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 MARCH 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 785-3181
------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,200,080 at April 28, 1997.
Page 1 of 32
COMM BANCORP, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
CONTENTS Page No.
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PART I. FINANCIAL INFORMATION:
ITEM 1:
Consolidated Statements of Income - For the Three Months
Ended March 31, 1997 and 1996................................ 3
Consolidated Balance Sheets - March 31, 1997, and December 31,
1996......................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1997.................... 5
Consolidated Statements of Cash Flows For the Three Months
Ended March 31, 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............................................. 31
Signature Page................................................ 32
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME_______________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................................ $ 4,795 $ 4,625
Tax-exempt......................................................................... 109 50
Interest and dividends on investment securities available for sale:
Taxable............................................................................ 807 1,026
Tax-exempt......................................................................... 525 485
Dividends.......................................................................... 31 25
Interest on deposits with banks...................................................... 2
Interest on federal funds sold....................................................... 35 124
--------- ---------
Total interest income............................................................ 6,302 6,337
--------- ---------
INTEREST EXPENSE:
Interest on deposits................................................................. 3,433 3,399
Interest on short-term borrowings.................................................... 1
Interest on long-term debt........................................................... 1 33
--------- ---------
Total interest expense........................................................... 3,435 3,432
--------- ---------
Net interest income.............................................................. 2,867 2,905
Provision for loan losses............................................................ 75 75
--------- ---------
Net interest income after provision for loan losses.............................. 2,792 2,830
--------- ---------
NONINTEREST INCOME:
Service charges, fees and commissions................................................ 413 336
--------- ---------
Total noninterest income......................................................... 413 336
--------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................................... 987 962
Net occupancy and equipment expense.................................................. 300 327
Other expenses....................................................................... 596 598
--------- ---------
Total noninterest expense........................................................ 1,883 1,887
--------- ---------
Income before income taxes........................................................... 1,322 1,279
Provision for income tax expense..................................................... 264 278
--------- ---------
Net income....................................................................... $ 1,058 $ 1,001
========= =========
PER SHARE DATA:
Net income........................................................................... $ 0.48 $ 0.45
Cash dividends declared.............................................................. $ 0.06 $ 0.05
Average common shares................................................................ 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>
MARCH 31, DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 7,636 $ 7,732
Federal funds sold.................................................................. 1,100 3,300
Investment securities available for sale............................................ 99,032 101,994
Loans, net of unearned income....................................................... 238,300 235,803
Less: allowance for loan losses................................................... 3,794 3,944
-------- --------
Net loans........................................................................... 234,506 231,859
Premises and equipment, net......................................................... 3,638 3,092
Accrued interest receivable......................................................... 2,382 2,671
Other assets........................................................................ 4,374 4,164
-------- --------
Total assets.................................................................... $352,668 $354,812
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 26,465 $ 26,424
Interest-bearing.................................................................. 291,339 294,032
-------- --------
Total deposits.................................................................. 317,804 320,456
Long-term debt...................................................................... 45 46
Accrued interest payable............................................................ 1,973 1,758
Other liabilities................................................................... 1,138 1,296
-------- --------
Total liabilities............................................................... 320,960 323,556
-------- --------
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................................................................... 24,575 23,649
Net unrealized gain on available for sale securities................................ 90 564
-------- --------
Total stockholders' equity...................................................... 31,708 31,256
-------- --------
Total liabilities and stockholders' equity...................................... $352,668 $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 (LOSS) 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........................................ 1,058 1,058
Dividends declared: $0.06 per share............... (132) (132)
Net change in unrealized gain on securities....... (474) (474)
---- ------ ------- ----- -------
BALANCE, MARCH 31, 1997........................... $726 $6,317 $24,575 $ 90 $31,708
==== ====== ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS___________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 1,058 $ 1,001
Adjustments:
Provision for loan losses............................................................... 75 75
Depreciation and amortization........................................................... 166 186
Amortization of loan fees............................................................... (50) (59)
Deferred income tax..................................................................... 50 (443)
Gains on sale of other real estate...................................................... (58)
Changes in:
Interest receivable................................................................... 289 (51)
Other assets.......................................................................... (295) 718
Interest payable...................................................................... 215 79
Other liabilities..................................................................... (48) (274)
------- --------
Net cash provided by operating activities........................................... 1,402 1,232
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of available for sale securities................................. 8,505 3,603
Purchases of available for sale securities................................................ (6,261) (10,969)
Proceeds from sale of other real estate................................................... 352
Net receipts (disbursements) from lending activities...................................... (2,742) 3,737
Purchases of premises and equipment....................................................... (657) (59)
------- --------
Net cash used in investing activities............................................... (803) (3,688)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................. (1,090) (5,076)
Time deposits........................................................................... (1,562) (4,032)
Payments on long-term debt................................................................ (1) (1)
Cash dividends paid....................................................................... (242) (293)
------- --------
Net cash used in financing activities............................................... (2,895) (9,402)
------- --------
Net decrease in cash and cash equivalents........................................... (2,296) (11,858)
Cash and cash equivalents at beginning of year...................................... 11,032 21,964
------- --------
Cash and cash equivalents at end of period.......................................... $ 8,736 $ 10,106
======= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest................................................................................ $ 3,220 $ 3,353
Noncash items:
Transfers of loans to other real estate................................................. 70 20
Change in net unrealized losses on available for sale securities........................ 474 697
Cash dividends declared................................................................. $ 132 $ 117
</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.
2. PER SHARE DATA:
Per share data has been adjusted to reflect a three-for-one stock split
effective April 1, 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, 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, tight money supply, real estate values, international conflicts,
and other factors beyond the control of the Company 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 areas, including
real estate, construction and consumer spending, could have an adverse impact
on the Company's ability to maintain or increase profitability. Therefore,
there is no assurance that the Company will continue its current rates of
income and growth.
