.............................................. $ 0.27 $ 4.53 $ 5.66 $ 3.81 $ 1.86
Cash dividends declared................................. 0.63 0.62 0.61 0.59 0.57
Stockholders' equity.................................... $ 38.04 $ 30.94 $ 33.42 $ 28.36 $ 25.13
Cash dividends declared as a percentage of net income... 231.00% 13.68% 10.70% 15.31% 30.67%
Average common shares................................... 733,360 733,357 733,298 733,031 732,922
SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets.............. 0.06% 0.95% 1.30% 0.96% 0.52%
Net income as a percentage of stockholders' equity...... 0.77 14.26 17.91 14.00 7.58
Stockholders' equity as a percentage of total assets.... 7.25 6.65 7.26 6.68 6.91
Tier I capital as a percentage of adjusted total assets. 6.95 7.13 6.84 6.11 5.86
Net interest income as a percentage of earning assets... 3.48 3.68 4.09 3.95 3.49
Loans, net as a percentage of deposits.................. 62.81% 61.01% 60.84% 59.15% 65.68%
SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-adjusted assets.. 14.23% 13.82% 13.52% 12.38% 10.85%
Total capital as a percentage of risk-adjusted assets... 15.49 15.68 15.49 14.12 11.99
Allowance for loan losses as a percentage of loans, net. 1.83% 1.84% 1.80% 1.54% 1.00%
Full-time equivalent employees.......................... 147 153 137 136 134
Locations............................................... 10 10 10 10 10
</TABLE>
Note: Per share information reflects the retroactive effect of a 4 for 1
stock split effective February 1994. Average balance was calculated
using average daily balances and includes nonaccrual loans.
Tax equivalent adjustment was calculated using the prevailing
statutory rate of 34.0 percent.
Management's Discussion and Analysis appearing on the following pages
should be read in conjunction with the Consolidated Financial Statements
beginning on page 109 and Management's Discussion and Analysis 1994
versus 1993 beginning on page 141.
OVERVIEW:
On May 24, 1995, the Board of Directors of Comm Bancorp, Inc. and
subsidiary, Community Bank and Trust Company (collectively, the
"Company") entered into a Memorandum of Understanding ("MOU") with the
Federal Reserve Bank of Philadelphia ("FRB") in recognition of their
common goals to restore and maintain the financial soundness of the
Company and to improve the overall financial condition of Community Bank
and Trust Company. Under the terms of the MOU, the Company and/or
subsidiary was required to: (I) obtain the prior written approval of the
FRB to declare or pay any dividends; (II) obtain the prior written
approval of the FRB before the Company incurs any debt other than normal
operating expenses; (III) obtain the prior written approval of the FRB
before the Company redeems its own stock; (IV) submit to the FRB a
written plan to maintain capital ratios well in excess of minimum
regulatory guidelines; (V) submit to the FRB a written plan to ensure
appropriate authority over and oversight of the Company's investment
practices; (VI) prohibit the Company from additional purchases of high-
risk securities and structured notes as well as securities not in
compliance with the Board of Governors of the Federal Reserve System's
("Federal Reserve Board's") Supervisory Policy Statement on Securities
Activities; (VII) retain an independent consultant to review the
Company's securities activities and investments in the context of the
Company's overall interest rate risk and liquidity position and provide a
written report to the FRB thereon; (VIII) submit to the FRB revised
investment policies and procedures to correct deficiencies cited in the
FRB's examinations with respect to prior investment practices involving
the investment portfolio; (IX) submit to the FRB a written liquidity plan
to provide for an adequate level of assets to fund operations and meet
customer needs; (X) submit quarterly progress reports to the FRB to
assure compliance with the MOU; and (XI) submit the written plans,
policies and procedures to the FRB for review and approval. The MOU was
a direct result of regulatory concerns about prior investment practices
and noncompliance with previously issued informal supervisory actions.
Such supervisory action placed a significant administrative and reporting
burden on the Company and increased both monetary and opportunity costs.
Management estimated the costs associated with compliance to the MOU
approximated $500 in 1995.
On February 16, 1996, the Company received the following information in a
letter from the FRB delineating the Company's improved financial
condition and strict compliance with all provisions of the MOU:
"As a result of the improving financial condition of Comm Bancorp, Inc.
and Community Bank and Trust Company, the Federal Reserve Bank of
Philadelphia is terminating the Memorandum of Understanding by and among
the Company and the FRB, dated May 24, 1995. The termination of this
supervisory action is pursuant to the authority granted to the FRB in
provision 14.b. of the MOU. The effective date of the termination is
February 16, 1996."
Management, consisting of the Board of Directors and executive officers,
in conjunction with regulatory guidance was able to demonstrate, within
nine months of the establishment of the MOU, a marked improvement in the
Company's financial strength while mitigating various risk elements that
restricted operations. During the final months of 1994 and early portion
of 1995, the Company was subject to an inordinate amount of risk from
changing interest rates as a result of the composition of its balance
sheet. The Company was funding long-term assets with short-term
liabilities, exposing itself to significant loss from upward pressure in
short-term interest rates. In addition, the Company's liquidity posture
was such that it was completely reliant on short-term borrowings from the
Federal Home Loan Bank ("FHLB") to fund normal operations. Significant
steps taken to relieve such adverse pressures included the divestiture of
criticized investment securities, development of formalized plans,
policies and procedures and reorganization of management oversight.
During the second quarter of 1995, the Company's reliance on short-term
borrowings to fund long-term earning assets elevated to 15.2 percent.
The buildup in such funding was primarily attributable to the structure
and composition of the investment portfolio. Rising interest rates in
1994 and the first quarter of 1995 made principal payments on mortgage
backed securities virtually nonexistent and limited the Company's ability
to create liquidity through investment dispositions, due to their
deteriorating market values. Management alleviated the Company's
liquidity crisis through the sale of certain investment securities and
loans and by aggressively competing for retail deposits. Such actions
had a positive influence on the Company's interest sensitivity posture as
it allowed management to eliminate the Company's reliance on short-term
funding and to reinvest the proceeds so that the Company could reduce its
exposure to changes in interest rates. As required by the MOU,
management developed formalized capital, liquidity and interest rate risk
plans and investment and asset/liability policies to provide a framework
in meeting the Company's strategic goal of becoming a "traditional
community bank." This type of bank insures safety to depositors while
providing a reasonable rate of return to stockholders by limiting the
risk exposure of its assets. The Board of Directors reorganized
management oversight of the Company through increased emphasis on
director participation on committees, utilization of external consultants
to assure independence and by naming a new President and Chief Executive
Officer.
OPERATING ENVIRONMENT:
The Commerce Department reported the economy grew during 1995 at its
slowest pace since the 1991 recession. The nation's gross domestic
product, the total output of goods and services, declined to 2.1 percent
in 1995 as compared to 3.5 percent in 1994. Such reduction in economic
activity was not expected based on the strength demonstrated during the
fourth quarter of 1994 when growth rates were at 4.0 percent annualized.
Gains in personal consumption expenditures, plant and equipment spending
and net exports during January of 1995 prompted the Federal Reserve Open
Market Committee ("FOMC") to continue tightening its monetary policy,
which began February 4, 1994. Accordingly the FOMC, concerned that high
levels of business activity would be inflationary, increased the
overnight federal funds and discount rates 50 basis points each on
February 1, 1995. However, the pace of the economy began to falter at
the end of the first quarter and throughout the second quarter of 1995,
causing the FOMC to cut the federal funds rate by 25 basis points on July
6, 1995. Weak motor vehicle sales and housing starts, sluggish retail
sales and reduced levels of business spending in the fourth quarter of
1995 caused the FOMC to continue easing by reducing the overnight federal
funds rate another 25 basis points on December 19, 1995. Despite the
slowdown in economic activity, unemployment and inflation rates remained
strong throughout 1995 at 5.6 percent and 2.8 percent, respectively.
The 0.5 percent rate of economic expansion for Northeastern Pennsylvania
during 1995 lagged behind both Pennsylvania and the nation. Slower
population growth and higher unemployment and costs were principally
responsible for the lower level of activity. Population throughout the
Company's quad-county market area increased slightly at 1.0 percent based
on a comparison of 1995 estimates to the 1990 census. Census growth
rates for Pennsylvania and the nation were 1.7 percent and 5.6 percent,
respectively. Unemployment rates in 1995 for the areas served by the
Company continued to be higher than Pennsylvania's overall rate of 5.9
percent. Lackawanna, Susquehanna, Wayne and Wyoming counties experienced
unemployment rates of 6.2 percent, 7.2 percent, 8.7 percent and 7.1
percent, respectively. In addition, Northeastern Pennsylvania was
comparatively more expensive with respect to costs in other areas of the
state with higher wages and benefits, energy, taxes and real estate
expenses. In order to grow rapidly, a region needs an expanding market
and favorable cost structure. As a result of the region lacking both
qualities, management expects the local economy to grow 0.7 percent in
1996, far below the anticipated national growth level of 2.3 percent.
A continuation of the slowdown in economic activity could have a profound
effect on the future financial condition and operating results of the
banking industry. Declines in loan demand and higher delinquencies
attributable to higher unemployment and interest rates, will adversely
affect the asset quality and profitability of financial institutions in
the future. On average, loans account for nearly 60.0 percent of bank
assets, thus a reduced level of demand could tempt management to allocate
resources to risky investments in order to obtain yields similar to those
achieved through lending. Generally, loans out-yield investment
securities by 200 to 300 basis points. Moreover, further reductions in
economic activity will increase financial institutions' credit problems
and levels of loan charge-offs. Such increase in net charge-offs, from
declines in recoveries and higher volumes of consumer credit, will prompt
banks to set aside larger provisions therefore reducing earnings. At the
end of 1995, consumer installment debt totaled $1.05 trillion, up 13.4
percent from one year ago and 39.0 percent from 1990. In addition,
rising interest rates as a result of inflationary pressure will have an
adverse effect on fund costs, further narrowing net interest margins.
Banks may be able to offset some of these adverse influences through
reductions in noninterest operating expenses as a result of achieving
synergistic efficiencies from mergers and reductions in deposit insurance
premiums. Bank mergers and acquisitions amounted to $42.0 billion in
1995 as a result of the easing of laws prohibiting interstate banking and
the push by large institutions to reduce their costs through efficiencies
of scale. On average, institutions recovered a portion of the purchase
price of 1995 acquisitions through the elimination of 38.0 percent of the
target bank's noninterest expenses. In addition, the Federal Deposit
Insurance Corporation's ("FDIC's") decision to lower deposit insurance
costs reduced noninterest expenses by $4.0 billion in 1995 and is
expected to further reduce such expenses by $1.0 billion in 1996. It is
anticipated that the ten largest banks in the United States will save
$10.0 million each in deposit insurance expense during 1996.
REVIEW OF FINANCIAL POSITION:
Total assets declined $11.6 million or 3.2 percent from $362.5 million at
December 31, 1994, to $350.9 million at December 31, 1995. Such decline
was in response to management's decision to sell investment securities
criticized by regulators and those demonstrating a high degree of risk in
order to eliminate the Company's reliance on short-term borrowings to
fund normal operations. In addition to being relieved of its debt
burden, the Company's liquidity, capital and interest sensitivity
positions improved as management redirected excess proceeds from the sale
of such assets. Liquidity, as defined by the net amount of liquid assets
and volatile liabilities, increased from $20.3 million at December 31,
1994, to $62.2 million at December 31, 1995. The capital level
strengthened as indicated by an improvement in the ratio of stockholders'
equity to total assets at December 31, 1994 and 1995, from 6.3 percent to
8.0 percent. The depressed capital position at year-end 1994 was
primarily a reflection of the risk inherent throughout the investment
portfolio. The Company reported net unrealized holding losses of $4.7
million at December 31, 1994, as compared to net unrealized holding gains
of $780 at December 31, 1995. Such actions also improved the Company's
exposure to changes in interest rates as reflected by having
approximately equal amounts of rate sensitive assets and rate sensitive
liabilities repricing within the next year.
The reduced volume of local economic activity had a direct reflection on
the demand for credit during 1995. Adjusting for short-term credit
extensions to other financial institutions and the sale of student loans,
average loans increased $10.3 million in 1995, a reduction from the $14.2
million level experienced in 1994. Employment conditions deteriorated in
Northeastern Pennsylvania as evidenced by a reduction in average weekly
earnings resulting from a decline in the average number of hours worked.
The average weekly earnings of a manufacturing worker in the Company's
market area declined from four hundred forty-eight dollars at December
1994, to four hundred two dollars at December 1995. Similarly, the
average weekly hours worked decreased from 39.8 in 1994 to 33.3 in 1995.
Loan demand is expected to remain soft throughout 1996 as the number of
workers and their earnings remain relatively unchanged from 1995. Gains
in the service sector will be offset by a declining number of
manufacturing positions. In addition, wage growth will be restrained as
a result of job insecurity and increased pressure on companies to keep
operating costs low.
Such weakness in local economic conditions also affected the Company's
asset quality during 1995. Nonperforming assets increased 27.4 percent
from $3.3 million to $4.2 million at December 31, 1994 and 1995,
respectively. Expectations of slightly higher unemployment levels and
greater volumes of consumer debt over the next twelve months could have a
profound adverse effect on future asset quality and the amount of loans
charged-off. Net charge-offs during 1995 approximated 27.5 percent of
the 1994 level. Management does not anticipate being able to sustain the
favorable volume experienced in 1995 as a result of reduced potential for
recoveries and instability of employment conditions.
Regulatory authorities characterized the Company's investment portfolio
during 1994 as one exhibiting an inordinate amount of risk while being an
inadequate source of secondary liquidity. Such riskiness was
demonstrated by the aggregate fair value of the portfolio being $12.0
million below amortized cost at December 31, 1994. Additionally, the
weighted average life of all investments held approximated 10.3 years at
year-end 1994. Moreover, nearly half of the portfolio was invested in
lower-quality mortgage backed securities exhibiting greater risk due to
the structure and composition of such holdings. Management took
significant steps in addressing regulatory concerns through restructuring
its oversight of the investment function, hiring an external investment
management consultant group and formulating and implementing a portfolio
reconstitution plan. As a result of such action, management constructed
a portfolio that provides a reasonable rate of return with considerably
less risk while assuring a continuous flow of cash to fund normal
operations. At December 31, 1995, the investment portfolio fair value
exceeded its amortized cost by $1.2 million. The weighted average life
of such portfolio was 3.2 years with an expected average term until cash
flows are received of 2.4 years. The amount of investment repayments
from maturities and principal payments due within one year increased
substantially from $1.4 million at December 31, 1994, to $21.6 million at
December 31, 1995. Attestation of the improved quality and elimination
of risk in the investment portfolio was the removal of the aforementioned
supervisory action, which was a direct result of the past problems with
such asset base.
Average deposit volumes grew $8.2 million from $309.7 million in 1994 to
$317.9 million in 1995, a 2.6 percent increase. The deposit increase for
1995 falls below the increase for the comparable period last year of
$22.5 million or 7.8 percent and the favorable change of 7.6 percent in
the Company's peer group of 35 banks in Northeastern Pennsylvania. The
Company's reduced rate of deposit growth in 1995 was attributable to less
aggressive competition for funds during the latter part of the year in
light of its improved liquidity position. Management may have to
reemphasize its historically aggressive product pricing if it perceives a
higher rate of disintermediation from customers who are willing to invest
in non-bank depository vehicles that yield higher returns but offer a
greater degree of risk.
Stockholders' equity increased $5.2 million from $22.7 million at
December 31, 1994, to $27.9 million at December 31, 1995. The 22.9
percent rise in capital was directly attributable to a reversal in the
unrealized holding adjustment on available for sale investment securities
of $5.5 million during 1995. The investment portfolio reconstitution
materially reduced the Company's future exposure to capital depreciation
from deteriorating market values. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," reductions in the fair values
of available for sale investments below their amortized costs are
recorded as adjustments, net of income taxes, to stockholders' equity.
The 300 basis point rise in general market rates during 1994 caused
stockholders' equity to be reduced $4.7 million at December 31, 1994.
Although the size of the available for sale portfolio at year-end 1995
was twice the amount at the same period last year, the expected capital
loss from rising interest rates is considerably less because of
improvements in the quality, composition and structure of the investment
portfolio.
INVESTMENT PORTFOLIO:
Actions taken during 1995 involving the investment portfolio were the
most significant factors in restoring the strength of the Company's
financial condition. As aforementioned, the investment portfolio, prior
to such actions, was subject to harsh regulatory criticism for exposing
the Company to inordinate amounts of risk while providing insufficient
liquidity to fund normal operations. Although containing minimal credit
risk, the portfolio was subject to an excessive amount of interest rate,
extension, call and marketability risk. Credit risk, referring to the
probability that an issuer is unable to meet principal and interest
payments on a timely basis, was mitigated as the majority of the holdings
were directly or indirectly guaranteed by the U.S. Government or its
agencies. However, the Company's prior investment practices and actions
exposed it to substantial interest rate risk from price volatility. Such
practices and actions include those that are referred to as unsuitable
pursuant to the Federal Reserve Board's Supervisory Policy Statement on
Securities Activities, as revised April 15, 1994, and the Federal Reserve
Board's Supervisory Policy Statement on Structured Notes dated August 5,
1994. Rises in general market rates during 1994 and the first quarter of
1995 caused strains on the Company's liquidity position as a significant
portion of the investment portfolio could not be disposed of without
realizing significant losses. The aggregate market value deteriorated
from a gain of $1.5 million at December 31, 1993, to a loss of $12.0
million at December 31, 1994. Moreover, such changes in general market
rates caused a significant slowdown in the cash flows received from
mortgage backed securities and extended the weighted average life of the
portfolio. Monthly cash receipts from mortgage backed securities
declined from $3.5 million in January of 1994 to $133 in December of
1994. Such slowdown also adversely affected the Company's
asset/liability sensitivity position as it restricted management's
ability to reinvest such receipts at higher interest rates. Many
securities included embedded options, allowing the issuer to call the
debt if interest rates declined, thus restricting the Company to only
obtaining the contractual premium rate when market rates exceed such
premium rate, making it less attractive by comparison. In addition, poor
quality with respect to the structure and composition of the holdings
subjected the Company to marketability risk. Management experienced
difficulty in determining the value at which a security could actually be
sold because of the size of the spread between the bid price and offer
price. As a direct result of the excessive amount of these types of
risks prevalent throughout the portfolio, the Company was placed under an
MOU from May 24, 1995, to February 16, 1996.
In order to address regulatory concerns and significantly mitigate the
portfolio's risk, management formulated an action plan. Such plan
included restructuring management oversight of the investment function,
hiring an external investment management consultant group, development of
a formalized investment policy and procedures and formulation and
implementation of a portfolio reconstitution plan. On April 26, 1995,
the Board of Directors exercised the termination option provision of the
then President and Chief Executive Officer's employment agreement. Prior
to such date, the former President and Chief Executive Officer had
primary oversight and authority over the investment function. Following
the execution of the termination provision, the Board of Directors
restructured the investment committee, emphasizing the need for its
proactive and direct involvement in the oversight of the investment
function. Shortly after its restructuring, the committee hired an
external investment management consultant group. Such group, a division
of a large international certified public accounting firm, was hired
primarily to assist management in assessing the amount and degree of the
portfolio's risk and in formulating a sound investment policy and
procedures to be followed consistently. Management utilized the
consultant's risk assessment analysis as one of its primary tools in
formulating the Company's reconstitution plan. The investment policy,
approved by the Board of Directors on August 30, 1995, and deemed
acceptable by the FRB on September 21, 1995, prohibits practices
considered unsuitable as defined in the Federal Reserve Board's
Supervisory Policy Statement on Securities Activities along with options
and derivative transactions. Such policy promotes investment portfolio
safety and soundness through establishment of strict limitations to the
quality, quantity and maximum maturity for each type of security.
Moreover, various operational procedures were adopted to enhance internal
controls and assure adherence with the investment policy.
Pursuant to the guidance set forth in the MOU, management submitted a
copy of a written report by the Company's external investment management
consultant to the FRB on July 5, 1995. Such report was reviewed and
deemed acceptable by the FRB on July 24, 1995. The report provided a
comprehensive review of the Company's securities activities and the
investments in its portfolio in the context of the Company's overall
interest rate risk and liquidity position. Specifically, the report
provided a volatility analysis of yield, market value and other factors
to assess various risks over a variety of interest rate scenarios. In
addition, the Company's investment and asset/liability management
policies and procedures were analyzed in making recommendations to the
Company's management concerning its risk identification procedures and
controls. Such recommendations were included in the investment and
asset/liability policies adopted by the Board of Directors during 1995.
The investment committee continues to utilize external investment
management consultants in reviewing the risk related to its investment
portfolio.
Management took the first step in reconstituting the investment portfolio
during the end of the second quarter and early part of the third quarter
of 1995, by disposing of thirty-two available for sale securities having
an amortized cost and fair value of $31.1 million and $29.2 million,
respectively. Specifically, the sale consisted of twenty-six high-risk
collateralized mortgage obligations ("CMOs") having an amortized cost of
$25.0 million and a fair value of $23.4 million and six structured notes
having an amortized cost of $6.1 million and a fair value of $5.8
million. The $1.9 million loss arising from such 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
("FASB") Emerging Issues Task Force ("EITF") Topic D-44 "Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
Cost Exceeds Fair Value." The Company's investment in such types of
securities, its investment in long-term variable-rate securities and
activities in writing options on U.S. Treasury and agency securities were
the primary focus of regulatory criticism. High-risk CMOs, as defined in
the Federal Reserve Board's Supervisory Policy Statement on Securities
Activities, are mortgage derivative products that at the time of
purchase, or at a subsequent testing date, meet any of the average life
or interest sensitivity tests. None of such Federal Reserve Board
defined high-risk securities met the definition of high-risk nonequity
CMOs as defined in Issue 2 of FASB's EITF 89-4, "Accounting for a
Purchased Investment in the Collateralized Mortgage Obligation Instrument
or in a Mortgage-Backed Interest-Only Certificate." EITF 89-4 defines
high-risk nonequity CMOs as those that have the potential for loss of a
significant portion of their original investments due to changes in
interest rates, prepayment rates of the assets of the CMO structure or
earnings from temporary reinvestment of cash collected by the CMO
structure but not yet distributed to the holders of its obligations.
Accordingly management, after considering whether such securities
satisfied any of the three subtests outlined above, did not discount
these CMOs to the present value of estimated future cash flows at a risk-
free rate to determine whether or not an other than temporary impairment
existed. Management applied the guidance to each type of CMO instrument,
including those with unusual or unique terms or features, in formulating
its conclusion that such securities did not meet the EITF 89-4 definition
of a high-risk nonequity CMO. Subsequent to the aforementioned sale, the
Company held Federal Reserve Board defined high-risk CMOs with an
amortized cost and fair value of $4.3 million. Structured notes, many of
which are issued by U.S. Government agencies, government-sponsored
agencies and other organizations with high credit ratings, are debt
securities having embedded options with cash flows that are often
dependent on one or more indices. Such securities tend to have medium-
term maturities and reflect a wide variety of cash flow characteristics
that can be tailored to the needs of individual investors. As a result
of their affiliation with the federal government, structured notes have
minimal credit risk. However, such investments contain a high degree of
many of the other aforementioned types of risks. The Company's holdings
of structured notes subsequent to the sale had an amortized cost of $18.0
million and a fair value of $17.6 million at June 30, 1995.
Specifically, that portion of the investment portfolio consisted of $15.0
million of step-up bonds, $1.0 million of dual index notes and $2.0
million of de-leveraged bonds.
The second phase of the investment portfolio's reconstitution was more
difficult as it considered the reclassification of securities designated
as held to maturity to available for sale. SFAS No. 115 requires an
enterprise to reassess the appropriateness of its accounting and
reporting classifications of debt and equity securities at each reporting
date. Accordingly, management prepared a comprehensive analysis to the
effects of such action from both a regulatory and accounting position.
Pursuant to the MOU, the Company was required to maintain a Tier I
Leverage ratio exceeding 5.0 percent after adjusting for market
depreciation, net of taxes, in securities classified as available for
sale and those high-risk CMOs and structured notes classified as held to
maturity. An entity not subject to such supervisory action excludes such
adjustments in calculating its Tier I Leverage ratio. In addition to the
regulatory consideration, management had to consider the effects of such
action on a financial accounting basis. Contrary to standard regulatory
accounting treatment, whereby an institution not subject to supervisory
actions can exclude the unrealized holding adjustment on available for
sale securities, financial accounting requires such adjustment to be
included as a separate component of stockholders' equity. The Board of
Directors, after an extensive examination of the results set forth in
such analysis on September 30, 1995, voted unanimously to transfer 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 specific 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 in the third quarter of 1995, the period
in which the decision to sell was made. Securities disposed of during
the second phase of the portfolio reconstitution plan had an amortized
cost of $59.5 million and a fair value of $57.0 million. As a result of
completing the second phase, management eliminated all CMOs designated as
high-risk and those that had the possibility of meeting any of the
average life or interest sensitivity tests in the future. In addition,
the carrying value of structured notes was reduced through sales from
$21.1 million at December 31, 1994, to $2.9 million at December 31, 1995.
After a discussion with an external investment management consultant and
review by the FRB, management decided to retain three structured notes
with maturities of less than three years. The decision to hold these
securities was based on their market values being less than their
economic value at the analysis date. Another major group of securities
sold during the second phase of the reconstitution were long-term
variable-rate securities. The strategy to acquire variable rate
securities was implemented in order to reduce the Company's exposure to
net interest margin erosion and guard against price deterioration.
However, as rates rose in 1994 and the early part of 1995, such
securities experienced significant price volatility even though their
interest rates reset monthly or quarterly. Unattractive coupons relative
to alternatives and the existence of embedded caps, which restrict the
coupon rate from exceeding a certain level regardless of rises in general
market rates, were principally responsible for such value deterioration.
The Company's holdings of variable rate securities declined from $52.0
million at December 31, 1994, to $17.3 million at December 31, 1995. The
weighted average life of such securities decreased significantly from
13.2 years to 2.5 years at year-end 1994 and 1995, respectively.
