UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1997
_____________
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 (Zip Code)
offices)
(717) 785-3181
________________________________________________________________________________
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,201,245 AT JULY 22, 1997.
Page 1 of 36
COMM BANCORP, INC.
FORM 10-Q
JUNE 30, 1997
INDEX
CONTENTS PAGE NO.
PART I. FINANCIAL INFORMATION:
ITEM 1:
Consolidated Statements of Income - For the Three Months and
Six Months Ended June 30, 1997 and 1996..................... 3
Consolidated Balance Sheets - June 30, 1997, and December 31,
1996........................................................ 4
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1997...................... 5
Consolidated Statements of Cash Flows For the Six Months
Ended June 30, 1997 and 1996................................ 6
Notes to Consolidated Financial Statements................... 7
ITEM 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II. OTHER INFORMATION:
ITEMS 1-6:
Other Information............................................ 35
Signature Page............................................... 36
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME_______________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996 INTEREST INCOME:
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Interest and fees on loans:
Taxable.......................................................... $ 4,946 $ 4,637 $ 9,741 $ 9,262
Tax-exempt....................................................... 132 57 241 107
Interest and dividends on investment securities available for sale:
Taxable.......................................................... 783 1,037 1,590 2,063
Tax-exempt....................................................... 513 488 1,038 973
Dividends........................................................ 33 28 64 53
Interest on deposits with banks.................................... 1 5
Interest on federal funds sold..................................... 113 75 148 197
_________ ________ _________ ________
Total interest income.......................................... 6,520 6,323 12,822 12,660
_________ ________ _________ ________
INTEREST EXPENSE:
Interest on deposits............................................... 3,518 3,327 6,951 6,726
Interest on short-term borrowings.................................. 1
Interest on long-term debt......................................... 1 33 2 66
_________ ________ _________ ________
Total interest expense......................................... 3,519 3,360 6,954 6,792
_________ ________ _________ ________
Net interest income............................................ 3,001 2,963 5,868 5,868
Provision for loan losses.......................................... 75 75 150 150
_________ ________ _________ ________
Net interest income after provision for loan losses............ 2,926 2,888 5,718 5,718
_________ ________ _________ ________
NONINTEREST INCOME:
Service charges, fees and commissions.............................. 349 372 762 708
Litigation recovery................................................ 250 250
Net investment securities losses................................... (27) (27)
_________ ________ _________ ________
Total noninterest income....................................... 599 345 1,012 681
_________ ________ _________ ________
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................. 1,035 981 2,022 1,943
Net occupancy and equipment expense................................ 300 314 600 641
Other expenses..................................................... 716 663 1,312 1,261
_________ ________ _________ ________
Total noninterest expense...................................... 2,051 1,958 3,934 3,845
_________ ________ _________ ________
Income before income taxes......................................... 1,474 1,275 2,796 2,554
Provision for income tax expense................................... 312 274 576 552
_________ ________ _________ ________
Net income..................................................... $ 1,162 $ 1,001 $ 2,220 $ 2,002
========= ======== ========= ========
PER SHARE DATA:
Net income......................................................... $ 0.53 $ 0.46 $ 1.01 $ 0.91
Cash dividends declared............................................ $ 0.06 $ 0.06 $ 0.12 $ 0.11
Average common shares.............................................. 2,200,080 2,200,080 2,200,080 2,200,080
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS_____________________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
_____________________________________________________________________________________________________________
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 10,814 $ 7,732
Federal funds sold.................................................................. 8,000 3,300
Investment securities available for sale............................................ 97,734 101,994
Loans, net of unearned income....................................................... 237,557 235,803
Less: allowance for loan losses................................................... 3,872 3,944
________ ________
Net loans........................................................................... 233,685 231,859
Premises and equipment, net......................................................... 3,546 3,092
Accrued interest receivable......................................................... 2,434 2,671
Other assets........................................................................ 3,999 4,164
________ ________
Total assets.................................................................... $360,212 $354,812
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 28,233 $ 26,424
Interest-bearing.................................................................. 295,393 294,032
________ ________
Total deposits.................................................................. 323,626 320,456
Long-term debt...................................................................... 45 46
Accrued interest payable............................................................ 1,720 1,758
Other liabilities................................................................... 1,462 1,296
________ ________
Total liabilities............................................................... 326,853 323,556
________ ________
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding
2,200,080 shares................................................................... 726 726
Capital surplus..................................................................... 6,317 6,317
Retained earnings................................................................... 25,605 23,649
Net unrealized gain on available for sale securities................................ 711 564
________ ________
Total stockholders' equity...................................................... 33,359 31,256
________ ________
Total liabilities and stockholders' equity...................................... $360,212 $354,812
======== ========
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY______________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED GAIN ON STOCKHOLDERS'
STOCK SURPLUS EARNINGS SECURITIES EQUITY
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........................ $726 $6,317 $23,649 $ 564 $31,256
Net income........................................ 2,220 2,220
Dividends declared: $0.12 per share............... (264) (264)
Net change in unrealized gain on securities....... 147 147
____ ______ _______ _____ _______
BALANCE, JUNE 30, 1997............................ $726 $6,317 $25,605 $ 711 $33,359
==== ====== ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS___________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1996
____________________________________________________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 2,220 $ 2,002
Adjustments:
Provision for loan losses............................................................... 150 150
Depreciation and amortization........................................................... 370 310
Amortization of loan fees............................................................... (102) (111)
Deferred income tax..................................................................... 6 (623)
Losses on sale of investment securities available for sale.............................. 27
Gains on sale of other real estate...................................................... (50) (1)
Changes in:
Interest receivable................................................................... 237 (221)
Other assets.......................................................................... (287) 662
Interest payable...................................................................... (38) (70)
Other liabilities..................................................................... 276 197
_______ _______
Net cash provided by operating activities........................................... 2,782 2,322
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities...................................... 873
Proceeds from repayments of available for sale securities................................. 13,283 5,877
Purchases of available for sale investment securities..................................... (8,799) (14,308)
Proceeds from sale of other real estate................................................... 380 69
Net receipts (disbursements) from lending activities...................................... (1,944) 2,878
Purchases of premises and equipment....................................................... (715) (281)
_______ _______
Net cash provided by (used in) investing activities................................. 2,205 (4,892)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................. 3,597 6,397
Time deposits........................................................................... (427) (8,032)
Payments on long-term debt................................................................ (1) (1)
Cash dividends paid....................................................................... (374) (411)
_______ _______
Net cash provided by (used in) financing activities................................. 2,795 (2,047)
_______ _______
Net increase (decrease) in cash and cash equivalents................................ 7,782 (4,617)
Cash and cash equivalents at beginning of year...................................... 11,032 21,964
_______ _______
Cash and cash equivalents at end of period.......................................... $18,814 $17,347
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest................................................................................ $ 6,992 $ 6,862
Income taxes............................................................................ 272 674
Noncash items:
Transfer of loans to other real estate.................................................. 70 150
Change in net unrealized losses (gains) on available for sale securities................ (147) 915
Cash dividends declared................................................................. $ 264 $ 249
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS______________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm Bancorp,
Inc. and subsidiary, Community Bank and Trust Company (collectively, the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all
normal recurring adjustments necessary for a fair presentation of the financial
position and results of operations for the periods have been included.
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. For additional information
and disclosures required under generally accepted accounting principles,
reference is made to the Company's Annual Report on Form 10-K for the period
ended December 31, 1996.
FORWARD-LOOKING DISCUSSION:
Certain statements in this form 10-Q are forward-looking statements that involve
a number of risks and uncertainties. The following factors, among others, may
cause actual results to differ materially from projected results:
Banking is affected, both directly and indirectly, by local, domestic and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, limited money supply, real estate values, international
conflicts, and other factors beyond the Company's control may adversely affect
its future results of operations. Management, consisting of the Board of
Directors and executive officers, does not expect any particular factor to
affect the Company's results of operations. A downward trend in several
sectors, including real estate, construction and consumer spending, could
adversely impact the Company's ability to maintain or increase profitability.