The Company's earnings depend largely upon 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, known 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
currently believes that 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 success of the Company is dependent upon the general
economic conditions in the geographic market 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 in economic conditions in the geographic market area served by the
Company would likely impair the Company's loan collections and could otherwise
have a materially adverse effect 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. Because of
their size, many of these competitors offer products and services the Company
does not offer. The Company is constantly striving to meet the convenience and
needs of its customers and to enlarge its customer base. No assurance can be
given that these efforts will be successful in maintaining and expanding the
Company's customer base.
OVERVIEW:
For the second consecutive year the Company experienced its highest first
quarter earnings from normal operations. Net income in the first quarter of
1997 of $1.06 million or $0.48 per share represents a 5.7 percent increase over
the comparable quarter of 1996. The Company's return on average assets and
return on average equity for the first three months of 1997 were 1.22 percent
and 13.67 percent, respectively, compared to 1.16 percent and 14.83 percent,
respectively, for the same period last year. This performance is largely
attributable to a 4.9 percent increase in loan revenues over those recorded for
the first quarter of 1996. Management continued its emphasis on the loan
portfolio during the first quarter of 1997 as loans, net of unearned income,
represented 70.4 percent of earning assets at March 31, 1997, as compared to
63.9 percent at March 31, 1996. Additionally, management's successful effort
to maintain overhead expenses at 1996 levels aided in bolstering net income.
In addition to the financial success, the Company recently recorded a
significant accomplishment through the installation of a Dividend Reinvestment
Plan ("DRP") effective for the second quarter of 1997 dividend payment to
stockholders. Such plan will provide a low-cost method for raising capital for
the Company while allowing younger, smaller stockholders to participate in the
Company's growth, and avoiding brokers' commissions on stock purchases for all
stockholders.
REVIEW OF FINANCIAL POSITION:
The Company's total assets at March 31, 1997, were $352.7 million, a $2.1
million reduction from the $354.8 million at December 31, 1996. This decline is
explained by a reduction in commercial time deposits. Such deposits declined
$2.7 million in the first quarter of 1997 as compared to a reduction of $9.1
million for the same period last year. Due to competitive pressures from mutual
funds, the stock market, credit unions and traditional deposit gatherers, such
as commercial banks and thrifts, the Company became more aggressive in its
product pricing during the first quarter of 1997. This action reduced the
severity of the decline in deposit volumes as compared to a year ago. Loans,
net of unearned income, were $238.3 million at March 31, 1997, compared to
$235.8 million at December 31, 1996, a $2.5 million increase. Despite the
increased volume of loans, asset quality improved during the first quarter of
1997 as evidenced by a reduction in the ratio of nonperforming assets to loans,
net from 1.62 percent at year-end 1996 to 1.50 percent at March 31, 1997. The
Company's capital position continued to strengthen as the Leverage ratio
increased to 8.5 percent at March 31, 1997, as compared to 7.5 percent at the
same period last year. Stockholders' equity grew $452 during the first quarter
as net income of $1,058 was partially offset by dividends of $132 and a $474
reduction in the net unrealized gain on available for sale investment
securities.
INVESTMENT PORTFOLIO:
During the first quarter of 1997, management maintained its position of reducing
the importance of the investment portfolio in the Company's earning assets mix.
The investment portfolio as a percentage of earning assets amounted to 29.3
percent at March 31, 1997, as compared to 35.0 percent at March 31, 1996. The
largest portion of the Company's investment portfolio is comprised of U.S.
Treasury securities and state and municipal obligations. At March 31, 1997,
such products totaled $30.5 million or 30.8 percent of total investments and
$38.7 million or 39.0 percent of total investments, respectively. By investing
in short-term U.S. Treasury securities, management is attempting to supplement
primary sources of cash flows to provide for adequate liquidity in funding
future loan demand. Investing in medium-term, tax-exempt state and municipal
obligations provides the Company with a lower effective tax rate.
The Company reported a net unrealized gain on available for sale securities of
$90, net of income taxes of $46, at March 31, 1997. The economy grew at a 5.6
percent annualized rate during the first quarter of 1997. Such increase was the
highest since the fourth quarter of 1987. Accordingly the Federal Reserve
Board, sensing the strong growth, invoked monetary policy by raising short-term
rates 25 basis points on March 25, 1997. The rise in short-term rates prompted
a corresponding 44 basis points increase in medium-term rates causing a $474
reduction in the net unrealized gain during the first three months of 1997.
Should the economy continue to grow at this strong pace, the Federal Reserve
will probably take additional steps by raising rates to ward off inflation.
The Company's Investment Committee continually monitors the effects changes in
interest rates have on the value of the investment portfolio. In addition,
such committee is formulating strategies to implement if rates continue upward
resulting in further declines in the portfolio's market value. Possible
strategies include the sale or transfer of certain bonds that exhibit a higher
degree of interest rate risk. The quarterly stress tests on the investment
portfolio indicate the investment portfolio at March 31, 1997, would lose
approximately 2.17 percent of its value with a 100 basis point increase in
general market rates.
