UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1996
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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.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.33 PER SHARE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing sale price: $43,843,599 AT FEBRUARY 3, 1997.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 2,200,080 AT FEBRUARY 3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1996, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 1997 Proxy Statement, are incorporated by
reference in Part III of this Annual Report.
Page 1 of 167
Exhibit Index on Page 36
COMM BANCORP, INC.
FORM 10-K INDEX
PART I PAGE
Item 1. Business................................................. 3
Item 2. Properties............................................... 18
Item 3. Legal Proceedings........................................ 19
Item 4. Submission of Matters to a Vote of Security Holders...... *
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 20
Item 6. Selected Financial Data.................................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 21
Item 8. Financial Statements and Supplementary Data.............. 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... *
PART III
Item 10. Directors and Executive Officers of the Registrant....... 22
Item 11. Executive Compensation................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 30
Item 13. Certain Relationships and Related Transactions........... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 32
SIGNATURES........................................................ 34
EXHIBIT INDEX..................................................... 36
*Not Applicable
COMM BANCORP, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Comm Bancorp, Inc. ("Company") is a Pennsylvania business corporation,
incorporated on May 20, 1983, and is a bank holding company, registered with and
supervised by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). The Company has one wholly-owned subsidiary, Community Bank
and Trust Company ("Community Bank"). The deposits of Community Bank are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Bank
Insurance Fund ("BIF"). The Company's business has consisted of managing and
supervising Community Bank and its principal source of income has been dividends
paid by Community Bank. At December 31, 1996, the Company
had total consolidated assets, deposits and stockholders' equity of
approximately $354.8 million, $320.5 million and $31.3 million, respectively.
During 1996, the Company and Community Bank employed approximately 149 persons
on a full-time equivalent basis.
Community Bank is a Pennsylvania state-chartered commercial bank and a member of
the Federal Reserve System. As of December 31, 1996, Community Bank had ten
branch locations, including its main office in Forest City, Susquehanna County,
Pennsylvania. Community Bank's branch offices are located in the Pennsylvania
counties of Lackawanna, Susquehanna, Wayne and Wyoming.
SUPERVISION AND REGULATION - COMPANY
The Company is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of its
securities. The Company is currently subject to the SEC's rules and regulations
relating to periodic reporting, insider trading reports, and proxy solicitation
materials in accordance with the Securities Exchange Act of 1934 ("Exchange
Act").
The Company is also subject to the provisions of the Bank Holding Company Act of
1956 ("Bank Holding Company Act") as amended, and to supervision by the Federal
Reserve Board. The Bank Holding Company Act will require the Company to secure
the prior approval of the Federal Reserve Board before it owns or controls,
directly or indirectly, more than 5.0 percent of the voting shares or
substantially all of the assets of any institution, including another bank.
A bank holding company is prohibited from engaging in, or acquiring direct or
indirect control of, more than 5.0 percent of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisition of control of a bank
holding company, such as the Company, without prior notice to the Federal
Reserve Board. Control is defined for this purpose as the power, directly or
indirectly, to influence the management or policies of a bank holding company or
to vote 25.0 percent, or 10.0 percent if no other person or persons acting in
concert holds a greater percentage, of the common stock or more of the Company's
common stock.
The Company is required to file an annual report with the Federal Reserve Board
and any additional information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may also
make examinations of the Company and Community Bank. Subject to certain
exceptions, a bank holding company and its subsidiaries are generally prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or service. The
so-called "Anti-tie-in" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any
service to a customer on the condition that the customer provide additional
credit or service to the bank, to its bank holding company, or to any other
subsidiary of its bank holding company or on the condition that the customer not
obtain other credit or service from a competitor of the bank, its bank holding
company, or any subsidiary of its bank holding company. Subsidiary banks of a
bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or any of its subsidiaries, on investments in
the stock or other securities of the bank holding company, and on taking of such
stock or securities as collateral for loans to any borrower.
PERMITTED NONBANKING ACTIVITIES
The Federal Reserve Board permits bank holding companies to engage in
non-banking activities so closely related to banking or managing or controlling
banks as to be a proper incident thereto. While the types of permissible
activities are subject to change by the Federal Reserve Board, the principal
nonbanking activities that presently may be conducted by a bank holding company
without prior approval of the Federal Reserve Board are:
1. Making, acquiring or servicing loans and other extensions of credit for its
own account or for the account of others, such as would be made by the following
types of companies: consumer finance, credit card, mortgage, commercial
finance, and factoring.
2. Operating as an industrial bank, Morris Plan bank or industrial loan
company in the manner authorized by state law so long as the institution does
not accept demand
deposits or make commercial loans.
3. Operating as a trust company in the manner authorized by federal or state
law so
long as the institution does not make certain types of loans or investments or
accept
deposits, except as may be permitted by the Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or financial
advisor to
investment companies and other persons.
5. Leasing personal and real property or acting as agent, broker or advisor in
leasing property, provided that it is reasonably anticipated that the
transaction
will compensate the lessor for not less than the lessor's full investment in the
property and provided further that the lessor may rely on estimated residual
values of up to 100.0 percent of the acquisition cost of the leased property.
6. Making equity and debt investments in corporations or projects designed
primarily to promote community welfare, such as the economic rehabilitation and
development of low-income areas by providing housing, services or jobs for
residents.
7. Providing to others financially-oriented data processing or bookkeeping
services.
8. Subject to certain limitations: (a) acting as an insurance principal, agent
or broker in relation to insurance for itself and its subsidiaries or for
insurance directly related to extensions of credit by the bank holding company
system; (b) acting as agent or broker for insurance directly related to an
extension of credit by
a finance company, that is a subsidiary; and (c) engaging in any insurance
agency activity in a place where the bank holding company or a subsidiary of the
bank holding company has a lending office and that: (1) has a population not
exceeding 5.0 thousand; and (2) has inadequate insurance agency facilities.
9. Owning, controlling or operating a savings association, if the savings
association engages only in deposit-taking activities, lending and other
activities permissible for bank holding companies.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management consulting advice to
nonaffiliated banks and non-bank depository institutions.
12. Selling money orders having a face value of $1.0 thousand or less,
travelers' checks and United States savings bonds.
13. Performing appraisals of real estate and personal property, including
securities.
14. Subject to certain limitations, acting as intermediary for the financing of
commercial or industrial income-producing real estate by arranging for the
transfer of the title, control and risk of such a real estate project to one or
more investors.
15. Subject to certain limitations, providing full-service brokerage and
financial
advisory activities, and selling, solely as an agent or broker for customers,
shares
of investment companies advised by an affiliate of the bank holding company or
providing investment advice to customers about the purchase and sale of shares
of investment companies advised by an affiliate of the bank holding company.
16. Underwriting and dealing in obligations of the United States, general
obligations of states and their political subdivisions, and other obligations
such as
bankers' acceptances and certificates of deposit.
17. Subject to certain limitations, providing by any means, general information
and statistical forecasting with respect to foreign exchange markets, advisory
services
designed to assist customers in monitoring, evaluating and managing their
foreign
exchange exposures, and certain transactional services with respect to foreign
exchange.
18. Subject to certain limitations, acting as a futures commission merchant in
the
execution and clearance on major commodity exchanges of futures contracts and
options
on futures contracts for bullion, foreign exchange, government securities,
certificates of deposit and other money market instruments.
19. Subject to certain limitations, providing commodity trading and futures
commission merchant advice, including counsel, publications, written analyses
and reports.
20. Providing consumer financial counseling that involves educational courses
and
distribution of instructional materials to individuals on consumer-oriented
financial
management matters, including debt consolidation, mortgage applications,
bankruptcy,
budget management, real estate tax shelters, tax planning, retirement and estate
planning, insurance, and general investment management, so long as this activity
does not include the sale of specific products or investments.
21. Providing tax planning and preparation advice such as strategies designed
to minimize tax liabilities and includes, for individuals, analysis of the tax
implications of retirement plans, estate planning and family trusts. For a
corporation, tax planning includes the analysis of the tax implications of
mergers
and acquisitions, portfolio mix, specific investments, previous tax payments and
year-end tax planning. Tax preparation involves the preparation of tax forms
and
advice concerning liability, based on records and receipts supplied by the
client.
22. Providing check guaranty services to subscribing merchants.
23. Subject to certain limitations, operating a collection agency.
24. Operating a credit bureau that maintains files on the past credit history
of
consumers and providing such information to a lender that is considering a
borrower's
application for credit, provided that the credit bureau does not grant
preferential
treatment to an affiliated bank in the bank holding company system.