Pursuant to SFAS No. 115, sales or transfers from the held to maturity
classification for reasons other than those specified, call into question
an enterprise's intent to hold other debt securities to maturity in the
future. Accordingly, the successful implementation of the reconstitution
plan, which benefited the Company by materially reducing its risk
posture, could have a material adverse impact on its book value in the
future. Management will not be able to establish a held to maturity
classification for future purchases or transfers until a time when
circumstances have changed such that management can assert with a greater
degree of credibility that it now has the intent to hold debt securities
to maturity. As a result, a significant rise in interest rates would
reduce the Company's book value as management would be required to report
the resulting unrealized loss, net of income taxes, as a separate
component of stockholders' equity. On October 18, 1995, the FASB voted
to temporarily suspend the rule prohibiting sales or transfers from the
held to maturity classification allowing enterprises a one-time
opportunity during the fourth quarter of 1995 to reassess the
appropriateness of the classifications of all securities held without
calling into question the holding intent of that enterprise. Management
was unaware that FASB would suspend such rule at the time it decided to
transfer securities from held to maturity to available for sale.
Accordingly, management will not be able to establish a held to maturity
classification for an indefinite period, unlike enterprises that were
afforded the opportunity to transfer securities unchallenged during the
temporary dispensation period.
The following table sets forth the carrying values of the major
classifications of securities as they relate to the total investment
portfolio over the past five years:
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
________________ ________________ ________________ ________________ _______________
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
_______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities........... $ 12,042 7.89% $ 13,027 8.96% $ 27,956 25.28% $32,570 32.87%
U.S. Government agencies........... 36,993 24.25 29,306 20.16 3,730 3.37 3,389 3.42
State and municipals............... 20,616 13.51 20,000 13.75 13,065 11.82 4,075 4.11
Mortgage backed securities......... 38,015 24.92 28,042 19.29 21,339 19.30 54,325 54.83
Other securities................... 1,305 0.90 3,125 2.83 4,726 4.77
________ ______ ________ ______ ________ ______ ________ ______ _______ ______
Total held to maturity........... 107,666 70.57 91,680 63.06 69,215 62.60 99,085 100.00
________ ______ ________ ______ ________ ______ ________ ______ _______ ______
Available for sale:
U.S. Treasury securities........... $ 43,751 40.25% 3,366 2.21 2,995 2.06
U.S. Government agencies........... 26,213 24.11 7,283 4.77 5,959 4.10
State and municipals............... 30,512 28.07
Mortgage backed securities......... 6,154 5.66 29,444 19.30 41,854 28.78 41,357 37.40
Other securities................... 2,076 1.91 4,807 3.15 2,912 2.00
________ ______ ________ ______ ________ ______ ________ ______ _______ ______
Total available for sale......... 108,706 100.00 44,900 29.43 53,720 36.94 41,357 37.40
________ ______ ________ ______ ________ ______ ________ ______
Total.......................... $108,706 100.00% $152,566 100.00% $145,400 100.00% $110,572 100.00% $99,085 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
The investment portfolio represented 32.2 percent of earning assets at
December 31, 1995, compared with 43.9 percent a year ago. As evidenced
by such reduction, management expects the investment portfolio to become
less prominent in the Company's asset mix as it focuses efforts on
satisfying local credit demand. As aforementioned, the Company
transferred its entire held to maturity portfolio to available for sale
during the third quarter of 1995. In comparison, the peer group held
87.7 percent of its investments in the available for sale classification
at December 31, 1995. Proceeds from the sale of available for sale
securities amounted to $87.1 million and $13.6 million in 1995 and 1994,
respectively. The Company realized net securities losses of $4.4 million
in 1995 and net securities gains of $495 in 1994 as a result of such
sales. The proceeds were used primarily to retire short-term debt and
fund loan demand. For the years ended December 31, 1995 and 1994, the
Company had repayments from maturities, calls and principal payments on
securities totaling $4.9 million and $15.4 million, respectively.
Securities purchases amounted to $44.2 million and $38.9 million during
1995 and 1994, respectively. Purchases during 1995 consisted principally
of short-term U.S. Treasury securities to provide future liquidity in
funding the loan portfolio and medium-term obligations of states and
municipalities to lower the Company's effective tax rate. The net
unrealized holding gain amounted to $780, net of income taxes of $401, at
December 31, 1995. Such gain represents a change in the net unrealized
adjustment of $5.5 million, net of income taxes of $2.8 million, from
December 31, 1994. The net unrealized holding loss totaled $4.7 million,
net of income taxes of $2.4 million, at December 31, 1994.
The tax equivalent yield on the investment portfolio improved from 6.1
percent in 1994 to 6.4 percent in 1995. The improvement was principally
due to the Company replacing lower-yielding variable-rate securities with
higher-yielding fixed-rate securities. As a result of the portfolio
reconstitution, U.S. Treasury and tax-exempt municipal securities
accounted for 68.3 percent of total investments at December 31, 1995, as
compared to 23.6 percent at December 31, 1994. The investment portfolio
contains minimal credit risk since the majority of its holdings are
issued and/or guaranteed by the U.S. Government or federally sponsored
agencies. Except for U.S. Treasury securities and U.S. Government
agencies, there were no securities of any individual issuer that exceeded
10.0 percent of the Company's stockholders' equity at December 31, 1995
and 1994. All of the securities in the Company's portfolio are
considered "investment grade," receiving a rating of "Baa" or higher from
Moody's or "BBB" or higher from Standard and Poor's rating services,
except for $2.4 million of tax-exempt obligations of local
municipalities, at December 31, 1995. Investment securities with an
amortized cost of $34.0 million and $39.0 million at December 31, 1995
and 1994, respectively, were pledged to secure deposits, to qualify for
fiduciary powers and for other purposes required or permitted by law.
The fair value of such securities was $34.1 million and $36.7 million at
December 31, 1995 and 1994, respectively.
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 at December 31, 1995, would
lose approximately 2.7 percent of its value with a 100 basis point
increase in general market rates as compared to an expected additional
loss of approximately 5.5 percent at December 31, 1994.
The following table sets forth the maturity distribution of the amortized
cost, fair value and weighted average tax equivalent yield of the
available for sale portfolio at December 31, 1995. The weighted average
yield based on amortized cost has been computed for state and municipals
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, which 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.
MATURITY DISTRIBUTION OF AVAILABLE FOR SALE PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
______________________________________________________________________________
DECEMBER 31, 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.... $16,124 5.70% $27,370 5.62% $ 43,494 5.65%
U.S. Government agencies.... 4,699 4.80 21,817 4.88 26,516 4.87
State and municipals........ 405 5.82 3,947 5.82 $5,780 8.33% $19,485 8.11% 29,617 7.82
Mortgage backed securities.. 341 6.89 2,601 6.48 3,182 5.82 6,124 6.16
Other securities............ 1,774 6.00 1,774 6.00
_______ _______ ______ _______ ________
Total..................... $21,569 5.52% $55,735 5.38% $8,962 7.44% $21,259 7.93% $107,525 6.09%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $16,166 $27,585 $ 43,751
U.S. Government agencies.... 4,685 21,528 26,213
State and municipals........ 405 3,946 $6,034 $20,127 30,512
Mortgage backed securities.. 342 2,614 3,198 6,154
Other securities............ 2,076 2,076
_______ _______ ______ _______ ________
Total..................... $21,598 $55,673 $9,232 $22,203 $108,706
======= ======= ====== ======= ========
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments," which requires disclosures about amounts, nature and terms
of derivative financial instruments. In addition, SFAS No. 119 requires
that a distinction be made between financial instruments held or issued
for trading purposes and those held or issued for other than trading
purposes. For entities that hold or issue derivative financial
instruments for trading purposes, SFAS No. 119 requires disclosure of
average fair value and of net trading gains or losses. For entities that
hold or issue derivative financial instruments for purposes other than
trading, it requires disclosure about those purposes and how the
instruments are reported in financial statements. For entities that hold
or issue derivative financial instruments and account for them as hedges
of anticipated transactions, it requires disclosure about the anticipated
transactions, the classes of derivative financial instruments used to
hedge those transactions, the amounts of hedging gains and losses
deferred and the transactions or other events that result in recognition
of the deferred gains or losses in earnings.
Because SFAS No. 119 excludes mortgage backed securities and interest-
only and principal-only obligations from its definition of derivative
financial instruments, the Company's involvement was limited to its
writing of covered call option contracts on U.S. Treasury securities,
which were subsequently exercised or expired. Such options were used to
limit its exposure to market fluctuations on investment securities and
were not used for trading purposes. A call option obligates the Company
to sell a fixed quantity of securities to the option holder at a specific
price within a specific term. The writing of an option effectively
limits the Company's ability to hold the underlying security beyond the
short-term, which necessitates the transfer of such assets to the trading
account classification. The Company recognized gross gains of $24 and
gross losses of $110 in 1994, as a result of transferring securities from
the available for sale classification into the trading account. The
aggregate trading account losses amounted to $656 in 1994. The Company
did not recognize any such gains or losses in 1995 as a result of the
discontinuance of writing option contracts prior to the fourth quarter of
1994. Furthermore, the revised investment policy adopted in 1995
prohibits future option and trading activities.
LOAN PORTFOLIO:
Despite the modest level of economic expansion, bank loan portfolios grew
in response to the conducive interest rate environment. Loan volumes for
all commercial banks in the United States grew 9.4 percent during 1995
while the volumes for the Company's peer group increased 7.8 percent over
the same period. Lower interest rates provided a more favorable
environment for purchasing homes while reducing costs associated with
business loans, as well as costs related to the purchase of other goods
on credit. The favorable impact of declining interest rates was
partially offset by consumer anxiety over adding to their already high
debt burdens, given the uncertainty of job and income growth. Analysts
believe the high spending patterns of individuals and businesses
demonstrated during 1995, would have been greater, if not for the
moderate economic conditions.
For the year, consumer lending, consisting of household debt not secured
by real estate, grew 13.4 percent for all commercial banks in the United
States and represented 45.0 percent of bank lending. Consumers took on
debt at an average annual rate of 10.8 percent in the second half of
1995, somewhat less than the 15.0 percent annualized rate for the first
half of the year. By year-end, consumer installment debt reached $1.05
trillion, marking an increase of 39.0 percent over the 1990 level.
Commercial lending also increased in 1995, rising 8.2 percent over 1994
volumes. Reductions in the cost of financing investments in new capital
provided some offset to the slowing tendencies that normally accompany a
moderation in economic growth.
The interest rate environment also encouraged growth in the mortgage
sector. Average mortgage rates began 1995 at 9.2 percent and dropped to
7.1 percent by year-end. Reductions in mortgage interest rates have put
the cost of financing a house within reach for a greater number of
families and made it possible for a significant number of households to
ease their debt-service burdens by refinancing their homes at lower
rates. Refinancing accounted for 51.5 percent of conventional home loans
made by banks in 1995. Reductions in the construction of new homes and
apartments by 7.3 percent in 1995 was offset by sales of existing homes
of 3.8 million units accounting for the 5.0 percent rise in median home
prices. Home prices in the Northeast contradicted such trend declining
0.7 percent during 1995.
Indications are that economic and employment conditions throughout
Northeastern Pennsylvania will remain below the expected moderate level
of the nation during 1996. Should this occur, management may have to
become more aggressive with respect to product pricing. Such action
could have a material adverse effect on the Company's net interest margin
if management is unable to make a corresponding reduction in fund costs.
Loans, net of unearned income, were $213.8 million at December 31, 1995,
an increase of $19.4 million, or 9.9 percent, over the volume reported at
December 31, 1994. Such increase, adjusted for short-term credit
extensions to other financial institutions and the disposition of student
loans, would have amounted to $5.9 million in 1995. The Company had
aggregate loans of $19.0 million to certain large Pennsylvania-based
commercial banks at December 31, 1995. None of such loans had maturities
greater than six months. In addition management, in response to
liquidity strains, sold student loans with a carrying value of $5.6
million to its servicing agent during the second quarter of 1995. The
increase in aggregate loan demand, after considering such adjustments,
can be explained by a rise in the volume of loans to finance one-to-four
family residential properties of $8.6 million and those to finance
commercial real estate properties of $3.2 million offset primarily by a
decline in commerical and industrial loans. Loans, net of unearned
income, as a percentage of total earnings assets were 63.3 percent and
56.0 percent at December 31, 1995 and 1994, respectively. Such material
increase was a result of the implementation of the investment portfolio
reconstitution plan and reflected management's desire to redirect the
institution's asset base in becoming a "traditional community bank."
During 1995, the peer group's average loans accounted for 62.2 percent of
average assets as compared to the Company's ratio of 55.6 percent.
The Company's volume of loans with predetermined interest rates increased
$5.7 million and represented 80.7 percent of the portfolio while those
bearing floating or adjustable interest rates rose $13.7 million and
represented 19.3 percent of the portfolio at December 31, 1995.
Customers, in taking advantage of declining interest rates, opted for
variable-rate products as opposed to higher-costing fixed-rate products.
The tax equivalent yield on the loan portfolio rose from 8.5 percent in
1994 to 8.8 percent in 1995. Such increase came primarily during the
first half of 1995 when interest rates were at their highest point. With
the decline in rates, the Company's yield remained level throughout the
second half of 1995. Contrary to the large volume of refinancings
nationwide, the volume of refinanced residential mortgages declined
significantly from $14.4 million in 1994 to $9.5 million in 1995.
Management expects loan yields to remain level or decline further during
1996 as a result of the falling interest rate environment. Additionally,
yields may not improve as management attempts to increase the volume of
loans through competitive product pricing and new product introductions.
The composition of the loan portfolio changed during 1995 primarily due
to the effects of the short-term credit extensions made to commercial
banks and the disposition of student loans. Commercial loans increased
$12.2 million during 1995 and represented 19.5 percent of loans, net of
unearned income. Excluding the commercial bank loans, such segment of
the loan portfolio would have experienced a decline of $6.8 million
during 1995. Although banks throughout the nation experienced a marked
increase in consumer credit, the Company experienced a drop in such
loans. The $4.6 million decline in consumer loans from $23.9 million at
December 31, 1994, to $19.3 million at December 31, 1995, was primarily
attributable to the Company's sale of student loans to a servicing agent
in the second quarter of 1995. Had such sale not occurred, the Company
would have had an increase of $1.0 million in consumer loans for 1995.
Despite such nonrecurring effects, loans to finance real estate remained
at approximately 72.0 percent of total loans outstanding. A favorable
interest rate climate coupled with declining home prices in the Northeast
were the primary reasons for the increased residential mortgage lending.
The Company's interest rates on mortgage loans peaked at 9.5 percent
during the first quarter of 1995. By the end of the fourth quarter rates
as low as 7.0 percent were being offered on the same products. The
Company's loan demand is expected to improve during 1996 as management
places increased emphasis on building the loan portfolio through
competitive product pricing and enhanced marketing efforts. Such
improvement could be hampered if local economic conditions deteriorate.
Based on the Company's asset/liability simulation model, management feels
confident it can facilitate loan demand through payments and prepayments
on investments and loans and increases in core deposits. Management
expects to receive approximately $49.8 million from repayments on loans
and investment securities during 1996. In the event an uncharacteristic
increase in loan demand arises in 1996, management could facilitate such
demand by aggressively competing for deposits or utilizing various credit
products available through the FHLB.
At December 31, 1995, the Company had no loan concentrations exceeding
10.0 percent of total loans. Loan concentrations are considered to exist
when there are amounts lent to individual or multiple borrowers engaged
in similar activities that would cause them to be similarly affected by
changes in economic or other conditions. The Company limits its exposure
to concentrations of credit risk by the nature of its lending activities
as approximately 56.6 percent of total loans outstanding are secured by
residential properties. The average mortgage outstanding on a
residential property was $32.9 at December 31, 1995. The Company
maintains a policy restricting the loan-to-value ratio to 80.0 percent.
The loan portfolio does not consist of any form of credit involving
highly-leveraged transactions, defined as financing transactions that
involve the buyout, acquisition or recapitalization of an existing
business and include credits extended to highly-leveraged industries.
In the ordinary course of business, the Company has entered into off-
balance sheet financial commitments consisting of commitments to extend
credit, unused portions of home equity and credit card lines and
commercial letters of credit. Such commitments are recorded in the
financial statements when they are exercised. The Company's involvement
in and exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual amounts of such
commitments. The Company employs the same credit policies and
requirements in making off-balance sheet credit commitments as it does
for on-balance sheet instruments. Provision for losses, if any, is
included in the Company's allowance for loan losses. No provision was
deemed necessary at December 31, 1995 or 1994. Such commitments are
generally issued for one year or less and often expire unused in whole or
part by the customer. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include property, plant and equipment, primary residential
properties, and to a lesser extent, income-producing properties. The
Company's exposure to such commitments remained constant at $9.6 million
at December 31, 1995 and 1994, respectively.
The following table sets forth the composition of the loan portfolio at
year-end for the past five years:
DISTRIBUTION OF LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
________________ ______________ _________________ ________________ _________________
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others $ 41,593 19.45% $ 29,419 15.13% $ 22,633 12.82% $ 21,754 13.38% $ 25,770 16.22%
Real estate:
Construction.................. 1,014 0.47 2,771 1.42 5,079 2.88 4,980 3.06 3,092 1.95
Mortgage...................... 151,926 71.05 138,379 71.15 125,848 71.31 112,544 69.20 99,724 62.78
Consumer, net................... 19,302 9.03 23,916 12.30 22,922 12.99 23,365 14.36 30,255 19.05
_________ ______ ________ ______ ________ ______ ________ ______ ________ ______
Loans, net of unearned income. 213,835 100.00% 194,485 100.00% 176,482 100.00% 162,643 100.00% 158,841 100.00%
Less: allowance for loan losses. 3,903 ====== 3,576 ====== 3,169 ====== 2,497 ====== 1,576 ======
________ ________ ________ ________ ________
Net loans................... $209,932 $190,909 $173,313 $160,146 $157,265
======== ======== ======== ======== ========
</TABLE>
Management continually examines the maturity distribution and interest
rate sensitivity of the loan portfolio in an attempt to limit interest
rate risk and liquidity strains. Approximately 41.1 percent of the
lending portfolio will reprice within the next twelve months as
management attempts to reduce the average term of fixed-rate loans and
increase its holdings of adjustable rate loans in order to limit interest
rate risk in the future. The 41.1 percent surpasses the 30.3 percent at
December 31, 1994, as a result of increased level of short-term funding
and a slight improvement towards achieving management's goal of
generating variable-rate loans.
The following table sets forth the maturity and repricing information of
the loan portfolio by major category at December 31, 1995:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1995 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others........................... $23,673 $ 7,994 $ 9,926 $ 41,593
Real estate:
Construction............................................. 1,014 1,014
Mortgage................................................. 3,164 17,547 131,215 151,926
Consumer, net.............................................. 347 13,500 5,455 19,302
_______ _______ ________ ________
Total.................................................. $28,198 $39,041 $146,596 $213,835
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates............................... $46,563 $54,808 $ 71,109 $172,480
Floating or adjustable interest rates...................... 41,355 41,355
_______ _______ ________ ________
Total.................................................. $87,918 $54,808 $ 71,109 $213,835
======= ======= ======== ========
</TABLE>
The Company does not sell loans secured by real estate. Accordingly,
SFAS No. 122, "Accounting for Mortgage Servicing Rights," which is
required to be applied prospectively in fiscal years beginning after
December 31, 1995, will not have any effect on future operating results
or financial position.
ASSET QUALITY:
Banking industry credit problems were low during 1995 as evidenced by
declines in the levels of nonperforming loans and nonperforming assets of
7.8 percent and 15.2 percent, respectively. Nonperforming assets as a
percentage of loans, net was 1.6 percent at December 31, 1994, as
compared to 1.2 percent at December 31, 1995. Net charge-offs as a
percentage of average loans outstanding increased slightly from 0.24
percent at year-end 1994 to 0.28 percent at year-end 1995. Such strong
asset quality is expected to deteriorate slightly during 1996 as a result
of increased amounts of problem loans and net charge-offs. Many banks
have been aggressive in extending credit to consumers. It appears,
however, that some have not been highly selective in their solicitations.
The high rate of extensions, which has increased debt burden over the
past year, has been the primary factor in the deterioration of credit
card deficiency ratios. Of the credit card loans extended in 1995, 4.3
percent were written-off as losses. Recent history shows a decline in
commercial loan charge-off ratios due to large recoveries offsetting
charged-off loans. This trend is not expected to continue as the
potential for recovery does not appear as strong as in past years.
Current conditions also indicate greater deficiency ratios in the credit
card loan sector.
Higher unemployment levels in the Company's market area as compared to
Pennsylvania and the United States have already resulted in asset quality
deteriorations as indicated by 1995 statistics. Such deterioration is
evidenced by an increase in the peer group's ratio of nonperforming
assets as a percentage of loans, net from 1.51 percent at December 31,
1994, to 1.71 percent at December 31, 1995. Moreover, the peer group
reported deteriorating levels of net charge-offs as a percentage of
average loans outstanding from 0.27 percent in 1994 to 0.20 percent in
1995. Management is aware that asset quality could decay further if
local economic conditions remain weak in 1996. As a result, management
will place additional emphasis on committing more resources to monitor
asset quality during 1996.
The Company attempts to manage credit risk through diversification of the
loan portfolio and application of policies and procedures designed to
foster sound lending practices. Such policies include certain standards
that assist lenders in making judgments related to the character,
capacity, capital structure and collateral of the borrower. In addition,
the lender is to ascertain whether the borrower will be able to repay the
credit based on prevailing and future business conditions. Although
supervised by a central loan committee, each community office is
responsible for credit administration of its loan portfolio, including
analyzing credit applications and making lending approvals within
specified lending limits, in order to minimize credit risk. The lending
authority of all credit officers is established by the Board of Directors
and is reviewed at least annually. Credits beyond the scope of the
community office lending officer are forwarded to a centralized lending
committee. Such committees, comprised of senior lending management and
board members, attempt to assure the quality of the loan portfolio
through careful analysis of credit applications, adherence to credit
policies and examination of outstanding loans and delinquencies. These
procedures aid in the early detection and timely follow-up of problem
loans. Credits in excess of $500 are subject to full board approval.
In addition, the Company minimizes credit risk by conducting an internal
loan review and contracting with an external loan review company to
perform such function independently on an annual basis. Such independent
loan review aids management in identifying deteriorating financial
conditions of borrowers, allowing them to assist customers in remedying
these situations. The results of an independent loan review conducted by
the FHLB at June 30, 1995, indicated no material difference from the
assets identified through the Company's review program.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
A loan is considered impaired when, based on current information and
events, it is probable that the Company will not collect all amounts due
according to the contractual terms of the loan agreement. 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, at the loan's observable market price or by the fair value of
the collateral if the loan is collateral dependent. When the measure of
an impaired loan is less than the recorded investment in the loan, the
impairment is recognized by adjusting the allowance for loan losses with
a corresponding charge to the provision for loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed
assets. Accruing loans past due 90 days or more and loans impaired under
SFAS Nos. 114 and 118 comprise nonperforming loans. Impaired loans
consist of nonaccrual and restructured loans. A loan is classified as
nonaccrual when it is determined that the collection of interest or
principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless such loan is well secured and in the
process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against
income in the current period. Interest collections after a loan has been
placed on nonaccrual status are credited to income when received unless
the collectibility of principal is in doubt, causing all collections to
be applied as principal reductions. A nonaccrual 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 minimum of six months.
Restructured loans are loans with original terms that have been modified
to below market rate terms as a result of a change in the borrower's
financial condition.
Foreclosed assets are comprised of properties acquired through
foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosures. In-substance
foreclosures are properties in which the borrower has little or no equity
in the collateral, where repayment of the loan is expected only from the
operation or sale of the collateral and the borrower either effectively
abandons control of the property or the borrower has retained control of
the property but the borrower's ability to rebuild equity based on
current financial conditions is considered doubtful. A loan is
classified as in-substance foreclosure when the Company has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. Foreclosed assets are recorded at the lower of
the related loan balance or its appraised fair value less estimated cost
to sell at the time of acquisition. Any excess of the loan balance over
the recorded value is charged to the allowance for loan losses.
Subsequent declines in the recorded value of the property prior to its
disposal and costs to maintain the assets are included in other expenses.
In addition, any gain or loss realized upon disposal is included in other
income or expense.
The following table sets forth information concerning nonperforming loans
and foreclosed assets for the last five years. The table includes all
credits classified for regulatory purposes as loss or doubtful. 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.
DISTRIBUTION OF NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993 1992 1991
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and others................................. $ 167 $ 45 $ 137 $ 227 $ 675
Real estate:
Construction...................................................
Mortgage....................................................... 1,164 1,352 1,497 1,067 1,185
Consumer, net.................................................... 40 14
______ ______ ______ ______ ______
Total nonaccrual loans....................................... 1,331 1,397 1,674 1,294 1,874
______ ______ ______ ______ ______
Loans past due 90 days or more:
Commercial, financial and others................................. 181 33 62 462 620
Real estate:
Construction...................................................
Mortgage....................................................... 1,633 1,194 1,130 2,375 1,490
Consumer, net.................................................... 336 197 374 285 323
______ ______ ______ ______ ______
Total loans past due 90 days or more......................... 2,150 1,424 1,566 3,122 2,433
______ ______ ______ ______ ______
Restructured loans............................................... 262 236 275
______ ______ ______ ______ ______
Total nonperforming loans.................................... 3,743 3,057 3,515 4,416 4,307
Other real estate................................................ 441 226 248 244 19
______ ______ ______ ______ ______
Total nonperforming assets................................... $4,184 $3,283 $3,763 $4,660 $4,326
====== ====== ====== ====== ======
Ratios:
Nonperforming assets as a percentage of loans, net............... 1.96% 1.69% 2.13% 2.87% 2.72%
Loans past due 90 days or more as a percentage of loans, net..... 1.01% 0.73% 0.89% 1.92% 1.53%
</TABLE>
Nonperforming assets, consisting of nonperforming loans and foreclosed
assets, totaled $4.2 million at December 31, 1995, compared to $3.3
million at December 31, 1994. The Company experienced a net increase of
$215 in foreclosed assets during 1995, as transfers of six loans from
nonaccrual status totaling $452 were offset by the sale of six properties
totaling $457, including net gains on such dispositions of $36. Also
included in other real estate was a property originally purchased by the
Company to be used as a site for a new branch office. As a result of the
downturn in the Company's financial condition prior to management's
corrective actions, management decided to suspend its plan and
transferred such property to other real estate at $220, which equals 80.0
percent of its appraised value with the difference being recorded in
other losses. The carrying values of all properties included in other
real estate were less than 80.0 percent of their collateral values at
December 31, 1995.
Nonperforming loans, consisting of accruing loans past due 90 days or
more and impaired loans, increased $686 during 1995. The increase in
nonperforming loans was principally due to the $726 rise in accruing
loans past due 90 days or more offset by a $40 decline in impaired loans.