The following table sets forth the carrying values of the major classifications
of securities as they relate to the total investment portfolio at March 31,
1997, and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
MARCH 31, DECEMBER 31,
1997 1996
AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $30,499 30.80% $ 35,619 34.92%
U.S. Government agencies............................. 17,629 17.80 18,606 18.24
State and municipals................................. 38,655 39.03 38,295 37.55
Mortgage backed securities........................... 9,527 9.62 7,058 6.92
Equity securities.................................... 2,722 2.75 2,416 2.37
------- ------ -------- ------
Total.............................................. $99,032 100.00% $101,994 100.00%
======= ====== ======== ======
</TABLE>
The tax-equivalent yield on the investment portfolio remained constant at 6.4
percent for the first quarters of 1997 and 1996. The Company received $8.5
million in securities repayments during the first quarter of 1997. Of such
receipts, the Company utilized $6.2 million to purchase $2.0 million in short-
term U.S. Treasury securities, $1.2 million in medium-term state and municipal
obligations, $1.8 million in short-term collateralized mortgage obligations
("CMOs"), $1.0 million in short-term pooled mortgage-backed securities, and $200
in Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh") stock during the quarter.
For the near term, management will continue to invest the majority of excess
funds not utilized in lending, in short-term U.S. Treasury securities and U.S.
Government agency mortgage backed products. At March 31, 1997, the weighted-
average life of the investment portfolio was 4.1 years as compared to 3.9 years
for the same period of 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 March 31, 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
------------------------------------------------------------------------------
MARCH 31, 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..... $17,613 5.53% $13,018 5.89% $30,631 5.68%
U.S. Government agencies..... 9,694 4.64 8,147 4.84 17,841 4.73
State and municipals......... 2,615 7.35 4,148 6.36 $4,686 8.51% $27,228 7.96% 38,677 7.81
Mortgage backed securities... 1,850 6.75 7,601 6.30 130 6.00 9,581 6.38
Equity securities............ 2,165 5.78 2,165 5.78
------- ------- ------ ------- -------
Total...................... $31,772 5.48% $32,914 5.78% $4,816 8.44% $29,393 7.80% $98,895 6.41%
======= ======= ====== ======= =======
Fair value:
U.S. Treasury securities..... $17,562 $12,937 $30,499
U.S. Government agencies..... 9,631 7,998 17,629
State and municipals......... 2,617 4,127 $4,857 $27,054 38,655
Mortgage backed securities... 1,906 7,493 128 9,527
Equity securities............ 2,722 2,722
------- ------- ------ ------- -------
Total...................... $31,716 $32,555 $4,985 $29,776 $99,032
======= ======= ====== ======= =======
</TABLE>
LOAN PORTFOLIO:
For the first quarter of 1997, the Company experienced loan growth of $2.5
million or 4.3 percent annualized. The primary sources of such increase were
increases in commercial and residential mortgage loans. Commercial loans
increased $1.4 million as loans to finance one-to-four family residential
properties grew $1.1 million. Loans secured by residential properties
represented 61.8 percent of total loans, net of unearned income, at March 31,
1997. The average volume of loans during the first quarter of 1997 amounted to
$236.5 million as compared to $212.8 million for the same period of 1996. The
tax-equivalent yield on the loan portfolio decreased from 8.9 percent for the
first three months of 1996 to 8.5 percent for the comparable period of 1997 in
response to implementing pricing strategies. The Company does not expect wide
fluctuations in loan yields for the remainder of 1997 as rises in general market
rates will probably be offset by management's desire to foster loan demand
through a continuation of competitive product pricing. Loan demand is expected
to be facilitated through increases in core deposits and repayments on loans and
investments.
The following table sets forth the major categories of the loan portfolio at
March 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
MARCH 31, DECEMBER 31,
1997 1996
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others............ $ 33,181 13.92% $ 31,744 13.46%
Real estate:
Construction.............................. 2,886 1.21 3,698 1.57
Mortgage.................................. 180,723 75.84 179,134 75.97
Consumer, net............................... 21,510 9.03 21,227 9.00
-------- ------ -------- ------
Loans, net of unearned income............. 238,300 100.00% 235,803 100.00%
====== ======
Less: allowance for loan losses............. 3,794 3,944
-------- --------
Net loans............................... $234,506 $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 33.8 percent of the lending portfolio will
reprice within the next 12 months. Such percentage falls below the 37.8 percent
at March 31, 1996, as a result of the massive amount of loan originations in the
past 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 interest rate risk in
the future.
The following table sets forth the maturity and repricing information of the
loan portfolio by major category at March 31, 1997:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
MARCH 31, 1997 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $13,895 $ 9,593 $ 9,693 $ 33,181
Real estate:
Construction....................... 2,886 2,886
Mortgage........................... 4,860 22,528 153,335 180,723
Consumer, net........................ 2,022 12,104 7,384 21,510
------- ------- -------- --------
Total............................ $23,663 $44,225 $170,412 $238,300
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $35,792 $66,038 $ 91,816 $193,646
Floating or adjustable interest rates 44,654 44,654
------- ------- -------- --------
Total............................ $80,446 $66,038 $ 91,816 $238,300
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
Nonperforming assets improved from $3,811 or 1.62 percent of loans, net, at
December 31, 1996, to $3,578 or 1.50 percent of loans, net, at March 31, 1997.
A reduction in the Company's foreclosed assets from $420 at December 31, 1996,
to $196 at March 31, 1997, was the primary reason for such improvement. The
majority of the change in foreclosed assets is attributable to the Company's
March 1997 sale of a property that it had originally purchased to be utilized as
a site for a branch office. The property was valued at $220 at the time of its
transfer to other real estate and was sold with a gain of $50 being recognized.
Accruing loans past due 90 days or more improved slightly from $3,391 at
December 31, 1996, to $3,382 at March 31, 1997. Through stringent collection
efforts, management expects further improvement in nonperforming loan levels for
the remainder of 1997, however a deterioration in local economic conditions
could offset such efforts by hindering borrowers' ability to make timely loan
payments.
The Company's recorded investment in impaired loans, consisting of nonaccrual
and restructured loans, was $1,491 and $1,494 at March 31, 1997, and December
31, 1996, respectively. The average recorded investment in impaired loans
during the first quarters of 1997 and 1996 was $1,486 and $1,625, respectively.