Therefore, there is no assurance that the Company will continue its current
income and growth rates.
The Company's earnings are greatly dependent on net interest income, which is
primarily influenced by the relationship between its cost of funds, deposits and
borrowings, and the yield on its interest-earning assets, loans and investments.
This relationship, defined as the net interest spread, is subject to fluctuation
and is affected by regulatory, economic and competitive factors that influence
interest rates, the volume, rate and mix of interest-earning assets and
interest-bearing liabilities, and the level of nonperforming assets. As part of
its interest rate risk management strategy, management seeks to control its
exposure to interest rate changes by managing the maturity and repricing
characteristics of interest-earning assets and interest-bearing liabilities.
In originating loans, the likelihood exists that some credit losses will occur.
This risk of loss varies with, among other things, general economic conditions,
loan type, creditworthiness and debt servicing capacity of the borrower over the
term of the loan and, in the case of a collateralized loan, the value and
marketability of the collateral securing the loan. Management maintains an
allowance for loan losses
based on, among other things, historical loan loss experience, known inherent
risks in the loan portfolio, adverse situations that may affect a borrower's
ability to repay, the estimated value of any underlying collateral, and an
evaluation of current economic conditions. Management believes that presently
the allowance for loan losses is adequate, but there can be no assurance that
nonperforming loans will not increase in the future.
To a certain extent, the Company's success is dependent on the general economic
conditions in the geographic market area served by the Company. Although the
Company expects that economic conditions will remain favorable in its market
area, no assurance can be given that such conditions will continue. Adverse
changes to economic conditions in the Company's geographic market area would
likely impair its loan collections and could otherwise have a materially adverse
impact on the consolidated results of operations and financial position of the
Company. The banking industry is highly competitive, with rapid changes in
product delivery systems and in consolidation of service providers. The Company
has many larger competitors in terms of asset size. These competitors also have
substantially greater technical, marketing and financial resources. The larger
size of these companies affords them the benefits of offering products and
services that the Company does not offer. The Company constantly strives to
meet the needs of its customers while making it more convenient for them to
fulfill these needs. As it is
aiding its existing customers, the Company is also working towards enlarging its
customer base. No assurance can be given that these efforts will be successful
in maintaining and expanding the Company's customer base.
OPERATING ENVIRONMENT:
During the second quarter of 1997, the Federal Reserve Board chose to maintain
its target rate for federal funds at 5.50 percent as its fears over imminent
inflation began to subside. The continuation of the 5.50 percent rate comes on
the heels of a controversial 25 basis point increase approved by the Federal
Open Market Committee ("FOMC") in March, the first increase in two years. This
decision resulted from a slowdown in economic growth during the second quarter
from the spurt experienced during the first quarter coupled with a moderation in
inflation. Economic activity as measured by the gross domestic product, the sum
of all goods and services produced
in the United States, expanded at a mild 2.2 percent during the second quarter
of 1997 as compared to a robust first quarter rate of 4.9 percent. Moreover,
inflation was 1.4 percent for the first half of 1997, marking a level not
experienced on a sustained basis since the 1960s. The national unemployment
rate was 5.0 percent in June of 1997, a decline from the 5.3 percent of a year
earlier. This trend towards
tighter labor markets makes conditions favorable for higher prices offered on
consumer goods and services. Many analysts expect personal consumption to
rebound during the third quarter of 1997. Such events could lead to the Federal
Reserve Board counteracting this inflationary pressure through monetary policy
changes that could result in higher interest rates during the remainder of 1997.
Similar to the national trend, local unemployment also fell during the second
quarter of 1997. Average unemployment for the Company's quad-county market area
of Lackawanna, Susquehanna, Wayne and Wyoming counties declined to 7.4 percent
for the second quarter of 1997 from 9.1 percent during the first quarter.
The second quarter also witnessed a decline in mortgage rates as the average
rate on 30-year mortgages hit a
low for the year of 7.47 percent. Such trends provided favorable borrowing
conditions for consumers. Management expects local economic activity to
moderate for the remainder of 1997 as rising interest rates reduce consumer
spending and lessen demand for borrowings.
With respect to the overall banking industry, second quarter of 1997 financial
results practically mirrored those of the first quarter. Despite credit card
delinquency levels remaining high, nonperforming assets ratios remained stable
as compared to the first quarter. This trend is expected to continue under the
current economic environment. Reserves to total loans ratios, although down
slightly, remain strong. This downward trend is expected to subside as smaller
banks see a 1.50 percent coverage ratio to be acceptable. Capital ratios
declined slightly in the second quarter of 1997 as compared to the first quarter
as a function of strong asset
growth and share repurchases. For the nation's 25 largest banks, shares
repurchased in the second quarter amounted to $7.7 billion. Despite being down
from the $11.4 billion in repurchases for the first quarter, such level is still
high as banks are using such capital strategy to enhance earnings per share and
return on equity ratios. Net interest margins have been stable for the past
several quarters due to the stable interest rate environment. This trend may
continue as the interest rate outlook that projected a 75 basis point increase
in market rates for 1997, has been
reevaluated and now sees rates rising only 25 basis points by the second quarter
of 1998. Efficiency ratios have been stable for the past several quarters but
expenses are expected to have modest growth as a result of merger-related
expenses.
REVIEW OF FINANCIAL POSITION:
The Company's total assets increased $5.4 million from $354.8 million at
December 31, 1996, to $360.2 million at June 30, 1997. This increase is due to
a rise in loan and federal funds sold volumes funded by $3.4 million of proceeds
from a sale of student loans and a $3.1 million increase in deposit volumes.
With strong competition from
mutual funds, the stock market, credit unions and traditional deposit gatherers,
such as commercial banks and thrifts, the Company continued its competitive
product pricing throughout the second quarter of 1997. Loans, net of unearned
income and adjusted for the sale of student loans, increased $5.2 million from
December 31, 1996, to June 30, 1997. The increased loan levels did not,
however, prove to be detrimental to the Company's asset quality as the
nonperforming assets to loans, net
ratio fell from 1.62 percent at year-end 1996 to 1.59 percent at June 30, 1997.
The
Company continued to exhibit an improved capital position as its Leverage ratio
reached 8.7 percent at June 30, 1997, as compared to 8.3 percent at December 31,
1996. Stockholders' equity increased $2,103 for the first half of 1997 as net
income
of $2,220 coupled with an increase of $147 in the net gain on available for sale
investment securities was partially offset by dividends of $264.
During the second quarter of 1997, the Company's total assets grew $7.5 million,
an
annualized rate of 8.6 percent. Loans, adjusted for the sale of $3.4 million in
student loans, grew $2.7 million while deposits increased $5.8 million from
March 31,
1997, to June 30, 1997. Total stockholders' equity grew $1.7 million during the
second quarter of 1997, due to the Company's larger volume of net income and a
significant increase in the unrealized gain in the investment portfolio
resulting from market appreciation.
Beyond its financial achievements, the Company successfully implemented its
Dividend Reinvestment Plan ("DRP") during the second quarter of 1997.
Approximately 26.0
percent of the outstanding shares enrolled during the initial solicitation of
the DRP, far exceeding management's expectations.
On July 30, 1997, Community Bank entered a definitive agreement to acquire two
branch
offices of First Union National Bank ("First Union"). These branches are
located in Factoryville, Wyoming County, Pennsylvania and Eynon, Lackawanna
County,
Pennsylvania. The acquisition is scheduled to be completed during the fourth
quarter
of 1997 and includes certain loans and all deposits of these offices. At
June 30,
1997, the deposits at these two branch offices were approximately $21.9 million.