The $40 change in impaired loans included gross loans placed into such
category of $1,081 and gross loans removed as a result of charge-offs,
transfers to other real estate and principal repayments totaling $69,
$457 and $595, respectively. Accruing loans past due 90 days or more
increased from $1.4 million at December 31, 1994, to $2.2 million at
December 31, 1995. Although concerned with the buildup, management is
aware that approximately 76.0 percent of these credits are secured by
real estate. The Company's historical loss experience on real estate
loans is extremely low. However, as a preventative measure, management
began emphasizing improved internal procedures with respect to delinquent
credits during the first quarter of 1996. Such procedures focus on early
detection and timely follow-up of past due loans in order to identify
potential problem loans and correct them prior to deteriorating. The
ratios of nonperforming assets and loans past due 90 days or more as a
percentage of total loans, net of 1.96 percent and 1.01 percent,
respectively, at December 31, 1995, compared unfavorably to ratios of the
peer group of 1.71 percent and 0.34 percent, respectively.
The Company's recorded investment in impaired loans, consisting of
nonaccrual and restructured loans, was $1,593 and $1,633 at December 31,
1995 and 1994, respectively. The average recorded investment in impaired
loans was $1,621 for 1995 and $2,075 for 1994. Impaired loans include a
$262 restructured loan to one commercial customer. Such credit has been
performing in accordance with its modified terms since the initial
restructuring of $315 in 1993 and the additional restructuring of $64 of
an existing loan to the same customer in 1995, with $38 in repayments
received in 1995. As a result of a 1994 reevaluation of the collateral
value of such loan, management feels confident that the credit is
adequately secured in order to eliminate any possibility of loss.
Interest income related to impaired loans would have been $57 and $136 in
1995 and 1994, respectively, had such loans been current and the terms
not been modified. Interest recognized on impaired loans amounted to $92
in 1995 and $45 in 1994. Included in these amounts is interest
recognized on a cash basis of $87 and $40, respectively. Cash received
on impaired loans applied as a reduction of principal totaled $595 in
1995 and $183 in 1994. There were no commitments to extend additional
funds to such parties at December 31, 1995 and 1994.
Classified assets are those assets cited by bank examiners, or by the
bank's internal rating system, as being at risk to a greater degree than
is considered desirable. Regulators separate classified assets into
three major categories based on degree of risk: substandard, doubtful and
loss. Accordingly, as part of their routine annual review process,
regulators from the FRB and Pennsylvania Department of Banking classified
assets of the Company at October 31, 1995. The result of such process
indicated a decline of 2.3 percent in the ratio of classified assets as a
percentage of Tier I capital from the September 30, 1994, examination.
The allowance for loan losses account is established through charges to
earnings in the form of a provision for loan losses. Loans, or portions
of loans, determined to be uncollectible are charged against the
allowance account with subsequent recoveries, if any, being credited to
the account. The allowance is maintained at a level believed adequate by
management to absorb estimated potential credit losses. While historical
loss experience provides a reasonable starting point in assessing the
adequacy of the allowance account, management also considers a number of
relevant factors likely to cause estimated credit losses associated with
the Company's current portfolio to differ from historical loss
experience. Such factors include changes in lending policies and
procedures, economic conditions, nature and volume of the portfolio, loan
review system, volumes of past due and classified loans, concentrations,
borrowers' financial status, collateral value and other factors deemed
relevant by management. In addition to management's assessment, various
regulatory agencies, as an integral part of their routine annual
examination process, review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments concerning information available to
them at the time of their examination. No such charge was deemed
necessary upon conclusion of the 1995 examination, as regulators
considered the Company's allowance for loan losses account adequate based
on the risk characteristics and size of the loan portfolio. Upon its
review of the 1995 regulatory report, management was not aware of any
significant recommendation with respect to the loan portfolio that would
materially affect future liquidity or capital resources.
Management utilizes the federal banking regulatory agencies' Interagency
Policy Statement on the Allowance for Loan and Lease Losses in assessing
the adequacy of its allowance for loan losses account. The policy
statement provides guidance on the nature and purpose of the allowance,
related responsibilities of the Board of Directors, management and
examiners, loan review systems and international transfer risk matters.
The Company implemented the analytical tool for assessing the
reasonableness of the allowance for loan losses account included in such
policy statement during the first quarter of 1994. The tool involves a
comparison of the reported loss allowance against the sum of specified
percentages, based on industry averages, applied to certain loan
classifications. The Company was considered adequately reserved at
December 31, 1995, based on the results of this regulatory calculation.
However, management will continue to perform a full and thorough analysis
of the bank's loan portfolio as such calculation does not take into
account differences between institutions, their portfolios, underwriting
and collection policies and credit-rating policies.
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
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:
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------- -------------- -------------- -------------- --------------
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A AS A
% OF % OF % OF % OF % OF
DECEMBER 31 AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others. $1,358 19.45% $1,188 15.13% $ 944 12.82% $ 722 13.38% $ 618 16.22%
Real estate:
Construction................... 0.47 1.42 2.88 3.06 1.95
Mortgage....................... 1,333 71.05 1,251 71.15 1,135 71.31 815 69.20 337 62.78
Consumer, net.................... 1,212 9.03 1,137 12.30 1,090 12.99 960 14.36 621 19.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........................ $3,903 100.00% $3,576 100.00% $3,169 100.00% $2,497 100.00% $1,576 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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 past five years:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993 1992 1991
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period................. $3,576 $3,169 $2,497 $1,576 $1,105
Loans charged-off:
Commercial, financial and others................................. 136 243 177 93 143
Real estate:
Construction...................................................
Mortgage....................................................... 171 176 263 233 56
Consumer, net.................................................... 86 131 140 178 248
------ ------ ------ ------ ------
Total........................................................ 393 550 580 504 447
------ ------ ------ ------ ------
Loans recovered:
Commercial, financial and others................................. 80 7 42 52 44
Real estate:
Construction...................................................
Mortgage....................................................... 144 64 69 44
Consumer, net.................................................... 61 86 61 44 54
------ ------ ------ ------ ------
Total........................................................ 285 157 172 140 98
------ ------ ------ ------ ------
Net loans charged-off............................................ 108 393 408 364 349
------ ------ ------ ------ ------
Provision charged to operating expense........................... 435 800 1,080 1,285 820
------ ------ ------ ------ ------
Allowance for loan losses at end of period....................... $3,903 $3,576 $3,169 $2,497 $1,576
====== ====== ====== ====== ======
Ratios:
Net loans charged-off as a percentage of average loans
outstanding..................................................... 0.05% 0.21% 0.23% 0.22% 0.23%
Allowance for loan losses as a percentage of period end loans.... 1.83% 1.84% 1.80% 1.54% 1.00%
</TABLE>
The allowance for loan losses, against which loans are charged-off, was
$3.9 million at December 31, 1995, representing 1.83 percent of loans,
net, compared to $3.6 million and 1.84 percent at December 31, 1994.
Improved success rates in loan collections coupled with monthly
provisions to the allowance account provided the greatest influence to
the increased volume. In comparison, the peer group reported ratios of
1.43 percent and 1.46 percent at December 31, 1995 and 1994,
respectively.
Included in the allowance account were amounts for impaired loans of
$1,331 in 1995 and $1,397 in 1994 for which there are related allowances
for loan losses of $614 and $488, respectively. The recorded investment,
for which there was no related allowance for loan losses, was $262 and
$236 at December 31, 1995 and 1994, respectively. In 1995, activity in
the allowance for loan losses account related to impaired loans included
a provision charged to operations of $4, losses charged to the allowance
of $69 and recoveries of amounts charged-off of $191.
As a percentage of nonperforming loans, the allowance account covered
104.3 percent and 117.0 percent at year-end 1995 and 1994, respectively.
Relative to all nonperforming assets, the allowance covered 93.3 percent
at December 31, 1995, and 108.9 percent at December 31, 1994. In
response to the increase in nonperforming assets and delinquent credits,
management remained cautious and built its allowance. Management may
consider reducing the provision credited to the allowance account upon
improvements in nonperforming asset levels.
Past due loans that have not been satisfied through repossession,
foreclosure or related actions, are evaluated on an individual basis to
determine if all or part of the outstanding balance should be charged
against the allowance for loan losses. Subsequent recoveries, if any,
are credited to the allowance account. Net charge-offs were $108 or 0.05
percent of average loans outstanding in 1995 compared to $393 or 0.21
percent in 1994. The peer group reported net charge-offs as a percentage
of average loans outstanding of 0.20 percent and 0.27 percent in 1995 and
1994, respectively. Historically, the Company has exceeded the
delinquency levels of its peers, however such levels do not appear to
equate the realization of losses, as the Company's net charge-off ratios
are consistently below the peer group ratios. Approximately 36.4 percent
of the gross charge-off activity in 1995 resulted from recognizing write-
downs upon reappraisals of collateral securing nonaccrual loans in
accordance with maintaining appropriate loan-to-value ratios. Management
expects 1996 net charge-off levels to revert to those experienced prior
to 1995 should local unemployment rates escalate.
DEPOSITS:
In 1995, banks throughout the nation experienced a rebirth in personal
savings patterns despite a decline in the interest rate environment.
Personal savings rates, a measure of savings as a percentage of
disposable after-tax income, rose to 4.4 percent in 1995 compared to 3.8
percent in 1994. Demographics played an instrumental role in this
increase as the "baby boomer" generation approached its peak earning
years and began to increase savings in preparation for retirement.
Increased savings levels cause consumer spending levels to slow at a
greater rate but may aid in controlling inflation and reducing interest
rates. Such reductions in interest rates occur because there is more
money being deposited into savings accounts, which leads to banks having
greater access to funds for lending, thus lowering borrowing costs for
consumers and businesses. The falling interest rate environment caused a
change in the deposit structure of banks as customers chose shorter term
deposit products in place of those products having longer maturities.
One-year certificates of deposit had only a 76 basis point decrease
compared to 1994 while the five-year product declined by nearly double
that amount, closing 1995 at 5.31 percent. Overall, retail time deposits
grew over $100 billion during 1995, approximately twice the amount of
1994. Aggregate deposit growth for United States financial institutions
was 6.6 percent in 1995. Management expects savings levels to rise
throughout 1996 as customers build reserves in response to their
continued concerns over employment security.
The following table sets forth the average amount of, and the rate paid
on, the major classifications of deposits for the past five years:
DEPOSIT DISTRIBUTION
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
YEAR ENDED DECEMBER 31 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing:
Money market accounts..... $ 21,869 3.47% $ 23,955 3.31% $ 22,267 3.26% $ 22,819 3.84% $ 20,350 5.39%
NOW accounts.............. 15,550 1.96 15,151 1.96 14,406 2.35 13,742 3.36 11,197 4.75
Savings accounts.......... 71,911 3.25 83,142 3.13 73,400 3.34 56,288 4.21 36,883 5.35
Time less than $100....... 155,183 5.75 139,641 4.94 131,572 5.26 130,753 6.19 123,604 7.65
Time $100 or more......... 29,336 6.04 25,995 5.97 25,960 5.02 25,956 6.11 28,700 7.55
-------- -------- -------- -------- --------
Total interest-bearing.. 293,849 4.80% 287,884 4.22% 267,605 4.39% 249,558 5.36% 220,734 6.89%
Noninterest-bearing....... 24,090 21,849 19,657 18,657 16,056
-------- -------- -------- -------- --------
Total deposits.......... $317,939 $309,733 $287,262 $268,215 $236,790
======== ======== ======== ======== ========
</TABLE>
Total deposits averaged $317.9 million in 1995 as compared to $309.7
million in 1994, an increase of 2.6 percent. The average growth
experienced by Northeastern Pennsylvania banks was 7.6 percent for the
comparable period. The majority of the Company's deposit growth occurred
during the second quarter as deposits grew at an annualized rate of 12.6
percent. Most of the second quarter growth was attributable to an
increase in retail time deposits as management aggressively competed for
funds in order to reduce its reliance on FHLB short-term borrowings to
fund normal daily operations. Once management resolved the Company's
liquidity problem, it became less competitive with respect to product
pricing as evidenced by a significantly slower growth rate in deposit
volumes of 4.4 percent annualized during the third quarter of 1995.
Management made further reductions in rates during the fourth quarter of
1995 as the proceeds from the investment portfolio reconstitution
resulted in a liquidity surplus. Such action, coupled with normal
cyclical deposit reductions caused by increased spending during the
holiday season, resulted in the Company reporting an annualized decline
of 8.8 percent in deposits during the fourth quarter of 1995. The
deposit composition changed as evidenced by a decline in the average
volume of transaction accounts as a percentage of average total deposits
from 46.5 percent to 42.0 percent in 1994 and 1995, respectively. Such
change is a function of depositors sacrificing accessibility by
transferring funds from lower-yielding transaction accounts to higher-
yielding time deposits. Although beneficial in funding loan demand, the
growth of retail certificates of deposit will further the Company's
reliance on higher-costing funding sources. Average time deposits
accounted for 51.4 percent of average assets during 1995 as compared to
36.9 percent for the peer group. The Company also experienced a downward
shift in its average core deposits to average total deposits from 91.6
percent in 1994, to 90.8 percent in 1995. The Company's cost of deposits
rose from 4.2 percent in 1994 to 4.8 percent in 1995 as compared to the
peer group's cost from 3.7 percent to 4.5 percent, respectively. The
average rate on certificates of deposit less than $100 increased from 5.5
percent during the first quarter of 1995 to 5.9 percent during the fourth
quarter of 1995. Management anticipates a reduction in the Company's
cost of funds during 1996 as a result of its improved liquidity position.
An integral part of achieving lower costs is dependent on the Company's
ability to build its base of noninterest-bearing deposits. The Company's
noninterest-bearing deposits grew $1.9 million from $23.5 million at
December 31, 1994, to $25.4 million at December 31, 1995. Average
volumes of noninterest-bearing deposits increased from $21.8 million to
$24.1 million in 1994 and 1995, respectively and comprised 6.7 percent of
total average assets for 1995, compared to 6.2 percent for 1994. Such
improvement resulted from building stronger relationships with local
businesses and municipalities.
Volatile deposits, time deposits in denominations of $100 or more,
decreased from $30.2 million at December 31, 1994, to $29.7 million at
December 31, 1995, however the Company exhibited a lesser reliance on
such funding as compared to the peer group during 1995. Average volatile
deposits, as a percentage of average assets, was 8.2 percent in 1995 as
compared to 8.7 percent for the peer group. The average cost of such
funds rose 14 basis points during 1995. The slight decline in the volume
of volatile deposits resulted from management's choice not to
aggressively compete for these deposits during 1995 due to their higher
cost and the Company's improved liquidity position.
The following table sets forth maturities of time deposits of $100 or
more for the past five years:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994 1993 1992 1991
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within three months............................................. $ 6,466 $ 7,861 $ 5,817 $ 4,529 $ 9,180
After three months but within six months........................ 6,646 4,200 5,447 6,133 9,045
After six months but within twelve months....................... 8,590 10,740 5,957 5,242 7,707
After twelve months............................................. 7,982 7,410 7,060 8,179 4,187
------- ------- ------- ------- -------
Total......................................................... $29,684 $30,211 $24,281 $24,083 $30,119
======= ======= ======= ======= =======
</TABLE>
As a result of the aforementioned actions taken to improve the liquidity
posture of the Company, management effectively eliminated its reliance on
borrowings to fund normal operations. During the second quarter of 1995,
the Company's reliance on borrowed funds peaked at $34.6 million, funding
10.2 percent of earning assets. At December 31, 1995, aggregate
borrowings amounted to $3.1 million or 0.9 percent of earning assets.
The Company's total borrowings averaged $14.7 million with a weighted
average rate of 6.2 percent in 1995 as compared to $16.2 million at 4.9
percent in 1994. The higher cost of such funding was a result of an
increase in the cost of short-term borrowings from 4.9 percent in 1994 to
6.8 percent in 1995.
At December 31, 1995, the Company had no short-term borrowings
outstanding. At December 31, 1994, total short-term borrowings amounted
to $16.0 million at 6.6 percent. Short-term borrowings consisted of a
line of credit and fixed-rate advances with the FHLB secured under terms
of a blanket collateral agreement by a pledge of FHLB stock and certain
other qualifying collateral, such as investment and mortgage backed
securities and mortgage loans. Such line had a maximum borrowing
capacity equal to 10.0 percent of total assets and accrued interest daily
based on the federal funds rate. The line is renewable on the first day
of each calendar year and carries no associated commitment fees. The
FHLB has the right to reduce or terminate the line at any time without
prior notice and the Company may repay such line at any time without
incurring prepayment penalties. Short-term fixed-rate advances are
issued with maturities less than one year based on the FHLB's current
cost of funds rate. Such advances are limited to the Company's maximum
borrowing capacity based on a percentage of qualifying collateral assets.
There are no commitment fees and the advance may be prepaid at the option
of the Company upon payment of a prepayment fee. The prepayment fee
applicable to FHLB advances is equal to the present value of the
difference between cash flows generated at the advance rate from the date
of the prepayment until the original maturity date, and the cash flows
resulting from the interest rate posted by the FHLB on the date of
prepayment for an advance of comparable maturity. The average daily
balance of aggregate short-term borrowings was $9.9 million in 1995 and
$11.2 million in 1994. The maximum amount of all short-term borrowings
outstanding at any month-end was $28.0 million and $19.4 million during
1995 and 1994, respectively. The FHLB line of credit included in total
short-term borrowings had an average daily balance of $3.6 million and
weighted average rate of 6.2 percent during 1995. The maximum amount of
such loan outstanding at any month-end was $17.6 million during 1995.
Short-term borrowings during 1994 consisted entirely of the FHLB line of
credit.
In addition, the Company reduced its long-term debt by $2.0 million
during 1995 as a 5.7 percent fixed-rate advance was redeemed at the
option of management. No prepayment fee was required upon redemption of
such note as the interest rate on the advance approximated the prevailing
interest rate at the date of the prepayment for advances of the same
amount and terms.
INTEREST RATE SENSITIVITY:
Interest rate sensitivity management attempts to limit and, to the extent
possible, control the effects interest rate fluctuations have on net
interest income. The responsibility of such management has been
delegated to the Asset Liability Management Committee ("ALCO").
Specifically, ALCO utilizes a number of 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 an RSA/RSL ratio
greater than 1.0, means that earnings will be impacted 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.
Pursuant to the guidelines set forth in the MOU, management was required
to submit to the FRB a written plan to limit and/or reduce the Company's
overall exposure to interest rate risk. Such plan was required to
consider the Company's earning capacity, capitalization and funding
profile. On August 2, 1995, the Company submitted to the FRB an interest
rate mitigation plan. Such plan was deemed acceptable by the FRB on
August 22, 1995. According to the FRB, such plan provided a very
comprehensive assessment of the Company's overall exposure to interest
rate risk, including a summary of how changes in interest rates would
impact the Company's earnings performance, liquidity provisions and
capital position. Also addressed were actions taken to reduce the
Company's overall exposure and management's plans to further mitigate the
Company's risks through the reconstitution of the available for sale
portfolio and the restructuring of the Company's balance sheet.
Additional strategies outlined in the plan, which the Company considers
proprietary in nature, included the disposition of securities having a
high degree of market value and liquidity risk, development and
enhancement of monitoring and reporting systems to demonstrate that the
Company has an understanding and ability to manage risk and the
development of investment policies and procedures and an asset/liability
policy to control and monitor the Company's interest rate exposure.
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 there is no
change in the current interest rate environment.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
DECEMBER 31, 1995 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities.............. $ 16,212 $ 19,774 $ 43,540 $ 29,180 $108,706
Loans, net of unearned income...... 70,529 17,389 54,808 71,109 213,835
Interest-bearing balances.......... 26 90 116
Federal funds sold................. 15,100 15,100
-------- -------- -------- -------- --------
Total............................ $101,867 $ 37,253 $ 98,348 $100,289 $337,757
======== ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts.............. $ 19,252 $ 19,252
NOW accounts....................... 14,989 14,989
Savings accounts................... $ 299 $ 68,423 68,722
Time deposits less than $100....... 25,801 64,523 68,699 $ 6 159,029
Time deposits $100 or more......... 6,834 14,868 7,982 29,684
Other borrowings................... 3,000 48 3,048
-------- -------- -------- -------- --------
Total............................ $ 32,934 $116,632 $145,152 $ 6 $294,724
======== ======== ======== ======== ========
Rate sensitivity gap:
Period........................... $ 68,933 $(79,379) $(46,804) $100,283
Cumulative....................... $ 68,933 $(10,446) $(57,250) $ 43,033 $ 43,033
RSA/RSL ratio:
Period........................... 3.09 0.32 0.68 16,714.83
Cumulative....................... 3.09 0.93 0.81 1.15 1.15
</TABLE>
Management has effectively lessened the Company's exposure to changing
interest rates as represented by the improvement in its ratio of rate
sensitive assets to rate sensitive liabilities repricing within one year
from 0.84 at December 31, 1994, to 0.93 at December 31, 1995. Based upon
the guidelines set forth in the Company's asset/liability management
policy, this ratio falls within the 0.7 and 1.3 deemed by management to
be acceptable. Such an improvement was directly attributable to the
Company's disposal of long-term investment securities. The proceeds from
such sales were used to retire short-term debt and invest in short-term
securities and loans. The Company's cumulative one-year gap position
improved as a result of such action, partially offset by an increase in
the volume of retail time deposits repricing within one year. Such
deposits amounted to $79.4 million at December 31, 1994, as compared to
$90.3 million at December 31, 1995.
Based on the static gap model at December 31, 1995, it appears the
Company is properly matched to guard against risk from fluctuations in
interest rates. However, management is aware that should such an
interest rate fluctuation occur, depositors could shift funds from
transaction accounts into retail time deposits causing an increase in
fund costs. Such a shift would negate some of the positive effects of
short-term 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 rate sensitivity throughout the year. Finally, assumptions
must be made in constructing such a table. For example, the conservative
nature of the Company's asset/liability management policy assigns money
market and NOW accounts to the due after three but within twelve months
repricing 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 December 31,
1995, indicate that a decline in net interest income of 5.4 percent is
expected should there be a parallel and instantaneous rise in interest
rates of 100 basis points. Conversely, a similar decline in interest
rates would result in a 4.9 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 precisely measure the impact of inflation on
the Company, however management believes that its exposure to interest
rate changes has been limited through asset/liability management.
LIQUIDITY:
Liquidity is defined as a company's 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/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.
In accordance with the requirement of the MOU, the Company developed a
liquidity plan during the third quarter of 1995. Such plan was
submitted to the FRB on August 21, 1995, and was deemed acceptable on
September 21, 1995. The mission of such 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. The Company's liquidity plan consists of an assessment of
its current liquidity position and includes determining appropriate
standards for the volume, mix, price and maturity of loans, investments
and deposits. In addition, management ascertains 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
position. Finally, the plan introduced strategies to assure future
liquidity. Such strategies, which the Company considers proprietary in
nature, include the maintenance of a minimum net federal funds sold
cushion, a capital contingency strategy and enhanced strategies on loan
and deposit pricing.
The most significant action taken during 1995 in improving the liquidity
position of the Company occurred on September 30, 1995, when the Board of
Directors voted unanimously to reconstitute the entire investment
portfolio. Such action eliminated the Company's reliance on short-term
borrowings and certain securities having long average lives that
exhibited high degrees of market price volatility and those securities
that were exposed to extension risk. The reconstituted portfolio
consists 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 severe losses in market value during a rising
interest rate environment. Other actions taken in 1995 to alleviate the
Company's liquidity strains included the introduction of a program to
aggressively compete for deposits during the second quarter of 1995 and
the disposition of its student loan portfolio.
As a result of such actions and the institution of the liquidity plan,
the Company showed a marked improvement in its liquidity position in 1995
compared to 1994. The Company's temporary investments to volatile
liabilities and its volatile liabilities less temporary investments to
total assets less temporary investments ratios improved dramatically from
8.7 percent and 11.8 percent at December 31, 1994, respectively, to 118.9
percent and negative 1.8 percent at December 31, 1995, respectively.
These ratios were also well above the 110.9 percent and 0.7 percent
respectively, recorded by the peer group at year-end 1995. By placing
emphasis on the composition of the investment portfolio, management
expects continued stability in these ratios.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities.
Cash and cash equivalents, consisting of cash and due from banks and
federal funds sold, increased $15.2 million in 1995. Net cash provided
by operating activities totaled $4.6 million and resulted primarily from
net income adjusted for deferred income taxes and securities losses.
Net cash provided by investing activities of $28.1 million was the major
component of the net increase in cash and cash equivalents. The major
component of the inflow from investing activities was investment sales
and repayments in excess of investment purchases partially offset by the
net increase in lending activities. The $47.7 million in net cash
provided through security activities resulted primarily from receiving
proceeds from sales of available for sale investment securities of $87.1
million. Such sales were in line with the Company's efforts to
reconstitute the portfolio to mitigate risk through higher quality
investments with shorter average lives and more stable cash flows. The
$25.4 million net outflow from lending activities consisted almost
entirely of short-term loans issued to various banks during the fourth
quarter of 1995.
Net cash used in financing activities totaled $17.5 million in 1995,
principally as a result of the Company reducing its short-term borrowings
by $16.0 million for the year as well as paying off a $2.0 million long-
term note in the fourth quarter. Partially offsetting these decreases
was an increase in deposits of $1.0 million.
CAPITAL ADEQUACY:
Stockholders' equity improved $5.2 million during 1995 principally due to
the reversal in the Company's unrealized holding adjustment. The Company
reported a net unrealized holding loss of $4.7 million at December 31,
1994, and a net unrealized holding gain of $780 at December 31, 1995.
The implementation of the reconstitution plan during 1995 limited the
Company's exposure to interest rate risk through improvements in the
quality, composition and structure of the investment portfolio. Such
improved risk position makes the Company less susceptible to market
depreciation on available for sale securities resulting from rising
interest rates.
Management attempts to assure capital adequacy by monitoring the current
and projected positions of the Company to support future growth, while
providing stockholders with an attractive long-term appreciation of their
investments. The recent history of bank failures resulted in regulatory
agencies adopting minimum capital adequacy requirements that include
mandatory and discretionary supervisory actions for noncompliance. At a
minimum, banks must maintain a Tier I capital to risk-adjusted assets
ratio of 4.0 percent and a total capital to risk-adjusted assets ratio of
8.0 percent. In addition, banks must maintain a Leverage ratio, defined
as Tier I capital to total average assets less goodwill, of 3.0 percent.