Impaired loans include a $220 restructured loan to one commercial customer.
Such credit continued to perform in accordance with its modified terms during
the first quarter of 1997. Interest income related to impaired loans would have
been $34 and $16 for the first three months of 1997 and 1996, respectively, had
such loans been current and the terms not been modified. Interest recognized on
impaired loans amounted to $3 for the first three months of 1997 and $16 for the
comparable period last year. Cash received on impaired loans applied as a
reduction of principal totaled $74 and $41 for the quarters ended March 31, 1997
and 1996, respectively. There were no commitments to extend additional funds to
such parties at March 31, 1997. The Company's peer group of 35 banks in
Northeastern Pennsylvania recorded impaired loans and nonperforming loans ratios
of 0.54 percent and 1.34 percent, respectively, at March 31, 1997.
The following table sets forth information concerning nonperforming assets at
March 31, 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
MARCH 31, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 238 $ 251
Real estate:
Construction.................................................
Mortgage..................................................... 1,018 1,018
Consumer, net.................................................. 15
------ ------
Total nonaccrual loans..................................... 1,271 1,269
------ ------
Restructured loans............................................. 220 225
------ ------
Total impaired loans....................................... 1,491 1,494
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 248 359
Real estate:
Construction.................................................
Mortgage..................................................... 1,358 1,247
Consumer, net.................................................. 285 291
------ ------
Total accruing loans past due 90 days or more.............. 1,891 1,897
------ ------
Total nonperforming loans.................................. 3,382 3,391
------ ------
Foreclosed assets.............................................. 196 420
------ ------
Total nonperforming assets................................. $3,578 $3,811
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 0.63% 0.63%
Nonperforming loans as a percentage of loans, net.............. 1.42 1.44
Nonperforming assets as a percentage of loans, net............. 1.50% 1.62%
</TABLE>
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. No such charge was deemed necessary upon
conclusion of the latest examination at September 30, 1996.
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
MARCH 31, 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................... $1,317 13.92% $1,396 13.46%
Real estate:
Construction..................................... 1.21 1.57
Mortgage......................................... 1,278 75.84 1,326 75.97
Consumer, net...................................... 1,199 9.03 1,222 9.00
------ ------ ------ ------
Total.......................................... $3,794 100.00% $3,944 100.00%
====== ====== ====== ======
</TABLE>
The following table sets forth a reconciliation of the allowance for loan losses
and illustrates the charge-offs and recoveries by major loan category for the
quarter ended March 31, 1997:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
MARCH 31,
1997
- --------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $3,944
Loans charged-off:
Commercial, financial and others............................................... 125
Real estate:
Construction.................................................................
Mortgage..................................................................... 73
Consumer, net.................................................................. 43
------
Total...................................................................... 241
------
Loans recovered:
Commercial, financial and others............................................... 6
Real estate:
Construction.................................................................
Mortgage..................................................................... 1
Consumer, net.................................................................. 9
------
Total...................................................................... 16
------
Net loans charged-off.......................................................... 225
------
Provision charged to operating expense......................................... 75
------
Allowance for loan losses at end of period..................................... $3,794
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.10%
Allowance for loan losses as a percentage of period end loans.................. 1.59%
</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 on the nature and purpose of the allowance, related responsibilities of
management and examiners, loan review systems, and international transfer risk
matters. Such analytical tool involves a comparison of the reported loss
allowance against the sum of specified percentages, based on industry averages,
applied to certain loan classifications. The Company was considered adequately
reserved at March 31, 1997, based on the results of this regulatory calculation.
Despite such results, management will continue to perform a thorough analysis of
the Company's loan portfolio as such calculation does not take into account
differences between institutions, their portfolios, underwriting and collection
policies, and credit-rating policies.
The allowance for loan losses was $3,794 and 1.59 percent of loans, net, at
March 31, 1997, as compared to $3,944 and 1.67 percent of loans, net, at
December 31, 1996. The decline was a result of net loans charged-off exceeding
funds provided for loan losses during the first quarter of 1997. As a
percentage of nonperforming loans, the allowance account covered 112.2 percent
and 116.3 percent at March 31, 1997, and December 31, 1996, respectively.
Relative to all nonperforming assets, the allowance covered 106.0 percent at
March 31, 1997, and 103.5 percent at December 31, 1996.
Included in the allowance account were amounts for impaired loans of $1,271 and
$1,269 at March 31, 1997, and December 31, 1996, respectively, with related
allowances for loan losses of $635 and $650, respectively, for each of these
periods. The recorded investment for which there was no related allowance for
loan losses, was $220 and $225 at March 31, 1997, and December 31, 1996,
respectively.
Past due loans that have not been satisfied through repossession, foreclosure or
related actions, are evaluated on an individual basis to determine if all or
part of the outstanding balance should be charged against the allowance for loan
losses account. Subsequent recoveries, if any, are credited to the allowance
account. Net charge-offs were $225 or 0.10 percent of average loans outstanding
compared to $18 or 0.01 percent for the first quarters ended March 31, 1997 and
1996, respectively.
DEPOSITS:
For the first quarter of 1997, total deposits decreased $2.7 million from $320.5
million at December 31, 1996, to $317.8 million at March 31, 1997. Such decline
was due to a reduction in commercial time deposits held by local school
districts. The Company's average deposits for the first quarter of 1997 were
$316.8 million, an increase of $3.6 million over the $313.2 million recorded for
the same period of 1996. The average cost of deposits increased slightly from
4.75 percent in the first quarter of 1996 to 4.78 percent in the first quarter
of 1997. The increase came as management became more aggressive in its product
pricing in light of increased competition and changes in general market rates.