PENNSYLVANIA BANKING LAW
Under the Pennsylvania Banking Code of 1965 ("Code"), as amended, the Company is
permitted to control an unlimited number of banks. However, the Company would
be
required, under the Bank Holding Company Act, to obtain the prior approval of
the
Federal Reserve Board before it could acquire all or substantially all of the
assets
of any bank, or acquire ownership or control of any voting shares of any bank
other
than Community Bank, if, after such acquisition, it would own or control more
than 5.0 percent of the voting shares of such bank.
INTERSTATE BANKING AND BRANCHING
The following discussion describes those provisions of the Riegle-Neal
Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act") that
would
pertain to the Company. It is not an exhaustive description of all provisions
of the Interstate Banking Act.
In general, the Federal Reserve Board may approve an application by the Company
to
acquire control of, or acquire all or substantially all of the assets of, a bank
located outside of the Commonwealth of Pennsylvania without regard to whether
such
acquisition is prohibited under the law of any state, but subject to certain
state
law restrictions and requirements enumerated in the Interstate Banking Act. The
Federal Reserve Board may approve such application if it finds, among other
things,
that the Company is adequately capitalized and adequately managed. Moreover,
the
Federal Reserve Board may not approve such acquisition if the target bank has
not
been in existence for the minimum period of time, if any, required by such
target
bank's "home" state. The Federal Reserve Board may, however, approve the
acquisition
of the target bank that has been in existence for at least five years without
regard
to any longer minimum period of time required under the law of the "home" state
of the target bank.
Furthermore, the Interstate Banking Act provides that, beginning June 1, 1997,
appropriate federal supervisory agencies may approve a merger of Community Bank
with
another bank located in a different state or the establishment by Community Bank
of a
new branch office either by acquisition or de novo, unless the Commonwealth of
Pennsylvania enacts a law prior to June 1, 1997, allowing an interstate merger
or
expressly prohibiting a merger with an out-of-state bank. The Commonwealth of
Pennsylvania has enacted a law to "opt-in" early to these interstate mergers.
Moreover, the Interstate Banking Act provides that Community Bank may establish
and
operate a de novo branch in any state that "opts-in" to de novo branching. A
"de
novo branch" is a branch office that is originally established as a branch and
does
not become a branch as a result of an acquisition or merger. The Commonwealth
of
Pennsylvania has enacted a law to "opt-in" early to de novo interstate
branching.
As of May 2, 1996, the State Bank Supervisors of the states of Alabama,
Delaware,
Maryland, New Jersey, North Carolina, Pennsylvania and Virginia executed a
Cooperative Agreement that governs the manner in which state-chartered banks
with
branches in multiple states will be supervised. This Cooperative Agreement was
necessitated by the Interstate Banking Act and was drafted to create a level
playing
field for state-chartered banks with respect to supervision and regulation of
branch
offices in a multiple state setting. Specifically, this agreement outlines
general
principles for determining whether home or host state law applies, including the
following: (1) host state law applies to operational issues relating to a branch
located in a host state, including antitrust, community reinvestment, consumer
protection, usury and fair lending laws; (2) the state law of the home state
will
apply to corporate structure issues, such as charter, bylaws, incorporation,
liquidation, stockholders and directors, capital and investments; and (3) bank
powers
issues will be resolved with reference to both home and host state laws.
LEGISLATION AND REGULATORY CHANGES
From time to time, legislation is enacted that has the effect of increasing the
cost
of doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial institutions. Proposals
to
change the laws and regulations governing the operations and taxation of banks,
bank
holding companies and other financial institutions are frequently made in
Congress
and before various bank regulatory agencies. No prediction can be made as to
the
likelihood of any major changes or the impact such changes might have on the
Company
and Community Bank. Certain changes of potential significance to the Company
that
have been enacted or promulgated, as the case may be, by Congress or various
regulatory agencies, respectively, are discussed below.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e., FIRREA, was
enacted
into law in order to restructure the regulation of the thrift industry, to
address
the financial condition of the Federal Savings and Loan Insurance Corporation
and to
enhance the supervisory and enforcement powers of the federal bank and thrift
regulatory agencies. The Federal Reserve Board, as the primary federal
regulator of
Community Bank, is responsible for the supervision of Community Bank. The
Federal
Reserve Board and FDIC have far greater flexibility to impose supervisory
agreements
on an institution that fails to comply with its regulatory requirements,
particularly
with respect to capital requirements. Possible enforcement actions include the
imposition of a capital plan, termination of deposit insurance and removal or
temporary suspension of an officer, director or other institution-affiliated
party.
Under FIRREA, civil penalties are classified into three levels, with amounts
increasing with the severity of the violation. The first tier provides for
civil
penalties of up to $5.0 thousand per day for any violation of law or regulation.
A civil penalty of up to $25.0 thousand per day may be assessed if more than a
minimal
loss or a pattern of misconduct is involved. Finally, a civil penalty of up to
$1.0
million per day may be assessed for knowingly or recklessly causing a
substantial
loss to an institution or taking action that results in a substantial pecuniary
gain
or other benefit. Criminal penalties are increased to $1.0 million per
violation, up
to $5.0 million for continuing violations or for the actual amount of gain or
loss.
These monetary penalties may be combined with prison sentences of up to five
years.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
GENERAL
The FDICIA reformed a variety of bank regulatory laws. Certain of these
provisions are discussed below.
EXAMINATIONS AND AUDITS
Annual full-scope, on-site examinations are required for all FDIC-insured
institutions with assets of $500.0 million or more. For bank holding companies
with $500.0 million or more in assets, the independent accountants of such
companies shall
attest to the accuracy of management's report. Such accountants shall also
monitor
management's compliance with governing laws and regulations. Such companies are
also
required to select an independent audit committee, composed of outside directors
who
are independent of management, to review with management and the independent
accountants the reports that must be submitted to the appropriate bank
regulatory
agencies. If the independent accountants resign or are dismissed, written
notification must be given to the FDIC and to the appropriate federal and state
bank
regulatory agencies.
PROMPT CORRECTIVE ACTION
In order to reduce losses to the deposit insurance funds, the FDICIA established
a format to more closely monitor FDIC-insured institutions and to enable prompt
corrective action by the appropriate federal supervisory agency if an
institution
begins to experience any difficulty. The FDICIA established five capital
categories.
They are: (I) well-capitalized; (II) adequately capitalized; (III)
undercapitalized;
(IV) significantly undercapitalized; and (V) critically undercapitalized. The
overall goal of these new capital measures is to impose more scrutiny and
operational
restrictions on depository institutions as they descend the capital categories
from well-capitalized to critically undercapitalized.
The FDIC, the Office of the Comptroller of the Currency, the Federal Reserve
Board,
and the Office of Thrift Supervision have jointly issued regulations relating
to
these capital categories and prompt corrective action. These capital measures
for prompt corrective action are defined as follows:
A well-capitalized institution would be one that has a 10.0 percent or greater
total
risk-based capital ratio, a 6.0 percent or greater Tier I risk-based capital
ratio, a
5.0 percent or greater Tier I Leverage capital ratio, and is not subject to any
written order or final directive by its regulator to meet and maintain a
specific capital level.
An adequately capitalized institution would be one that meets the required
minimum
capital levels, but does not meet the definition of a well-capitalized
institution.
The existing capital rules generally require banks to maintain a Tier I Leverage
capital ratio of at least 4.0 percent and an 8.0 percent or greater total
risk-based
capital ratio. Since the risk-based standards also require at least half of the
total risk-based capital requirement to be in the form of Tier I capital, this
also
will mean that an institution would need to maintain at least a 4.0 percent
Tier I
risk-based capital ratio. Thus, an institution would need to meet each of the
required minimum capital levels in order to be deemed adequately capitalized.
An undercapitalized institution would fail to meet one or more of the required
minimum capital levels for an adequately capitalized institution. An
undercapitalized institution must file a capital restoration plan and is
automatically subject to restrictions on dividends, management fees and asset
growth.
In addition, the institution is prohibited from making acquisitions, opening new
branches or engaging in new lines of business without the prior approval of its
primary federal regulator. A number of other discretionary restrictions may
also be
imposed on a case-by-case basis, and more stringent restrictions that otherwise
would
apply to significantly undercapitalized institutions may be imposed on an
undercapitalized institution that fails to file or implement an acceptable
capital restoration plan.