INVESTMENT PORTFOLIO:
At June 30, 1997, the Company's investment portfolio constituted 28.5 percent of
its
total earning assets. Such percentage was below the 29.9 percent and 34.4
percent
recorded at December 31, and June 30, 1996, respectively, and was in line with
the
Company's strategy of de-emphasizing the role of investments in the Company's
earning
asset mix. The two major components of the Company's investment portfolio
consist of
U.S. Treasury securities and state and municipal obligations. These categories
accounted for $29.1 million or 29.8 percent of investments and $37.4 million or
38.3
percent of investments, respectively, at June 30, 1997. Such investment
strategy is
based on the liquidity of short-term U.S. Treasury securities as they supplement
primary sources of cash flows and provide for adequate cash flow to fund future
loan
demand. Medium-term, tax-exempt state and municipal obligations provide a
reduction in the Company's effective tax rate.
At June 30, 1997, the Company reported a net unrealized gain on available for
sale
securities of $711, net of income taxes of $367. During the second quarter of
1997,
the nation's economy moderated causing the FOMC to maintain short-term interest
rates
at their present levels. This decision prompted a decline in general market
rates thus enhancing the market value of the Company's investment portfolio.
Should the country experience another surge in the economy during the remainder
of
1997, the Federal Reserve may take action by raising rates to protect against
inflation. The Company's Investment Committee regularly monitors the effects of
interest rate changes on the investment portfolio. At June 30, 1997, stress
tests
conducted on the investment portfolio indicated that the portfolio would lose
approximately 2.0 percent of its value given an instantaneous parallel increase
of 100 basis points in the yield curve.
The following table sets forth the carrying values of the major classifications
of
securities as they relate to the total investment portfolio at June 30, 1997,
and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
JUNE 30, DECEMBER 31,
1997 1996
________________ _______________
AMOUNT % AMOUNT %
________________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $29,074 29.75% $ 35,619 34.92%
U.S. Government agencies............................. 17,708 18.12 18,606 18.24
State and municipals................................. 37,444 38.31 38,295 37.55
Mortgage-backed securities........................... 10,690 10.94 7,058 6.92
Equity securities.................................... 2,818 2.88 2,416 2.37
_______ ______ ________ ______
Total.............................................. $97,734 100.00% $101,994 100.00%
======= ====== ======== ======
</TABLE>
The tax-equivalent yield on the investment portfolio was constant at 6.6 percent
for
the second quarter of 1997 as compared to the first quarter. Securities
repayments
for the first half of 1997 totaled $13.3 million. The Company used $8.8 million
of
such repayments to purchase $3.0 million in short-term U.S. Treasury securities,
$1.2
million in medium-term state and municipal obligations, $1.9 million in
short-term
collateralized mortgage obligations ("CMOs"), $2.5 million in short-term pooled
mortgage-backed securities, and $200 in Federal Home Loan Bank of Pittsburgh
("FHLB-Pgh") stock during the first six months of 1997. Management's near-term
plans are to
continue investing most of the excess funds not used in lending into short-term
U.S.
Treasury securities and U.S. Government agency mortgage-backed products. The
weighted average life of the Company's investment portfolio was 3.6 years at
June 30, 1997, compared to 3.8 years at June 30, 1996.
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 June 30, 1997. 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. Except for equity securities, 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. Equity securities with no stated contractual
maturities are included in the after ten year maturity distribution. 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>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE FOR SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
______________________________________________________________________________
JUNE 30, 1997 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..... $19,578 5.55% $ 9,507 5.92% $29,085 5.67%
U.S. Government agencies..... 12,697 4.58 5,147 4.96 17,844 4.69
State and municipals......... 1,045 5.33 3,898 6.47 $5,354 8.47% $26,566 7.90% 36,863 7.76
Mortgage-backed securities... 3,487 6.32 7,008 6.35 198 6.05 10,693 6.33
Equity securities............ 2,171 5.78 2,171 5.78
_______ _______ ______ _______ _______
Total...................... $36,807 5.28% $25,560 5.93% $5,552 8.38% $28,737 7.74% $96,656 6.36%
======= ======= ====== ======= =======
Fair value:
U.S. Treasury securities..... $19,573 $ 9,501 $29,074
U.S. Government agencies..... 12,627 5,081 17,708
State and municipals......... 1,044 3,905 $5,585 $26,910 37,444
Mortgage-backed securities... 3,492 7,001 197 10,690
Equity securities............ 2,818 2,818
_______ _______ ______ _______ _______
Total...................... $36,736 $25,488 $5,782 $29,728 $97,734
======= ======= ====== ======= =======
</TABLE>
LOAN PORTFOLIO:
Community banks are highly dependent on the housing industry for business
sustainability as nearly two-thirds of their lending activities are related to
financing real estate properties. Accordingly, management continually monitors
information related to such activities.
After a decline of 6.6 percent in May of 1997, housing starts throughout the
United
States rebounded in June as they rose by 4.8 percent. For June, new home and
apartment constructions rose to a seasonally-adjusted annual rate of 1.45
million
homes with all regions, except for the Northeast, sharing in the gain. This
increase
in housing starts for June was attributable to favorable mortgage interest rates
and
a strong period of job income and growth. By the end of the second quarter of
1997,
interest rates on 30-year, fixed-rate mortgages averaged 7.47 percent.
Moreover, the
unemployment rate of 5.0 percent and a 3.8 percent increase in hourly wages
compared
to a year ago produced a favorable environment for housing starts. Despite the
June
rebound, housing starts were down 3.2 percent for the first six months of 1997
as
compared to the same period of 1996. Management anticipates a decline in loan
demand
during the second half of 1997 as a result of a continued slowdown in real
estate financing.
For the six months ended June 30, 1997, the Company experienced loan growth of
$1.8
million, a 1.6 percent annualized rate. Adjusting for the $3.4 million sale of
student loans to a servicing agent during the second quarter of 1997, loan
volumes
would have grown $5.2 million or 4.4 percent annualized. The primary reasons
for the
increase were a $2.4 million increase in commercial mortgages coupled with a
$1.1
million increase in one-to-four family residential mortgages. Loan volumes for
the
Company averaged $238.2 million during the first half of 1997 compared to
$212.6 million during the same period of 1996.
Management's continued emphasis on restructuring the Company's balance sheet to
focus
more attention on the loan portfolio in the asset mix led to an increase in the
percentage of loans to earning assets at June 30, 1997, as compared to
June 30, 1996.
Loans, net of unearned income, accounted for 69.2 percent of total earning
assets at
June 30, 1997, as compared to 63.2 percent at June 30, 1996. Loans secured by
residential properties have become more prominent in the loan portfolio compared
to
December 31, 1996, as such loans represented 62.8 percent of loans, net of
unearned
income at June 30, 1997, as compared to 61.9 percent at year-end 1996. The loan
portfolio's tax-equivalent yield decreased from 8.9 percent during the first
half of
1996, to 8.6 percent for the same period of 1997. The current yield of 8.6 also
falls below the peer group's yield of 8.8 percent. Such variance was mainly
attributed to the Company's implementation of pricing strategies in light of
increased competition. During the second half of 1997, management does not
expect a
wide fluctuation in loan yields as any rises in general market rates will most
likely
be offset by management's interest in enhancing loan demand through its
competitive
pricing strategies. The Company expects to facilitate its future loan demand
through
increases in its core deposits as well as repayments on loans and investments.
The following table sets forth the major categories of the loan portfolio at
June 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
JUNE 30, DECEMBER 31,
1997 1996
AMOUNT % AMOUNT %
________________________________________________________________________________________
<S> <C> <C> <C> <C>
Commercial, financial and others.......... $ 32,318 13.61% $ 31,744 13.46%
Real estate:
Construction............................ 1,544 0.65 3,698 1.57
Mortgage................................ 185,162 77.94 179,134 75.97
Consumer, net............................. 18,533 7.80 21,227 9.00
________ ______ ________ ______
Loans, net of unearned income........... 237,557 100.00% 235,803 100.00%
Less: allowance for loan losses........... 3,872 ====== 3,944 ======
________ ________
Net loans............................. $233,685 $231,859
======== ========
</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 32.4 percent of the loan portfolio will
reprice
within the next 12 months. Management will price loan products in the near term
in
order to reduce the average term of fixed-rate loans and increase its holdings
of
adjustable-rate loans so that it could lower the Company's future interest rate
risk.