The Company's cost of funds rose 8 basis points comparing the final quarter of
1996 to the first quarter of 1997. Management expects further increases in
deposit costs during the remainder of 1997 as general market rates continue to
rise.
The following table sets forth the average amount of, and the rate paid on, the
major classifications of deposits for the quarters ended March 31, 1997 and
1996:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
MARCH 31, MARCH 31,
1997 1996
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 15,424 3.05% $ 18,700 2.88%
NOW accounts................................ 17,743 2.17 15,383 1.96
Savings accounts............................ 65,581 3.03 67,400 2.85
Time less than $100......................... 158,322 5.69 157,565 5.81
Time $100 or more........................... 34,131 6.05 28,900 6.08
-------- --------
Total interest-bearing.................... 291,201 4.78% 287,948 4.75%
Noninterest-bearing......................... 25,570 25,272
-------- --------
Total deposits............................ $316,771 $313,220
======== ========
</TABLE>
Average volumes of noninterest-bearing deposits rose slightly from $25.3 million
to $25.6 million during the comparable first quarters of 1996 and 1997,
respectively. As a percentage of total deposits, noninterest-bearing deposits
accounted for 8.3 percent in 1997 as compared to 8.2 percent in 1996.
Time deposits in denominations of $100 or more decreased $2.7 million from $35.9
million at December 31, 1996, to $33.2 million at March 31, 1997, due to the
decline in commercial time deposits held by local school districts. The average
cost of such deposits rose 12 basis points to 6.05 percent during the first
quarter of 1997 from the 5.93 percent reported for the fourth quarter 1996.
The following table sets forth maturities of time deposits of $100 or more at
March 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Within three months......................................... $13,685 $ 8,598
After three months but within six months.................... 1,754 9,958
After six months but within twelve months................... 11,818 11,262
After twelve months......................................... 5,902 6,047
------- -------
Total..................................................... $33,159 $35,865
======= =======
</TABLE>
INTEREST RATE SENSITIVITY:
Interest rate sensitivity management attempts to limit and, to the extent
possible, control the effects interest rate fluctuations have on net interest
income. The responsibility of such management has been delegated to the
Asset/Liability Management Committee ("ALCO"). Specifically, ALCO utilizes a
number of computerized modeling techniques to monitor and attempt to control
influences 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
MARCH 31, 1997 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $15,678 $ 19,379 $ 29,766 $ 34,209 $ 99,032
Loans, net of unearned income....... 52,076 28,370 66,038 91,816 238,300
Federal funds sold.................. 1,100 1,100
------- -------- -------- -------- --------
Total............................. $68,854 $ 47,749 $ 95,804 $126,025 $338,432
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 15,051 $ 15,051
NOW accounts........................ 17,734 17,734
Savings accounts.................... $ 66,204 66,204
Time deposits less than $100........ $35,241 61,695 62,248 $ 7 159,191
Time deposits $100 or more.......... 13,685 13,572 5,902 33,159
Long-term debt...................... 1 1 8 35 45
------- -------- -------- -------- --------
Total............................. $48,927 $108,053 $134,362 $ 42 $291,384
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $19,927 $(60,304) $(38,558) $125,983
Cumulative........................ $19,927 $(40,377) $(78,935) $ 47,048 $ 47,048
RSA/RSL ratio:
Period............................ 1.41 0.44 0.71 3,000.60
Cumulative........................ 1.41 0.74 0.73 1.16 1.16
</TABLE>
The Company's ratio of rate sensitive assets to rate sensitive liabilities
repricing within one year declined from 0.87 at March 31, 1996, to 0.74 at March
31, 1997. This ratio improved slightly from the 0.73 reported at December 31,
1996. Based upon the guidelines set forth in the Company's asset/liability
management policy, this ratio falls within the 0.7 and 1.3 deemed by management
to be acceptable. The decline in such ratio compared to that at March 31, 1996,
is attributable to the Company's decision to reinvest cash flows received from
short-term credit extensions to financial institutions and securities repayments
into residential mortgages. This decision was made based upon management's
desire to invest a higher percentage of the Company's resources in loans as
opposed to investments. Other factors affecting the Company's one-year RSA/RSL
ratio were the increases of $10.4 million and $5.4 million, respectively, in
retail and commercial time deposits maturing within one year. These larger
volumes came as customers chose greater liquidity over higher return when
investing in time deposit products. The Company was liability rate sensitive
for the cumulative one-year period based on the results of the March 31, 1997,
static gap report. This means that an increase in general market rates should
have an adverse impact on net interest income. Conversely, a decline in market
rates should have a favorable effect 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 does not fully illustrate the impact of interest rate
changes on future earnings. First, market rate changes will not equally or
simultaneously affect all categories of assets and liabilities. Second, assets
and liabilities that can contractually reprice within the same period may not do
so at the same time or to the same magnitude. Third, the 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 a result of the static gap report's failure to address the dynamic changes in
the balance sheet composition or prevailing interest rates, the Company enhances
its asset/liability management by using a simulation model. Such model creates
pro forma net interest income scenarios under various interest rate shocks.
Model results at March 31, 1997, indicate similar results to those indicated by
the static gap model. A decline in net interest income of 4.7 percent is
expected should there be a parallel and instantaneous rise in interest rates of
100 basis points. Conversely, a similar decline in interest rates would result
in a 4.7 percent increase in net interest income.
Inflation impacts financial institutions differently than it does commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of the Company's assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely measure the impact of inflation on the Company, however management
believes that its exposure to 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. Principal sources of liquidity are found in core
deposits and loan and investment payments and prepayments. Management considers
the Company's available for sale portfolio as a secondary source of liquidity.