Institutions not possessing the highest regulatory composite rating or
those experiencing significant growth are expected to operate well above
such minimum capital standards. In the event an institution is deemed to
be undercapitalized by such standards, banking law prescribes an
increasing amount of regulatory intervention, including the required
institution of a capital restoration plan and restrictions on the growth
of assets, branches or lines of business. Further restrictions are
applied to institutions that reach the significantly or critically
undercapitalized levels, including restrictions on interest payable on
accounts, dismissal of management and appointment of a receiver. For
well-capitalized institutions, banking law provides authority for
regulatory intervention where the institution is deemed to be engaging in
unsafe and unsound practices or receives a less than satisfactory
examination report rating for asset quality, management, earnings or
liquidity.
Effective December 31, 1994, the Federal Reserve Board issued a final
rule with respect to the implementation of SFAS No. 115 for regulatory
capital reporting purposes. Under this final rule, banks not subject to
a supervisory directive will exclude unrealized holding gains and losses,
net of income taxes, on available for sale debt securities when
calculating Tier I capital. However, net unrealized holding losses on
available for sale marketable equity securities will continue to be
deducted from Tier I capital. Such regulatory accounting rule does not
affect reporting for financial statement purposes. Accordingly for
financial accounting presentations, banks will continue to report
available for sale debt and equity securities at fair value, with
unrealized holding gains and losses, net of income taxes, excluded from
earnings and reported in a separate component of stockholders' equity.
The following table sets forth the risk-adjusted core and total capital
calculations at December 31, 1995 and 1994:
RISK-ADJUSTED CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital.......................................................................... $ 24,845 $ 24,839
Tier II capital......................................................................... 2,203 3,338
-------- --------
Total capital......................................................................... $ 27,048 $ 28,177
======== ========
Risk-adjusted assets.................................................................... $170,089 $175,093
Risk-adjusted off-balance sheet items................................................... 4,489 4,632
Adjusted average assets for Leverage ratio.............................................. $357,410 $348,422
Tier I capital as a percentage of risk-adjusted assets and off-balance sheet items...... 14.2% 13.8%
Total of Tier I and Tier II capital as a percentage of risk-adjusted assets and off-
balance sheet items.................................................................... 15.5 15.7
Tier I capital as a percentage of total average assets less goodwill.................... 7.0% 7.1%
</TABLE>
In accordance with the MOU, which became effective May 24, 1995, and was
terminated on February 16, 1996, the Company was required to maintain a
Tier I Leverage ratio of no less than 5.0 percent after adjusting for
unrealized holding losses, net of income taxes, in securities classified
as available for sale and those high-risk securities and structured notes
classified as held to maturity. At December 31, 1995, the Company
classified all securities as available for sale, which had an unrealized
holding gain, net of income taxes, of $780. Accordingly, such adjustment
is not required to be included in the preceding table. At December 31,
1994, the Company exceeded all requirements of the well-capitalized
regulatory classification that include a total risk-based ratio of at
least 10.0 percent, a Tier I ratio of at least 6.0 percent and a Leverage
ratio of at least 5.0 percent. Although the Company exceeded the
required ratio levels to be considered well-capitalized at December 31,
1995, such designation could not be given as a result of the MOU
provision requiring it to meet and maintain the specified capital level.
Subsequent to the termination date of the MOU, the Company regained its
well-capitalized status.
In addition, the MOU required the Company to submit a written plan to
maintain an adequate capital position acceptable to the FRB, taking into
account the risk inherent in the Company's securities portfolio. Such
plan was submitted to the FRB on July 21, 1995, and was deemed acceptable
on September 8, 1995. The plan was required to address, at a minimum,
(I) the current and future capital requirements of the Company, including
the maintenance of capital ratios well in excess of minimum regulatory
guidelines; (II) the market value of the Company's securities and the
resulting effect on the Company's capital; (III) the maintenance of a
Tier I Leverage ratio of no less than 5.0 percent after adjusting for
market depreciation, net of applicable taxes, in securities classified as
available for sale and those high-risk securities and structured notes
classified as held to maturity; (IV) any planned growth in the Company's
assets; (V) the Company's anticipated level of net earnings, taking into
account the Company's projected asset/liability position and exposure to
changes in market interest rates; and (VI) the source and timing of
additional funds to fulfill the future capital requirement set forth in
the MOU. The submitted plan covered the period from July 1, 1995, to
June 30, 1998, taking into account the market value of the Company's
securities and the resulting effect on capital position under four
different interest rate scenarios. It was noted that the Company's
Leverage ratio is not projected to fall below the 5.0 percent minimum,
pursuant to the MOU, during the period covered by the plan. Also
included in the plan were contingency strategies that could be followed
in the event the Company's ratios did fall below regulatory guidelines.
Such strategies, which the Company considers proprietary in nature,
include recognition of the economic loss in the Company's investment
portfolio and the generation of capital through other means.
On August 2, 1995, the Federal Reserve Board issued a final rule revising
risk-based capital standards to implement section 305 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
regarding interest rate risk ("IRR"). Such ruling went into effect on
September 1, 1995. This will allow regulatory agencies to consider the
potential negative effects changes in interest rates may have on the
economic value of a company's capital when determining its economic
needs. This amendment created a standardized supervisory measurement
system model that will measure the risk of banks not exempt from
reporting additional information on their IRR exposure. In addition,
banks are encouraged to report the results of their internal IRR systems.
The regulatory agencies will consider both a rising and falling rate
scenario based on a 200 basis point parallel change in market interest
rates for all maturities when measuring a bank's IRR exposure level for
adequacy. Such scenarios may be modified based on current and historical
interest rate levels and volatilities as well as other relevant market
and supervisory considerations. For model purposes, banks need to report
assets, liabilities and off-balance sheet item maturities for various
time intervals. The appropriate time interval is determined by using
guidelines set forth by the regulatory agencies. Once the bank's assets,
liabilities and off-balance sheet items have been classified into the
appropriate time intervals, they are multiplied by IRR risk weights. The
result is the bank's IRR exposure. The risk weights are designed to
approximate the percentage change in the value of the reported position
that would result from a 200 basis point instantaneous and uniform
movement in market interest rates. Banks having fixed-rate residential
mortgages exceeding 20.0 percent of total assets or adjustable-rate
residential mortgage holdings exceeding 10.0 percent of total assets must
provide additional disclosures to the agencies.
Upon review of the supervisory model and the bank's internal model,
examiners will determine the amount of capital needed to be held by the
bank should such bank have high levels of measured exposure or weak
management systems. This determination as well as the examiners' overall
IRR conclusions will be discussed with management at the end of the
bank's examination. During interim periods, the agencies will use the
model to monitor a bank's IRR exposure changes, making decisions as to
supervisory actions when warranted. Based on the results of the
Company's internal IRR system, it is management's opinion that the
Company was adequately capitalized at December 31, 1995.
The Company's dividends declared increased from $455 or $.62 per share to
$462 or $.63 per share for the years of 1994 and 1995, respectively. The
capital appreciation of the Company's common stock amounted to 5.0
percent for the year ended December 31, 1995. It is the present
intention of the Board of Directors to continue to increase dividends in
the future. However, these decisions will depend on operating results,
financial and economic conditions, capital needs, growth objectives,
appropriate dividend restrictions related to the Company and its
subsidiary and other relevant factors. The Company's ability to pay
dividends to its stockholders is limited by its ability to obtain funds
from its subsidiary as specified by federal and state regulations.
Accordingly, the subsidiary without prior approval of bank regulators,
may declare dividends to the Company in 1996 totaling $1,612 plus net
profits earned by the subsidiary for the period from January 1, 1996,
through the date of declaration, less dividends previously paid in 1996.
REVIEW OF FINANCIAL PERFORMANCE:
The nation's top 50 commercial banks posted a $32.1 billion profit for
1995, a 9.0 percent increase over the 1994 level. Higher noninterest
income and lower noninterest expenses were the major components in
improved earnings partially offset by a tightening of the net interest
margin. Noninterest income levels, excluding securities transactions and
nonrecurring income, increased 11.0 percent over 1994 recorded levels
while noninterest expenses were confined to a 5.0 percent rise. The net
interest margin of such banks narrowed from 4.1 percent in 1994 to 3.9
percent in 1995.
Over $42.0 billion in bank mergers occurred in 1995, nearly four times
the activity of 1994. An easing of interstate banking laws, in response
to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, made bank mergers a more attractive option. In addition,
consolidations and restructuring within the industry continued during
1995 as institutions anticipate interstate branching. Such activities
influence earnings levels of the banking industry in several ways.
Mergers often lead to higher service charges as larger banks tend to
charge higher fees and usually require larger minimum balances than
smaller banks. Over the past two years, large bank service charges have
risen at twice the inflation rate. Also, services that were free to
customers in the past now carry charges. Mergers also reduce noninterest
expenses for banks. Expense benefits associated with bank mergers are
cost reductions from the consolidation of offices, elimination of
branches and personnel downsizing. On average, banks that made
acquisitions during 1995 reduced the expenses of the acquired bank by
38.0 percent. Noninterest expenses were also aided by the August 8,
1995, decision by the FDIC to reduce insurance premiums paid by banks.
This decision provided savings of approximately $4.0 billion for the
banking industry. FDIC insurance premiums have been lowered again
effective January 1, 1996, and are estimated to save banks approximately
$1.0 billion dollars for the year.
The beneficial effects from the improvements in noninterest income and
expenses were partially offset by tighter net interest margins. As
market interest rates fell in 1995, the importance of deposits as a
funding source and the value of customer relationships, as openings to
offer other products, kept institutions from lowering rates to the same
degree as experienced in general market rates.
Bank earnings in 1996 are expected to remain relatively unchanged from
1995 levels as improved cost controls are offset by higher provisions for
loan losses and continued pressure on net interest margins. Declines in
recoveries of charged-off loans and greater volumes of nonperforming
loans are expected to result in higher loan loss provisions. Such
increases in nonperforming loans along with more aggressive competition
for loans and deposits will restrict the earning potential of the banking
industry for 1996.
The Company's reported net income for the year ended December 31, 1995,
was $200 compared to $3,325 in 1994. On a per share basis, earnings were
$0.27 for the year, compared with $4.53 reported in 1994. The material
reduction in net income was a direct result of the Company's recognition
of nonrecurring losses from restructuring the investment portfolio and
nonrecurring costs associated with its compliance to the MOU. Net
income, excluding such one-time adjustments, would have totaled $3.4
million in 1995 similar to the comparable net income of 1994. The return
on average assets and return on average stockholders' equity were 0.06
percent and 0.77 percent in 1995, respectively, as compared to 0.95
percent and 14.26 percent in 1994, respectively. Adjusting for the
aforementioned nonrecurring charges, return on average assets and return
on average equity would have been 0.95 percent and 13.17 percent,
respectively, in 1995. The comparable ratios of the peer group were 1.11
percent and 11.18 percent in 1995, respectively.
Net interest income on a tax equivalent basis declined from $12,760 in
1994 to $12,215 in 1995. Such reduction was a product of the Company's
cost of funds increasing at a greater rate than its yield on earning
assets. Interest income on a tax equivalent basis increased $1,507 from
$25,702 in 1994 to $27,209 in 1995. Interest expense increased $2,052
from $12,942 in 1994 to $14,994 in 1995.
As a result of being adequately reserved after consideration of the
Company's loan volume and asset quality, management reduced its monthly
provision charged to operations during 1995. Accordingly, the loan loss
provision declined from $800 in 1994 to $435 in 1995.
Noninterest income recorded a loss of $3,196 in 1995, a decrease of
$4,201 compared to 1994. The majority of such decrease was attributable
to reporting investment securities losses of $4,393 in 1995 as opposed to
net investment and trading securities losses of $161 in 1994. Revenue
from service charges, fees and commissions increased $31 from 1994 to
1995.
Noninterest expense totaled $8,194 in 1995, an increase of $245, or 3.1
percent, compared to 1994. During 1995, the rise in salaries and
employee benefits expense and other expenses of $246 and $26,
respectively, was partially offset by a decline in net occupancy and
equipment expense of $27. The unfavorable variance of $245 includes
nonrecurring expenses of approximately $500 associated with compliance to
the MOU.
NET INTEREST INCOME:
The Company derives its largest source of operating income from net
interest income. Net interest income is defined as the amount by which
interest and fees on loans and other investments exceeds interest expense
incurred on deposits and other funding sources used to support such
assets. Net interest margin is the percentage of net interest income on
a tax equivalent basis to average earning assets. Changes in volumes and
rates of earning assets and liabilities, in response to changes in
general market rates, are the primary factors affecting net interest
income. Additional factors influencing the level of net interest income
include the composition of earning assets and interest-bearing
liabilities and the level of nonperforming assets.
Net interest income on a tax equivalent basis decreased to $12,215 in
1995, a reduction of $545 or 4.3 percent, compared to 1994. Such
reduction resulted from a decline in the Company's net interest margin
partially offset by the growth in average earning assets exceeding that
of interest-bearing liabilities. Management anticipates an increase in
net interest income during 1996 if successful in building the Company's
loan portfolio and reducing its cost of funds. In following its strategy
of becoming a traditional community bank, management plans to emphasize
loan growth through competitive pricing and offering new and enhanced
credit products. The Company's improved liquidity position should also
aid in increasing net income as it will not be forced to aggressively
compete for funds or be reliant on high-cost borrowings. However, higher
levels of impaired loans may result if local unemployment conditions
deteriorate thus diluting such positive influences.
Changes in the volumes of average earning assets in excess of average
interest-bearing liabilities resulted in a positive influence of $50 on
net interest income. Total average earning assets increased $4.9 million
to $351.2 million in 1995 while average interest-bearing liabilities
increased $4.4 million to $308.5 million in 1995. The Company
experienced a 5.7 percent increase in its volume of average loans from
$189.0 million to $199.7 million in 1994 and 1995, respectively. Such
increase was responsible for $915 of the improvement in interest income
as a result of volume changes. The other major contributor to the
favorable rise in interest income was the higher average volume of
federal funds sold in 1995, which contributed $977 to the rise in
interest income. Average federal funds sold increased $16.8 million
during 1995 as management invested proceeds from the sales of securities
into such funds in response to a flattening yield curve. The decision to
reconstitute the investment portfolio led to a $1,327 unfavorable volume
variance in investments. The average volume of investments declined
$22.5 million or 14.3 percent to $134.5 million during 1995. The
unfavorable volume variance of $508 in interest expense partially offset
the favorable volume variance of $558 in interest income. Increased
volumes of retail and commercial time deposits, partially offset by
decreased savings volumes, were the major contributors to such variance.
Average aggregate time deposits grew from $165.6 million in 1994 to
$184.5 million in 1995 as customers sacrificed accessibility to obtain
higher yields.
The Company's unfavorable rate variance of $595 in net interest income
for the comparable years of 1994 versus 1995 resulted from a decline in
the Company's net interest margin as earning assets yield rose at a
slower pace than cost of funds. The Company's net interest margin
decreased by 20 basis points from 3.68 percent in 1994 to 3.48 percent in
1995 while its net interest spread fell 27 basis points from 3.16 percent
to 2.89 percent for the same period. Earning assets yield rose from 7.42
percent to 7.75 percent while funds cost rose from 4.26 percent to 4.86
percent for the comparable years of 1994 and 1995. The cost of funds
increase came in response to the Company's aggressive retail time deposit
product pricing in light of prior liquidity strains. Such pricing was
responsible for $1,202 of the $1,544 negative rate variance in interest
expense. A $949 positive rate variance associated with interest income
partially offset the negative rate impact on interest expense. Such
increase came primarily from the loan portfolio as it accounted for $654
of the increase. Loan yields rose 33 basis points in 1995 from 8.48
percent to 8.81 percent. Should lending rates continue to decline, the
Company's return on the loan portfolio will flatten or decline as
competition for loan demand intensifies. Management expects the
Company's net interest margin to improve during 1996 as its strengthened
liquidity position allows it to be more selective in competing for funds.
Management analyzes interest income and interest expense by segregating
volume and rate components of earning assets and interest-bearing
liabilities. The following table demonstrates the impact changes in the
interest rates earned and paid on assets and liabilities, along with
changes in the volume of earning assets and interest-bearing liabilities,
have on net interest income. Earning assets averages include nonaccrual
loans. Investment averages include available for sale securities at
amortized cost. Investment securities and loans are 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 allocated
proportionately to the change due to rate and the change due to volume.
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
-------------------------- --------------------------
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......................................... $ 1,477 $ 638 $ 839 $ 13 $(1,124) $1,137
Tax-exempt...................................... 92 16 76 46 (60) 106
Investments:
Taxable......................................... (1,037) 305 (1,342) 864 (477) 1,341
Tax-exempt...................................... 1 (14) 15 229 (109) 338
Interest-bearing deposits with banks.............. (8) (1) (7) (58) 50 (108)
Federal funds sold................................ 982 5 977 (103) 12 (115)
------- ------- ------- ------ ------- ------
Total interest income......................... 1,507 949 558 991 (1,708) 2,699
------- ------- ------- ------ ------- ------
Interest expense:
Money market accounts............................. (34) 37 (71) 66 11 55
NOW accounts...................................... 8 8 (41) (58) 17
Savings accounts.................................. (266) 97 (363) 152 (160) 312
Time deposits less than $100...................... 2,018 1,202 816 (20) (432) 412
Time deposits $100 or more........................ 218 18 200 249 247 2
Short-term borrowings............................. 132 198 (66) 512 23 489
Long-term debt.................................... (24) (8) (16) 24 (38) 62
------- ------- ------- ------ ------- ------
Total interest expense........................ 2,052 1,544 508 942 (407) 1,349
------- ------- ------- ------ ------- ------
Net interest income........................... $ (545) $ (595) $ 50 $ 49 $(1,301) $1,350
======= ======= ======= ====== ======= ======
</TABLE>
SUMMARY OF NET INTEREST INCOME
<TABLE>
<CAPTION>
1995 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..................................... $195,047 $17,238 8.84% $185,318 $15,761 8.50%
Tax-exempt.................................. 4,649 364 7.83 3,657 272 7.44
Investments:
Taxable..................................... 113,675 6,789 5.97 136,386 7,826 5.74
Tax-exempt.................................. 20,775 1,818 8.75 20,609 1,817 8.82
Interest-bearing deposits with banks.......... 170 13 7.65 250 21 8.40
Federal funds sold............................ 16,900 987 5.84 134 5 3.73
-------- ------- -------- -------
Total earning assets...................... 351,216 27,209 7.75% 346,354 25,702 7.42%
Less: allowance for loan losses............... 3,816 3,540
Other assets.................................. 11,770 7,586
-------- --------
Total assets.............................. $359,170 $350,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 21,869 758 3.47% $ 23,955 792 3.31%
NOW accounts.................................. 15,550 305 1.96 15,151 297 1.96
Savings accounts.............................. 71,911 2,336 3.25 83,142 2,602 3.13
Time deposits less than $100.................. 155,183 8,923 5.75 139,641 6,905 4.94
Time deposits $100 or more.................... 29,336 1,771 6.04 25,995 1,553 5.97
Short-term borrowings......................... 9,935 677 6.82 11,186 545 4.87
Long-term debt................................ 4,715 224 4.75 5,050 248 4.91
-------- ------- -------- -------
Total interest-bearing liabilities........ 308,499 14,994 4.86% 304,120 12,942 4.26%
Noninterest-bearing deposits.................. 24,090 21,849
Other liabilities............................. 547 1,120
Stockholders' equity.......................... 26,034 23,311
-------- ------- -------- -------
Total liabilities and stockholders' equity $359,170 14,994 $350,400 12,942
======== ------- ======== -------
Net interest/income spread................ $12,215 2.89% $12,760 3.16%
======= =======
Net interest margin....................... 3.48% 3.68%
Tax equivalent adjustments:
Loans......................................... $ 124 $ 93
Investments................................... 618 618
------- -------
Total adjustments......................... $ 742 $ 711
======= =======
</TABLE>
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 unrealized holding loss of $1,272 and $4,217 in 1995 and
1994, respectively, included in other assets. Tax equivalent
adjustment was calculated using the prevailing statutory rate of 34.0
percent.
SUMMARY OF NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
1993 1992
--------------------------- --------------------------
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......................................... $172,416 $15,748 9.13% $157,674 $15,573 9.88%
Tax-exempt...................................... 2,343 226 9.65 5,169 456 8.82
Investments:
Taxable......................................... 113,380 6,962 6.14 96,964 7,181 7.41
Tax-exempt...................................... 16,841 1,588 9.43 10,581 1,021 9.65
Interest-bearing deposits with banks.............. 2,255 79 3.50 694 39 5.62
Federal funds sold................................ 3,281 108 3.29 7,936 254 3.20
-------- ------- -------- -------
Total earning assets.......................... 310,516 24,711 7.96% 279,018 24,524 8.79%
Less: allowance for loan losses................... 2,886 2,114
Other assets...................................... 11,784 15,399
-------- --------
Total assets.................................. $319,414 $292,303
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts............................. $ 22,267 726 3.26% 22,819 876 3.84%
NOW accounts...................................... 14,406 338 2.35 13,742 462 3.36
Savings accounts.................................. 73,400 2,450 3.34 56,288 2,369 4.21
Time deposits less than $100...................... 131,572 6,925 5.26 130,753 8,088 6.19
Time deposits $100 or more.................... 25,960 1,304 5.02 25,956 1,586 6.11
Short-term borrowings............................. 1,005 33 3.28 797 24 3.00
Long-term debt.................................... 3,866 224 5.79 1,817 109 6.00
-------- ------- -------- -------
Total interest-bearing liabilities............ 272,476 12,000 4.40% 252,172 13,514 5.36%
Noninterest-bearing deposits...................... 19,657 18,657
Other liabilities............................. 4,104 1,513
Stockholders' equity.......................... 23,177 19,961
-------- ------- -------- -------
Total liabilities and stockholders' equity.... $319,414 12,000 $292,303 13,514
======== ------- ======== -------
Net interest/income spread.................... $12,711 3.56% $11,010 3.43%
======= =======
Net interest margin........................... 4.09% 3.95%
Tax equivalent adjustments:
Loans............................................. $ 77 $ 155
Investments....................................... 540 347
------- -------
Total adjustments............................. $ 617 $ 502
======= =======
</TABLE>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
1991
---------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE
------- -------- --------
<S> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable.............................................. $149,191 $16,114 10.80%
Tax-exempt........................................... 6,356 588 9.25
Investments:
Taxable.............................................. 74,891 5,994 8.00
Tax-exempt........................................... 7,194 726 10.09
Interest-bearing deposits with banks................... 914 74 8.10
Federal funds sold..................................... 8,390 463 5.53
-------- -------
Total earning assets............................... 246,936 23,959 9.70%
Less: allowance for loan losses........................ 1,397
Other assets........................................... 14,463
--------
Total assets....................................... $260,002
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts.................................. $ 20,350 1,096 5.39%
NOW accounts........................................... 11,197 532 4.75
Savings accounts....................................... 36,883 1,972 5.35
Time deposits less than $100........................... 123,604 9,451 7.65
Time deposits $100 or more............................. 28,700 2,166 7.55
Short-term borrowings..................................
Long-term debt......................................... 1,452 128 8.82
-------- -------
Total interest-bearing liabilities................. 222,186 15,345 6.91%
Noninterest-bearing deposits........................... 16,056
Other liabilities...................................... 3,783
Stockholders' equity................................... 17,977
-------- -------
Total liabilities and stockholders' equity......... $260,002 15,345
======== -------
Net interest/income spread......................... $ 8,614 2.79%
=======
Net interest margin................................ 3.49%
Tax equivalent adjustments:
Loans.................................................. $ 200
Investments............................................ 247
-------
Total adjustments.................................. $ 447
=======
</TABLE>
PROVISION FOR LOAN LOSSES:
Provisions for loan losses for the nation's top 50 banks increased 10.0
percent in 1995 to $7.8 billion. Such increase came in response to a
rise in net charge-offs for the year of 13.0 percent to $8.6 billion,
which pushed net charge-offs as a percentage of average loans outstanding
to 0.28 percent in 1995 from 0.24 percent in 1994. Even after taking
higher provisions, net charge-offs still outdistanced the provision for
the year by $800 million, resulting in a 1.0 percent reduction in the
allowance for loan losses account. It is likely that net charge-off
ratios will continue to climb in 1996 as credit card charge-offs increase
and recoveries decline. This occurrence, coupled with a quicker pace of
loan growth, may prompt the banking industry to take greater loan loss
provisions in 1996.
The Company makes provisions for loan losses through evaluating the
adequacy of its allowance for loan losses account. In making its
decision management considers such factors as previous loan experience,
overall loan portfolio characteristics, prevailing economic conditions
and other relevant factors. Based on its most current valuation,
management believes that the allowance is adequate to absorb any known
and inherent losses in the portfolio.
Contrary to the provision stance taken by the banking industry, the
Company reduced its provision for loan losses by $365 to $435 in 1995
from the $800 taken in 1994. As net charge-off levels rose nationwide,
the Company experienced an improvement in its level. Net charge-offs for
the Company declined to $108 from $393 for the comparable periods of 1995
and 1994. Consideration will be made with respect to reducing the amount
credited to the allowance account should nonperforming asset levels
improve and loan demand not fluctuate significantly from expected amounts
in 1996.
NONINTEREST INCOME:
The Company reported a loss of $3,196 in noninterest income for the year
ended December 31, 1995, as compared to income totaling $1,005 for the
year ended December 31, 1994. The $4,201 decline was primarily a result
of reporting net losses on investment securities of $4,393 in 1995
compared to net losses of $161 in 1994 on investment and trading account
securities. The divestiture of high-risk CMOs, structured notes and
other highly criticized investments provided the major component of the
1995 securities losses.
An increased volume of service charges, fees and commissions partially
offset the net security losses incurred in 1995. The $31 or 2.7 percent
increase over the previous year was principally due 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.
NONINTEREST EXPENSE:
Generally, noninterest expense includes the costs of providing salaries
and necessary employee benefits, maintaining facilities and general
operating costs such as insurances, supplies, advertising, data
processing, taxes and other related expenses. Several of these costs and
expenses are variable while others are fixed. Management uses budgets
and other related strategies in an effort to control variable expenses.
Noninterest expense totaled $8,194 in 1995, an increase of $245, or 3.1
percent, compared to 1994. The Company had a net overhead expense to
average assets ratio of 1.9 percent, an improvement over the 2.0 percent
recorded in 1994. In relation to the peer group ratio of 2.8 percent,
the Company continues to demonstrate a greater efficiency level.