A significantly undercapitalized institution would have a total risk-based
capital
ratio of less than 6.0 percent, a Tier I risk-based capital ratio of less than
3.0
percent or a Tier I Leverage capital ratio of less than 3.0 percent, as the case
may
be. Institutions in this category would be subject to all the restrictions that
apply to undercapitalized institutions. Certain other mandatory prohibitions
also
would apply, such as restrictions against the payment of bonuses or raises to
senior
executive officers without the prior approval of the institution's primary
federal regulator. A number of other restrictions may also be imposed.
A critically undercapitalized institution would be one with a tangible equity
(Tier I
capital) ratio of 2.0 percent or less. In addition to the same restrictions and
prohibitions that apply to undercapitalized and significantly undercapitalized
institutions, the FDIC's rule implementing this provision of the FDICIA also
addresses certain other provisions for which the FDIC has been accorded
responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes critically undercapitalized is
prohibited
from taking the following actions without the prior written approval of its
primary
federal regulator: engaging in any material transactions other than in the
usual
course of business; extending credit for highly leveraged transactions; amending
its
charter or bylaws; making any material changes in accounting methods; engaging
in
certain transactions with affiliates; paying excessive compensation or bonuses;
and
paying interest on liabilities exceeding the prevailing rates in the
institution's
market area. In addition, a critically undercapitalized institution is
prohibited
from paying interest or principal on its subordinated debt and is subject to
being
placed in conservatorship or receivership if its tangible equity capital level
is not increased within certain mandated time frames.
At any time, an institution's primary federal regulator may reclassify it into a
lower capital category. All institutions are prohibited from declaring any
dividends, making any other capital distribution or paying a management fee if
it
would result in downward movement into any of the three undercapitalized
categories.
The FDICIA provides an exception to this requirement for stock redemptions that
do
not lower an institution's capital and would improve its financial condition, if
the
appropriate federal regulator has consulted with the FDIC and approved the
redemption.
The regulation requires institutions to notify the FDIC following any material
event
that would cause such institution to be placed in a lower category.
Additionally,
the FDIC monitors capital levels through call reports and examination reports.
DEPOSIT INSURANCE
As a result of the special assessment due on October 1, 1996, and required
by the Deposit Insurance Funds Act of 1996 ("Funds Act"), the Savings
Association
Insurance Fund ("SAIF") was capitalized at the Designated Reserve Rate of 1.25
percent of estimated insured deposits on October 1, 1996. The FDIC has,
therefore,
lowered the rate on assessments paid to the SAIF. Effective January 1, 1997,
the
Funds Act separates the Financing Corporation ("FICO") assessment to service the
interest on its bond obligations from the SAIF and BIF deposit insurance
assessments.
The amount assessed on Community Bank by the FICO will be in addition to any
amount
paid for deposit insurance. FICO assessment rates for the first semi-annual
period
of 1997 were set at 1.3 basis points annually for BIF-assessable deposits (which
are
the type of deposits held by Community Bank) and 6.48 basis points annually for
SAIF-
assessable deposits. The FICO rate on BIF-assessable deposits must be one-fifth
the
rate on SAIF-assessable deposits until the BIF and SAIF are merged, or until
January 1, 2000, whichever occurs first.
REAL ESTATE LENDING STANDARDS
Pursuant to the FDICIA, the Federal Reserve Board and other federal banking
agencies
adopted real estate lending guidelines that would set loan-to-value ("LTV")
ratios
for different types of real estate loans. An LTV ratio is generally defined as
the
total loan amount divided by the appraised value of the property at the time the
loan
is originated or the purchase price, whichever is lower. If the institution
does not
hold a first lien position, the total loan amount would be combined with the
amount
of all senior liens when calculating the ratio. In addition to establishing the
LTV
ratios, the guidelines require all real estate loans to be based upon proper
loan documentation and a recent appraisal of the property.
BANK ENTERPRISE ACT OF 1991
Within the overall FDICIA is a separate subtitle called the Bank Enterprise Act
of
1991 ("Act"). The purpose of the Act is to encourage banking institutions to
establish "basic transaction services for consumers" or so-called "lifeline
depository accounts." The FDIC assessment rate is reduced for all lifeline
depository accounts. The Act establishes ten factors that are the minimum
requirements to qualify as a lifeline depository account. Some of these factors
relate to minimum opening and balance amounts, minimum number of monthly
withdrawals,
the absence of discriminatory practices against low-income individuals, and
minimum
service charges and fees. Moreover, the Housing and Community Development Act
of
1972 requires that the FDIC's risk-based assessment system include provisions
regarding lifeline depository accounts. Assessment rates applicable to lifeline
depository accounts are to be established by FDIC rule.
TRUTH IN SAVINGS ACT
FDICIA also contains the Truth in Savings Act ("TSA"). The Federal Reserve
Board has
adopted Regulation DD under the TSA. The purpose of the TSA is to require the
clear
and uniform disclosure of the rates of interest that are payable on deposit
accounts
by depository institutions and the fees that are assessable against deposit
accounts,
so that consumers can make a meaningful comparison between the competing claims
of
banks with regard to deposit accounts and products. In addition to disclosures
to be
provided when a customer establishes a deposit account, the TSA requires the
depository institution to include, in a clear and conspicuous manner, the
following
information with each periodic statement: (I) the annual percentage yield; (II)
the
amount of interest earned; (III) the amount of any fees and charges imposed; and
(IV)
the number of days in the reporting period. The TSA allows for civil lawsuits
to be
initiated by customers if the depository institution violates any provision or
regulation under the TSA.
REGULATORY CAPITAL REQUIREMENTS
The following table presents the Company's consolidated capital ratios at
December 31, 1996:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Tier I capital................................................................ $ 28,692
Tier II capital............................................................... $ 2,346
Total capital................................................................. $ 31,038
Adjusted total average assets................................................. $345,738
Total adjusted risk-weighted assets(1)........................................ $186,070
Tier I risk-based capital ratio(2)............................................ 15.42%
Required Tier I risk-based capital ratio...................................... 4.00%
Excess Tier I risk-based capital ratio........................................ 11.42%
Total risk-based capital ratio(3)............................................. 16.68%
Required total risk-based capital ratio....................................... 8.00%
Excess total risk-based capital ratio......................................... 8.68%
Tier I Leverage ratio(4)...................................................... 8.30%
Required Tier I Leverage ratio................................................ 4.00%
Excess Tier I Leverage ratio.................................................. 4.30%
<FN>
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I risk-based capital ratio is defined as the ratio of Tier I
capital to total adjusted
risk-weighted assets.
(3) Total risk-based capital ratio is defined as the ratio of Tier I
and
Tier II capital to total
adjusted risk-weighted assets.
(4) Tier I Leverage ratio is defined as the ratio of Tier I capital to
adjusted total average
assets.
</TABLE>
The Company was required to implement, on January 1, 1994, Statement of
Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt
and Equity Securities." For financial capital reporting purposes, SFAS No. 115
changed the composition of stockholders' equity in financial statements prepared
in
accordance with generally accepted accounting principles by including, as a
separate
component of equity, the amount of net unrealized holding gains or losses on
debt and
equity securities that are deemed to be available for sale.
Effective December 31, 1994, the Federal Reserve Board issued a final rule with
respect to the implementation of SFAS No. 115 for regulatory capital reporting
purposes. Under this final rule, net unrealized holding losses on available for
sale
equity securities, but not debt securities, with readily determinable fair
values
will be included when calculating consolidated Tier I capital. All other
unrealized
holding gains and losses on available for sale securities will be excluded from
consolidated Tier I capital.
The Company's ability to maintain the required levels of capital is
substantially
dependent upon the success of its capital and business plans, the impact of
future
economic events on loan customers, the ability to manage its interest rate risk
and
investment portfolio, and control its growth and other operating expenses.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are, and will be, affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and
its agencies. The monetary policies of the Federal Reserve Board have had, and
will
likely continue to have, an important impact on the operating results of
commercial
banks through their power to implement national monetary policy in order to curb
inflation or combat a recession, among other things. The Federal Reserve Board
has a
major effect upon the levels of bank loans, investments and deposits through its
open
market operations in United States government securities and through its
regulations
of, among other things, the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not possible to
predict the
nature and impact of future changes in monetary and fiscal policies.
HISTORY AND BUSINESS - COMMUNITY BANK
Community Bank's legal headquarters is located at 521 Main Street, Forest City,
Pennsylvania 18421. As of December 31, 1996, Community Bank had total assets of
$350.6 million, total stockholders' equity of $28.0 million and total deposits
of $320.5 million.