As a final source of liquidity, the Company has the ability to exercise existing
credit arrangements. As specified in the Company's Asset/Liability Management
Policy, such borrowings will only be used on a contingency basis. The reliance
on these borrowings to fund temporary deficiencies is limited to a maximum of
five consecutive business days before management is required to take appropriate
action to remedy the shortfall through normal operations. The Company manages
liquidity daily, enabling management to effectively monitor changes in liquidity
and to react accordingly to market conditions. Management believes that
liquidity is sufficient to meet present and future financial obligations and
commitments on a timely basis. There are no known trends, demands, commitments,
events or uncertainties that have resulted or are reasonably likely to result in
material changes in the Company's liquidity.
Management believes the Company's liquidity position remains sufficient to meet
its present and future financial obligations and commitments, however this
position has become less favorable in comparison to a year ago. Such
unfavorable change is best illustrated by the ratio of temporary investments to
volatile liabilities and the ratio of volatile liabilities less temporary
investments to total assets less temporary investments. At March 31, 1997,
these ratios were 59.7 percent and 4.0 percent, respectively. At March 31,
1996, these ratios were 106.3 and negative 0.58, respectively. Management feels
it can foster stability in these ratios through maintaining an adequate amount
of short-term investments and aggressively competing for medium-term
certificates of deposit.
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, noniterest-bearing deposits with other banks, balances with the
Federal Reserve Bank of Philadelphia and the FHLB-Pgh, and federal funds sold,
decreased $2,296 in the first quarter of 1997. Net cash provided by operating
activities totaled $1,402 primarily through recognizing $1,058 of net income for
the first three months of 1997.
Net cash used in investing activities amounted to $803 for the first quarter of
1997. The majority of such amount resulted from $6,261 in investment purchases
and $2,742 in net loan disbursements. Such activity was funded primarily by
proceeds received on repayments from securities totaling $8,505 for the first
quarter of 1997.
The major component of the net decrease in cash and cash equivalents was the net
cash used in financing activities. For the three months ended March 31, 1997,
such amount was $2,895. A decline in deposit volumes of $2,652, as a result of
a decrease in school district funds, comprised the majority of the total
reduction.
CAPITAL ADEQUACY:
The Company's stockholders' equity showed a modest improvement as first quarter
net income of $1,058 was offset by dividends of $132 and a reduction of $474 in
the unrealized gain on available for sale securities. The severity of the
investment portfolio depreciation caused by increasing market rates has been
lessened by improvements in the quality, composition and structure of the
Company's investment portfolio. Through management's efforts the Company has
become less susceptible to market depreciation on available for sale securities
resulting from changing interest rates.
For the first quarter of 1997, the Company's cash dividends declared as a
percentage of net income was 12.5 percent. Presently, the Company's Board of
Directors expects dividends to 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 affect 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. Such plan will afford stockholders the opportunity
to automatically reinvest their dividends in shares of common stock. Main
features of the plan include the following: (i) shares will be purchased from
original issuances; (ii) no optional cash payments; (iii) eligibility for all
registered and street name stockholders; (iv) no minimum or maximum number of
shares participation restrictions; and (v) availability of full or partial
dividend reinvestment. The Plan is expected to be operational for reinvestment
of second quarter 1997 dividend payments.
The following table presents the Company's capital ratios at March 31, 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
------------------------------------------------------------------
MARCH 31 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets... $ 29,684 $ 25,797 $ 7,566 $ 7,072 $11,349 $10,608
Total capital to risk-adjusted assets.... 32,066 28,029 15,132 14,144 18,915 17,680
Tier I capital to total average assets
less goodwill........................... 29,684 25,797 $13,990 $13,777 $17,487 $17,222
Risk-adjusted assets..................... 182,248 171,992
Risk-adjusted off-balance sheet items.... 6,902 4,806
Average assets for Leverage ratio........ $349,746 $344,437
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 15.7% 14.6% 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................. 17.0 15.9 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.5% 7.5% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at March 31,
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 a
Leverage ratio, defined as Tier I capital to total average assets less goodwill,
of at least 5.0 percent. The Company has shown substantial improvement in its
capital level as evidenced by the positive change in its Leverage ratio. At
March 31, 1997, such ratio was 8.5 percent as compared to 7.5 percent at March
31, 1996.
REVIEW OF FINANCIAL PERFORMANCE:
The Company reported its highest first quarter earnings for the second
consecutive year. Net income totaled $1,058 or $0.48 per share in the first
quarter of 1997 as compared to $1,001 or $0.45 per share for the same period in
1996. Improved loan revenues and maintained overhead expense levels were the
driving forces behind the improved net income level.
NET INTEREST INCOME:
The Company derives its largest source of operating income from net interest
income. Net interest income is defined as the amount by which interest and fees
on loans and other investments exceeds interest expense incurred on deposits and
other funding sources used to support such assets. Net interest margin is the
percentage of net interest income on a tax equivalent basis to average earning
assets. Changes in volumes and rates of earning assets and liabilities, in
response to changes in general market rates, are the primary factors affecting
net interest income. Additional factors influencing the level of net interest
income include the composition of earning assets and interest-bearing
liabilities and the level of nonperforming assets.