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 operating efficiency
ratio showed an increase from 59.6 percent at December 31, 1994, to 64.1
percent at December 31, 1995. Reduced levels of net interest income
coupled with the increase in noninterest expense were responsible for the
adverse change in such ratio.
Salaries and benefits composed 49.2 percent of noninterest expense and
totaled $4,028 in 1995, representing a $246 or a 6.5 percent increase
compared to 1994. The majority of such increase was attributable to the
Company's Board of Directors exercising its termination option of the
former President and Chief Executive Officer's written employment
agreement during the second quarter of 1995. The one-time cost of
exercising such agreement approximated $207.
Net occupancy and equipment expense amounted to $1,222, a decrease of
$27, or 2.2 percent, compared to 1994. The reduction is a reflection of
lower costs associated with the maintenance of bank facilities partially
offset by greater costs related to the maintenance of equipment used in
normal bank operations.
Other expenses totaled $2,944 in 1995, an increase of $26 compared to the
1994 level. Such increase came as a direct result of the Company's
compliance with the MOU. The aggregate costs associated with compliance
approximated $500 for the year ended December 31, 1995. Had the Company
not been under this written directive, other expenses would have declined
$474 for 1995 as compared to 1994. As of February 16, 1996, the Company,
due to its substantial compliance with all provisions of the MOU, had
such directive rescinded. As a result, management expects a decline in
legal and consulting costs during 1996.
Partially offsetting the increase in other expenses associated with the
MOU was a reduction in the Company's FDIC insurance expense. Effective
August 8, 1995, the FDIC's Board of Directors ("FDIC Board") put its
proposal to lower bank deposit insurance premiums into effect. Such
reduction came in response to the recapitalization of the Bank Insurance
Fund ("BIF") during the second quarter of 1995. Under the plan, rates
ranging from 4 to 31 cents per every one hundred dollars of insured
deposits were assessed dependent upon risk characteristics of each
institution. Based on the evaluation of its risk characteristics, the
Company's insurance rate was reassessed from 26 cents per every one
hundred dollars of insured deposits to 7 cents per every one hundred
dollars of insured deposits. This reevaluation led to a $261 reduction
in the Company's FDIC insurance premiums for 1995. On November 14, 1995,
the FDIC Board voted to further reduce the insurance premiums paid on
deposits covered by the BIF effective January 1, 1996. Under the new
rate structure, rates will range from 3 to 27 cents per every one hundred
dollars of insured deposits, subject to the statutory requirement that
all institutions pay no less than $2 annually for FDIC insurance. Such
rates came in response to the FDIC Board seeking to balance the
applicable requirements of meeting BIF long-term funding, the statutory
requirement of maintaining a risk-based deposit insurance system and
maintaining the BIF reserve ratio at the target Designated Reserve Ratio.
Based upon its current risk characteristics, the Company's FDIC insurance
expense is expected to decline $415 in 1996 as compared to the 1995
level.
The following table sets forth the major components of noninterest
expense for the past five years:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes........................................ $3,429 $3,022 $2,585 $2,432 $2,238
Employee benefits................................................. 599 760 746 614 459
------ ------ ------ ------ ------
Salaries and employee benefits expense.......................... 4,028 3,782 3,331 3,046 2,697
------ ------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense............................................. 684 784 680 579 529
Equipment expense................................................. 538 465 654 781 657
------ ------ ------ ------ ------
Net occupancy and equipment expense............................... 1,222 1,249 1,334 1,360 1,186
------ ------ ------ ------ ------
OTHER EXPENSES:
Marketing expense................................................. 281 201 211 177 145
Other taxes....................................................... 200 191 127 199 172
Stationery and supplies........................................... 250 262 338 337 168
Contractual services.............................................. 879 727 597 682 486
Insurance including FDIC assessment............................... 480 717 807 630 611
Other............................................................. 854 820 1,107 821 636
------ ------ ------ ------ ------
Other noninterest expense....................................... 2,944 2,918 3,187 2,846 2,218
------ ------ ------ ------ ------
Total noninterest expense..................................... $8,194 $7,949 $7,852 $7,252 $6,101
====== ====== ====== ====== ======
</TABLE>
INCOME TAXES:
As a result of the loss before income taxes the Company reported a tax
benefit for 1995. The tax benefit was 156.8 percent of the loss before
tax and above the marginal tax rate due to the effect of tax-exempt
income. The Company was able to utilize the tax benefit because of
taxable income in previous years and expectations of the future
realization of the benefit. During 1994, the Company's effective tax
rate was 22.8 percent. Management anticipates a reduction in the
effective tax rate for 1996 as a result of higher levels of tax-exempt
income on investment securities and recognition of tax credits on its
limited partnership investment in a residential housing program. Such
investment will provide for a reduction in income taxes by utilization of
tax credits allowed on such investments. During 1995, the Company
recognized $71 of the $895 of total tax credits available from such
project that will be recognized annually until the year 2003.
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
has determined that it is not required to establish a valuation reserve
for the deferred tax assets since it is more likely than not that the net
deferred tax assets could be principally realized through carryback to
taxable income in prior years and by future reversals of existing taxable
temporary differences or, to a lesser extent, through future taxable
income. The Company reviews the tax criteria related to the recognition
of deferred tax assets on a quarterly basis.
INDEPENDENT AUDITORS' REPORT
Board of Directors
and Stockholders
Comm Bancorp, Inc.
Forest City, Pennsylvania
We have audited the accompanying consolidated balance sheets of Comm
Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three year period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comm
Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
February 2, 1996
KRONICK KALADA BERDY & COMPANY
Kingston, Pennsylvania
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1995 1994 1993
____________________________________________________________________________________________________________
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable........................................................................ $17,238 $15,761 $15,748
Tax-exempt..................................................................... 240 179 149
Interest on investment securities held to maturity:
Taxable........................................................................ 3,830 4,134 3,902
Tax-exempt..................................................................... 895 1,199 1,048
Interest and dividends on investment securities available for sale:
Taxable........................................................................ 2,839 3,518 2,839
Tax-exempt..................................................................... 305
Dividends...................................................................... 120 79 91
Interest on trading account securities........................................... 95 130
Interest on deposits with banks.................................................. 13 21 79
Interest on federal funds sold................................................... 987 5 108
_______ _______ _______
Total interest income........................................................ 26,467 24,991 24,094
_______ _______ _______
INTEREST EXPENSE:
Interest on deposits............................................................. 14,093 12,149 11,743
Interest on short-term borrowings................................................ 677 545 33
Interest on long-term debt....................................................... 224 248 224
_______ _______ _______
Total interest expense....................................................... 14,994 12,942 12,000
_______ _______ _______
Net interest income.......................................................... 11,473 12,049 12,094
Provision for loan losses........................................................ 435 800 1,080
_______ _______ _______
Net interest income after provision for loan losses.......................... 11,038 11,249 11,014
_______ _______ _______
NONINTEREST INCOME:
Service charges, fees and commissions............................................ 1,197 1,166 1,013
Net investment securities gains (losses)......................................... (4,393) 495 1,261
Trading account profits (losses)................................................. (656) 297
_______ _______ _______
Total noninterest income (losses)............................................ (3,196) 1,005 2,571
_______ _______ _______
NONINTEREST EXPENSE:
Salaries and employee benefits expense........................................... 4,028 3,782 3,331
Net occupancy and equipment expense.............................................. 1,222 1,249 1,334
Other expenses................................................................... 2,944 2,918 3,187
_______ _______ _______
Total noninterest expense.................................................... 8,194 7,949 7,852
_______ _______ _______
Income (loss) before income taxes................................................ (352) 4,305 5,733
Provision for income tax expense (benefit)....................................... (552) 980 1,583
_______ _______ _______
Net income................................................................... $ 200 $ 3,325 $ 4,150
======= ======= =======
PER SHARE DATA:
Net income....................................................................... $0.27 $4.53 $5.66
Cash dividends declared.......................................................... $0.63 $0.62 $0.61
Average common shares............................................................ 733,360 733,357 733,298
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 1995 1994
____________________________________________________________________________________________________________
<S> <C> <C>
ASSETS:
Cash and due from banks.............................................................. $ 6,864 $ 6,783
Interest-bearing deposits with banks................................................. 116 90
Federal funds sold................................................................... 15,100
Investment securities:
Held to maturity (market value 1994, $101,850)..................................... 107,666
Available for sale................................................................. 108,706 44,900
Loans, net of unearned income........................................................ 213,835 194,485
Less: allowance for loan losses.................................................... 3,903 3,576
________ ________
Net loans............................................................................ 209,932 190,909
Premises and equipment, net.......................................................... 3,070 3,293
Accrued interest receivable.......................................................... 2,872 2,636
Other assets......................................................................... 4,288 6,186
________ ________
Total assets..................................................................... $350,948 $362,463
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing................................................................ $ 25,423 $ 23,462
Interest-bearing................................................................... 291,676 292,707
________ ________
Total deposits................................................................... 317,099 316,169
Short-term borrowings................................................................ 15,956
Long-term debt....................................................................... 3,048 5,050
Accrued interest payable............................................................. 1,761 1,556
Other liabilities.................................................................... 1,145 1,043
________ ________
Total liabilities................................................................ 323,053 339,774
________ ________
STOCKHOLDERS' EQUITY:
Common stock, par value $1, authorized 4,000,000 shares, issued and outstanding
733,360 shares...................................................................... 733 733
Capital surplus...................................................................... 6,310 6,310
Retained earnings.................................................................... 20,072 20,334
Net unrealized gain (loss) on available for sale securities.......................... 780 (4,688)
________ ________
Total stockholders' equity....................................................... 27,895 22,689
________ ________
Total liabilities and stockholders' equity....................................... $350,948 $362,463
======== ========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED TREASURY GAIN (LOSS) ON STOCKHOLDERS'
FOR THE THREE YEARS ENDED DECEMBER 31, 1995 STOCK SURPLUS EARNINGS STOCK SECURITIES EQUITY BALANCE,
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1992............................ $733 $6,310 $13,758 $(1) $20,800
Net income................................... 4,150 4,150
Sale of common stock held in treasury, net... 1 1
Dividends declared: $0.61 per share.......... (444) (444)
____ ______ _______ ___ _______ _______
BALANCE, DECEMBER 31, 1993................... 733 6,310 17,464 24,507
Net income................................... 3,325 3,325
Dividends declared: $0.62 per share.......... (455) (455)
Net unrealized loss on securities............ $(4,688) (4,688)
____ ______ _______ ___ _______ _______
BALANCE, DECEMBER 31, 1994................... 733 6,310 20,334 (4,688) 22,689
Net income................................... 200 200
Dividends declared: $0.63 per share.......... (462) (462)
Net unrealized gain on securities:
Securities transferred to available for sale. 1,249 1,249
Other........................................ 4,219 4,219
____ ______ _______ ___ _______ _______
BALANCE, DECEMBER 31, 1995................... $733 $6,310 $20,072 $ 780 $27,895
==== ====== ======= === ======= =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1995 1994 1993
____________________________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 200 $ 3,325 $ 4,150
Adjustments:
Provision for loan losses..................................................... 435 800 1,080
Depreciation and amortization................................................. 645 667 532
Amortization of loan fees..................................................... (179) (173) (318)
Deferred income tax benefit................................................... (140) (2,608) (300)
(Gains) losses on sale of investment securities available for sale............ 4,393 (495) (1,261)
Gains on sale of loans........................................................ (72)
(Gains) losses on sale of other real estate................................... (36) (9) 6
Changes in:
Trading account securities.................................................. 287 910
Interest receivable......................................................... (236) (322) (26)
Other assets................................................................ (783) 2,242 (154)
Interest payable............................................................ 205 316 (37)
Other liabilities........................................................... 95 (48) (101)
________ _______ _______
Net cash provided by operating activities................................. 4,527 3,982 4,481
________ _______ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities............................ 87,103 13,637 69,161
Proceeds from repayments of investment securities:
Held to maturity.............................................................. 2,970 13,833 31,590
Available for sale............................................................ 1,887 1,532 9,731
Purchases of investment securities:
Held to maturity.............................................................. (179) (9,597) (53,979)
Available for sale............................................................ (44,054) (29,284) (89,994)
Proceeds from sale of loans..................................................... 5,591
Proceeds from sale of other real estate......................................... 457 291 106
Net increases in lending activities............................................. (25,434) (18,483) (14,039)
Purchases of premises and equipment............................................. (204) (860) (223)
________ _______ _______
Net cash provided by (used in) investing activities....................... 28,137 (28,931) (47,647)
________ _______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts................... (13,946) 4,560 13,564
Time deposits................................................................. 14,877 14,374 2,845
Short-term borrowings......................................................... (15,956) 6,815 7,141
Proceeds from the issuance of long-term debt.................................... 50 3,000
Payments on long-term debt...................................................... (2,002) (800) (400)
Proceeds from the issuance of common shares, net................................ 1
Cash dividends paid............................................................. (456) (448) (436)
________ _______ _______
Net cash provided by (used in) financing activities....................... (17,483) 24,551 25,715
________ _______ _______
Net increase (decrease) in cash and cash equivalents...................... 15,181 (398) (17,451)
Cash and cash equivalents at beginning of year............................ 6,783 7,181 24,632
________ _______ _______
Cash and cash equivalents at end of year.................................. $ 21,964 $ 6,783 $ 7,181
======== ======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest...................................................................... $ 14,789 $12,626 $12,037
Income taxes.................................................................. 114 1,511 2,125
Noncash items:
Transfers of:
Loans to other real estate.................................................. 636 260 $ 110
Investments from held to maturity to available for sale..................... 105,799
Investments from available for sale to held to maturity..................... 17,470
Investments from trading account to held to maturity or available for sale.. 3,676
Change in net unrealized losses (gains) on available for sale securities...... $ (5,468) $ 4,688
</TABLE>
See notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business:
Comm Bancorp, Inc. provides a full range of banking and related financial
services through its subsidiary to individuals and corporate customers
and is subject to intense competition from other financial service
companies with respect to these services and customers. Comm Bancorp,
Inc., which is a holding company, is also subject to the regulations of
certain federal and state agencies and undergoes periodic examinations by
such regulatory authorities.
Basis of presentation:
The consolidated financial statements of Comm Bancorp, Inc. and
subsidiary, Community Bank and Trust Company, (collectively, the
"Company") have been prepared in conformity with generally accepted
accounting principles, Regulation S-X and reporting practices applied in
the banking industry. The Company also presents herein condensed parent
company only financial information regarding Comm Bancorp, Inc. (the
"Parent Company"). All significant intercompany accounts and
transactions have been eliminated in the consolidated financial
statements. Prior period amounts are reclassified when necessary to
conform with the current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those
estimates.
Investment securities:
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Statement requires
investments to be classified and accounted for as either held to
maturity, available for sale or trading account securities based on
management's intent at the time of acquisition. Management is required
to reassess the appropriateness of such classifications at each reporting
date.
The Company classifies debt securities as held to maturity when
management has the positive intent and ability to hold such securities to
maturity. Held to maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Investment securities are designated as available for sale when they are
to be held for indefinite periods of time as management intends to use
such securities in implementing asset/liability strategies or would sell
them in response to changes in interest rates or resultant prepayment
risk, liquidity requirements or other circumstances identified by
management. Available for sale securities are generally reported at fair
value, with unrealized gains and losses, net of income taxes, excluded
from earnings and reported in a separate component of stockholders'
equity. All marketable equity securities are accounted for at fair
value, except for Federal Home Loan Bank ("FHLB") and Federal Reserve
Bank ("FRB") stock, which are carried at cost. Estimated fair values for
investment securities are based on quoted market prices from a national
electronic pricing service. Fair values of securities unavailable
through such service are arrived at through dealer or broker price
quotations.
Management periodically evaluates each investment security to determine
whether a decline in fair value below the amortized cost basis is other
than temporary. If a decline is judged to be other than temporary, the
cost basis of the individual security is written-down to fair value with
the amount of the write-down included in earnings. Realized gains and
losses are computed using the specific identification method and are
included in noninterest income. Premiums are amortized and discounts are
accreted using the interest method over the contractual lives of
investment securities, except for mortgage backed securities, where
amortization and accretion are based on principal repayments.
Securities that are bought and held principally for the purpose of
selling them in the near term, in order to generate profits from market
appreciation, are classified as trading account securities. Trading
account securities are carried at market value. Interest on trading
account securities is included in interest income. Profits or losses on
trading account securities are included in noninterest income. The
Company discontinued its trading activities prior to the fourth quarter
of 1994, thus eliminating its trading account classification.
Transfers of securities between categories are recorded at fair value at
the date of the transfer, with the accounting treatment of unrealized
gains or losses determined by the category into which the security is
transferred.
Financial options:
The Company utilized option contracts to limit its exposure to market
fluctuations on investment securities prior to the fourth quarter of
1994.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Options commit the Company to purchase or sell securities at a specified
price at a future date. Premiums received from writing options were
included in other liabilities until the option was exercised and
thereafter included in the cost of such investment, or until the
expiration date, when they were recognized in noninterest income.
Loans:
Loans are stated at principal amounts outstanding, net of unearned
interest and net unamortized loan fees. Interest income is accrued on
the principal
amount outstanding, except for discounted loans with interest recognized
over the respective loan terms utilizing the effective interest method.
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized over the contractual life of the related loan as
an adjustment of yield. The Company does not sell mortgage loans.
Accordingly, SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
which is required to be applied prospectively in fiscal years beginning
after December 15, 1995, will not have any effect on future operating
results or financial position.
Nonperforming assets:
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
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.
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, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of an
impaired loan is less than the recorded investment in the loan, the
impairment is recognized by adjusting the allowance for loan losses with
a corresponding charge to the provision for loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed
assets. Accruing loans past due 90 days or more and loans impaired under
SFAS Nos. 114 and 118 comprise nonperforming loans. Impaired loans
consist of nonaccrual and restructured loans. A loan is classified as
nonaccrual when it is determined that the collection of interest or
principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless such loan is well secured and in the
process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against
income in the current period. Interest collections after a loan has been
placed on nonaccrual status are
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
credited to income when received unless the collectibility of principal
is in doubt, causing all collections to be applied as principal
reductions. A nonaccrual 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 minimum of six months. Restructured loans
are loans with original terms that have been modified to below-market
rate terms as a result of a change in the borrower's financial condition.
Foreclosed assets are comprised of properties acquired through
foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosures. In-substance
foreclosures are properties in which the borrower has little or no equity
in the collateral, where repayment of the loan is expected only from the
operation or sale of the collateral and the borrower either effectively
abandons control of the property or the borrower has retained control of
the property but the borrower's ability to rebuild equity based on
current financial conditions is considered doubtful. A loan is
classified as in-substance foreclosure when the Company has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. Foreclosed assets are recorded at the lower of
the related loan balance or its appraised fair value less estimated cost
to sell at the time of acquisition. Any excess of the loan balance over
the recorded value is charged to the allowance for loan losses.
Subsequent declines in the recorded value of the property prior to its
disposal and costs to maintain the assets are included in other expense.
In addition, any gain or loss realized upon disposal is included in other
income or expense.
Allowance for loan losses:
The allowance for loan losses account is established through charges to
earnings in the form of a provision for loan losses. Loans, or portions
of loans, determined to be uncollectible are charged against the
allowance account and subsequent recoveries, if any, are credited to the
account. Nonaccrual, restructured and large delinquent commercial and
real estate loans are reviewed monthly to determine if carrying value
reductions are warranted. Consumer loans are considered losses when they
are 120 days past due, except loans that are expected to be recovered
through insurance or collateral disposition proceeds.
The allowance is maintained at a level believed adequate by management to
absorb estimated potential credit losses. While historical loss
experience provides a reasonable starting point in assessing the adequacy
of the allowance account, management also considers a number of relevant
factors that are likely to cause estimated credit losses associated with
the Company's current portfolio to differ from historical loss
experience. Such
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
factors include changes in lending policies and procedures, economic
conditions, nature and volume of the portfolio, loan review system,
volumes of past due and impaired loans, concentrations, borrowers'
financial status, collateral value and other factors deemed relevant by
management. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change. The Company employs the December 21, 1993, federal
banking regulatory agencies' Interagency Policy Statement on the
Allowance for Loans and Lease Losses, as the primary analytical tool in
assessing the adequacy of the allowance account.
Under SFAS No. 114, the 1995 allowance for loan losses related to
impaired loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Prior to 1995, the allowance for loan losses
related to such loans was based on undiscounted cash flows or the fair
value of the collateral for collateral dependent loans. The adoption of
SFAS No. 114 did not have a material effect on operating results or
financial position.
In addition to management's assessment, various regulatory agencies, as
an integral part of their routine annual examination process, review the
Company's allowance for loan losses account. Such agencies may require
the
Company to recognize additions to the allowance based on their judgments
concerning information available to them at the time of their
examination.
Management is unaware of any such requirements based on the results of
the Company's latest regulatory examination at September 30, 1995.
Premises and equipment, net:
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to noninterest expense over the estimated useful
lives of the assets and is computed by using the straight-line method.
Useful lives of up to 45 years for premises and up to 12 years for
equipment are utilized. Leasehold improvements are amortized on a
straight-line basis over the terms of the leases or the estimated useful
lives of the improvements, whichever is shorter. Expenditures for
maintenance and repairs are expensed as incurred. The costs of
significant replacements, renewals and betterments are capitalized. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in noninterest income or noninterest expense.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Long-lived and intangible assets:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identified intangibles and goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. The
excess cost over the net assets acquired accounted for as a purchase is
included in other assets and amortized on a straight-line basis over
fifteen years. SFAS No. 121 is effective for financial statements for
fiscal years beginning after December 15, 1995, with earlier application
encouraged. The Company's adoption of SFAS No. 121 in 1996 is not
expected to have any material effect on operating results or financial
position.
Earnings per share:
Earnings per common share is based on the weighted average number of
common shares outstanding during the period. Common shares outstanding
have been adjusted to reflect a four-for-one stock split effective
February 1, 1994, which changed par value from $4.00 per share to $1.00
per share.
Off-balance sheet financial instruments:
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to
extend credit, commitments under home equity and credit card
arrangements, commercial letters of credit and securities option
contracts. Such financial instruments are recorded in the financial
statements when they are exercised.
Employee benefit plans:
The Company has a defined contribution plan covering all employees who
have completed 1,000 hours of service, attained 21 years of age and have
been employed by the Company for at least one year. Pension costs are
accrued monthly to salaries and benefits expense with the plan being
funded annually.
In addition, the Company has a deferred compensation plan for certain
senior management employees. Costs for such plan are recognized monthly
in salaries and benefits expense on the accrual basis.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Trust assets:
Assets held in a fiduciary or agency capacity for customers are not
included in the accompanying consolidated balance sheets, since such
assets are not assets of the Company. Trust income is recorded on a cash
basis, which is not materially different than if reported on an accrual
basis.
Statements of cash flows:
The statements of cash flows are presented using the indirect method.
For the purpose of cash flow, cash and cash equivalents include cash,
noninterest-bearing balances due from banks and federal funds sold.
Federal funds are highly liquid investments sold for one-day periods.
Income taxes:
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using
the provisions of the enacted tax laws. Deferred tax assets and
liabilities are recognized for the estimated future tax effects of
temporary differences. The amount of deferred tax assets is reduced, if
necessary, to the amount that, based on available evidence, will more
likely than not be realized.
The Parent Company and its subsidiary file a consolidated federal income
tax return. Its subsidiary provides for income taxes on a separate
return basis, and remits to the Parent Company amounts determined to be
currently payable.
2. CASH AND CASH EQUIVALENTS:
The Federal Reserve Act, as amended by the Monetary Control Act of 1980,
requires that reserve balances on certain deposits of depository
institutions be maintained at the FRB. The reserve balances were $1,057
and $1,022 at December 31, 1995 and 1994, respectively. Such reserve
balances averaged $1,079 in 1995 and $985 in 1994. In addition,
compensating balances are maintained with the FRB and various
correspondent banks, most of which are not required, but are used to
offset specific charges for check clearing and other services. The
Company maintained compensating balances of $2,890 and $2,663 at December
31, 1995 and 1994, respectively. Compensating balances averaged $3,124
in 1995 and $3,314 in 1994.
3. INVESTMENT SECURITIES:
SFAS No. 115 requires an enterprise to reassess the appropriateness of
its accounting and reporting classifications of debt and equity
securities at each reporting date. Accordingly, management transferred
its entire held to maturity classification at September 30, 1995, to
available for sale after reviewing a comprehensive analysis of the risk
profile of its held to maturity classification. The securities
transferred had an amortized cost of $105,799 and a fair value of
$103,906 at the date of the transfer. The Company recognized unrealized
holding losses of $1,249, net of applicable income taxes of $644, as a
separate component of stockholders' equity as a result of such transfer.
In conjunction with its review of the analysis, management made the
decision to sell certain available for sale securities at a loss after
September 30, 1995, some of which were transferred from the held to
maturity portfolio. The resulting loss of $2,500 on the sale was
recognized in earnings in the third quarter of 1995, the period in which
the decision to sell was made. The loss on securities transferred from
held to maturity to available for sale included in such loss was $1,825.
The Company did not sell any security from the held to maturity
classification in 1995 or 1994.
Pursuant to SFAS No. 115, sales or transfers from the held to maturity
classification for reasons other than those specified, call into question
an enterprise's intent to hold other debt securities to maturity in the
future. On October 18, 1995, the FASB voted to temporarily suspend this
rule allowing enterprises a one-time opportunity during the fourth
quarter of 1995 to reassess the appropriateness of the classifications of
all securities held without calling into question the holding intent of
that enterprise. Management was unaware that FASB would suspend such
rule at the time it decided to transfer securities from held to maturity
to available for sale. Accordingly, management will not be able to
establish a held to maturity classification for future purchases or
transfers for an indefinite period.
During the third quarter of 1994, management reevaluated its intent to
hold a portion of its available for sale portfolio based on
asset/liability management considerations. Upon completion of such
considerations and within the confines of the rules, management
transferred twenty-two securities with an amortized cost of $17,470 to
the held to maturity classification. These available for sale securities
had a net unrealized loss of $998 at the transfer date. Such loss
continued to be reported in a separate component of stockholders' equity,
being amortized over the lives of the securities as an adjustment to
yield in a manner consistent with the amortization of any discount, until
such securities were transferred back to available for sale at September
30, 1995.