Community Bank is a community bank that seeks to provide personal attention and
professional financial assistance to its customers. Community Bank is a locally
managed and oriented financial institution established to serve the needs of
individuals and small- and medium-sized businesses. Community Bank's business
philosophy includes offering direct access to its President and other officers
and
providing friendly, informed and courteous service, local and timely decision
making,
flexible and reasonable operating procedures, and consistently-applied credit
policies.
Community Bank is a full-service commercial bank offering a range of commercial
and
retail banking services to its customers. These include personal and business
checking and savings accounts, certificates of deposit and mortgage, home equity
and
commercial loans. In addition, Community Bank provides safe deposit boxes,
travelers' checks, wire transfers of funds and certain personal, corporate and
pension trust services. Community Bank is a member of the MAC system and
provides
customers with access to this automated teller machine network. Community Bank
also
makes credit cards available to its customers. In addition, Community Bank has
a trust department that provides traditional fiduciary services to its
customers.
Community Bank solicits small- and medium-sized businesses located primarily
within
its market area that typically borrow less than $100.0 thousand. In the event
that
certain loan requests exceed Community Bank's lending limit to any one customer,
Community Bank seeks to arrange such loans on a participation basis with other
financial institutions.
MARKET AREA
Community Bank's primary market area comprises Lackawanna, Susquehanna, Wayne
and
Wyoming counties that are located in the Northeast corner of the Commonwealth of
Pennsylvania. The largest municipality in this market area is the city of
Scranton
with a population of approximately 82.0 thousand based upon 1990 census data.
None
of Community Bank's branches are within the city of Scranton. All of the
branches
are located well outside of Scranton in rural or small-town settings. See Item
2 hereof for a description of the location of each branch office.
Community Bank competes with eighteen commercial banks, three thrift
institutions and
twenty-two credit unions, many of which are substantially larger in terms of
assets
and liabilities. In addition, Community Bank has recently experienced increased
competition for deposits from mutual funds and security brokers. Consumer,
mortgage
and insurance companies actively compete for various types of loans. Principal
methods of competing for banking and permitted non-banking services include
price, nature of product, quality of service, and convenience of location.
SUPERVISION AND REGULATION - COMMUNITY BANK
The operations of Community Bank are subject to federal and state statutes
applicable
to banks chartered under the banking laws of the United States, to members of
the
Federal Reserve System, and to banks whose deposits are insured by the FDIC.
Bank
operations are also subject to regulations of the Pennsylvania Department of
Banking ("Department"), the Federal Reserve Board and the FDIC.
The primary federal supervisory authority that regularly examines Community Bank
is
the Federal Reserve Board. The Federal Reserve Board has the authority under
the
Financial Institutions Supervisory Act to prevent a state member bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other things, the
scope
of a bank's business; the investments a bank may make; the reserves against
deposits
a bank must maintain; loans a bank makes and the collateral it takes; the
activities
of a bank with respect to mergers and consolidations; and the establishment of
branches. All banks in Pennsylvania are permitted to maintain branch offices in
any
county of the state. Branches of state-chartered banks may be established only
after
approval by the Department. The Department is required to grant approval only
if it
finds that there is a need for banking services or facilities such as are
contemplated by the proposed branch. The Department may disapprove the
application if the bank does not have the capital and surplus deemed necessary.
Multi-bank holding companies are permitted in Pennsylvania. See sections
entitled "Pennsylvania Banking Law" and "Interstate Banking and Branching."
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding
company or its subsidiaries, on investments in the stock or other securities of
the
bank holding company or its subsidiaries, and on taking such stock or securities
as
collateral for loans. The Federal Reserve Act and Federal Reserve Board
regulations
also place certain limitations and reporting requirements on extensions of
credit by
a bank to principal stockholders of its parent holding company, among others,
and to
related interests of such principal stockholders. In addition, such legislation
and
regulations may affect the terms upon which any person becoming a principal
stockholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
From time to time, various types of federal and state legislation have been
proposed
that could result in additional regulations of, and restrictions on, the
business of
Community Bank. It cannot be predicted whether any such legislation will be
adopted
or how such legislation would affect the business of Community Bank. As a
consequence of the extensive regulation of commercial banking activities in the
United States, Community Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the costs of
doing business.
Under the Federal Deposit Insurance Act, the Federal Reserve Board possesses the
power to prohibit institutions regulated by it, such as Community Bank, from
engaging
in any activity that would be an unsafe and unsound banking practice and in
violation
of the law. Moreover, the Financial Institutions and Interest Rate Control Act
of
1987 ("FIRA") generally expands the circumstances under which officers or
directors
of a bank may be removed by the institution's federal regulator; restricts
lending by
a bank to its executive officers, directors, principal stockholders or related
interests thereof; restricts management personnel of a bank from serving as
directors
or holding other management positions with certain depository institutions whose
assets exceed a specified amount or that have an office within a specified
geographic
area; and restricts management personnel from borrowing from another institution
that
has a correspondent relationship with their bank. Additionally, FIRA requires
that
no person may acquire control of a bank unless the appropriate federal regulator
has
been given sixty days prior written notice and within that time has not
disapproved the acquisition or extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), Community Bank is required to report to the
Internal Revenue Service currency transactions of more than $10.0 thousand or
multiple transactions of which it is aware in any one day that aggregate in
excess of
$10.0 thousand. Civil and criminal penalties are provided under the BSA for
failure
to file a required report, failure to supply information required by the BSA, or
filing a false or fraudulent report.
The Garn-St. Germain Depository Institutions Act of 1982 ("1982 Act"), removes
certain restrictions on the lending powers and liberalizes the depository
abilities
of Community Bank. The 1982 Act also amends FIRA (see above) by eliminating
certain
statutory limits on lending by a bank to its executive officers, directors,
principal
stockholders or related interests thereof, and by relaxing certain reporting
requirements. However, the 1982 Act strengthened FIRA provisions respecting
management interlocks and correspondent bank relationships by management
personnel.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA"), as amended, and the regulations
promulgated to implement the CRA, are designed to create a system for bank
regulatory
agencies to evaluate a depository institution's record in meeting the credit
needs of
its community. Until May 1995, a depository institution was evaluated for CRA
compliance based upon twelve assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to establish new
performance-based standards for use in examining a depository institution's
compliance with the CRA. The revised CRA regulations establish new tests for
evaluating both small and large depository institutions' investments in the
community. A small bank is defined as a depository institution that has total
assets
of less than $250.0 million and is independent or is an affiliate of a holding
company with less than $1.0 billion in assets. Pursuant to the revised CRA
regulations, a depository institution that qualifies as a small bank will be
examined
under a streamlined procedure that emphasizes lending activities. The
streamlined
examination procedures for a small bank became effective on January 1, 1996.
A large depository institution is one that does not meet the small bank
definition
above. A large depository institution can be evaluated under one of two tests:
(1) a three-part test evaluating the institution's lending, service and
investment
performance; or (2) a "strategic plan" designed by the institution with
community
involvement and approved by the appropriate federal bank regulator. A large
depository institution must choose one of these options prior to July 1997, but
may
opt to be examined under one of these two options prior to that time. Effective
January 1, 1996, a large depository institution that opts to be examined
pursuant to
a strategic plan may submit its strategic plan to the bank regulators for
approval.
In addition, the revised CRA regulations include separate rules regarding the
manner
in which "wholesale banks" and "limited purpose banks" will be evaluated for
compliance.
The new CRA regulations will be phased in over a two-year period, beginning
July 1,
1995, with a final effective date of July 1, 1997. Until the applicable test is
phased-in, institutions may be examined under the prior CRA regulations.
On December 27, 1995, the federal banking regulators issued a joint final rule
containing technical amendments to the revised CRA regulations. Specifically,
the
recent technical amendments clarify the various effective dates in the revised
CRA
regulations, correct certain cross references and state that once an institution
becomes subject to the requirements of the revised CRA regulations, it must
comply
with all aspects of the revised CRA regulations, regardless of the effective
date of
certain provisions. Similarly, once an institution is subject to the revised
CRA
regulations, the prior CRA regulations do not apply to that institution.
For the purposes of the revised CRA regulations, Community Bank is a small
depository
institution, based upon financial information as of December 31, 1996. In the
future, Community Bank will be evaluated for CRA compliance using the
streamlined
procedures for a small bank. Under the twelve assessment factors contained in
the
prior CRA regulations, Community Bank received an "outstanding" rating in 1995.