Net interest income on a tax equivalent basis showed a slight improvement from
$3,181 for the three months ended March 31, 1996, to $3,193 for the same period
of 1997. Such improvement was primarily due to the Company's higher average
loan volumes partially offset by a reduction in loan yields. For the first
quarter of 1997, the Company's average loan volumes totaled $236.5 million, an
increase of $23.7 million or 11.1 percent from the average for the same period
of 1996. Such difference accounted for a positive volume variance of $1,301
related to the loan portfolio. During the second and third quarters of 1996,
management undertook an aggressive product pricing strategy that fueled the
increase in loan volumes. This aggressive pricing strategy did, however, lead
to a reduction in the yield on the Company's loan portfolio from the first
quarter of 1996 to the same period of 1997. The Company's tax equivalent yield
on the loan portfolio declined to 8.51 percent for the first quarter of 1997
from 8.90 for the first quarter of 1996, a 39 basis point decline. Such decline
accounted for $1,042 of the $1,181 decline in net interest income due to rate
reductions. The Company's net interest margin experienced minimal decline from
3.83 percent for the first quarter of 1996 to 3.82 percent for the same period
of 1997. Such negligible change resulted from a higher cost of funds caused by
competitive pressures and rises in general market rates offset by a greater
portion of loans in the Company's asset mix. Management expects the Company's
net interest margin to increase based on the higher loan volumes, however such
increase could be minimized by continued competition in deposit gathering and
further increases in general market rates. Management is also aware that a
downturn in local employment conditions may lead to larger levels of impaired
loans, which would lessen the positive influence.
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
MARCH 31,
1997 VS. 1996
-------------------------
INCREASE (DECREASE)
ATTRIBUTABLE TO
-------------------------
TOTAL
CHANGE RATE VOLUME
------ ---- ------
<S> <C> <C> <C>
INTEREST INCOME:
Loans:
Taxable.................................................... $ 170 $ (959) $1,129
Tax-exempt................................................. 89 (83) 172
Investments:
Taxable.................................................... (213) (4) (209)
Tax-exempt................................................. 60 (128) 188
Interest-bearing deposits with banks......................... (2) (2)
Federal funds sold........................................... (89) (7) (82)
----- ------- ------
Total interest income.................................... 15 (1,181) 1,196
----- ------- ------
INTEREST EXPENSE:
Money market accounts........................................ (18) 43 (61)
NOW accounts................................................. 20 8 12
Savings accounts............................................. 13 82 (69)
Time deposits less than $100................................. (53) (114) 61
Time deposits $100 or more................................... 72 (16) 88
Short-term borrowings........................................ 1 1
Long-term debt............................................... (32) (32)
----- ------- ------
Total interest expense................................... 3 3
----- ------- ------
Net interest income...................................... $ 12 $(1,184) $1,196
===== ======= ======
</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
MARCH 31, 1997 MARCH 31, 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..................................... $227,886 $4,795 8.53% $209,506 $4,625 8.88%
Tax-exempt.................................. 8,591 165 7.79 3,265 76 9.33
Investments:
Taxable..................................... 61,915 838 5.49 77,814 1,051 5.43
Tax-exempt.................................. 38,226 795 8.43 34,457 735 8.58
Interest-bearing deposits with banks.......... 90 2 8.94
Federal funds sold............................ 2,681 35 5.29 8,901 124 5.60
-------- ------ -------- ------
Total earning assets...................... 339,299 6,628 7.92% 334,033 6,613 7.96%
Less: allowance for loan losses............... 3,941 3,935
Other assets.................................. 15,801 15,961
-------- --------
Total assets.............................. $351,159 $346,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 15,424 116 3.05% $ 18,700 134 2.88%
NOW accounts.................................. 17,743 95 2.17 15,383 75 1.96
Savings accounts.............................. 65,581 490 3.03 67,400 477 2.85
Time deposits less than $100.................. 158,322 2,223 5.69 157,565 2,276 5.81
Time deposits $100 or more.................... 34,131 509 6.05 28,900 437 6.08
Short-term borrowings......................... 52 1 7.80
Long-term debt................................ 45 1 9.01 3,047 33 4.36
-------- ------ -------- ------
Total interest-bearing liabilities........ 291,298 3,435 4.78% 290,995 3,432 4.74%
Noninterest-bearing deposits.................. 25,570 25,272
Other liabilities............................. 2,909 2,661
Stockholders' equity.......................... 31,382 27,131
-------- ------ -------- ------
Total liabilities and stockholders' equity $351,159 3,435 $346,059 3,432
======== ------ ======== ------
Net interest/income spread................ $3,193 3.14% $3,181 3.22%
====== ======
Net interest margin....................... 3.82% 3.83%
Tax equivalent adjustments:
Loans......................................... $ 56 $ 26
Investments................................... 270 250
------ ------
Total adjustments......................... $ 326 $ 276
====== ======
</TABLE>
Note: Average balance was calculated using average daily balances and
includes nonaccrual loans. Available for sale securities,
included in investment securities, are stated at amortized cost with
the related average unrealized holding gain of $1,174 and
$1,129 at March 31, 1997 and 1996, respectively, included in other
assets. Tax equivalent adjustment was calculated using the
prevailing statutory rate of 34.0 percent.
PROVISION FOR LOAN LOSSES:
The Company makes provisions for loan losses through evaluating the adequacy of
its allowance for loan losses account. In making its decision management
considers such factors as previous loan experience, overall loan portfolio
characteristics, prevailing economic conditions, and other relevant factors.
Based on its most current valuation, management believes that the allowance is
adequate to absorb any known and inherent losses in the portfolio.
The Company's provision for loan losses was unchanged at $75 for the three
months ended March 31, 1997 and 1996. Management believes that maintaining a
standard monthly charge to operations in the form of a provision is warranted,
despite maintaining an adequate allowance account, as nonperforming asset levels
have risen and loan demand has increased. If the strong loan demand continues
or nonperforming asset levels deteriorate, management will consider adjusting
the monthly provision amount for the remainder of 1997.
NONINTEREST INCOME:
Noninterest income for the first quarter of 1997 was up $77 or 22.9 percent from
$336 for the first quarter of 1996 to $413 for the same period of 1997. Such
increase was primarily due to fees received related to insufficiently-funded
customer accounts.