3. INVESTMENT SECURITIES (CONTINUED):
The following table sets forth the amortized cost and fair value of
securities classified as held to maturity at December 31, 1994:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1994 COST GAINS LOSSES VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 12,042 $ 1 $ 454 $ 11,589
U.S. Government agencies.................... 36,993 2,543 34,450
State and municipals........................ 20,616 87 713 19,990
Mortgage backed securities.................. 38,015 2,194 35,821
________ ___ ______ ________
Total..................................... $107,666 $88 $5,904 $101,850
======== === ====== ========
</TABLE>
The following tables set forth the amortized cost and fair value of
securities classified as available for sale at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 43,494 $ 267 $ 10 $ 43,751
U.S. Government agencies.................... 26,516 21 324 26,213
State and municipals........................ 29,617 954 59 30,512
Mortgage backed securities.................. 6,124 53 23 6,154
Other securities............................ 1,774 302 2,076
________ ______ ____ ________
Total..................................... $107,525 $1,597 $416 $108,706
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1994 COST GAINS LOSSES VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 3,735 $ 369 $ 3,366
U.S. Government agencies.................... 8,358 1,075 7,283
Mortgage backed securities.................. 34,186 $ 1 4,743 29,444
Other securities............................ 4,801 131 125 4,807
_______ ____ ______ _______
Total..................................... $51,080 $132 $6,312 $44,900
======= ==== ====== =======
Proceeds from the sales of available for sale securities amounted to
$87,103, $13,637 and $69,161 in 1995, 1994 and 1993, respectively. The
Company realized gross gains of $320 in 1995, $549 in 1994 and $1,325 in
1993. Gross losses of $4,713, $54 and $64 were realized in 1995, 1994
and 1993, respectively. The net unrealized holding gain, included as a
separate component of stockholders' equity, amounted to $780, net of
income taxes of $401, at December 31, 1995. Such gain represents a
change in the net unrealized adjustment of $5,468, net of income taxes of
$2,816, from December 31, 1994. The net unrealized holding loss totaled
$4,688, net of income taxes of $2,415, at December 31, 1994. Such
unrealized holding loss included $923 that represented the unamortized
unrealized loss, aforementioned in this note, related to available for
sale securities transferred to held to maturity.
At December 31, 1995 and 1994, other securities include marketable equity
securities of $2,076 and $2,018, respectively. The fair value of such
securities exceeded their cost by $302 and $131 at December 31, 1995 and
1994, respectively.
3. INVESTMENT SECURITIES (CONTINUED):
The Company held collateralized mortgage obligations ("CMOs") deemed to
be high-risk as defined in the Board of Governors of the Federal Reserve
System's ("Federal Reserve Board's") Supervisory Policy Statement on
Securities Activities during 1995, 1994 and 1993. High-risk CMOs are
defined as any mortgage derivative product that at the time of purchase,
or at a subsequent testing date, meets any of the average life or
interest sensitivity tests. The Company held no such securities at
December 31, 1995, as all securities determined to be high-risk CMOs and
those that had the potential to become high-risk were disposed of during
1995. None of such Federal Reserve Board defined high-risk securities
met the definition of high-risk nonequity CMOs as defined in Issue 2, of
FASB's Emerging Issues Task Force ("EITF") 89-4, "Accounting for a
Purchased Investment in a Collateralized Mortgage Obligation Instrument
or in a Mortgage-Backed Interest-Only Certificate." EITF 89-4 defines
high-risk nonequity CMOs as those that have the potential for loss of a
significant portion of their original investments due to changes in
interest rates, prepayment rate of the assets of the CMO structure or
earnings from temporary reinvestment of cash collected by the CMO
structure but not yet distributed to the holders of its obligations.
Accordingly management, after considering whether such securities
satisfied any of the three subtests outlined above, did not discount
these CMOs to the present value of estimated future cash flows at a risk-
free rate to determine whether or not an other than temporary impairment
existed. Management applied the guidance to each type of CMO instrument,
including those with unusual or unique terms or features, in formulating
its conclusion that such securities did not meet the EITF 89-4 definition
of a high-risk nonequity CMO. The amortized cost and fair value of
Federal Reserve Board defined high-risk CMOs at December 31, 1994,
amounted to $26,481 and $22,251, respectively. Such securities had gross
unrealized losses of $4,230 at December 31, 1994. Proceeds from the sale
of high-risk CMOs amounted to $27,674 in 1995, $8,611 in 1994 and $23,879
in 1993. Gross gains on such sales of $66, $338 and $437 were realized
in 1995, 1994 and 1993, respectively. Gross losses of $1,621 were
realized on the sale of Federal Reserve Board defined high-risk CMOs in
1995.
Investment securities with an amortized cost of $33,997 and $38,971 at
December 31, 1995 and 1994, respectively, were pledged to secure
deposits, to qualify for fiduciary powers and for other purposes required
or permitted by law. The fair value of such securities was $34,050 and
$36,738 at December 31, 1995 and 1994, respectively.
The following table sets forth the maturity distribution of the amortized
cost, fair value and weighted average tax equivalent yield of the
available for sale portfolio at December 31, 1995. The weighted average
yield based
3. INVESTMENT SECURITIES (CONTINUED):
on amortized cost has been computed for state and municipals 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, which 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.
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
______________________________________________________________________________
DECEMBER 31, 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..... $16,124 5.70% $27,370 5.62% $ 43,494 5.65%
U.S. Government agencies..... 4,699 4.80 21,817 4.88 26,516 4.87
State and municipals......... 405 5.82 3,947 5.82 $5,780 8.33% $19,485 8.11% 29,617 7.82
Mortgage backed securities... 341 6.89 2,601 6.48 3,182 5.82 6,124 6.16
Other securities............. 1,774 6.00 1,774 6.00
_______ _______ ______ _______ ________
Total...................... $21,569 5.52% $55,735 5.38% $8,962 7.44% $21,259 7.93% $107,525 6.09%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities..... $16,166 $27,585 $ 43,751
U.S. Government agencies..... 4,685 21,528 26,213
State and municipals......... 405 3,946 $6,034 $20,127 30,512
Mortgage backed securities... 342 2,614 3,198 6,154
Other securities............. 2,076 2,076
_______ _______ ______ _______ ________
Total...................... $21,598 $55,673 $9,232 $22,203 $108,706
======= ======= ====== ======= ========
</TABLE>
Except for U.S. Treasury securities and U.S. Government agencies, there
were no securities of any individual issuer that exceeded 10.0 percent of
the Company's stockholders' equity at December 31, 1995 and 1994. All of
the investment securities in the Company's portfolio are considered
"investment grade," receiving a rating of "Baa" or higher from Moody's or
"BBB" or higher from Standard and Poor's rating services, except for
$2,420 of tax-exempt obligations of local municipalities, at December 31,
1995.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments," which requires disclosures about amounts, nature and terms
of derivative financial instruments. In addition, SFAS No. 119 requires
that a distinction be made between financial instruments held or issued
for trading purposes and those held or issued for other than trading
purposes. For entities that hold or issue derivative financial
instruments for trading purposes, SFAS No. 119 requires disclosure of
average fair value and of net trading gains or losses. For entities that
hold or issue derivative financial instruments for purposes other than
trading, it requires disclosure about those purposes and how the
instruments are reported in financial statements. For entities
that hold or issue
3. INVESTMENT SECURITIES (CONTINUED):
derivative financial instruments and account for them as hedges of
anticipated transactions, it requires disclosure about the anticipated
transactions, the classes of derivative financial instruments used to
hedge those transactions, the amounts of hedging gains and losses
deferred and the transactions or other events that result in recognition
of the deferred gains or losses in earnings.
Because SFAS No. 119 excludes mortgage backed securities and interest-
only and principal-only obligations from its definition of derivative
financial instruments, the Company's involvement was limited to
its writing
of covered call option contracts on U.S. Treasury securities, which were
subsequently exercised or expired. Such options were used to limit its
exposure to market fluctuations on investment securities and were not
used for trading purposes. A call option obligates the Company to sell a
fixed quantity of securities to the option holder at a specific price
within a specific term. The writing of an option effectively limits the
Company's ability to hold the underlying security beyond the short-term,
which necessitates the transfer of such assets to the trading account
classification. The Company recognized gross gains of $24 and $155 and
gross losses of $110 and $41 in 1994 and 1993, respectively, as a result
of transferring securities from the available for sale classification
into the trading account. The Company did not recognize any such gains
or losses in 1995 as a result of the discontinuance of writing option
contracts prior to the fourth quarter of 1994. Furthermore, the revised
investment policy adopted in 1995 prohibits option and trading activities
in the future.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following table sets forth the composition of the loan portfolio, net
of unearned interest of $2,682 and $3,042 and net unamortized loan fees
of $801 and $852 at December 31, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Commercial, financial and other................................... $ 41,593 $ 29,419
Real estate:
Construction.................................................... 1,014 2,771
Mortgage........................................................ 151,926 138,379
Consumer, net..................................................... 19,302 23,916
________ ________
Total......................................................... $213,835 $194,485
======== ========
</TABLE>
Loans with fixed interest rates totaled $172,480 and $166,815 while loans
with variable interest rates totaled $41,355 and $27,670 at December 31,
1995 and 1994, respectively.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table sets forth maturity information of the loan portfolio
by major category at December 31, 1995:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1995 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and other...... $23,673 $ 7,994 $ 9,926 $ 41,593
Real estate:
Construction....................... 1,014 1,014
Mortgage........................... 3,164 17,547 131,215 151,926
Consumer, net........................ 347 13,500 5,455 19,302
_______ _______ ________ ________
Total............................ $28,198 $39,041 $146,596 $213,835
======= ======= ======== ========
</TABLE>
Loans outstanding to directors, executive officers, principal
stockholders or to any of their associates, that are made in the ordinary
course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with others, totaled $3,157 at December 31, 1995,
and $4,828 at December 31, 1994. Originations totaled $2,099 while
repayments totaled $3,606 for such loans during 1995. In addition,
changes in the composition of the Board of Directors and the group
comprising executive officers accounted for a reduction of $164 in such
loans. At December 31, 1995 and 1994, none of such loans were classified
as nonaccrual, past due, restructured or potential problem loans.
At December 31, 1995, the Company had no concentrations of loans
exceeding 10.0 percent of total loans to individual or multiple borrowers
engaged in similar activities that would cause them to be similarly
affected by changes in economic or other conditions.
During the second quarter of 1995, the Company sold student loans with a
carrying value of $5,519 to its servicing agent. The Company recognized
a gain of $72 on such sale. The Company had no loans for sale at
December 31, 1995.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table sets forth information concerning nonperforming
loans at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and other..................................... $ 167 $ 45
Real estate:
Construction......................................................
Mortgage.......................................................... 1,164 1,352
Consumer, net.......................................................
______ ______
Total nonaccrual loans.......................................... 1,331 1,397
______ ______
Loans past due 90 days or more:
Commercial, financial and other..................................... 181 33
Real estate:
Construction......................................................
Mortgage.......................................................... 1,633 1,194
Consumer, net....................................................... 336 197
______ ______
Total loans past due 90 days or more............................ 2,150 1,424
______ ______
Restructured loans.................................................. 262 236
______ ______
Total nonperforming loans....................................... $3,743 $3,057
====== ======
</TABLE>
The average recorded investment in impaired loans was $1,621 for 1995 and
$2,075 for 1994. The recorded investment in impaired loans was $1,593
and $1,633 at December 31, 1995 and 1994, respectively. Included in
these amounts were $1,331 and $1,397, respectively, for which there were
related allowances for loan losses of $614 and $488, respectively. The
recorded investment, for which there was no related allowance for loan
losses, was $262 and $236 at December 31, 1995 and 1994, respectively.
In 1995 activity in the allowance for loan losses account related to
impaired loans included a provision charged to operations of $4, losses
charged to the allowance of $69 and recoveries of amounts charged-off of
$191. Interest income related to impaired loans would have been $57,
$136 and $103 in 1995, 1994 and 1993, respectively, had such loans been
current and the terms of the loans not been modified. Interest recognized
on impaired loans amounted to $92 in 1995, $45 in 1994 and $14 in 1993.
Included in these amounts is interest recognized on a cash basis of $87,
$40 and $9, respectively. Cash received on impaired loans applied as a
reduction of principal totaled $595, $183 and $64 in 1995, 1994 and 1993,
respectively. There were no commitments to extend additional funds to
such parties at December 31, 1995 and 1994.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table sets forth an analysis of changes affecting the
allowance for loan losses account for the three years ended December 31,
1995:
<TABLE>
<CAPTION>
1995 1994 1993
______________________________________________________________________________________
<S> <C> <C> <C>
Balance, January 1............................................. $3,576 $3,169 $2,497
Provision for loan losses...................................... 435 800 1,080
Loans charged-off.............................................. (393) (550) (580)
Loans recovered................................................ 285 157 172
______ ______ ______
Balance, December 31........................................... $3,903 $3,576 $3,169
====== ====== ======
</TABLE>
5. PREMISES AND EQUIPMENT, NET:
The following table sets forth the major components of premises and
furniture and equipment at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Land.................................................................... $ 187 $ 517
Premises................................................................ 4,582 4,384
Leasehold improvements.................................................. 166 166
Furniture and equipment................................................. 2,866 2,564
______ ______
7,801 7,631
Less: accumulated depreciation.......................................... 4,731 4,338
______ ______
Total................................................................. $3,070 $3,293
====== ======
</TABLE>
Amounts charged to noninterest expense for depreciation amounted to $428,
$450 and $320 in 1995, 1994 and 1993, respectively.
Certain facilities and equipment are leased under operating lease
agreements expiring at various dates until the year 2009. One lease
provides for cost of living adjustments and several contain renewal
options. The realty leases require the Company to pay real estate taxes,
insurances and repair costs. Rental expense on all such operating leases
amounted to $304 in 1995, $308 in 1994 and $397 in 1993. Minimum
required annual rentals for each of the years 1996 through 2000 are $304,
$212, $149, $70 and $71, respectively, and $468, thereafter, totaling
$1,274.
6. OTHER ASSETS:
The following table sets forth the major components of other assets at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Goodwill................................................................ $1,659 $1,878
Deferred income taxes................................................... 875 3,551
Other real estate....................................................... 441 226
Other................................................................... 1,313 531
______ ______
Total................................................................. $4,288 $6,186
====== ======
</TABLE>
Total amortization expense on goodwill amounted to $218 per year for
1995, 1994 and 1993.
7. DEPOSITS:
The following table sets forth the major components of interest-bearing
and noninterest-bearing deposits at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Interest-bearing deposits:
Money market accounts............................................. $ 19,252 $ 23,958
NOW accounts...................................................... 14,989 14,698
Savings accounts.................................................. 68,722 80,215
Time deposits less than $100...................................... 159,029 143,625
Time deposits $100 or more........................................ 29,684 30,211
________ ________
Total interest-bearing deposits................................. 291,676 292,707
Noninterest-bearing deposits........................................ 25,423 23,462
________ ________
Total deposits.................................................. $317,099 $316,169
======== ========
</TABLE>
The Company accepts deposits of its directors, executive officers,
principal stockholders or any of their associates on the same terms and
at the prevailing interest rates offered at the time of deposit for
comparable transactions with unrelated parties. The aggregate amount of
deposits of such related parties was $1,419 and $2,373 at December 31,
1995 and 1994, respectively.
The following table sets forth maturities of time deposits $100 or more
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Within three months................................................... $ 6,466 $ 7,861
After three months but within six months.............................. 6,646 4,200
After six months but within twelve months............................. 8,590 10,740
After twelve months................................................... 7,982 7,410
_______ _______
Total............................................................... $29,684 $30,211
======= =======
</TABLE>
Interest expense on time deposits $100 or more amounted to $1,771, $1,553
and $1,304 in 1995, 1994 and 1993, respectively. The aggregate amounts
of maturities for all time deposits at December 31, 1995, were $105,410
in 1996, $35,071 in 1997, $19,690 in 1998, $13,558 in 1999, $14,291 in
2000 and $693 thereafter.
8. SHORT-TERM BORROWINGS:
Short-term borrowings consist of a line of credit and fixed-rate advances
with the FHLB secured under terms of a blanket collateral agreement by a
pledge of FHLB stock and certain other qualifying collateral, such as
investment and mortgage backed securities and mortgage loans. Such line
has a maximum borrowing capacity equal to 10.0 percent of total assets
and accrues interest daily based on the federal funds rate. The line is
renewable on the first day of each calendar year and carries no
associated commitment fees. The FHLB has the right to reduce or
terminate the line at any time without prior notice and the Company may
repay such line at any
8. SHORT-TERM BORROWINGS (CONTINUED):
time without incurring prepayment penalties. Short-term fixed-rate
advances are issued with maturities less than one year based on FHLB's
current cost of funds rate. Such advances are limited to the Company's
maximum borrowing capacity based on a percentage of qualifying collateral
assets. There are no commitment fees and the advance may be prepaid at
the option of the Company upon payment of a prepayment fee. The
prepayment fee applicable to FHLB advances is equal to the present value
of the difference between cash flows generated at the advance rate from
the date of the prepayment until the original maturity date, and the cash
flows resulting from the interest rate posted by the FHLB on the date of
prepayment for an advance of comparable maturity.
At December 31, 1995, the Company had no short-term borrowings
outstanding. At December 31, 1994, total short-term borrowings amounted
to $15,956 at 6.6 percent. The average daily balance and weighted
average rate on aggregate short-term borrowings was $9,935 at 6.8 percent
in 1995 and $11,186 at 4.9 percent in 1994. The maximum amount of all
short-term borrowings outstanding at any month end was $28,000 and
$19,430 during 1995 and 1994, respectively. The FHLB line of credit
included in total short-term borrowings had an average daily balance of
$3,589 and weighted average rate of 6.2 percent during 1995. The maximum
amount of such loan outstanding at any month-end was $17,600 during 1995.
Short-term borrowings during 1994 consisted entirely of the FHLB line of
credit.
9. LONG-TERM DEBT:
The following table sets forth the components of long-term debt at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
4.3% note due September 9, 1996......................................... $3,000 $3,000
5.7% note due September 23, 1997........................................ 2,000
7.5% note due September 2, 2009......................................... 48 50
______ ______
Total................................................................. $3,048 $5,050
====== ======
</TABLE>
The 5.7 percent fixed-rate note due in 1997 was redeemed at the option of
the Company in October 1995, at 100.0 percent of the principal
outstanding plus accrued interest. No prepayment fee was required upon
redemption of such note as the interest rate on the advance approximated
the prevailing interest rate at the date of the prepayment for advances
of the same amount and terms.
The 4.3 percent fixed-rate note due 1996 is an advance from the FHLB.
The note requires monthly interest payments and is redeemable, subject to
a prepayment fee, in whole or in part at the option of the Company prior
to maturity. The 7.5 percent FHLB note is a fixed-rate amortizing
advance
9. LONG-TERM DEBT (CONTINUED):
from the FHLB Community Investment Program that is subject to a
prepayment fee in the event the advance is repaid prior to maturity.
The scheduled
principal payments on such note total $2 for each of the five years 1996
through 2000. The prepayment fee applicable to FHLB advances is
aforementioned in Note 8 to these financial statements. Such advances
are secured under terms of a blanket collateral agreement by a pledge of
qualifying investment and mortgage backed securities, certain mortgage
loans and a lien on FHLB stock.
10. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution plan covering all employees who
meet the age and service requirements. Contributions to the plan are
determined by the Board of Directors and are based upon a prescribed
percentage of the annual compensation of all participants. Salaries and
employee benefits expense included $50 in 1995, $87 in 1994 and $91 in
1993 for the plan.
The Company also has a deferred compensation plan for certain senior
management employees. Expense for such plan is being recognized through
the full eligibility dates of the participants and amounted to $29 in
1995, 1994 and 1993. Life insurance contracts are being used to fund
this plan.
11. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. Such instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
financial statements. Management does not anticipate that losses, if
any, which may occur as a result of funding off-balance sheet commitments
would have a material adverse effect on the Company's results of
operations or financial position.
The following table identifies the contractual amounts of off-balance
sheet commitments at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Commitments to extend credit........................................... $7,191 $7,619
Unused portions of home equity and credit card lines................... 1,382 1,451
Commercial letters of credit........................................... 1,009 486
______ ______
Total................................................................ $9,582 $9,556
====== ======
</TABLE>
The Company's involvement in and exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of home equity and
credit
11. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
card lines and commercial letters of credit is represented by the
contractual notional amounts of those instruments. Commitments to extend
credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Commercial letters of credit are
conditional commitments issued by the Company to support customers in the
purchase of commercial goods. Such letters of credit are automatically
renewable upon their anniversary date unless canceled prior to such date at the
option of the Company.
The Company utilized option contracts to limit its exposure to market
fluctuations on investment securities prior to the fourth quarter of
1994. Options give the holder the right to purchase or sell securities at a
specified price at a future date. The contractual or notional amount of
option contracts does not represent exposure to credit loss, but rather
the principal amount of the underlying securities.
The Company employs the same credit policies and requirements in making
off-balance sheet credit commitments as it does for on-balance sheet
instruments. Provision for losses, if any, is included in the Company's
allowance for loan losses. No provision was deemed necessary at December
31, 1995 and 1994. Such commitments are generally issued for one year or
less and often expire unused in whole or in part by the customer. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include property, plant and
equipment, primary residential properties, and to a lesser extent,
income-producing properties.
The Company provides deposit and loan products and other financial
services to consumer and corporate customers in its quad-county market
area of Lackawanna, Susquehanna, Wayne and Wyoming. There are no
significant concentrations of credit risk from any individual
counterparty or groups of counterparties. The concentrations of the
credit portfolio by loan type are set forth in Note 4. The Company
requires collateral on all real estate exposure and maintains
loan-to-value ratios of no greater than 80.0 percent. Although the
credit portfolio is diversified, the Company and its borrowers are
dependent on the continued viability of the Northeastern Pennsylvania
economy.
Securities and short-term investment activities are conducted with a
diverse group of government entities, corporations and depository
institutions. The Company evaluates the counterparty's creditworthiness
and the need for collateral on a case-by-case basis. At December 31,
1995, there were no significant concentrations of credit risk from any
one issuer
11. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
with the exception of U.S. Treasury securities and U.S. Government agencies.
There is no material legal proceeding to which the Company is a party, or
of which any of its property is the subject, except proceedings that
arise in the normal course of business. Management, after consultation
with legal counsel, does not anticipate that the ultimate liability, if
any, arising out of pending and threatened lawsuits will have a material
effect on the Company's results of operations or financial position.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets.
In many cases, these values cannot be realized in immediate settlement of
the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying values of cash, noninterest bearing balances due from banks
and federal funds sold as reported on the balance sheet approximate fair
value.
Interest-bearing deposits with banks:
The carrying value of interest-bearing deposits with banks as reported on
the balance sheet approximates fair value.
Investment securities:
The fair value of investment securities is based on quoted market prices.
Loans:
For variable rate loans that reprice frequently and with no significant
credit risk, fair values are based on carrying values. The fair values
of all other loans are estimated using discounted cash flow analysis,
using interest rates currently offered for loans with similar terms to
borrowers of similar credit risk.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
Accrued interest receivable:
The carrying value of accrued interest receivable as reported on the
balance sheet approximates fair value.
Deposits without stated maturities:
The fair value of demand deposits, savings accounts and certain money
market accounts is the amount payable on demand at the reporting date.
Deposits with stated maturities:
The present value of future cash flows for time deposits is used to
estimate fair value. The discount rates used are the current rates
offered for time deposits with similar maturities.
Short-term borrowings:
The carrying value of short-term borrowings at a variable interest rate
approximates the fair value.
Long-term debt:
The fair value of the fixed-rate long-term debt is estimated based on
rates currently available to the Company for debt with similar terms.
Accrued interest payable:
The carrying value of accrued interest payable as reported on the balance
sheet approximates fair value.
Commitments:
The majority of the Company's commitments to extend credit, unused
portions of home equity and credit card lines and letters of credit carry
current market interest rates if converted to loans. Because such
commitments are generally unassignable by either the Company or the
borrower, they only have value to the Company and the borrower. The
estimated fair value approximates the recorded deferred fee amounts and
is included in net loans.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The following table represents the carrying value and estimated fair
value of financial instruments at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
_________________________________________
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................... $ 21,964 $ 21,964 $ 6,783 $ 6,783
Interest-bearing deposits with banks......... 116 116 90 90
Investment securities........................ 108,706 108,706 152,566 146,750
Net loans.................................... 209,932 214,595 190,909 181,465
Accrued interest receivable.................. 2,872 2,872 2,636 2,636
________ ________ ________ ________
Total...................................... $343,590 $348,253 $352,984 $337,724
======== ======== ======== ========
Financial liabilities:
Deposits without stated maturities........... $128,386 $128,386 $142,333 $142,333
Deposits with stated maturities.............. 188,713 190,071 173,836 173,380
Short-term borrowings........................ 15,956 15,956
Long-term debt............................... 3,048 3,028 5,050 4,948
Accrued interest payable..................... 1,761 1,761 1,556 1,556
________ ________ ________ ________
Total...................................... $321,908 $323,246 $338,731 $338,173
======== ======== ======== ========
</TABLE>
13. INCOME TAXES:
The following table sets forth the current and deferred amounts of the
provision for income taxes (benefit) for the three years ended December
31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
______________________________________________________________________________________
<S> <C> <C> <C>
Current......................................................... $(412) $1,173 $1,883
Deferred........................................................ (140) (193) (300)
_____ ______ ______
Total......................................................... $(552) $ 980 $1,583
===== ====== ======
</TABLE>
The following is a reconciliation between the effective income tax
expense (credit) and the amount of income taxes (credit) that would have
been provided at the federal statutory rate of 34.0 percent for the three
years ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
______________________________________________________________________________________
<S> <C> <C> <C>
Federal income tax at statutory rate............................ $(120) $1,464 $1,949
Differences resulting from:
Tax-exempt interest, net...................................... (416) (408) (440)
Excess of cost over net assets acquired....................... 74 74 74
Other......................................................... (90) (150)
_____ ______ ______
Total....................................................... $(552) $ 980 $1,583
===== ====== ======
</TABLE>
13. INCOME TAXES (CONTINUED):
The sources of deferred income taxes and the related tax effects are as
follows for the three years ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1995 1994 1993
______________________________________________________________________________________
<S> <C> <C> <C>
Allowance for loan losses...................................... $ (111) $ (139) $(234)
Loans, net of unearned income.................................. 18 (40) (12)
Accrued interest receivable.................................... (15) 20 (35)
Premises and equipment, net.................................... (37) (30) (7)
Other, net..................................................... 5 (4) (12)
______ _______ _____
Deferred income taxes recognized in statements of income..... (140) (193) (300)
Deferred income taxes on investment securities recognized in
stockholders' equity.......................................... 2,816 (2,415)
______ _______ _____
Total deferred income taxes................................ $2,676 $(2,608) $(300)
====== ======= =====
</TABLE>
The significant components of temporary differences between the financial
statement carrying amounts and tax bases of deferred tax assets and
liabilities are as follows at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 1995 1994
_______________________________________________________________________________________
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................. $1,160 $1,049
Loans, net of unearned income......................................... 272 290
Accrued interest receivable........................................... 134 119
Investment securities................................................. 2,415
Other................................................................. 45 50
______ ______
Total............................................................... 1,611 3,923
______ ______
Deferred tax liabilities:
Investment securities................................................. 401
Premises and equipment, net........................................... 335 372
______ ______
Total............................................................... 736 372
______ ______
Net deferred tax assets............................................. $ 875 $3,551
====== ======
</TABLE>
The Company has determined that it is not required to establish a
valuation reserve for the deferred tax assets since it is more likely
than not that the net deferred tax assets could be principally realized
through carryback to taxable income in prior years and by future
reversals of existing taxable temporary differences, or to a lesser
extent, through future taxable income. The Company reviews the tax
criteria related to the recognition of deferred tax assets on a quarterly
basis.