Community Bank expects to receive a rating under the revised CRA regulations
that is consistent with its 1995 rating.
CONCENTRATION
The Company and Community Bank are not dependent for deposits nor exposed by
loan
concentrations to a single customer or to a small group of customers, the loss
of any
one or more of which would have a material adverse effect on the financial
position of the Company or Community Bank.
ITEM 2. PROPERTIES
The Company owns no property other than through Community Bank as follows:
Type of Approximate
Property Location Ownership Square Footage Use
- -------- -------- --------- -------------- ---
1 521 Main Street Owned 7,100 Banking services.
Forest City, PA
2 528 Main Street Leased 4,250 Administrative
Forest City, PA offices.
3 347 Main Street Owned 5,500 Banking services.
Simpson, PA
4 37 Dundaff Street Owned 4,300 Banking services.
Carbondale, PA
5 Route 370 Leased 900 Banking services.
Lakewood, PA
6 57 Main Street Owned 6,000 Banking services.
Nicholson, PA
7 Route 6 Owned 3,500 Banking services.
Tunkhannock, PA
8 Route 106 Owned 1,300 Banking services.
Clifford, PA
9 61 Church Street Owned 3,500 Banking services.
Montrose, PA
10 Route 29 Leased 2,175 Banking services.
Eaton Township, PA
11 Route 307 Leased 1,250 Banking services.
Lake Winola, PA
The administrative offices' property lease expires in 1997 and contains an
option
that allows for an unlimited number of additional terms of six months each. The
Lakewood property lease expires in 2001 and contains an option to renew the
lease for
an additional term of five years. The Route 29 Eaton Township and Lake Winola
property leases expire in 2009. For information with respect to obligations for
lease rentals, refer to Note 6 of the Notes to Consolidated Financial Statements
in
the Company's Annual Report to Stockholders filed at Exhibit 13 hereto and
incorporated in its entirety by reference.
It is management's opinion that the facilities currently utilized are suitable
and adequate for current and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The nature of the Company's and Community Bank's business generates a certain
amount
of litigation involving matters arising in the ordinary course of business.
However,
in the opinion of management of the Company and Community Bank, there are no
proceedings pending to which the Company and Community Bank are a party or to
which
their property is subject, which if determined adversely, would be material in
relation to the Company's and Community Bank's undivided profits or financial
position, nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Company and Community Bank. In
addition,
no material proceedings are pending or are known to be threatened or
contemplated
against the Company and Community Bank by government authorities or others.
ENVIRONMENTAL ISSUES
There are several federal and state statutes that govern the obligations of
financial
institutions with respect to environmental issues. Besides being responsible
for its
own conduct under such statutes, a bank may also be held liable under certain
circumstances for actions of borrowers or other third parties on properties that
collateralize loans held by the bank. Such potential liability may far exceed
the
original amount of the loan made by the bank. Currently, Community Bank is not
a party to any pending legal proceedings under any environmental statute nor is
Community Bank aware of any circumstances that may give rise to liability of
Community Bank under any such statute.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company had 744 stockholders of record and 2,200,080 shares of common stock,
par
value of $0.33 per share, the only authorized class of common stock ("Common
Stock")
outstanding as of February 3, 1997. The Company's Common Stock began trading on
the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National
Market Tier of The NASDAQ Stock Market under the Symbol "CCBP" on June 17, 1996.
Prior to June 17, 1996, the Company's Common Stock was quoted on the
over-the-counter
Electronic Bulletin Board Interdealer System. The following table sets forth
during
the periods indicated: (1) the high and low closing sale prices for a share of
the Company's Common Stock, and (2) dividends on a share of the Common Stock.
Retroactive effect is given in sale prices and dividend information for a
three-for-one stock split effectuated April 1, 1996.
<TABLE>
<CAPTION>
Dividends
High Low Declared
------- ------- ---------
<S> <C> <C> <C>
1995:
First quarter..................................... $13 3/8 $13 3/8 ----
Second quarter.................................... 13 3/8 13 3/8 ----
Third quarter..................................... 13 3/8 13 3/8 $.08
Fourth quarter.................................... $14 $13 3/8 $.13
1996:
First quarter..................................... $14 $14 $.05
Second quarter.................................... 23 3/4 14 .06
Third quarter..................................... 25 1/2 21 1/2 .06
Fourth quarter.................................... $27 1/2 $25 $.11
</TABLE>
The Company has paid cash dividends since 1983. It is the present intention of
the
Company's Board of Directors to continue the dividend payment policy, although
the
payment of future dividends must necessarily depend upon earnings, financial
position, appropriate restrictions under applicable law, and other factors
relevant
at the time the Board of Directors considers any declaration of dividends. Cash
available for the payment of dividends must initially come from dividends paid
by
Community Bank to the Company. Therefore, the restrictions on Community Bank's
dividend payments are directly applicable to the Company. For information with
respect to dividend restrictions of the Company and Community Bank, refer to
Note 15
of the Notes to Consolidated Financial Statements in the Company's Annual Report
to
Stockholders filed at Exhibit 13 hereto and incorporated in its entirety by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto are filed at
Exhibit 13 hereto and are incorporated in their entirety by reference under this
Item 8.
The Company's supplementary data is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 8.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Each director of the Company is elected for a one-year term and until his
successor
is duly elected and qualified. Current directors were elected at the 1996
Annual
Meeting of Stockholders, which was held on June 7, 1996. The following table
contains certain information with respect to the directors and executive
officers of the Company:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
FOR PAST FIVE YEARS
AGE AS OF AND POSITION HELD DIRECTOR OF
FEBRUARY 3, WITH THE COMPANY AND COMPANY/COMMUNITY
NAME 1997 COMMUNITY BANK BANK SINCE
- ---- ---------- --------------------- -----------------
<S> <C> <C> <C>
David L. Baker 51 President and Chief 1988/1993
Executive Officer ("CEO")
of the Company and
Community Bank (as of
April 26, 1995); Senior
Vice President of
Community Bank (as of
January 20, 1993);
President of the First
National Bank of
Nicholson ("FNB Nicholson")
(1987-1993) prior to its
merger with Community Bank
Donald R. Edwards, Sr.(1) 53 Owner, Mountain View Inn 1988/1993
William F. Farber, Sr. 59 President, Farber's 1983/1970
Restaurants; Chairman of the
Boards of Directors of the
Company and Community Bank
Judd B. Fitze 44 Partner, Farr, Davis & Fitze 1995/1993
(attorney-at-law)
John P. Kameen 55 Publisher, Forest City News; 1983/1979
Secretary of the Company
William B. Lopatofsky 65 Owner, Northeast Distributors 1983/1982
and Equipment
J. Robert McDonnell 61 Owner, McDonnell's Restaurant; 1983/1979
Vice President of the Company
Joseph P. Moore, Jr. 70 Retired President, Moore 1988/1992
Motors Inc. (automobile
dealership); President,
Elk Mountain Ski Resort, Inc.
Eric Stephens(1) 45 Auto Dealer, H.L. Stephens 1988/1993
and Son (automobile dealership)
<FN>
(1) Eric Stephens is married to the niece of Donald R. Edwards, Sr.
</TABLE>
PRINCIPAL OFFICERS OF THE COMPANY
The following table sets forth selected information about the principal officers
of
the Company, each of whom is elected by the Board of Directors and each of whom
holds office at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
COMPANY
HELD EMPLOYEE NUMBER OF SHARES AGE AS OF
NAME AND POSITION SINCE SINCE BENEFICIALLY OWNED FEBRUARY 3, 1997
- ----------------- ----- -------- ------------------ ----------------
<S> <C> <C> <C> <C>
David L. Baker 1995 1992 11,304(2) 51
President and CEO
William F. Farber, Sr. 1983 (1) 188,820 59
Chairman of the Board
John P. Kameen 1996 (1) 20,280(3) 55
Secretary
J. Robert McDonnell 1983 (1) 32,544(4) 61
Vice President
Scott A. Seasock 1989 1989 3,005(5) 39
Senior Vice President and
Chief Financial Officer
("CFO")
Thomas E. Sheridan 1989 1985 5,844(6) 40
Senior Vice President and
Chief Operations Officer
("COO")
<FN>
(1) Messrs. Farber, Kameen and McDonnell are not employees of the Company.
(2) Includes 5,040 shares held individually; 4,800 shares held jointly
with his spouse; 732 shares
held under his IRA; and 732 shares held under his spouse's IRA.