NONINTEREST EXPENSE:
Noninterest expense generally includes the costs of providing salaries and
necessary employee benefits, maintaining facilities and general operating costs
such as insurance, supplies, advertising, data processing, taxes and other
related expenses. Several of these costs and expenses are variable while others
are fixed. Management uses budgets and other related strategies in an effort to
control variable expenses.
For the first quarter of 1997, noninterest expense totaled $1,883, which was a
slight decline from the $1,887 for the same period of 1996. By maintaining
expenses at 1996 levels, the Company bettered its two main efficiency ratios.
The net overhead to average assets ratio for the first quarter of 1997 improved
slightly to 1.7 percent in comparison to the 1.8 percent for the corresponding
period of 1996. A company's productivity is also measured by its operating
efficiency ratio, 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 ratio for the first
quarter of 1997 improved to 57.1 percent compared to 57.9 percent for the same
period of 1996.
Salaries and benefits amounted to $987 or 52.4 percent of noninterest expenses
for the first three months of 1997. Such amount was $25 or 2.6 percent above
the $962 recorded for the same period last year. The primary reason for the
slight increase was an addition in the number of full-time equivalent employees
from March of 1996 to March of 1997. At March 31, 1997, the Company had 149
full-time equivalent employees compared to 146 at March 31, 1996.
For the first three months of 1997, net occupancy and equipment expenses
aggregated $300 marking a $27 or 8.3 percent decline compared to the same period
of 1996. This decline was primarily attributable to reduced costs associated
with the maintenance of equipment used in normal bank operations with a
reduction in the cost of maintaining bank facilities also contributing but to a
lesser degree. Such expenses are expected to increase slightly for the
remainder of 1997 due to the Company's introduction of a document imaging system
during the fourth quarter of 1996. This newly implemented system is expected to
positively influence other operating expenses in the future. The Company does
not have any pending commitment to make any material capital expenditures other
than those incurred in the normal course of business.
Other expenses amounted to $596 for the first quarter of 1997, a minimal
decrease of $2 compared to the $598 incurred for the same period of 1996. The
Company's Federal Deposit Insurance Corporation insurance premiums will increase
for the remainder of 1997 based on the Deposit Insurance Fund Act of 1996 that
the President signed into law during the third quarter of 1996. Under this law,
Bank Insurance Fund ("BIF")-insured institutions will be responsible for 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 be one-fifth of the Saving
Association Insurance Fund ("SAIF") rate. For the first semiannual period of
1997, the annualized BIF and SAIF rates were set at 1.30 basis points and 6.48
basis points, respectively. There may be quarterly adjustments to reflect
changes in the assessment bases for the BIF and 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.
The following table sets forth the major components of noninterest expenses for
the quarters ended March 31, 1997, and March 31, 1996:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED
MARCH 31,
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
SALARIES AND EMPLOYEE BENEFITS EXPENSE:
Salaries and payroll taxes........................................ $ 824 $ 806
Employee benefits................................................. 163 156
------ ------
Salaries and employee benefits expense.......................... 987 962
------ ------
NET OCCUPANCY AND EQUIPMENT EXPENSE:
Net occupancy expense............................................. 160 166
Equipment expense................................................. 140 161
------ ------
Net occupancy and equipment expense............................. 300 327
------ ------
OTHER EXPENSES:
Marketing expense................................................. 48 73
Other taxes....................................................... 71 56
Stationery and supplies........................................... 98 50
Contractual services.............................................. 186 217
Insurance including FDIC assessment............................... 20 36
Other............................................................. 173 166
------ ------
Other expenses... .............................................. 596 598
------ ------
Total noninterest expense..................................... $1,883 $1,887
====== ======
</TABLE>
INCOME TAXES:
The Company's effective tax rate declined from 21.7 percent for the first
quarter of 1996 to 20.0 percent for the same period of 1997. Such reduction
resulted from management's continued emphasis on acquiring tax-exempt loans and
investments and in utilizing investment tax credits available from its
investment in a residential housing program designed for the elderly and for
low- to moderate-income families.
The Company has determined that it is not required to establish a valuation
reserve for the deferred tax assets since it is more likely than not that the
net deferred tax assets could be principally realized through carryback to
taxable income in prior years and by future reversals of existing taxable
temporary differences or, to a lesser extent, through future taxable income.
The Company reviews the tax criteria related to the recognition of deferred tax
assets on a quarterly basis.
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) NONE
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 May 12, 1997 /s/ David L. Baker
----------------------- ------------------------------------
David L. Baker
Chief Executive Officer
Date May 12, 1997 /s/ Scott A. Seasock
----------------------- ------------------------------------
Scott A. Seasock
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,636
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,032
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 238,300
<ALLOWANCE> 3,794
<TOTAL-ASSETS> 352,668
<DEPOSITS> 317,804
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,111
<LONG-TERM> 46
0
0
<COMMON> 726
<OTHER-SE> 30,982
<TOTAL-LIABILITIES-AND-EQUITY> 352,668
<INTEREST-LOAN> 4,904
<INTEREST-INVEST> 1,363
<INTEREST-OTHER> 35
<INTEREST-TOTAL> 6,302
<INTEREST-DEPOSIT> 3,433
<INTEREST-EXPENSE> 3,435
<INTEREST-INCOME-NET> 2,867
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,883
<INCOME-PRETAX> 1,322
<INCOME-PRE-EXTRAORDINARY> 1,322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,058
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 7.92
<LOANS-NON> 1,271
<LOANS-PAST> 1,891
<LOANS-TROUBLED> 220
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,944
<CHARGE-OFFS> 241
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 3,794
<ALLOWANCE-DOMESTIC> 3,794
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