The following table sets forth the maturity and repricing information of the
loan portfolio by major category at June 30, 1997:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
JUNE 30, 1997 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $12,819 $ 9,214 $ 10,285 $ 32,318
Real estate:
Construction....................... 1,544 1,544
Mortgage........................... 4,855 24,250 156,057 185,162
Consumer, net........................ 2,207 11,991 4,335 18,533
_______ _______ ________ ________
Total............................ $21,425 $45,455 $170,677 $237,557
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $33,560 $66,281 $ 94,293 $194,134
Floating or adjustable interest rates 43,423 43,423
_______ _______ ________ ________
Total............................ $76,983 $66,281 $ 94,293 $237,557
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
Unemployment ratios for the nation and Pennsylvania at the end of the second
quarter
of 1997 were at 5.0 percent and 5.3 percent, respectively. For the area served
by
the Company, unemployment rates were considerably higher. Lackawanna,
Susquehanna,
Wayne and Wyoming counties reported unemployment rates at the end of the second
quarter of 1997 of 7.7 percent, 7.3 percent, 7.4 percent and 7.2 percent,
respectively. While Wayne and Wyoming counties followed national trends by
falling
from year-end ratios, Lackawanna and Susquehanna counties experienced a rise in
unemployment ratios. Generally, higher unemployment levels would lead to the
deterioration of asset quality in the loan portfolio, however the Company had
virtually no change in the volume of nonperforming assets compared to the
year-end
1996 level of $3.8 million or 1.6 percent of loans, net of unearned income.
However,
such figure was up slightly from the $3.6 million or 1.5 percent of loans, net
of
unearned income recorded at March 31, 1997, due to an increase in mortgage loans
past
due 90 days or more. Management believes the relative stability in the
nonperforming
assets ratios is due to general decline in unemployment rates and the continued
rise
in average weekly earnings. The improved average weekly earnings levels can be
attributed to an increase in the average hourly workweek from 41.4 hours per
week at December 31, 1996, to 41.9 hours per week at June 30, 1997.
The following table sets forth information concerning nonperforming assets at
June 30, 1997, and December 31, 1996. The table includes credits classified for
regulatory
purposes and all material credits that cause management to have serious doubts
as to the borrowers' ability to comply with present loan repayment terms:
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
1997 1996
______________________________________________________________________________________
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others............................... $ 223 $ 251
Real estate:
Construction.................................................
Mortgage..................................................... 1,050 1,018
Consumer, net.................................................. 12
______ ______
Total nonaccrual loans..................................... 1,285 1,269
______ ______
Restructured loans............................................. 217 225
______ ______
Total impaired loans....................................... 1,502 1,494
______ ______
Loans past due 90 days or more:
Commercial, financial and others............................... 292 359
Real estate:
Construction.................................................
Mortgage..................................................... 1,545 1,247
Consumer, net.................................................. 285 291
______ ______
Total loans past due 90 days or more....................... 2,122 1,897
______ ______
Total nonperforming loans.................................. 3,624 3,391
______ ______
Foreclosed assets.............................................. 160 420
______ ______
Total nonperforming assets................................. $3,784 $3,811
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 0.63% 0.63%
Nonperforming loans as a percentage of loans, net.............. 1.53 1.44
Nonperforming assets as a percentage of loans, net............. 1.59% 1.62%
</TABLE>
The Company's recorded investment in impaired loans, consisting of nonaccrual
and
restructured loans, was $1,502 at June 30, 1997, $1,491 at March 31, 1997, and
$1,494
at December 31, 1996. The slight increase in the second quarter of 1997 was
primarily attributable to the addition of one nonaccrual loan secured by real
estate
offset by payments received on existing nonaccrual loans. The average recorded
investment in impaired loans during the three and six months ended
June 30, 1997, was
$1,516 and $1,501, respectively. The average recorded investment in impaired
loans
for the comparable periods of 1996 was $1,440 and $1,532, respectively.
Impaired
loans included a $217 restructured loan to one commercial customer at
June 30, 1997.
Such credit continued to perform in accordance with its modified terms during
the
second quarter of 1997. Had such loans been current and the terms not modified,
interest income on impaired loans would have been $32 and $66 for the second
quarter
and first half of 1997, respectively, and $26 and $42 for the same periods of
1996,
respectively. Interest recognized on impaired loans amounted to $4 for the
first six
months of 1997 and $23 for the comparable period last year. For the quarter
ended June 30, 1997 and 1996, interest recognized on impaired loans totaled $1
and $7,
respectively. Cash received on impaired loans applied as a reduction of
principal
totaled $119 and $243 for the six months ended June 30, 1997 and 1996,
respectively.
For the quarter ended June 30, 1997 and 1996, cash receipts on impaired loans
amounted to $45 and $202, respectively. There were no commitments to extend
additional funds to such parties at June 30, 1997.
Accruing loans past due 90 days or more totaled $2,122 at June 30, 1997, $1,891
at
March 31, 1997, and $1,897 at December 31, 1996. This slight increase of the
$231
compared to the first quarter of 1997 can be attributed to cyclical delinquency
trends for the Company. Nonperforming loans as a percentage of total loans,
net,
rose to 1.53 percent at June 30, 1997, from 1.42 percent and 1.44 percent at
March 31, 1997, and December 31, 1996, respectively. The Company's peer group
of 35 banks
in Northeastern Pennsylvania recorded a 1.45 percent ratio at June 30, 1997.
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. 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, beyond normal monthly provisions, based on their
judgments concerning information available to them at the time of their
examination.
As of the latest regulatory examination, conducted at September 30, 1996, no
such charge was deemed necessary.
In general, the allowance for loan losses account 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:
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30, DECEMBER 31,
1997 1996
_______________ ______________
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
______________________________________________________________________________________
<S> <C> <C> <C> <C>
Commercial, financial and others................... $1,347 13.61% $1,396 13.46% Real estate:
Construction..................................... 0.65 1.57
Mortgage......................................... 1,303 77.94 1,326 75.97
Consumer, net...................................... 1,222 7.80 1,222 9.00
______ ______ ______ ______
Total.......................................... $3,872 100.00% $3,944 100.00%
====== ====== ====== ======
</TABLE>
The following table sets forth a reconciliation of the allowance for loan losses
account and illustrates the charge-offs and recoveries by major loan category
for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30,
1997
______________________________________________________________________________________
<S> <C>
Allowance for loan losses at beginning of period............................... $3,944
Loans charged-off:
Commercial, financial and others............................................... 162
Real estate:
Construction.................................................................
Mortgage..................................................................... 73
Consumer, net.................................................................. 59
______
Total...................................................................... 294
______
Loans recovered:
Commercial, financial and others............................................... 11
Real estate:
Construction.................................................................
Mortgage..................................................................... 2
Consumer, net.................................................................. 59
______
Total...................................................................... 72
______
Net loans charged-off.......................................................... 222
______
Provision charged to operating expense......................................... 150
______
Allowance for loan losses at end of period..................................... $3,872
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............ 0.09%
Allowance for loan losses as a percentage of period end loans................. 1.63%
</TABLE>
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
regarding
the nature and purpose of the allowance, related responsibility of management
and
examiners, loan review systems, and international transfer risk matters. Such
tool
involves a comparison of the reported loss allowance against the sum of
specified
percentages, based on industry averages, applied to certain loan
classifications.
Based on the results of this regulatory calculation, the Company was considered
adequately reserved at June 30, 1997. Despite these favorable results,
management
will continue performing a thorough analysis of the Company's loan portfolio as
such
calculation fails to account for differences between institutions, their
portfolios, underwriting and collection policies, and credit-rating policies.