(3) Includes 17,280 shares held jointly with his spouse; and 3,000 shares
held jointly with other
individuals.
(4) Held jointly with his spouse.
(5) Includes 825 shares held jointly with his spouse; 1,520 shares held
jointly with his spouse and
sons; and 660 shares held under his IRA.
(6) Includes 1,764 shares held jointly with his spouse; and 4,080 shares
held jointly with his
father.
</TABLE>
PRINCIPAL OFFICERS OF COMMUNITY BANK
The following table sets forth selected information about the principal officers
of
Community Bank, each of whom is elected by the Board of Directors of Community
Bank
and each of whom holds office at the discretion of Community Bank's Board of
Directors:
<TABLE>
<CAPTION>
COMMUNITY
BANK
HELD EMPLOYEE NUMBER OF SHARES AGE AS OF
NAME AND POSITION SINCE SINCE BENEFICIALLY OWNED FEBRUARY 3, 1997
- ----------------- ----- --------- ------------------ ----------------
<S> <C> <C> <C> <C>
David L. Baker 1995 1993(1) 11,304(3) 51
President and CEO
Thomas M. Chesnick 1989 1952 28,200(4) 62
Vice President, Cashier and
Assistant Secretary
Scott A. Seasock 1993 1993(2) 3,005(5) 39
Senior Vice President and
CFO
Thomas E. Sheridan 1989 1985 5,844(6) 40
Senior Vice President and
COO
<FN>
(1) Prior to the merger of FNB Nicholson with Community Bank, Mr. Baker
was employed by FNB
Nicholson from 1987 to 1993 as the President.
(2) Prior to the merger of FNB Nicholson with Community Bank, Mr. Seasock
was employed by FNB
Nicholson from 1987 to 1993 as Senior Vice President and CFO.
(3) See footnote (2) under the above caption entitled "Principal Officers
of the Company."
(4) Includes 17,820 shares held jointly with his spouse; and 10,380 shares
held jointly with various
relatives.
(5) See footnote (5) under the above caption entitled "Principal Officers
of the Company."
(6) See footnote (6) under the above caption entitled "Principal Officers
of the Company."
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires the Company's officers
and
directors, and persons who own more than 10.0 percent of the registered class of
the
Company's equity securities, to file reports of ownership and changes in
ownership
with the SEC. Officers, directors and persons who own more than 10.0 percent of
the
Company's stock are required by the SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Except as follows, based solely on its review of the copies of such forms
received by
it, or written representations from certain reporting persons that no Form 5 was
required for any of those persons, the Company believes that during the period
January 1, 1996, through December 31, 1996, its officers and directors were in
compliance with all filing requirements applicable to them.
On November 14, 1996, Judd B. Fitze, a director of the Company, purchased 300
shares
of the Common Stock at a price of $27.25 per share or $8,175 in the aggregate.
Mr. Fitze failed to report the purchase on Form 5 in a timely manner. Such Form
5 was
required to be filed on or before February 14, 1997. Mr. Fitze filed his Form 5
with the SEC for such purchase on March 6, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for services in
all
capacities to the Company and Community Bank for the fiscal years ended
December 31,
1996 and 1995, to the President and CEO of the Company and Community Bank. No
other
officers' total annual salary and bonus exceeded $100.0 thousand during the
fiscal years reported:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
Other
Name and Annual Restricted All Other
Principal Compensa- Stock Options/ LTIP Compensa-
Position Year Salary($) Bonus($) tion($) Award(s) SARs Payouts tion($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David L. Baker 1996 101,029 10,000 2,992(2) -0- -0- -0- 27,958(3)
President and 1995 84,666 6,000 1,379(2) -0- -0- -0- -0-
CEO (1)
<FN>
(1) Mr. Baker was named President and CEO of the Company and Community Bank
effective April 26, 1995. Prior to such time, Mr. Baker was a Senior Vice President of
Community Bank.
(2) Represents the contribution Community Bank made on behalf of Mr. Baker
pursuant to the
profit sharing plan. Aggregate perquisites and other personal benefits
were less than
10.0 percent of the salary and bonus reported, and therefore, need not be
presented.
(3) Represents the payout from the discontinuance of the Company's deferred
compensation
plan for certain senior management employees.
</TABLE>
PENSION PLAN
Community Bank has a profit sharing plan ("Plan"), which covers all employees
who
have completed 1.0 thousand hours of service, attained twenty-one years of age
and
have been employed by Community Bank for at least one year. The entry date of
an
employee into the Plan is January 1 of the year following the satisfaction of
the
eligibility requirements. Normal retirement age is sixty-five. The normal
retirement benefit is the accumulated account balance of annual contributions,
investment income and forfeitures. The annual contribution is determined by the
Board of Directors each year. Contributions are allocated to each participant
based
on a pro-rata share of compensation covered under the Plan. Investment income
is
allocated to each participant based on a pro-rata share of the account balances
accumulated at the beginning of the year. Forfeitures are allocated to each
participant based on a pro-rata share of compensation covered under the Plan.
If a
participant separates from service prior to retirement, the participant will be
entitled to a portion of the profit sharing account based on years of service
according to the following schedule:
Years of Service Vested Interest
---------------- ---------------
Less than 1 0%
1 10
2 20
3 30
4 40
5 60
6 80
7 or more 100%
A participant is always 100.0 percent vested in pension plan transferred
balances.
During 1996, $66,615 was allocated among the participants' accounts of the Plan.
The
amount contributed by Community Bank in 1996 to the Plan for Mr. Baker, the
President
and CEO of the Company and Community Bank was $2,992. Mr. Baker had ten (10)
years of credited service under the Plan.
COMPENSATION OF DIRECTORS
During 1996, Mr. Baker, an officer of the Company and Community Bank, sat on the
Company's and Community Bank's Board of Directors and various committees of
Community
Bank. Mr. Baker received no fees for his services on such committees. Mr.
Baker
received no fees for his services on the Company's or Community Bank's Board of
Directors.
All members of the Company's Board of Directors, including Mr. Farber, the
Chairman
of the Company, received a fee of $400 per quarter for the first half of 1996.
Effective July 1, 1996, directors received a fee of $500 per month. Aggregate
fees
paid by the Company in 1996 totaled $30,400. Except for Mr. Farber, members of
Community Bank's Board of Directors received a fee of $800 per month for the
first
half of 1996. Effective July 1, 1996, the directors received $1,000 per month.
Mr. Farber, as the Chairman of Community Bank, received a fee of $2,800 per
month for the
first half of 1996. Effective July 1, 1996, Mr. Farber received $3,000 per
month.
Aggregate directors' fees paid by Community Bank in 1996 were $175,200.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Company is responsible for the governance of the
Company and its subsidiary, Community Bank. In fulfilling its fiduciary duties,
the
Board of Directors acts in the best interests of the Company's stockholders,
customers and the communities served by the Company and Community Bank. To
accomplish the strategic goals and objectives of the Company, the Board of
Directors
engages competent persons who undertake to accomplish these objectives with
integrity
and in a cost-effective manner. The compensation of these individuals is part
of the
Board of Directors' fulfillment of its duties to accomplish the Company's
strategic
mission. Community Bank provides compensation to the employees of the Company
and Community Bank.
The fundamental philosophy of the Company's and Community Bank's compensation
program
is to offer competitive compensation opportunities for all employees based on
each
individual's contribution and personal performance. The compensation program is
administered by the Executive Compensation Committee ("Committee") comprised of
two
outside directors and three members of the Company's Board of Directors listed
in the
section "Principal Officers," thereto. The objective of the Committee is to
establish a fair compensation policy to govern executive officers' base salaries
and
incentive plans to attract and motivate competent, dedicated and ambitious
managers
whose efforts will enhance the products and services of the Company, the results
of
which will be improved profitability, increased dividends to our stockholders
and subsequent appreciation in the market value of our stock.
The compensation of the Company's and Community Bank's top executives is
reviewed and
approved annually by the Board of Directors. The top executives whose
compensation
is determined by the Committee include the CEO and all other executive
management.
As guidance for review in determining base salaries, the Committee uses
information
composed from a Pennsylvania bank peer group. This bank peer group is different
than
the peer group utilized for the performance chart. Pennsylvania peer group
banks
have been utilized because of common industry issues and competition for the
same executive talent group.
CEO COMPENSATION
The Board of Directors has determined that the President and CEO's 1996
compensation of $111,029 was appropriate in light of the Company's 1996
performance
accomplishments. There is no direct correlation, however, between the President
and
CEO's compensation and the Company's performance, nor is there any weight given
by
the Committee to any specific individual criteria. Such 1996 compensation was
based
on the Committee's subjective determination after review of all information that
it deemed relevant.