Banks in Pennsylvania are not subject to state or local income taxes,
however they pay a tax on capital. Such tax is included in other
expenses.
14. PARENT COMPANY FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1995 1994 1993
________________________________________________________________________________________
<S> <C> <C> <C>
Income:
Dividends from subsidiary...................................... $ 821 $1,617 $ 866
Management fees from subsidiary................................ 180 180 330
Other income................................................... 51 64 60
______ ______ ______
Total income................................................. 1,052 1,861 1,256
______ ______ ______
Expense:
Interest....................................................... 4 56
Other expenses................................................. 654 601 708
______ ______ ______
Total expenses............................................... 654 605 764
______ ______ ______
Income before income taxes and undistributed income of
subsidiary.................................................... 398 1,256 492
Income tax benefits............................................ (127) (130) (67)
______ ______ ______
Income before undistributed income of subsidiary............... 525 1,386 559
Equity in undistributed income of subsidiary................... (325) 1,939 3,591
______ ______ ______
Net income................................................... $ 200 $3,325 $4,150
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31 1995 1994
________________________________________________________________________________________
<S> <C> <C>
Assets:
Cash................................................................... $ 7 $ 7
Investment in bank subsidiary.......................................... 27,337 22,603
Investment securities available for sale............................... 826 639
Other assets........................................................... 441 147
_______ _______
Total assets......................................................... $28,611 $23,396
======= =======
Liabilities:
Dividends payable...................................................... $ 293 $ 286
Other liabilities...................................................... 423 421
_______ _______
Total liabilities.................................................... 716 707
Stockholders' equity................................................... 27,895 22,689
_______ _______
Total liabilities and stockholders' equity........................... $28,611 $23,396
======= =======
</TABLE>
14. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED):
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1995 1994 1993
________________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 200 $ 3,325 $ 4,150
Adjustments:
Equity in undistributed income of subsidiary................ (1,939) (3,591)
Distributions in excess of earnings of subsidiary........... 325
Gains on sale of investment securities...................... (22)
Changes in:
Other assets.............................................. 1 239 295
Other liabilities......................................... (54) (103) 35
_______ _______ _______
Net cash provided by operating activities............... 472 1,522 867
_______ _______ _______
Cash flows from investment activities:
Proceeds from sales of investment securities.................. 55
Purchases of investment securities............................ (17) (388) (14)
_______ _______ _______
Net cash provided by (used in) investment activities.... (17) (388) 41
_______ _______ _______
Cash flows from financing activities:
Payments of long-term debt.................................... (800) (400)
Proceeds from issuance of common shares, net.................. 1
Cash dividends paid........................................... (455) (448) (436)
_______ _______ _______
Net cash used in financing activities................... (455) (1,248) (835)
_______ _______ _______
Net increase (decrease) in cash......................... (114) 73
Cash at beginning of year............................... 7 121 48
_______ _______ _______
Cash at end of year..................................... $ 7 $ 7 $ 121
======= ======= =======
Supplemental disclosure:
Noncash item:
Change in net unrealized losses (gains) on available for
sale securities............................................ $(5,468) $ 4,688
======= =======
</TABLE>
15. REGULATORY MATTERS:
During the fourth quarter of 1995, the FRB and the State Department of
Banking conducted a joint examination of the Company at September 30,
1995. The examination results delineated a significant improvement in
the Company's overall financial condition and substantial compliance with
the May 24, 1995, written supervisory agreement in the form of a
Memorandum of Understanding ("MOU") with the FRB. Accordingly, the FRB
terminated the MOU on February 16, 1996, releasing the Company from the
supervisory actions of the agreement. The MOU was a direct result of
regulatory concerns about prior investment practices and noncompliance
with previously issued informal supervisory actions. Under the terms of
the MOU, the Company was required to: (I) obtain the prior written
approval of the FRB to declare or pay any dividends; (II) obtain the
prior written approval of the FRB before the Company incurs any debt other than
normal operating expenses; (III) obtain the prior written approval of the FRB
before the Company redeems its own stock; (IV) submit to the FRB a written plan
to maintain capital ratios well in excess of minimum regulatory guidelines;
15. REGULATORY MATTERS (CONTINUED):
(V) submit to the FRB a written plan to ensure appropriate authority over
and oversight of the Company's investment practices; (VI) prohibit the
Company from additional purchases of high-risk securities and structured
notes as well as securities not in compliance with the Federal Reserve
Board's Supervisory Policy Statement on Securities Activities; (VII)
retain an independent consultant to review the Company's securities
activities and investments in the context of the Company's overall
interest rate risk and liquidity position and provide a written report to
the FRB thereon; (VIII) submit to the FRB revised investment policies and
procedures to correct deficiencies cited in the FRB's examinations with
respect to prior investment practices involving the investment portfolio;
(IX) submit to the FRB a written liquidity plan to provide for an
adequate level of assets to fund operations and meet customer needs; (X)
submit quarterly progress reports to the FRB to assure compliance with
the MOU; and (XI) submit the written plans, policies and procedures to
the FRB for review and approval. Significant steps taken by the Company
to comply with the MOU in 1995 included the divestiture of criticized
investment securities, development of formalized policies, plans and
procedures and reorganization of management oversight. The costs
associated with the MOU included in noninterest expense approximated $500
in 1995. Management expects the removal of such supervisory action to
have a positive effect on future operating results and financial
position.
The Company is also subject to Federal Reserve Regulation H, which
restricts state member banks from paying a dividend if the total of all
dividends declared by the bank in any calendar year exceeds the total of
its net profits, as defined, for that year combined with its retained net
profits, as defined, of the preceding two calendar years, less any
required transfers to surplus, unless the bank has received the prior
approval from the Federal Reserve Board. Accordingly, the subsidiary,
without prior approval of bank regulators, may declare dividends to the
Company in 1996 totaling $1,612 plus net profits earned by the subsidiary
for the period from January 1, 1996, through the date of declaration,
less dividends previously paid in 1996.
In addition, the provisions of section 23A of the Federal Reserve Act
require that "covered transactions," as defined, engaged in by insured
banks and their subsidiaries with certain affiliates, including the
Parent Company, be at arm's length and limited to 20.0 percent of capital
and surplus, as defined, and "covered transactions" with any one such
affiliate be limited to 10.0 percent of capital and surplus. Covered
transactions are defined to include, among other things, loans and other
extensions of credit to such an affiliate and guarantees, acceptances and
letters of credit issued on behalf of such an affiliate. Such loans,
other extensions of credit, guarantees, acceptances and letters of credit
must be secured.
15. REGULATORY MATTERS (CONTINUED):
At December 31, 1995, the maximum amount available for transfer from the
subsidiary to the Parent Company in the form of loans amounted to $2,808.
There were no loans or advances to the Parent Company from its subsidiary
during 1995 and 1994, nor were there any such amounts outstanding.
The Company is also required to maintain certain capital to total risk
weighted asset ratios as defined by section 38 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Company is
required to have minimum Tier I and total capital ratios of 4.0 percent
and 8.0 percent, respectively. At December 31, 1995, the Company's Tier
I and total capital ratios were 14.2 percent and 15.5 percent, respectively.
Furthermore, the Federal Reserve Board has established a minimum level of
Tier I capital to adjusted total average assets at 3.0 percent. The
Company's Tier I capital to adjusted total average assets ratio at
December 31, 1995, was 7.0 percent. Institutions not possessing the
highest regulatory composite rating or those experiencing significant
growth are expected to operate well above such minimum capital standards.
In the event an institution is deemed to be undercapitalized by such
standards, FDICIA prescribes an increasing amount of regulatory
intervention, including the required institution of a capital restoration
plan and restrictions on the growth of assets, branches or lines of
business. Further restrictions are applied to institutions that reach
the significantly or critically undercapitalized levels including
restrictions on interest payable on accounts, dismissal of management and
appointment of a receiver. For well-capitalized institutions, FDICIA
provides authority for regulatory intervention where the institution is
deemed to be engaging in unsafe and unsound practices or receives a less
than satisfactory examination report rating for asset quality,
management, earnings or liquidity.
OVERVIEW:
Comm Bancorp, Inc. ("Company") surpassed its $3.1 million profit goal for
1994, earning $3.3 million or $4.53 per share, despite weathering an
operating environment highlighted by transitional monetary policy and
intensified legislative emphasis on fiscal policy.
The operating environment of 1994 was highlighted by the strongest
economic growth in ten years at 3.5 percent. In response, the Federal
Open Market Committee decided to raise short-term interest rates,
beginning in February 1994, aimed at fostering a financial environment
conducive to sustained economic growth through price stability. Although
economic expansion is necessary in promoting an increased standard of
living, growth at too rapid a rate can lend itself to higher wages and
long-term interest rates that can starve future productivity. Stable
labor costs are essential in protecting the prices of gtry experienced the
lowest jobless rate in over four years at 5.4 percent.
The other major factor affecting the 1994 operating environment was the
increased legislative presence on fiscal or budgetary policy. A major
election sweep by Republicans and the introduction of plans for a
Balanced Budget Amendment, spending cuts and tax reform caused changes in
consumer and business spending, saving and borrowing patterns.
The impact of economic change was more significant to the banking
industry than to any other industry as a function of the monetary nature
of its assets. In 1994, the nation's commercial banks set a profit
record for the third consecutive year at $44.7 billion, surpassing the
$43.1 billion and $32.0 billion reported for 1993 and 1992, respectively.
However, the 1994 record was more impressive than previous years since it
was set in a period of rising rates that adversely affected fund costs
and, to a lesser degree due to pent up consumer demands, credit
extensions. Moreover, interest rate spreads were adversely impacted as
banks encouraged households and businesses to shift borrowing from other
sources by easing lending standards and not allowing the entire rise in
market rates to be added to the rate charged to their customers. Interest
rate increases adversely affected borrowers' cash flows, reducing their
ability to service variable rate loans, which caused a deterioration in
asset quality. Rising rates severely impacted asset valuations as banks
were forced to hold loans and securities carrying below-market yields
simply to avoid recognition of unrealized losses associated with these
assets. Such inability to divest asset positions placed a strain on
liquidity levels and adversely impacted profitability as banks were
forced to borrow or raise deposit rates in order to fund loan demand.
REVIEW OF FINANCIAL POSITION:
The Company's financial position improved during 1994, as total assets
increased $23.5 million or 6.9 percent from $339.0 million at December
31, 1993, to $362.5 million at December 31, 1994. Such growth was below
the $29.7 million experienced in 1993 when both major earning asset
groups contributed significantly to improving the Company's financial
position, whereas growth in 1994 was primarily a function of improvements
in the loan portfolio. Although increasing during 1994, investment
securities played a lesser role in the growth of assets as a result of
the nonconducive nature of the interest rate environment during the past
year. Average loan volumes increased $14.2 million during 1994 as
compared to $11.9 million during the previous year. Average deposit
volumes grew $22.4 million from $287.3 million in 1993 to $309.7 million
in 1994, a 7.8 percent increase. The deposit increase in 1994 exceeds
the increase of last year of $19.1 million or 7.1 percent.
The liquidity posture of the Company was significantly impacted by the
Board of Governors of the Federal Reserve System ("Federal Reserve
Board") monetary policy changes during 1994. Rising interest rates
severely affected cash prepayment speeds on loans and mortgage backed
securities. Proceeds from repayments on investment securities decreased
62.8 percent primarily from the reductions in the monthly payments on
mortgage backed securities. In addition, increased interest rates caused
a severe deterioration in the value of investment securities that limited
the Company's ability to create liquidity through dispositions of
available for sale securities. The investment portfolio had a positive
carry-to-market of $1.5 million at December 31, 1993, compared to a
negative carry-to-market of $12.0 million at December 31, 1994. Proceeds
from the sale of available for sale securities declined from $69.2
million to $13.6 million in 1993 and 1994, respectively. As a result of
the onset of illiquidity in the investment portfolio, the Company
supported excess loan demand not funded from deposit growth by exercising
its line of credit with the Federal Home Loan Bank ("FHLB").
Stockholders' equity declined $1.8 million from $24.5 million at December
31, 1993, to $22.7 million at December 31, 1994. The Company's adoption
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," on January 1,
1994, caused the Company to recognize a capital reduction of $4.7 million
during 1994 to reflect the devaluation, net of income taxes, of available
for sale securities. Such decrease was partially offset by the retention
of $2.9 million of earnings.
INVESTMENT PORTFOLIO:
The rising interest rate environment of 1994 had a severe impact on the
value and liquidity of the Company's investment portfolio. The Federal
Reserve Board began raising short-term rates in February in an attempt to
ward off potential inflation and the relational increase in long-term
rates. Despite having a positive impact on inflationary pressures, long-
term rates grew with each increase in short-term rates, with the
exception of the final increase of 1994. Such increases caused the
Company to recognize net unrealized holding losses of $4.7 million, net
of income taxes of $2.4 million, at December 31, 1994.
Prepayments on mortgage backed securities also declined substantially due
to the rising interest rate environment. Cash flows from repayments on
such securities declined from $3.5 million in January 1994 to $133 in
December 1994 with most of the reduction occurring during the first
quarter. The steep fall off in receipts lengthened the weighted average
life of the portfolio, adversely affecting the marketability and
underlying value of the securities. The weighted average life of
mortgage backed securities rose from 9.3 years to 15.0 years at December
31, 1993 and 1994, respectively. In the past, the Company relied on its
ability to sell securities in order to fund loan demand in excess of
deposits. However, such luxury dissipated during 1994 as the majority of
the securities held at year-end had fair values below their costs and
could not be liquidated without realizing losses. As a result,
management substituted FHLB borrowings to fund excess loan demand, which
adversely impacted operating results and capital resources.
The investment portfolio represented 43.9 percent of earning assets at
December 31, 1994. The available for sale classification declined
throughout 1994 as a result of sales and transfers and represented 29.4
percent of total investments at year-end. Proceeds from the sale of
available for sale securities amounted to $13.6 million and $69.2 million
in 1994 and 1993, respectively. The Company realized securities gains of
$495 in 1994 and $1,261 in 1993 as a result of such sales. The proceeds
were used primarily to purchase variable rate securities and fund loan
demand. Based on asset/liability management considerations, management
reevaluated its intent to hold a portion of its available for sale
portfolio during the third quarter 1994. Upon completion of such
considerations and within the confines of SFAS No. 115, management
transferred twenty-two securities with an amortized cost of $17.5 million
to the held to maturity classification. These available for sale
securities had a net unrealized loss of $998 at the transfer date.
The tax equivalent yield on the investment portfolio declined from 6.6
percent in 1993 to 6.1 percent in 1994. The Company held $52.0 million
of variable rate securities, representing one-third of the total
portfolio, at December 31, 1994. The weighted average lives of the fixed and
variable rate portfolios were 8.7 years and 13.2 years at December 31, 1994,
respectively.
The Company held structured notes having a carrying value of $21.1
million at December 31, 1994. Specifically, this portion of the
portfolio consisted of $16.1 million of step-up bonds, $3.0 million of
dual index notes and $2.0 million of de-leveraged bonds. Such securities
earned a weighted average coupon rate of 5.5 percent and had a 10.0
percent negative carry-to-market at December 31, 1994. In addition, the
portfolio included high-risk collateralized mortgage obligations
("CMOs") having an amortized cost of $26.5 million and a fair value of
$22.3 million at December 31, 1994. The average life of such securities
approximated 14.0 years. The amortized cost and fair value of high-risk
CMOs approximated $20.1 million at December 31, 1993. Such securities had
gross unrealized losses of $4.2 million at December 31, 1994, and gross
unrealized losses of $349 and gross unrealized gains of $390 at December
31, 1993.
The Company adopted SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," on December 31,
1994. Management's involvement with derivative financial instruments was
limited to its writing of option contracts on U.S. Treasury securities
during 1994. The Company had no option contracts outstanding at December
31, 1994. Accordingly, SFAS No. 119 had no effect on operating results
or financial position.
Except for U.S. Treasury and U.S. Government agency securities, there
were no securities of any individual issuer that exceeded 10.0 percent of
the Company's stockholders' equity at December 31, 1994 and 1993.
Furthermore, all of the investment securities in the Company's portfolio
were considered investment grade at December 31, 1994 and 1993.
LOAN PORTFOLIO:
Credit conditions improved throughout the United States during 1994
despite the rise in interest rates as borrowing increased in response to
greater spending patterns of both consumers and businesses. In addition,
the increased level of credit extension was influenced by the aggressive
behavior of banks in response to an inability to find suitable
alternative investments. The Company's loan demand was similarly
affected, experiencing its second consecutive year of significant loan
growth during 1994. Loans, net of unearned income, were $194.5 million
at December 31, 1994, an increase of $18.0 million or 10.2 percent over
the volume reported at December 31, 1993. Such increase was a result of
improved local employment conditions, higher volumes of consumer spending
for durables and an inability to place funds into investment portfolios
that experienced a significant adverse reaction to changing market
conditions. Total loans averaged $189.0 million in 1994, an increase of
$14.2 million from 1993. The cyclical nature of loan demand during 1994
was similar to that experienced by the peer group with the second and
third quarters being most active. The Company's credit demand grew at
annualized rates of 16.3 percent and 17.8 percent during such periods,
respectively. Although not as active as the Company's loan demand,
competing regional banks' loans grew at annualized rates of 14.4 percent
and 13.9 percent over the comparable quarters. However, the Company did
not act consistently compared to its peers in considering the terms of
such demand as the majority of credit extensions came in the form of
fixed-rate loans. The Company's volume of loans with predetermined
interest rates increased $16.1 million while those bearing floating or
adjustable interest rates rose $1.9 million during 1994. Customers,
fearful of rapidly changing interest rates, converted borrowings from
variable rate products to higher-costing fixed-rate products to avoid
potential debt servicing problems. The tax equivalent yield on the loan
portfolio declined from 9.1 percent in 1993 to 8.5 percent in 1994. Such
decline was a function of 1994 being the first year earnings received the
full impact of the refinancing frenzy. The volume of refinanced
residential mortgages declined significantly from $23.6 million in 1993
to $14.4 million in 1994.
The composition of the loan portfolio changed slightly during 1994 as
commercial lending experienced its first significant increase since 1991,
growing $6.8 million, as compared to a $0.9 million increase during 1993.
Taxable commercial lending was responsible for $4.6 million of the 1994
increase as companies sought to avoid potentially higher interest rate
burdens by replacing variable rate funding from other sources with fixed-
rate products from the Company. The remaining $2.2 million increase in
commercial lending was attributable to establishing stronger customer
relationships with state and political subdivisions in line with tax
planning strategies. Loans to finance one-to-four family residential
properties were principally responsible for the $11.2 million increase in
retail lending. Falling home prices in the Northeast and favorable
employment conditions, partially offset by the rise in mortgage rates,
were responsible for the growth of residential mortgages.
At December 31, 1994, the Company had no loan concentrations exceeding
10.0 percent of total loans. The Company limits its exposure to
concentrations of credit risk by the nature of its lending activities as
approximately 57.9 percent of total loans outstanding are secured by
residential properties. The average mortgage outstanding on a
residential property was $37.2 at December 31, 1994. The loan portfolio
did not consist of any form of credit involving highly-leveraged
transactions at December 31, 1994.
In the ordinary course of business, the Company has entered into off-
balance sheet financial commitments consisting of commitments to extend
credit, unused portions of home equity and credit card lines and
commercial letters of credit. The Company's exposure to such commitments
increased from $7.8 million at December 31, 1993, to $9.6 million at
December 31, 1994.
At December 31, 1994, management determined that approximately 30.3
percent of the lending portfolio would reprice within the next twelve
months. The 30.3 percent surpasses the 21.3 percent at December 31, 1993,
as a result of increased demand for short-term funding and a slight
improvement towards achieving management's goal of generating variable-
rate loans.
ASSET QUALITY:
The Company benefited from improvements in local employment conditions as
the level of nonperforming assets and accruing loans past due 90 days or
more declined during 1994. Such decline was also attributable to
improvements in internal procedures with respect to delinquent credits.
Nonperforming assets were $3.3 million at December 31, 1994.
Nonperforming loans declined $458 during 1994. The ratios of
nonperforming assets and loans past due 90 days or more as a percentage
of total loans, net, were 1.69 percent and 0.73 percent, respectively, at
December 31, 1994.
Interest income related to nonaccrual and restructured loans would have
been $136 in 1994 and $103 in 1993, had such loans been current and the
terms not been modified. Interest recognized on nonaccrual loans
amounted to $40 in 1994 and $9 in 1993. There were no commitments to
extend additional funds to such parties at December 31, 1994.
The Company experienced a net decline of $22 in other real estate during
1994, as transfers of four loans from nonaccrual status totaling $260
were offset by the sale of six properties totaling $291, including net
gains on such dispositions of $9. The carrying value of properties
included in other real estate was less than 80.0 percent of the
collateral value at December 31, 1994.
Loans past due 90 days or more declined $142 during 1994, primarily from
a reduction in the volume of consumer loans. Such reduction is a
reflection of improvements made in credit administration, as
approximately three- quarters of the amelioration resulted from customers
paying-off or bringing credits current.
Classified assets are those assets cited by bank examiners, or by the
bank's internal rating system, as being at risk to a greater degree than
is considered desirable. Regulators separate classified assets into
three major categories based on degree of risk: substandard, doubtful and
loss. Classified assets as a percentage of Tier I capital decreased 6.5
percent in comparing the Federal Reserve Bank of Philadelphia ("FRB")
Reports of Examination for 1994 and 1993.
The allowance for loan losses, against which loans are charged-off, was
$3.6 million at December 31, 1994, representing 1.84 percent of total
loans, compared to $3.2 million and 1.80 percent at December 31, 1993.
In comparison, the peer group reported ratios of 1.46 percent and 1.64
percent at December 31, 1994 and 1993, respectively. As a percentage of
nonperforming loans, the allowance account covered 117.0 percent and 90.2
percent at year-end 1994 and 1993, respectively. Relative to all
nonperforming assets, the allowance covered 108.9 percent at December 31,
1994, and 84.2 percent at December 31, 1993.
Net charge-offs were $393 or 0.21 percent of average loans outstanding in
1994 compared to $408 or 0.23 percent in 1993. The peer group reported
net charge-offs as a percentage of average loans outstanding of 0.27
percent and 0.33 percent in 1994 and 1993, respectively. Approximately
one-third of the gross charge-off activity in 1994 resulted from
recognizing write- downs upon reappraisals of collateral securing
nonaccrual loans in accordance with maintaining appropriate loan-to-value
ratios.
DEPOSITS:
Total deposits averaged $309.7 million in 1994 as compared to $287.3
million in 1993, an increase of 7.8 percent. The average growth
experienced by Northeastern Pennsylvania banks was 5.2 percent for the
comparable period. The majority of the Company's deposit growth occurred
during the third quarter as deposits grew at an annualized rate of 19.1
percent. Most of the third quarter growth was attributable to retail
certificates of deposit with stated maturities less than two years.
Average time deposits accounted for 47.3 percent of average assets during
1994 as compared to 31.8 percent for the peer group. The Company's cost
of deposits declined from 4.4 percent in 1993 to 4.2 percent in 1994 as
compared to the peer group's cost declining from 4.0 percent to 3.7
percent, respectively. The reduction is comparably smaller than prior
years as a result of increases in the cost of retail time deposits. The
average yield on certificates of deposit less than $100 increased from
4.9 percent during the first quarter 1994 to 5.1 percent during the
fourth quarter 1994.
Volatile deposits, defined as time deposits in denominations of $100 or
more, increased from $24.3 million at December 31, 1993, to $30.2 million
at December 31, 1994. The Company exhibited a greater dependence on such
funding as compared to the peer group during 1994. Average volatile
deposits, as a percentage of average assets, was 7.4 percent in 1994 as
compared to 5.4 percent for the peer group. The average cost of such
funds rose 95 basis points during 1994.
A decline in the Company's ability to fund asset growth through cash
flows from the investment portfolio caused a greater reliance on FHLB
borrowings in 1994. The Company's total borrowings averaged $4.9 million
with a weighted average rate of 5.3 percent in 1993 as compared to $16.2
million at 4.9 percent in 1994. The decline in the cost of such funding
was a result of a greater proportion of short-term borrowings during
1994. Management chose short-term borrowings as opposed to aggressively
competing for deposits due to their lower cost and exemption from
insurance costs.
Short-term borrowings consisted of a line of credit with the FHLB secured
under terms of a blanket collateral agreement by a pledge of FHLB stock
and certain other qualifying collateral, such as investment and mortgage
backed securities and mortgage loans. The average daily balance and
weighted average rate on the FHLB line was $11.2 million at 4.9 percent
in 1994 and $1.0 million at 3.3 percent in 1993. The average volume and
weighted average rate on long-term debt amounted to $5.1 million at 4.9
percent and $3.9 million at 5.8 percent in 1994 and 1993, respectively.