The allowance for loan losses account was $3,872 at June 30, 1997, as compared
to
$3,794 at March 31, 1997. With respect to nonperforming loans, the allowance
account
covered 106.8 percent and 112.2 percent at June 30, 1997, and March 31, 1997,
respectively. Relative to all nonperforming assets, the allowance account
covered
102.3 percent at June 30, 1997, and 106.0 percent at March 31, 1997. The
increased
volume of the allowance for loan losses account as compared to March 31, 1997,
was
attributable to the Company continuing to make monthly additions to such
allowance
through provisions charged to operations. The allowance for loan losses account
as a
percentage of period end loans was 1.63 percent at June 30, 1997. This ratio
exceeds
the peer group's ratio of 1.38 percent, however management considers the monthly
provision justifiable as a result of increased loan demand.
Included in the allowance account were amounts for impaired loans of $1,285,
$1,271
and $1,269 at June 30, 1997, March 31, 1997, and December 31, 1996,
respectively.
The related allowance for loan losses for these three periods was $634, $635 and
$650, respectively. The recorded investment for which there was no related
allowance
for loan losses was $217 at June 30, 1997, $220 at March 31, 1997, and $225 at
December 31, 1996. For the first half of 1997, activity in the allowance for
loan
losses account related to impaired loans included a provision charged to
operations
of $2 and losses charged to the allowance of $18. There were no recoveries of
such loans for the first half of 1997.
Past due loans that have not been satisfied through repossession, foreclosure or
related actions, are evaluated individually to determine if all or a portion of
the
outstanding balance should be charged against the allowance for loan losses
account.
Subsequent recoveries, if any, are credited to the allowance account. Net
chargeoffs
totaled $222 compared to net recoveries of $3 for the six months ended
June 30, 1997 and 1996, respectively.
DEPOSITS:
The Company experienced an increase in deposits of $5.8 million for the quarter
ended
June 30, 1997, from $317.8 million at March 31, 1997, to $323.6 million. This
marked
a reversal from the $2.7 million decline in the first quarter of 1997. The
higher
deposit level came primarily as a result of an increase in retail time deposits
of
$8.2 million and an increase in commercial interest checking accounts of $2.1
million. Such increases were partially offset by a $7.2 million reduction in
commercial time deposits. The increase in retail time deposits occurred
primarily
due to management's offering of a special retail certificate of deposit product.
The
decline in commercial certificate of deposit products came primarily from
products
held by local school districts. The Company's average deposit volumes increased
$7.1
million to $319.7 million for the first half of 1997, as compared to $312.6
million
for the same period of 1996. The cost of interest-bearing deposits remained
constant
at 4.78 percent for the first and second quarters of 1997. Such costs were
only
slightly above the 4.70 percent recorded by the Company's peer group. This
slightly
unfavorable rate variance as compared to the peer group stemmed from the
Company's aggressive pricing strategies in light of increased competition.
The Company continually analyzes its pricing strategies with respect to
prevailing
market conditions. Factors such as changes in general market rates, loan demand
and
liquidity position are all taken into consideration in making decisions for
future actions regarding deposit pricing.
The following table sets forth the average amount of, and the rate paid on, the
major
classifications of deposits for the six months ended June 30, 1997, and June 30,
1996:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
JUNE 30, JUNE 30,
1997 1996
________________________________________
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
______________________________________________________________________________________
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 15,765 3.06% $ 18,209 2.85%
NOW accounts................................ 18,218 2.16 15,813 1.98
Savings accounts............................ 65,583 3.03 67,205 2.94
Time less than $100......................... 161,314 5.70 157,351 5.74
Time $100 or more........................... 32,193 6.09 27,943 6.02
________ ________
Total interest-bearing.................... 293,073 4.78% 286,521 4.73%
Noninterest-bearing......................... 26,610 26,042
________ ________
Total deposits............................ $319,683 $312,563
======== ========
</TABLE>
Average volumes of noninterest-bearing deposits increased from $26.0 million for
the
six months ended June 30, 1996, to $26.6 million for the comparable period of
1997.
Such volumes as a percentage of average assets totaled 7.5 percent and lagged
behind
the local peer group average of 9.9 percent, which effectively increased the
Company's cost of funds.
Volatile liabilities, time deposits in denominations of $100 or more, declined
from
$35.9 million at December 31, 1996, to $26.0 million at June 30, 1997. Such
decline
resulted from the cyclical nature of commercial time deposits held by local
school
districts. The Company's average cost of such deposits rose slightly to 6.1
percent
in 1997 from 6.0 percent in 1996. The following table sets forth maturities of
time deposits of $100 or more for June 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
JUNE 30, DECEMBER 31,
1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Within three months......................................... $ 3,225 $ 8,598
After three months but within six months.................... 11,048 9,958
After six months but within twelve months................... 3,748 11,262
After twelve months......................................... 7,974 6,047
_______ _______
Total..................................................... $25,995 $35,865
======= =======
</TABLE>
INTEREST RATE SENSITIVITY:
Interest rate sensitivity is the relationship between prevailing interest rates
and
earnings volatility based on the repricing characteristics of interest-earning
assets
and interest-bearing liabilities. Interest rate sensitivity management attempts
to
limit, and to the extent possible, control the effects interest rate
fluctuations
have on net interest income as such income plays a vital role in the Company's
financial performance. The responsibility of interest rate sensitivity
management
has been delegated to the Asset/Liability Management Committee ("ALCO").
Specifically, ALCO utilizes several computerized modeling techniques to monitor
and
attempt to control influences that 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, implies 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.
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:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
JUNE 30, 1997 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $17,295 $ 22,737 $ 23,498 $ 34,204 $ 97,734
Loans, net of unearned income....... 46,525 30,458 66,281 94,293 237,557
Federal funds sold.................. 8,000 8,000
_______ ________ ________ _________ ________
Total............................. $71,820 $ 53,195 $ 89,779 $ 128,497 $343,291
======= ======== ======== ========= ========
Rate sensitive liabilities:
Money market accounts............... $ 16,512 $ 16,512
NOW accounts........................ 19,838 19,838
Savings accounts.................... $ 65,558 65,558
Time deposits less than $100........ $30,563 66,508 70,392 $ 27 167,490
Time deposits $100 or more.......... 3,225 14,796 7,974 25,995
Long-term debt...................... 2 8 35 45
_______ ________ ________ _________ ________
Total............................. $33,788 $117,656 $143,932 $ 62 $295,438
======= ======== ======== ========= ========
Rate sensitivity gap:
Period............................ $38,032 $(64,461) $(54,153) $ 128,435
Cumulative........................ $38,032 $(26,429) $(80,582) $ 47,853 $ 47,853
RSA/RSL ratio:
Period............................ 2.13 0.45 0.62 2,072.53
Cumulative........................ 2.13 0.83 0.73 1.16 1.16
</TABLE>
At June 30, 1997, the Company's ratio of cumulative one year rate sensitive
assets to
rate sensitive liabilities improved to 0.83 compared to 0.74 at March 31, 1997.
With
respect to 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 positive change occurred as a result of management's strategy
of
investing the $3.4 million received from the sale of longer-term student loans
and
the excess investment and loan repayments not used to fund loan demand, into
short-term U.S. Treasury securities and federal funds sold. Another
contributing factor
to the Company's improved cumulative one-year gap was a decline of $9.2 million
in
commercial time deposits repricing within one year from $27.2 million at
March 31, 1997, to $18.0 million at June 30, 1997. Finally, management's
promotion of an
above-market yield on an intermediate-term certificate of deposit during the
second
quarter of 1997 increased the weighted-average life of retail certificates.
The Company's three month ratio also increased, rising to 2.13 at June 30, 1997,
from
1.41 at March 31, 1997. Such increase was attributable to the same reasons
presented
for the rise in the cumulative one year interest sensitivity gap. Based on the
results of the June 30, 1997, static gap report the Company was liability rate
sensitive for the cumulative one-year period. This indicates that should
general
market rates increase, the likelihood exists that net interest income will be
adversely impacted. Conversely, a decline in general market rates would likely
have
a positive impact on net interest income. However, these forward-looking
statements
are qualified by the aforementioned section entitled "Forward-Looking
Discussion" in this Management's Discussion and Analysis.