EXECUTIVE OFFICERS
Compensation for the Company's and Community Bank's executive officers is
determined
by the Committee based on its subjective analysis of the individual's
contribution to
the Company's strategic goals and objectives. In determining whether strategic
goals
have been achieved, the Board of Directors considers, among numerous other
factors,
the following: the Company's performance as measured by earnings, revenues,
return
on assets, return on equity, market share, total assets and nonperforming loans.
Although the performance and increases in compensation are measured in light of
these
factors, there is no direct correlation between any specific criterion and the
employees compensation, nor is there any specific weight provided to any such
criteria in the Committee's analysis. The determination by the Committee is
subjective after review of all information, including the above, it deems
relevant.
Total compensation opportunities available to the employees of the Company and
Community Bank are influenced by general labor market conditions, the specific
responsibilities of the individual and the individual's contributions to the
Company's success. Individuals are reviewed annually on a calendar year basis.
The
Company strives to offer compensation that is competitive with that offered by
employers of comparable size in the banking industry. Through these
compensation
policies, the Company strives to meet its strategic goals and objectives to its
constituents and provide compensation that is fair and meaningful to its
employees.
Submitted by the Executive Compensation Committee
-------------------------------------------------
William F. Farber, Sr.
Judd B. Fitze
John P. Kameen
J. Robert McDonnell
Joseph P. Moore, Jr.
STOCK PERFORMANCE GRAPH AND TABLE
Set forth below is a line graph comparing the cumulative total stockholder
return on
the Company's Common Stock, based on the market price change and assuming
reinvestment of dividends, with the cumulative total return of the NASDAQ Stock
Market (US Companies) Index and the NASDAQ Bank Stocks (SIC 6000-6099 US
Companies)
Index during the five-year period ended December 31, 1996. The stockholder
return
shown on the graph and table below is not necessarily indicative of future
performance. The Company's Common Stock began trading on the NASDAQ National
Market
Tier of the NASDAQ Stock Market under the Symbol "CCBP" on June 17, 1996.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Comm Bancorp, Inc.............................. 100.0 102.5 132.1 179.0 190.9 362.5
Total Returns Index for
NASDAQ Stock Market
(US Companies)................................. 100.0 116.4 133.6 130.6 184.7 227.2
Total Returns Index for
NASDAQ Bank Stocks
(SIC 6000-6099 US Companies)................... 100.0 153.3 202.0 204.7 313.4 406.3
<FN>
NOTES:
A. The lines represent monthly index levels derived from compounded daily returns
that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on the previous
trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the
preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/31/91.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL OWNERS
The following table sets forth information, as of February 3, 1997, related to
each
person who owns of record or who is known by the Board of Directors to be the
beneficial owner of more than 5.0 percent of the outstanding Common Stock.
Included
are the name, address, number of shares beneficially owned by such person, and
the percentage of the outstanding Common Stock so owned.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES BENEFICIALLY COMMON STOCK
NAME AND ADDRESS OWNED(1) BENEFICIALLY OWNED
- ---------------- ------------------- ----------------------
<S> <C> <C>
Joseph P. Moore, Jr. 218,760(2) 9.94%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 188,820 8.58%
Crystal Lake Road
R.R. 1, Box 1281
Carbondale, PA 18407
Gerald B. Franceski 129,700(3) 5.90%
Lewis Lake, P.O. Box 88
Union Dale, PA 18470
Robert T. Seamans 128,305(4) 5.83%
P.O. Box 462
Factoryville, PA 18419
<FN>
(1) The shares "beneficially owned" by an individual are determined in
accordance with the
definitions of "beneficial ownership" set forth in the General Rules
and Regulations of the SEC.
Included may be shares owned by or for the individual's spouse and
minor children and any other
relative who has the same home, as well as shares to which the
individual has or shares voting
or investment power or has the right to acquire beneficial ownership
within sixty (60) days
after February 3, 1997. Beneficial ownership may be disclaimed as to
certain of the shares.
(2) Includes 30,240 shares held individually; 6,300 shares held in the
Moore Motors, Inc. Profit
Sharing Plan, an automobile dealership of which he was President; and
182,220 shares held by
Moore & Company, which are held in trust for his various relatives.
(3) Includes 99,700 shares held jointly with his spouse; and 30,000 shares
held jointly in various
combinations with relatives.
(4) Includes 126,470 shares held individually; and 1,835 shares held
individually by his spouse.
</TABLE>
BENEFICIAL OWNERSHIP BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth as of February 3, 1997, the amount and percentage
of
the Common Stock beneficially owned by each director and all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL AMOUNT AND NATURE OF PERCENT
OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1)(2)(3) OF CLASS(4)
- -------------------- ----------------------------- -----------
<S> <C> <C>
David L. Baker 11,304(5) ----
Donald R. Edwards, Sr. 51,816(6) 2.36%
William F. Farber, Sr. 188,820 8.58%
Judd B. Fitze 11,500(7) ----
John P. Kameen 20,280(8) ----
William B. Lopatofsky 25,410(9) 1.16%
J. Robert McDonnell 32,544(10) 1.48%
Joseph P. Moore, Jr. 218,760(11) 9.94%
Scott A. Seasock 3,005(12) ----
Thomas E. Sheridan 5,844(13) ----
Eric Stephens 6,960(14) ----
All Executive Officers and Directors
of the Company as a Group
(9 Directors, 6 Officers,
11 Persons in Total) 576,243 26.19%
<FN>
(1) Does not include any Common Stock held in fiduciary accounts under the
control of the Trust
Department of Community Bank.
(2) See footnote (1) under the above caption entitled "Principal Owners."
(3) Information furnished by the Executive Officers, Directors and the
Company.
(4) Less than 1.0 percent unless otherwise indicated.
(5) See footnote (2) under the above caption entitled "Principal Officers
of the Company."
(6) Includes 500 shares held individually; 100 shares held individually by
his spouse; 50,700 shares
held jointly with his spouse; 300 shares held jointly by his spouse
and daughter; 108 shares
held under his IRA; and 108 shares held under his spouse's IRA.
(7) Includes 9,000 shares held jointly with his spouse; and 2,500 shares
held under his IRA.
(8) See footnote (3) under the above caption entitled "Principal Officers
of the Company."
(9) Held jointly with his spouse.
(10) See footnote (4) under the above caption entitled "Principal Officers
of the Company."
(11) See footnote (2) under the above caption entitled "Principal Owners."
(12) See footnote (5) under the above caption entitled "Principal Officers
of the Company."
(13) See footnote (6) under the above caption entitled "Principal Officers
of the Company."
(14) Includes 5,340 shares held individually; 900 shares held individually
by his spouse; and 720
shares held individually by his children.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described in the paragraphs below, there have been no material
transactions
between the Company and Community Bank, nor any material transactions proposed,
with
any director or executive officer of the Company and Community Bank, or any
associate
of the foregoing persons. The Company and Community Bank have had financial
transactions in the ordinary course of business with directors and officers of
the
Company and Community Bank. The Company and Community Bank intend to continue
to
have banking and financial transactions in the ordinary course of business with
directors and officers of the Company and Community Bank and their associates on
substantially the same terms, including interest rates and collateral, as those
prevailing from time to time for comparable transactions with other persons.
Total
loans outstanding from Community Bank as of December 31, 1996, to the Company's
and
Community Bank's executive officers and directors as a group, members of their
immediate families, and companies in which they had an ownership interest of
10.0 percent or more was $5,005,964, or approximately 16.0 percent of the total
equity
capital of the Company. Loans to such persons were made in the ordinary course
of
business and were made on substantially the same terms, including interest rates
and
collateral, as those prevailing at the time for comparable transactions with
other
persons, and did not involve more than the normal risk of collectibility or
present other unfavorable features.
Community Bank leased its Carbondale branch office from William F. Farber, Sr.,
the
Chairman of the Boards of Directors of the Company and Community Bank. The
lease,
which commenced in October 1988, was scheduled to expire in 1998 and contained
an
option that allowed Community Bank to purchase the property at fair market value
or
renew the lease for two additional terms of five years each. In 1996, lease
payments
to Mr. Farber were $6,020 per month or $72,240 annually. During the first
quarter of
1997, Community Bank purchased such property for the sum of $600 thousand.