INTEREST RATE SENSITIVITY:
The Company's three-month asset sensitive position improved from $19.2
million in 1993 to $28.1 million in 1994. Such an improvement was
directly attributable to the change in depositor attitudes as they
lengthened their deposit maturities in order to enhance yield. Retail
time deposits scheduled to reprice within three months declined from
$37.5 million to $20.3 million at December 31, 1993 and 1994,
respectively. The weighted average maturity of retail time deposits
increased from 1.8 years to 2.2 years during 1994. The cumulative one-
year rate sensitive asset to rate sensitive liability ratio declined from
0.95 at December 31, 1993, to 0.84 at December 31, 1994. The
deterioration in the cumulative one-year rate sensitive position was due
to the reduction in prepayments on mortgage backed securities and loans,
partially offset by lengthening retail time deposit maturities.
Estimated prepayments on mortgage backed securities included in the
cumulative one-year period were $530 and $8.4 million at December 31,
1994 and 1993, respectively. Rising interest rates also slowed the
estimated loan prepayments from refinancings. The volume of refinancings
in the low rate environment of 1993 amounted to $23.6 million as opposed
to the rising rate environment of 1994 totaling $14.4 million. The
Company's cumulative one-year gap position was favorably affected by a
reduction in the volume of retail time deposits repricing during such
time frame. Such deposits amounted to $95.6 million at December 31,
1993, as compared to $79.4 million at December 31, 1994.
The Company enhances its asset/liability management through use of a
simulation model. The simulation model results at December 31, 1994,
indicate a departure from the expected results of the static gap model.
Net interest income is expected to decrease 10.7 percent should interest
rates rise 50 basis points. Conversely, a similar decline in interest
rates would result in an increase in net interest income of 10.7 percent.
LIQUIDITY:
The Company's liquidity position deteriorated in 1994 primarily due to
reductions in prepayments on mortgage backed securities and an inability
to dispose of available for sale securities as a result of rising
interest rates.
The consolidated statements of cash flows present the change in cash and
cash equivalents from operating, investing and financing activities.
Cash and cash equivalents, consisting of cash and due from banks and
federal funds sold, decreased $0.4 million in 1994. Net cash provided by
operating activities totaled $4.0 million and was the result of net
income of $3.3 million adjusted for changes in deferred tax assets and
other assets.
Net cash used in investing activities was the major component of the
change in cash and cash equivalents, resulting in a net outflow of $28.9
million. The major components of such outflow were the net increase in
lending activities, and to a lesser extent, investment purchases in
excess of sales and repayments. The $18.5 million outflow from lending
activities was a function of increased loan demand and management's
aggressiveness to extend credit. Net cash used to fund investment growth
was $9.9 million. Net cash provided by financing activities totaled
$24.6 million in 1994 as a result of attracting deposits and taking
advantage of short-term funding.
CAPITAL ADEQUACY:
Stockholders' equity declined $1.8 million during 1994 as a result of the
effects of adopting SFAS No. 115, partially offset by the retention of
net income in excess of dividends declared. At December 31, 1994, the
Company exceeded all requirements of the well-capitalized regulatory
classification that include a Total risk-based ratio of at least 10.0
percent, a Tier I ratio of at least 6.0 percent and a Leverage ratio of
at least 5.0 percent. The Company was not subject to any written
agreement, order, capital directive or prompt corrective action directive
to meet and maintain a specific capital level for any capital measure at
December 31, 1994.
The Company's dividend payout ratio increased from 10.7 percent to 13.7
percent for the years ended December 31, 1993 and 1994, respectively.
The capital appreciation of the Company's common stock amounted to 33.3
percent for the year ended December 31, 1994. The Company's ability to
pay dividends to its stockholders is limited by its ability to obtain
funds from its subsidiary as specified by federal and state regulations.
Accordingly the subsidiary, without prior approval of bank regulators,
could declare dividends to the Company totaling $5,531 at year-end 1994.
REVIEW OF FINANCIAL PERFORMANCE:
Net income for the year ended December 31, 1994, was $3,325 compared to
$4,150 in 1993, a decrease of $825, or 19.9 percent. On a per share
basis, earnings were $4.53 for the year, compared with $5.66 reported in
1993. Net income, excluding the effects of investment security gains or
losses, would have totaled $3,431 or $4.68 per share in 1994 as compared
to $3,121 or $4.26 per share in 1993. The return on average assets and
return on average stockholders' equity were 0.95 percent and 14.26
percent in 1994, respectively, as compared to 1.30 percent and 17.91
percent in 1993, respectively. The comparable ratios of the peer group
were 1.12 percent and 11.80 percent in 1994, respectively.
Net interest income on a tax equivalent basis improved slightly from
$12,711 in 1993 to $12,760 in 1994. The greater volume of earning assets
offset the adverse increase in fund costs. Interest income on a tax
equivalent basis increased $991 from $24,711 in 1993 to $25,702 in 1994.
Interest expense increased $942 from $12,000 in 1993 to $12,942 in 1994.
The monthly provision charged to operations in 1994 was slightly lower
than the level experienced during 1993. The $280 reduction in the
provision during 1994 was a reflection of improvements in asset quality
and, to a lesser extent, higher earnings achieved in 1993.
Noninterest income totaled $1,005 in 1994, a decrease of $1,566 or 60.9
percent, compared to 1993. The majority of such decrease was
attributable to reporting net investment and trading securities gains of
$1,558 in 1993 as opposed to net investment and trading securities losses
of $161 in 1994. Revenue from service charges, fees and commissions
increased $153 from 1993 to 1994.
Noninterest expense totaled $7,949 in 1994, an increase of $97 or 1.2
percent, compared to 1993. During 1994, the rise in salaries and
benefits expense of $451 was partially offset by declines in net
occupancy and equipment and other expenses of $85 and $269, respectively.
NET INTEREST INCOME:
Net interest income on a tax equivalent basis increased at its lowest
level in over five years, initiating concern as gains in net earning
asset growth approximated the unfavorable decline in net interest margin.
Rises in general market rates caused a corresponding effect on deposits
that could not be transferred to loan customers as a result of
competitive pressures. Tax equivalent net interest income improved
slightly to $12,760 in 1994, an increase of $49 or 0.4 percent, compared
to 1993.
Changes in the volumes of average earning assets in excess of average
interest-bearing liabilities resulted in a positive influence of $1,350
on net interest income. Total average earning assets increased $35.8
million to $346.4 million in 1994 while average interest-bearing
liabilities increased $31.6 million to $304.1 million. The Company
experienced its second consecutive year of strong loan growth evidenced
by an increase in the volume of average loans from $174.8 million to
$189.0 million in 1993 and 1994, respectively. Such increase was
responsible for $1,243 of the $2,699 improvement in net interest income
as a result of volume changes. The other major contributor to the
favorable rise in net interest income was the higher average volume of
investments in 1994. Average investments increased $26.8 million during
1994 as management increased its holdings of variable rate securities to
address interest rate risk and tax-exempt securities to lower the
Company's tax burden. The unfavorable volume variance of $1,349 in
interest expense partially offset the improvement in net interest income.
Increased volumes of savings, retail time deposits and short-term
borrowings were the major contributors to such variance. The Company
chose to facilitate loan demand in excess of deposits through FHLB
borrowings as a result of their lower cost and exemption from Federal
Deposit Insurance Corporation ("FDIC") insurance.
The rapid rise in general market rates was the primary cause for the
Company reporting an unfavorable rate variance of $1,301 in net interest
income for the comparable years of 1993 versus 1994. The Company's net
interest margin decreased by 41 basis points from 4.09 percent in 1993 to
3.68 percent in 1994. Such decline is the first reported since 1991 when
the net interest margin declined 19 basis points in response to
reductions in loan demand along with increased levels of nonperforming
assets and refinancing activities. The 41 basis point decline in the net
interest margin is a result of earning asset yields falling faster than
fund costs. As a result of competitive pressure, management was unable
to apply the same changes in interest rates to lending as required in
order to retain deposits. The unfavorable rate variance of $1,301 in net
interest income was primarily attributable to recording a negative rate
impact of $1,708 to interest income partially offset by a favorable rate
variance of $407 in interest expense. The Company's yield on earning
assets declined from 7.96 percent in 1993 to 7.42 percent in 1994. The
lending portfolio was the principal reason for reporting the negative
rate variance as management was required to competitively price loan
products in light of the unsuitable investing environment. The adverse
impact of aggressive competition was partially offset by lower levels of
nonperforming assets and greater volumes of adjustable rate loans. The
negative rate variance of $586 in investment securities was a function of
converting higher-yielding fixed- rate securities to variable rate
securities, along with recognizing smaller amounts of accretion on
mortgage backed securities in line with the slowdown of prepayments. The
Company's cost of funds declined from 4.40 percent in 1993 to 4.26
percent in 1994. The slight improvement in interest expense, as
evidenced by the favorable rate variance of $407, resulted from a
reduction in the cost of retail time deposits from 5.26 percent in 1993
to 4.94 percent in 1994. Such trend reversed itself during the final
half of 1994 in line with changes in general market rates.
PROVISION FOR LOAN LOSSES:
Contrary to the behavior of many financial institutions, management
continued its prudent policy of building its allowance account despite
improvement in asset quality. The Company's provision for loan losses
declined $280 from $1,080 in 1993 to $800 in 1994. The decrease resulted
from reporting a reduced amount of net charge-offs in 1994 as compared to
1993, and to a lesser extent, higher reported earnings in 1993. Although
the Company experienced reduced nonperforming assets and delinquent
credits, it continued to build its allowance through the provision in
response to greater loan demand.
NONINTEREST INCOME:
Noninterest income totaled $1,005 for the year ended December 31, 1994,
as compared to $2,571 for the year ended December 31, 1993. The $1,566
decline was primarily a result of reporting net losses of $161 in 1994
and net gains of $1,558 in 1993 on investment and trading account
securities. Most of the losses realized in 1994 occurred as a result of
marking trading account assets to market in accordance with SFAS No. 115
rules. The majority of such assets was obtained through exercised
written put option contracts and was marked to market prior to their
transfer into the available for sale or held to maturity portfolios. The
sale of mortgage backed securities displaying volatile prepayment speeds,
and those with fixed interest rates to adjust interest rate sensitivity,
provided the major component of the 1993 securities gains. An increased
volume of service charges, fees and commissions partially offset the net
security losses incurred in 1994. The $153 increase over the previous
year was a result of taking a more aggressive stance toward insufficient
funds activities and a growth in the volume of accounts.
NONINTEREST EXPENSE:
Noninterest expense totaled $7,949 in 1994, an increase of $97, or 1.2
percent, compared to 1993. The Company had a net overhead expense to
average assets ratio of 2.0 percent, an improvement over the 2.1 percent
recorded in 1993. In relation to the peer group ratio of 2.8 percent,
the Company continued to demonstrate a greater efficiency level. The
Company's operating efficiency ratio showed a slight increase from 59.1
percent at December 31, 1993, to 59.6 percent at December 31, 1994.
Salaries and benefits composed 47.6 percent of noninterest expense and
totaled $3,782 in 1994, representing a $451 or a 13.5 percent increase
compared to 1993. Salaries and payroll taxes increased in 1994
principally due to annual merit raises coupled with the addition of new
employees. Additional staff was required to meet and improve on
regulatory compliance issues and to pursue the expansion of the
commercial segment. Higher costs of providing medical and other
insurances also contributed to the increase in salaries and employee
benefits expense.
Net occupancy and equipment expense amounted to $1,249, a decrease of
$85, or 6.4 percent, compared to 1993. The reduction is a reflection of
lower costs associated with the Company's conversion to an in-house
computer system in 1992 thus eliminating charges paid to a service
bureau. In addition, leases on branch automation equipment having
aggregate annual payments of $166 expired in the fourth quarter of 1993.
An increase of $104 in net occupancy expense partially diluted the
reduction in equipment expense. Such increase was a result of expenses
related to relocating a branch office to a larger facility.
Other expenses totaled $2,918 in 1994, a decrease of $269 or 8.4 percent,
compared to the 1993 level. Reductions in postage expense and other
insurances partially offset by an increase in Pennsylvania Capital Shares
Tax were the major factors influencing such decrease.
INCOME TAXES:
The Company's effective tax rate declined from 27.6 percent in 1993 to
22.8 percent in 1994. Implementation of tax planning strategies
involving tax-exempt assets and a limited partnership investment coupled
with reporting lower levels of earnings were primarily responsible for
such decline.
During the first quarter of 1993, the Company acquired a limited
partnership interest in a residential housing program designed for the
elderly and for low- to moderate-income families. Such investment will
provide for a reduction in income taxes by utilizing tax credits allowed
on such investments. During 1994, the Company recognized $71 of the $895
of total tax credits available from such project that will be recognized
annually until the year 2003.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
COMM BANCORP, INC.
__________________
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Comm Bancorp, Inc. and
Community Bank and Trust Company
DONALD R. EDWARDS
Owner, Mountain View Inn
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
MICHAEL T. GOSKOWSKI
SECRETARY
Owner, Kartri Sales Mfg.
JOHN P. KAMEEN
Publisher, Forest City News
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
CORPORATE OFFICERS
Comm Bancorp, Inc.
__________________
DAVID L. BAKER
President and
Chief Executive Officer
THOMAS M. CHESNICK
Assistant Secretary
WILLIAM F. FARBER, SR.
Chairman of the Board
MICHAEL T. GOSKOWSKI
Secretary
J. ROBERT McDONNELL
Vice President
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operating Officer
BOARD OF DIRECTORS
COMMUNITY BANK AND TRUST COMPANY
________________________________
ROBERT BABCOCK
Retired
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Comm Bancorp, Inc. and
Community Bank and Trust Company
DONALD R. EDWARDS
Owner, Mountain View Inn
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
MICHAEL T. GOSKOWSKI
SECRETARY
Owner, Kartri Sales Mfg.
ALLAN A. HORNBECK
President, Allan Hornbeck Chevrolet
JOHN P. KAMEEN
Publisher, Forest City News
ERWIN KOST
Owner, Kost Tire and Muffler
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE POROSKY
Owner, Porosky Lumber
ROBERT T. SEAMANS
Owner, Seamans Airport
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
DIRECTORS AND OFFICERS (CONTINUED)
ADVISORY BOARDS
COMMUNITY BANK AND TRUST COMPANY
________________________________
CARBONDALE OFFICE
_________________
JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home
JOHN J. CERRA
Attorney
Walsh and Cerra
HENRY E. DEECKE
Henry E. Deecke Real Estate
GEORGE HORNBECK III
Hornbeck Chevrolet-Cadillac
HAROLD McGOVERN
McGovern Insurance Agency
Gantar Insurance
CLIFFORD OFFICE
_______________
DONALD R. EDWARDS
Owner, Mountain View Inn
JOSEPH KOCHMER
Kochmer Stone Quarry
THOMAS J. LOPATOFSKY, JR.
Lenox Propane
JOSEPH T. McGRAW
Attorney
McGraw and McGraw
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK OFFICES
___________________
ROD AZAR
Azar Insurance Agency
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
DOUG GAY
Gay's True Value
THOMAS KUKUCHKA
Sheldon-Kukuchka Funeral Home
GLEN LAYAOU
Eaton Hills Development Corp.
Layaou Construction Co.
HOWARD TRAUGER
Trauger's, Inc.
MONTROSE OFFICE
_______________
ROBERT BABCOCK
Retired
EDGAR B. BAKER
Consultant
DUANE JERAULD
Montrose Beverage
TOM KERR
Tom Kerr Chevrolet
ROBERT LEE
Lee's Furniture Store
DONNA WILLIAMS
Livestock Dealer/Farmer
NICHOLSON OFFICE
________________
RICHARD LOCHEN
Lochen's Market
MARK NOVITCH
Kram Trucking
DAVID SCHMIDT, JR.
Schmidt's Valley Farm Market
CHARLES SPENCER
Retired Industrial Engineer
SIMPSON OFFICE
______________
WILLIAM A. KERL
Kerl's Coal and Oil
BERNARD M. LAPERA
Lapera Oil Company
SUSAN MANCUSO
Accountant
GERALD SALKO, D.D.S.
Dentist
DIRECTORS AND OFFICERS (CONTINUED)
OFFICERS
COMMUNITY BANK AND TRUST COMPANY
________________________________
DAVID L. BAKER
President and
Chief Executive Officer
WILLIAM R. BOYLE
Vice President
Carbondale Branch Manager
MARK E. CATERSON
Vice President
Senior Trust Officer
THOMAS M. CHESNICK
Vice President, Cashier
Forest City Branch Manager
JOHN B. ERRICO
Comptroller
CRAIG FISCHER
Lakewood Branch Manager
VALERIE HITE
Simpson Branch Manager
RANDOLPH LaCROIX
Clifford Branch Manager
KENNETH LEONE
Eaton Township Branch Manager
PAMELA S. MAGNOTTI
Compliance Officer
JOELYN MARK
Vice President
Marketing
MARY ANN MUSHO
Assistant Cashier
Human Resource Officer
JANICE NESKY
Nicholson Branch Manager
M. EVELYN PANTZAR
Vice President
Internal Auditor
JOSEPH V. PAVLOVICH
Vice President
Tunkhannock Branch Manager
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS W. SHEPPARD
Vice President
Senior Loan Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operating Officer
RONALD K. SMITH
Vice President
Montrose Branch Manager
TAMI L. SNYDER
Vice President
Information Services
GEORGE WEISS
Lake Winola Branch Manager
GLOSSARY OF TERMS
BASIS POINT - Unit of measure equal to one hundredth of one percent.
BOOK VALUE PER COMMON SHARE - Value of one share of common stock
calculated by dividing stockholders' equity by the total number of common
shares outstanding.
COMMON SHARES OUTSTANDING - The total number of common shares issued less
any shares held in the treasury.
CORE DEPOSITS - Total deposits excluding time deposits of $100,000 or
more.
EARNING ASSETS - Assets that generate interest income and/or yield-
related fee income. Such assets include loans, securities and short-term
investments.
EARNINGS PER SHARE - Net income divided by the average number of common
shares outstanding.
FULLY TAX EQUIVALENT - An adjustment made for tax-exempt instruments
equal to the amount of taxes that would have been paid had these
instruments been taxable at the statutory rate of 34.0 percent.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid for
the use of funds. Such liabilities include interest checking, savings,
time deposit accounts and borrowed funds.
INTEREST SENSITIVE ASSETS/LIABILITIES - Interest-bearing assets and
liabilities adjustable within a specified period due to maturity or
contractual agreements. These agreements typically relate stated
interest rates to the prime rate.
INTEREST SENSITIVITY - A measurement of the effect on net interest income
due to changes in interest rates.
LEVERAGE RATIO - Determined by dividing total stockholders' equity less
intangible assets and unrealized holding gains and losses by current
average tangible assets.
LIQUIDITY - A corporation's ability to meet cash requirements. Deposits,
borrowings, capital and/or asset conversions are all items used for the
raising of cash.
MORTGAGE BACKED SECURITIES - Securities collateralized by pools of
residential mortgages having cash flows serviced by repayment activity on
the underlying mortgages.
NET CHARGE-OFFS - The amount of loans charged against the allowance for
loan loss account less any recoveries on loans previously charged-off.
GLOSSARY OF TERMS (CONTINUED)
NET INTEREST INCOME - Income earned on earning assets less interest
expense paid on interest-bearing liabilities.
NET INTEREST MARGIN - Net interest income on a fully tax equivalent basis
divided by total average earning assets.
NET INTEREST SPREAD - Difference between the average tax equivalent rate
received on earning assets and the average rate paid on interest-bearing
liabilities.
NONACCRUAL LOANS - Loans that have had interest accruals interrupted due
to the financial difficulties of the borrower.
NONPERFORMING ASSETS - Assets consisting of nonperforming loans and
foreclosed assets. Nonperforming loans are defined as accruing loans
past due 90 days or more, loans on which interest is currently not being
accrued or loans on which the rate or term has been altered due to the
deteriorated financial condition of the borrower.
OVERHEAD RATIO - Used as a measurement of the relationship between
operating expenses and revenues. It is total noninterest expenses
divided by the total of tax equivalent net interest income and
noninterest income.
PAST DUE LOANS - Loans that are still accruing interest but are past due
90 days or more with respect to the collection of principal or interest.
PROVISION FOR LOAN LOSSES - A charge against income made to estimate the
expense related to management's estimated losses with respect to the loan
portfolio.
RESERVE FOR LOAN LOSSES - A valuation allowance charged against the loan
portfolio representing the amount considered by management to be adequate
to cover estimated losses with respect to the loan portfolio.
RETURN ON AVERAGE TOTAL ASSETS - Net income divided by the average total
assets for the period.
RETURN ON AVERAGE TOTAL EQUITY - Net income divided by the average total
stockholders' equity for the period.
RISK-ADJUSTED ASSETS - Assets and credit equivalent amounts of
off-balance sheet items that have been adjusted according to regulatory
guidelines into their assigned risk weights.
RISK-BASED CAPITAL RATIOS - Guidelines set forth by regulatory agencies
as to the measurement of capital and how total assets and certain
off-balance sheet items are to be risk-adjusted to reflect levels of
credit risk.
GLOSSARY OF TERMS (CONTINUED)
SENSITIVITY GAP - The difference between rate sensitive assets and rate
sensitive liabilities for a designated period. Assets exceeding
liabilities reflect a positive or net asset position. Liabilities
exceeding assets reflect a negative or a net liability position.
STOCKHOLDERS' EQUITY - Total investment by holders of common stock plus
retained earnings.
STOCKHOLDERS' EQUITY PER COMMON SHARE - The value of a common share of
stock calculated by dividing total common stockholders' equity by the
total number of outstanding common shares at the end of the period.
TIER I RISK-BASED CAPITAL - Stockholders' equity less goodwill and any
other intangible items.
TOTAL RISK-BASED CAPITAL - The sum of Tier I capital and the allowance
for loan losses (restricted by certain regulatory limitations).
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS:
521 Main Street
P.O. Box 129
Forest City, PA 18421
LEGAL COUNSEL:
Schnader Harrison Segal & Lewis
Suite 700
30 North Third Street
Harrisburg, PA 17101-1713
INDEPENDENT AUDITORS:
Kronick Kalada Berdy & Company
190 Lathrop Street
Kingston, PA 18704
TRANSFER AGENT:
Comm Bancorp, Inc.
Stock Transfer Department
521 Main Street
P.O. Box 129
Forest City, PA 18421
MARKET MAKERS:
The primary market makers in Comm
Bancorp, Inc. stock are the
investment-brokerage houses of
Rutherford Brown and Catherwood, Inc.
and Hopper Soliday & Co., Inc.
SEC REPORTS AND ADDITIONAL
INFORMATION:
Copies of Comm Bancorp's Annual
Report on Form 10-K and Quarterly
Reports on Form 10-Q to the
Securities and Exchange Commission or
additional financial information
concerning Comm Bancorp, Inc. may be
obtained without charge by writing to
Scott A. Seasock, Chief Financial
Officer, at corporate headquarters.
COMMUNITY REINVESTMENT:
Copies of Community Bank and Trust
Company's community reinvestment
statement, including charitable
contributions, may be obtained
without charge by writing to Joelyn
Mark, Vice President, at corporate
headquarters.
ANNUAL STOCKHOLDERS MEETING:
All Stockholders are invited to
attend the Company's annual meeting
on Friday June 7, 1996 at 1:00 p.m.
at the American Legion Post# 524,
Dundaff Street, Forest City,
Pennsylvania.
COMMON STOCK MARKET INFORMATION:
Shares of Comm Bancorp, Inc. common
stock are traded in the over-the-
counter market and "bid" and "asked"
quotations regularly appear on the
Over-the-Counter Electronic Bulletin
Board system under the symbol "CCBP."
As of March 1, 1996, two firms were
listed on the Over-the-Counter
Electronic Bulletin Board system as
market makers for the Company's
common stock. The following table
sets forth: (1) the quarterly average
bid and asked prices for a share of
the Company's common stock during the
periods indicated as reported by
Rutherford Brown and Catherwood, Inc.
of Clarks Summit, Pennsylvania, one
of the market makers of the Company's
common stock and (2) dividends on a
share of the common stock with
respect to each dividend declared
since January 1, 1994. The following
quotations represent prices between
buyers and sellers and do not include
retail markup, markdown or
commission. There may have been
transactions or quotations at higher
or lower prices of which management
is unaware.
<TABLE>
<CAPTION>
AVERAGE STOCK PRICES CASH DIVIDENDS
_____________________
1995: BID ASKED DECLARED
_______ ______ ______________
<S> <C> <C> <C>
First Quarter... $40.00 $40.00
Second Quarter.. 40.00 40.00
Third Quarter... 40.00 40.00 $.23
Fourth Quarter.. $40.00 $42.00 $.40
1994:
First Quarter... $30.00 $32.00
Second Quarter.. 32.00 35.00 $.23
Third Quarter... 35.00 40.00
Fourth Quarter.. $40.00 $40.00 $.39
</TABLE>
Holders of Comm Bancorp, Inc. common
stock are entitled to receive
dividends when declared by the Board
of Directors out of funds legally
available. Comm Bancorp, Inc. has
paid cash dividends since its
formation as a bank holding company
in 1983. It is the present intention
of the Board of Directors to continue
this dividend payment policy;
however, further dividends must
necessarily depend upon earnings,
financial condition, appropriate
legal restrictions and other factors
relevant at the time the Board of
Directors of Comm Bancorp, Inc.
considers payment of dividends.
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Community Bank and Trust Company, incorporated under the laws of the
Commonwealth of Pennsylvania as a state-chartered commercial banking institution
and trust company.
<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 110 AND 111 OF THE COMPANY'S FORM 10-K 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,864
<INT-BEARING-DEPOSITS> 116
<FED-FUNDS-SOLD> 15,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,706
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 213,835
<ALLOWANCE> 3,903
<TOTAL-ASSETS> 350,948
<DEPOSITS> 317,099
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,906
<LONG-TERM> 3,048
0
0
<COMMON> 733
<OTHER-SE> 27,162
<TOTAL-LIABILITIES-AND-EQUITY> 350,948
<INTEREST-LOAN> 17,478
<INTEREST-INVEST> 7,989
<INTEREST-OTHER> 1,000
<INTEREST-TOTAL> 26,467
<INTEREST-DEPOSIT> 14,093
<INTEREST-EXPENSE> 14,994
<INTEREST-INCOME-NET> 11,473
<LOAN-LOSSES> 435
<SECURITIES-GAINS> (4,393)
<EXPENSE-OTHER> 8,194
<INCOME-PRETAX> (352)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,331
<LOANS-PAST> 2,150
<LOANS-TROUBLED> 262
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,576
<CHARGE-OFFS> 393
<RECOVERIES> 285
<ALLOWANCE-CLOSE> 3,903
<ALLOWANCE-DOMESTIC> 3,903
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