Static gap analytics, although a credible measuring tool, does not fully
illustrate
the impact of interest rate changes on future earnings. First, market rate
changes
normally do 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
interest rate sensitivity 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 12 months repricing interval. In
reality, these items may reprice less frequently and in different magnitudes
than changes in general interest rate levels.
As the static gap report fails 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 is used to create pro forma
net
interest income scenarios under various interest rate shocks. Model results at
June 30, 1997, produced similar results to those indicated by the static gap
model.
Should a parallel and instantaneous rise in interest rates of 100 basis points
occur,
a decline in net interest income of 5.4 percent is expected. Conversely, a 100
basis
point decline in market rates would cause a 5.4 percent increase in net interest
income.
Financial institutions are impacted differently by inflation than are 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 inflation can be mitigated 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. The Company's principal sources of liquidity are
its
core deposits and loan and investment payments and prepayments. Providing a
secondary source of liquidity is the Company's available for sale portfolio.
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. The Company manages liquidity daily, thus
enabling management to effectively monitor fluctuations in the Company's
liquidity
position and to adapt its position according to market fluctuations. Management
believes the Company's liquidity position is adequate to meet both present and
future
shifts in loan demand and deposit withdrawals on a timely basis. There are
presently
no known trends, demands, commitments, events or uncertainties that have
resulted or
are reasonably likely to result in material changes with respect to the
Company's liquidity.
The Company showed a marked improvement in its liquidity at June 30, 1997, as
compared to March 31, 1997. The best evidence of such improvement is
illustrated by
the Company's net noncore funding dependence and net short-term noncore funding
dependence ratios. The net noncore funding dependence ratio is defined as the
difference between noncore funds, consisting of time deposits over $100 and
brokered
time deposits under $100, and short-term investments to long-term assets. The
net
short-term noncore funding dependence ratio is defined as the difference between
noncore funds maturing within one year, including borrowed funds, less
short-term
investments to long-term assets. Such ratios were negative 4.8 percent and
negative
7.5 percent, respectively, at June 30, 1997, compared to 1.5 percent and
negative 0.7
percent, respectively, at March 31, 1997. These ratios also outperformed
the 7.3
percent and 3.0 percent, respectively, recorded by the Company's peer group. By
maintaining an adequate volume of short-term investments and aggressively
competing
for medium-term certificates of deposit, management feels such ratios will
remain stable.
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 on hand, cash items in the process of
collection,
noninterest-bearing deposits with other banks, balances with the Federal Reserve
Bank
of Philadelphia and the FHLB-Pgh, and federal funds sold, increased $7.8 million
over
the first six months of 1997. Net cash provided by operating activities totaled
$2,782 as a primary result of the Company's recognizing net income of $2,220 for
the first six months of 1997.
For the first half of 1997, net cash provided by investing activities
was $2,205.
The major component of this increase was the receipt of $13,283 in repayments on
available for sale securities. Of such receipts, $8,799 were reinvested
primarily in
short-term investment securities with the remainder used to fund loan demand.
Net cash provided by financing activities aggregated $2,795 for the first six
months
of 1997. The Company's $3,170 increase in deposit volumes for the six months
ended
June 30, 1997, provided the major portion of the gain as the Company's took an
aggressive product pricing position during the second quarter.
CAPITAL ADEQUACY:
For the first half of 1997, the Company's stockholders' equity showed an
improvement
of $2,103 over year-end 1996. The major source of such improvement was the
recording
of net income of $2,220 for the first six months of the year less dividends
declared
of $264. Also aiding the greater capital level was an increase of $147 in the
Company's net unrealized gain on available for sale securities. For the second
quarter of 1997, the Company had an increase of $621 in the net unrealized gain
on
available for sale securities, marking a turnaround from the $474 reduction
experienced for the first quarter. Management's efforts towards improving the
quality, composition and structure of the investment portfolio have aided the
Company
in lessening the impact of market depreciation on the investment portfolio
resulting from changes in interest rates.
The Company declared a $132 or $.06 per share dividend for the second quarter of
1997. Cash dividends declared during the first six months of 1997 were $264 or
$0.12
per share, 9.1 percent above those declared for the same period of 1996. As a
percentage of net income, cash dividends for the six months ended June 30, 1997,
equalled 11.9 percent. It is the present intention of the Company's board of
directors that dividends will be paid in the future. However, factors such as
operating results, financial and economic conditions, capital needs, growth
objectives, appropriate dividend restrictions related to the Company, and other
relevant factors may have an influence on these decisions.
On April 2, 1997, the Company filed a registration statement with the Securities
and
Exchange Commission ("SEC") to register 300 thousand shares of common stock to
be
utilized in the DRP. The plan went into effect beginning with the Company's
second
quarter dividend and affords stockholders the opportunity to automatically
reinvest
their dividends in shares of the Company's common stock. Management considered
the
initial solicitation of the DRP to be a success as approximately 26.0 percent of
the outstanding shared enrolled subsequent to such solicitation.
The following table presents the Company's capital ratios at June 30, 1997 and
1996, as well as the required minimum ratios for capital adequacy purposes and
to be "well capitalized" under the prompt corrective action provisions:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
__________________________________________________________________
JUNE 30 1997 1996 1997 1996 1997 1996
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets... $ 30,782 $ 26,733 $ 7,505 $ 7,619 $11,257 $11,429
Total capital to risk-adjusted assets.... 33,146 29,135 15,010 15,238 18,762 19,048
Tier I capital to total average assets
less goodwill........................... 30,782 26,733 $14,126 $13,784 $17,658 $17,230
Risk-adjusted assets..................... 180,494 185,200
Risk-adjusted off-balance sheet items.... 7,129 5,277
Average assets for Leverage ratio........ $353,161 $344,604
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 16.4% 14.0% 4.0% 4.0% 6.0% 6.0%
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items................. 17.7 15.3 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.7% 7.8% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at
June 30, 1997,
and was considered "well capitalized." Regulatory agencies define institutions
not
under a written directive to maintain certain capital levels as "well
capitalized" if
they exceed the following: Tier I risk-based ratio of at least 6.0 percent, a
total
risk-based ratio of at least 10.0 percent and Leverage ratio, defined as Tier I
capital to total average assets less goodwill, of at least 5.0 percent. The
Company
continues to improve its capital level as illustrated by an increase in its
Leverage
ratio from 8.5 percent at March 31, 1997, to 8.7 percent at June 30, 1997. Such
ratio also exceeds the 8.3 percent recorded at December 31, 1996.
REVIEW OF FINANCIAL PERFORMANCE:
The Company reported net income of $1.2 million or $0.53 per share for the
second
quarter of 1997, thus bringing total earnings for the year to $2.2 million or
$1.01
per share. Such level represents a 10.9 percent increase over the comparable
period
of 1996. The Company's return on average assets and return on average equity
were
1.26 percent and 14.00 percent, respectively, for the first half of 1997
compared to
1.16 percent and 14.45 percent, respectively for the same period of 1996. These
levels are attributable to the Company's improved loan revenues and noninterest
income. Management maintained its focus on the generation of higher
proportional
earnings during 1997 as evidenced by an increase in the ratio of average loans
to
earning assets from 63.8 percent in 1996 to 69.6 percent in 1997. In addition,
during the second quarter, Community Bank and Trust Company ("Community Bank"),
the
wholly-owned subsidiary of the Company, reached a settlement with a securities
broker. The $250 settlement was awarded with respect to Community Bank's
business
relationship with this broker prior to 1995. This one-time addition to
noninterest
income had a $148.5 positive impact on 1997 earnings after applicable income
taxes and legal fees.
NET INTEREST INCOME:
The major source of the Company's operating income is derived from net interest
income. Net interest income is defined as the excess amount of interest and
fees on
loans and other investments over 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.
Variations 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. Net interest income levels are also influenced by the composition of
earning
assets and interest-bearing liabilities as well as the level of nonperforming
asset volumes.
The Company had a modest increase of $103 in net interest income on a
tax-equivalent
basis for the six months ended June 30, 1997, as compared to the same period
of 1996.
The primary cause of such increase came from the Company's greater average loan
volumes partially offset by a reduction in its loan yields and investment
volumes.
For the first six months of 1997, the Company's average loan volumes totaled
$238.2
million, a $25.6 million or 12.0 percent increase over the $212.6 million for
the
same period of 1996. This change accounted for a $1,633 favorable variance in
interest income related to loan volumes. Throughout the second and third
quarters of
1996, management instituted aggressive loan pricing strategies in light of the
competitive lending environment. Such strategies, while benefitting loan
volumes,
did have an adverse influence on the loan portfolio's yield. The Company's tax-
equivalent yield on loans for the six months ended June 30, 1997, was 8.56
percent, a
38 basis point decline from the 8.94 percent recorded for the same period of
1996.
This drop accounted for a $951 decline in interest income related to loan
yields. In
its effort to localize a larger portion of its earning assets into the loan
area, the
Company reduced its investment volumes. For the six months ended
June 30, 1997, the
Company recorded a $14.9 million decline in average investments to $98.6 million
from
$113.5 million for the same period of 1996. This downsizing of the investment
portfolio accounted for a $510 decline in interest income related to investment
volumes. While the volumes declined on the investment portfolio, an increase in
tax-equivalent yields on the portfolio mitigated a portion of the reduction in
income due
to volumes. The Company's tax-equivalent yield on the investment portfolio
rose 22
basis points from 6.38 percent for the first half of 1996 to 6.60 percent for
the
same period of 1997. Partially offsetting the $265 positive change in interest
income was a $162 unfavorable variance in interest expense. The primary
component of
such change was an increase in average commercial time deposits for the six
months
ended June 30, 1997, as compared to the same period of 1996. Such volumes
increased
$3.3 million to $30.3 million for the first half of 1997 from $27.0 million for
the first half of 1996.
The Company's net interest margin showed a slight decline from 3.87 percent for
the
first half of 1996 to 3.85 percent for the same period of 1997. Such change
was a
product of a higher cost of funds influenced by a competitive deposit-gathering
environment partially offset by the more prominent role of loans in the
Company's
earning assets mix. The net interest margin has, however, shown an improvement
over the 3.82 percent recorded for the first quarter of 1997.
For the quarter ended June 30, 1997, net interest income on a tax-equivalent
basis
increased $90 compared to the same period of 1996. Circumstances similar to
those
given for the six month period provide the reasons for such favorable change.
A
greater level of loan volumes offset by the decline in tax-equivalent loan
yields and
investment volumes formed the basis for the improvement over the comparable
three
month periods of June 30, 1997, and June 30, 1996, respectively. For the second
half
of 1997, management expects continued improvements with respect to its net
interest
margin due to the greater loan volumes. However, should there be an increase in
general market rates or a heightened intensity in the competition for deposits,
such
margin increases may be limited. Management is also aware that should the
current
local unemployment levels deteriorate, impaired loan levels may experience an
increase leading to another obstacle stunting margin improvements.
Management analyzes interest income and interest expense by segregating rate and
volume 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:
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 VS. 1996 1997 VS. 1996
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............................. $ 309 $(912) $1,221 $ 479 $(879) $1,358
Tax-exempt.......................... 114 (75) 189 203 (72) 275
Investments:
Taxable............................. (249) 288 (537) (462) 219 (681)
Tax-exempt.......................... 38 (38) 76 99 (72) 171
Interest-bearing deposits with banks.. (1) (1) (5) (5)
Federal funds sold.................... 38 3 35 (49) 7 (56)
_____ _____ ______ _____ _____ ______
Total interest income............. 249 (734) 983 265 (797) 1,062
_____ _____ ______ _____ _____ ______
Interest expense:
Money market accounts................. (1) 44 (45) (19) 44 (63)
NOW accounts.......................... 19 6 13 39 15 24
Savings accounts...................... (11) (2) (9) 2 57 (55)
Time deposits less than $100.......... 120 12 108 67 (84) 151
Time deposits $100 or more............ 64 13 51 136 12 124
Short-term borrowings................. 1 1
Long-term debt........................ (32) 85 (117) (64) 85 (149)
_____ _____ ______ _____ _____ ______
Total interest expense............ 159 158 1 162 129 33
_____ _____ ______ _____ _____ ______
Net interest income............... $ 90 $(892) $ 982 $ 103 $(926) $1,029
===== ===== ====== ===== ===== ======
</TABLE>
The following table sets forth a summary of net interest income for major
categories of earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
JUNE 30, 1997 JUNE 30, 1996
___________________________ ___________________________
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..................................... $228,967 $ 9,741 8.58% $209,122 $ 9,262 8.91%
Tax-exempt.................................. 9,197 365 8.00 3,469 162 9.39
Investments:
Taxable..................................... 60,737 1,654 5.49 78,458 2,116 5.42
Tax-exempt.................................. 37,886 1,573 8.37 35,029 1,474 8.46
Interest-bearing deposits with banks.......... 90 5 11.17
Federal funds sold............................ 5,431 148 5.50 7,269 197 5.45
________ _______ ________ _______
Total earning assets...................... 342,218 13,481 7.94% 333,437 13,216 7.97%
Less: allowance for loan losses.............. 3,905 3,969
Other assets.................................. 16,231 16,731
________ ________
Total assets.............................. $354,544 $346,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 15,765 239 3.06% $ 18,209 258 2.85%
NOW accounts.................................. 18,218 195 2.16 15,813 156 1.98
Savings accounts.............................. 65,583 986 3.03 67,205 984 2.94
Time deposits less than $100.................. 161,314 4,558 5.70 157,351 4,491 5.74
Time deposits $100 or more.................... 32,193 973 6.09 27,943 837 6.02
Short-term borrowings......................... 29 1 6.95
Long-term debt................................ 46 2 8.77 3,047 66 4.36
________ _______ ________ _______ _
Total interest-bearing liabilities........ 293,148 6,954 4.78% 289,568 6,792 4.72%
Noninterest-bearing deposits.................. 26,610 26,042
Other liabilities............................. 2,804 2,815
Stockholders' equity.......................... 31,982 27,774
________ _______ ________ _______
Total liabilities and stockholders' equity $354,544 6,954 $346,199 6,792
======== _______ ======== _______
Net interest/income spread................ $ 6,527 3.16% $ 6,424 3.25%
======= =======
Net interest margin....................... 3.85% 3.87%
Tax equivalent adjustments:
Loans......................................... $ 124 $ 55
Investments................................... 535 501
_______ _______
Total adjustments......................... $ 659 $ 556
======= =======
Note: Average balance was calculated using average daily balances and
includes nonaccrual loans. Available for sale securities, included in
investment securities, are stated at amortized cost with the related
average unrealized holding gain of $778 and $437 at June 30, 1997
and 1996, respectively, included in other assets. Tax equivalent
adjustment was calculated using the prevailing statutory rate of 34.0
percent.
</TABLE>
PROVISION FOR LOAN LOSSES:
The Company makes provisions for loan losses based on evaluations of its
allowance
for loan losses account. Factors such as previous loan experience, overall loan
portfolio characteristics, prevailing economic conditions, and other relevant
factors
are taken into consideration when determining the provision. Based on its most
current evaluation, management believes the allowance is adequate to absorb any
known and inherent losses in the portfolio.
The Company's provision for loan losses for the three and six months ended
June 30, 1997 and 1996, remained unchanged at $75 and $150, respectively.
Although management
feels the current allowance account is adequate, based on the aforementioned
regulatory calculation, it has increased the monthly loan loss provision to $35
effective July 1, 1997, consistent with the greater amount of loans.
NONINTEREST INCOME:
For the first half of 1997, the Company recorded noninterest income of $1,012,
a $331
or 48.6 percent increase over the same period of 1996. The significant
increase was
primarily due to a $250 litigation settlement paid by a securities broker to the
Company's wholly-owned subsidiary, Community Bank. The $250 settlement was
awarded
with respect to Community Bank's business relationship with this broker prior to
1995. Service charges, fees and commissions increased $54 or 7.6 percent from
$708
for the six months ended June 30, 1996, to $762 for the same period of last
year.
The major source of this increase came from fees received with respect to
insufficiently-funded customer accounts. The net investment securities losses
of $27
for the six months ended June 30, 1996, resulted from the disposition of three
variable-rate CMOs with a carrying value of $897. The investment committee
decided
to dispose of such investments after reassessing their appropriateness with
respect
to their structure, composition and characteristics in line with the Company's
investment goals. For the quarter ended June 30, 1997, noninterest income
totaled
$599 as compared to $345 for the same period of 1996. Such increase is
explained by the same reasons related to the year-to-date positive change.
NONINTEREST EXPENSE:
The general components of noninterest expense are the costs of providing
salaries and
necessary employee benefits, maintaining facilities and general operating costs
such
as insurance, supplies, advertising, data processing and other related expenses.
Several of these costs and expenses are variable while others are fixed. In its
efforts to control the variable portion of these expenses, management employs
budgets and other related strategies.
For the six months ended June 30, 1997, the Company's noninterest expense
totaled
$3,934, an increase of $89 or 2.3 percent as compared to the same period last
year.
In terms of operating efficiency, the Company maintained its net overhead to
average
assets ratio at 1.8 percent for the first halves of 1997 and 1996. Such level
continues to outperform the 2.0 percent overhead ratio experienced by the
Company's
peer group. A company can also measure its productivity with 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 for the
first six months of 1997 was 59.1 percent compared to 57.9 percent for the same
period of 1996. It is reasonably likely that the acquisition of the two branch
offices from First Union will increase the level of noninterest expenses and
cause a corresponding adverse affect to the Company's efficiency ratios.
The primary portion of the Company's noninterest expense is salaries and
benefits, as
it accounted for 51.4 percent of such expense. For the six months ended
June 30, 1997, salaries and benefits expense totaled $2,022, an increase of $79
or 4.1
percent. Such increase can be attributed to the Company's addition of personnel
to
better serve the needs of its expanding customer base as well as 1996 merit
raises issued during the first half of 1997.
Net occupancy and equipment expenses aggregated $600 for the first half of 1997,
marking a $41 or 6.4 percent decline from the same period of 1996. The primary
reasons for such decline were reduced costs associated with the maintenance of
equipment used in normal banking operations as well as with the maintenance of
bank
facilities. Presently the Company has no pending commitment to make any
material
capital expenditures other than those associated with the newly acquired branch
offices and those incurred in the normal course of business. Management expects
capital expenditures for such offices to approximate $300.
During the first half of 1997, the Company incurred other noninterest expenses
of
$1,312, a $51 or 4.0 percent increase over the same period of 1996. The primary
reason for such increase was a nonrecurring increase in the Company's stationery
and
supplies expense caused by the centralization of the Company's purchasing
department
as well as supply expenses associated with the introduction of the imaging
system.
The Company also has increased Federal Deposit Insurance Corporation premiums
for
1997 due to the Deposit Insurance Fund Act of 1996, signed into law by the
President
during the third quarter of 1996. This law provides Bank Insurance Fund
("BIF")-insured institutions the responsibility of paying a portion of the
$780.0 million
annual Finance Corporation ("FICO") interest payments. The rate for BIF-insured
institutions for the period beginning January 1, 1997, through
December 31, 1999,
will equal one-fifth of the Savings Association Insurance Fund ("SAIF") rate.
The
rates for the first half of 1997 were set at 1.30 basis points and 6.48 basis
points,
respectively. These rates have been set at 1.26 basis points and 6.30 basis
points,
respectively, for the second half of 1997. Rates may be adjusted quarterly to
reflect changes in the assessment bases for the BIF and the SAIF. The law
requires
the FICO rate on BIF-assessable deposits to be one-fifth the rate on
SAIF-assessable
deposits until the funds merge or until January 1, 2000, whichever comes first.
For the quarter ended June 30, 1997, the Company experienced a $93 or 4.7
percent
increase in noninterest expenses of as compared to the same period of 1996.
Reasons
similar to those stated for the year to date increases account for the quarterly
change.
The following table sets forth the major components of noninterest expenses for
the three months and six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $ 849 $ 823 $1,673 $1,629
Employee benefits.............................. 186 158 349 314
______ ______ ______ ______
Salaries and employee benefits expense....... 1,035 981 2,022 1,943
______ ______ ______ ______
Net occupancy and equipment expense:
Net occupancy expense.......................... 140 155 300 321
Equipment expense.............................. 160 159 300 320
______ ______ ______ ______
Net occupancy and equipment expense.......... 300 314 600 641
______ ______ ______ ______
Other noninterest expenses:
Marketing expense.............................. 96 46 144 119
Other taxes.................................... 59 56 130 112
Stationery and supplies........................ 80 75 178 125
Contractual services........................... 254 244 440 461
Insurance including FDIC assessment............ 21 31 41 67
Other.......................................... 206 211 379 377
______ ______ ______ ______
Other noninterest expenses................... 716 663 1,312 1,261
______ ______ ______ ______
Total noninterest expense.................. $2,051 $1,958 $3,934 $3,845
====== ====== ====== ======
</TABLE>
INCOME TAXES:
For the three and six months ended June 30, 1997, the Company recorded effective
tax
rates of 21.2 percent and 20.6 percent, respectively. Such rates are
improvements
over the 21.5 percent and 21.6 percent, respectively, recorded for the same
periods
of 1996. These improvements are a result of management's continued emphasis on
acquiring tax-exempt investments and loans as well as the Company's use of
investment
tax credits available through its investment in a residential housing program
established to benefit the elderly and low- to moderate-income families.
It is the Company's determination that a valuation reserve need not be
established
for the deferred tax assets as it is more likely than not that such 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 performs quarterly reviews on the tax
criteria related to the recognition of deferred tax assets.
COMM BANCORP, INC.
OTHER INFORMATION_______________________________________________________________
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE
(b) Reports on Form 8-K during the quarter
June 6, 1997 - The following events were reported:
Item 5. - Effective June 9, 1997, Donald R. Edwards, Sr. retired
as a Director of the Company and Community Bank.
Item 7.(c) - Letter from Donald R. Edwards, Sr. announcing his
retirement as a Director of the Company and Community Bank.
Item 7.(c) - Form of Press Release that Donald R. Edwards, Sr.
has retired as a Director of the Company and Community Bank.
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: August 8, 1997 /s/ David L. Baker
_____________________________ _________________________________________
David L. Baker
Chief Executive Officer
Date: August 8, 1997 /s/ Scott A. Seasock
_____________________________ _________________________________________
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 1997 /s/ John B. Errico
_____________________________ _________________________________________
John B. Errico, Comptroller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLODATED INCOME STATEMENTS AND CONSOLODATED BALANCE SHEETS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,814
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,734
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 237,557
<ALLOWANCE> 3,872
<TOTAL-ASSETS> 360,212
<DEPOSITS> 323,626
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,182
<LONG-TERM> 45
0
0
<COMMON> 726
<OTHER-SE> 32,633
<TOTAL-LIABILITIES-AND-EQUITY> 360,212
<INTEREST-LOAN> 9,982
<INTEREST-INVEST> 2,692
<INTEREST-OTHER> 148
<INTEREST-TOTAL> 12,822
<INTEREST-DEPOSIT> 6,951
<INTEREST-EXPENSE> 6,954
<INTEREST-INCOME-NET> 5,868
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,934
<INCOME-PRETAX> 2,796
<INCOME-PRE-EXTRAORDINARY> 2,796
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,220
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 7.96
<LOANS-NON> 1,285
<LOANS-PAST> 2,122
<LOANS-TROUBLED> 217
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,944
<CHARGE-OFFS> 294
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 3,872
<ALLOWANCE-DOMESTIC> 3,872
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