Community
Bank received a certified appraisal prior to this transaction from a qualified
commercial realtor stating that the fair market value of such property exceeded
$600 thousand.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The Company's consolidated financial statements and notes
thereto as well as
the applicable reports of the independent certified public accountants are filed
at
Exhibit 13 hereto and are incorporated in their entirety by reference under this
Item 14(a)1.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. The exhibits required by Item 601 of Regulation S-K are included
under Item 14(c) hereto.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the quarter ended
December 31, 1996.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- -------------------------- ----------------------
2 None.
3 None.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended
December 31, 1996.
16 None.
18 None.
21 List of Subsidiaries of the Company.
22 None.
23 None.
24 None.
27 None.
28 None.
99 None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto, duly authorized.
COMM BANCORP, INC.
(Registrant)
BY:/s/ David L. Baker March 10, 1997
David L. Baker, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature and Capacity Date
/s/ David L. Baker March 10, 1997
David L. Baker, President and
Chief Executive Officer/Director
(Principal Executive Officer)
/s/ Donald R. Edwards, Sr. March 10, 1997
Donald R. Edwards, Sr., Director
/s/ John B. Errico March 10, 1997
Comptroller
(Principal Accounting Officer)
/s/ William F. Farber, Sr. March 10, 1997
William F. Farber, Sr.,
Chairman of the Board/Director
/s/ Judd B. Fitze March 10, 1997
Judd B. Fitze, Director
/s/ John P. Kameen March 10, 1997
John P. Kameen, Director
/s/ William B. Lopatofsky March 10, 1997
William B. Lopatofsky, Director
/s/ J. Robert McDonnell March 10, 1997
J. Robert McDonnell,
Vice President/Director
/s/ Joseph P. Moore, Jr. March 10, 1997
Joseph P. Moore, Jr., Director
/s/ Scott A. Seasock March 10, 1997
Scott A. Seasock, Chief Financial
Officer (Principal Financial Officer)
/s/ Eric Stephens March 10, 1997
Eric Stephens, Director
EXHIBIT INDEX
Item Number Description Page
- ---------- ----------- ----
13 Portions of the Annual Report to
Stockholders for the
Fiscal Year Ended December 31, 1996 37
21 List of Subsidiaries of the Company 167
COMM BANCORP, INC.
CONTENTS
INTRODUCTION MANAGEMENT'S DISCUSSION AND
ANALYSIS 1995 VERSUS 1994
39 Consolidated Financial Highlights
137 Overview
40 Dedication 138 Operating Environment
41 President's Message to Stockholders
139 Review of Financial Position
43 New Developments
155 Review of Financial Performance
46 Consolidated Selected Financial Data
DIRECTORS AND OFFICERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
160 Board of Directors and
Corporate Officers
47 Forward-Looking Discussion
161 Advisory Boards
48 Operating Environment
162 Officers
53 Review of Financial Position
163 Glossary of Terms
90 Review of Financial Performance
166 Stockholder Information
CONSOLIDATED FINANCIAL STATEMENTS
101 Independent Auditors' Report
102 Consolidated Statements of Income
103 Consolidated Balance Sheets
104 Consolidated Statements of Changes in
Stockholders' Equity
105 Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
106 Summary of significant accounting policies
115 Cash and cash equivalents
116 Investment securities
121 Loans, nonperforming assets and allowance for loan losses
123 Commitments, concentrations and contingent
liabilities
125 Premises and equipment, net
125 Other assets
126 Deposits
126 Short-term borrowings
128 Long-term debt
129 Employee benefit plans
129 Fair value of financial instruments
129 Income taxes
131 Parent Company financial statements
132 Regulatory matters
136 Summary of quarterly financial information (unaudited)
COMM BANCORP, INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL POSITION:
Assets................................................... $354,812 $350,948 $362,463
Investment securities.................................... 101,994 108,706 152,566
Net loans................................................ 231,859 209,932 190,909
Deposits................................................. 320,456 317,099 316,169
Stockholders' equity..................................... $ 31,256 $ 27,895 $ 22,689
FINANCIAL PERFORMANCE:
Interest income.......................................... $ 25,059 $ 26,467 $ 24,991
Interest expense......................................... 13,550 14,994 12,942
Net interest income...................................... 11,509 11,473 12,049
Net income............................................... 4,200 200 3,325
Cash dividends declared.................................. $ 623 $ 462 $ 455
FINANCIAL RATIOS:
Return on average total assets........................... 1.21% 0.06% 0.95%
Return on average stockholders' equity................... 14.57 0.77 14.26
Tier I capital ratio..................................... 15.42 14.23 13.82
Total capital ratio...................................... 16.68 15.49 15.68
Leverage ratio........................................... 8.30 6.95 7.13
Allowance for loan losses to loans, net.................. 1.67% 1.83% 1.84%
PER SHARE DATA:
Net income............................................... $ 1.91 $ 0.09 $ 1.51
Cash dividends declared.................................. 0.28 0.21 0.21
Stockholders' equity..................................... $ 14.21 $ 12.68 $ 10.31
</TABLE>
Comm Bancorp, Inc. is a bank holding company
incorporated under the laws of Pennsylvania.
Headquartered in Forest City, Pennsylvania, Comm
Bancorp, Inc. serves four counties through ten
community banking offices. Each office interdependent
with the community offers a comprehensive array of
financial products and services to individuals,
businesses, not-for-profit organizations, and
government entities.
COMM BANCORP, INC.
DEDICATION
JOSEPH P. KOCHMER
(1941-1996)
"The best portion of a good man's life is his little, nameless,
unremembered acts of kindness and love"
--Wordsworth
Joseph P. Kochmer was born in Scranton on January 1, 1941. For thirty-seven
years he was the owner and operator of Kochmer Quarries located in Clifford.
He served as a member of the Community Bank & Trust Company Clifford Office
Advisory Board for over ten years.
Someone once said, "The only place where success comes before work is in the
dictionary." It surely applied to Joe Kochmer. Mr. Kochmer was very active
throughout the Clifford area. His civic affiliations included memberships in
the Clifford Volunteer Fire Company, the Harford Masonic Lodge 445, the
Community Rod and Gun Club and the Twilight Golf League at Crystal Lake.
He was also a member of the Clifford Baptist Church where he served as a member
of its Board of Trustees. Joe was also a former school director of the Mountain
View School District.
Joe's commitment to his community was evident during his many years of service
to the Clifford Volunteer Fire Company. He could be found cooking hot dogs and
hamburgers at "Joe's Stand" during the annual firemen's picnic, as well as
donning his apron at their annual chicken barbecue.
One of Joe's greatest loves was that of nature. His membership in the Community
Rod and Gun Club was very special to him. Joe, along with other members of the
club, would spend many hours nurturing and raising trout, which they released
each spring into local streams. Anyone could see the pride and excitement in
his eyes when he spoke about the fish nursery.
Mr. Kochmer was a loving, family man who came from modest means and worked very
hard to build his business while raising his family. Joe was married to the
former Rachel Machell. They were the parents of four children and had five
grandchildren. Their children include a daughter, Machelle Owens, and three
sons, Joseph Paul Jr., Robert and Scott. He is also survived by two brothers,
Edward and Andrew, and seven sisters, Louise Dutka, Catherine Fron, Marie
Aikens, Elizabeth Super, Virginia Hendricks, Josephine Barone and Anna Mae
Sacco.
Joe will be sadly missed by all who knew him and especially by his friends at
Community Bank & Trust Company. He was a fine gentleman who was always willing
to roll up his sleeves and lend a helping hand.
To him we dedicate this annual report.
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS
Dear Stockholders:
While preparing this 1996 Annual Report, we paused to reflect on areas that were
of significant importance to you as a stockholder, the customers we serve, and
the Company. Our largest investment was in new technology. We installed and
implemented a new process called Check Imaging. This project has been completed
and was extremely well received by our customers. Other operating upgrades
included software updates to our mainframe computer. These upgrades allow us to
continue providing our customers the best and most efficient system on the
market.
We achieved record earnings in 1996. Net income increased to $4.2 million or
$1.91 per share. Factors that contributed to this dramatic increase included
increased loan volume, reduced overhead costs, and the strengthened position of
our investment portfolio. These changes resulted in an attainment of a 1.21
percent return on average assets and a 14.57 percent return on average
stockholders' equity.
Total assets increased from $350.9 million at year end 1995 to $354.8 million at
year-end 1996. Total loans increased $41.0 million, adjusted for loans to other
financial institutions, during 1996. Deposits showed a slight increase from
$317.1 million to $320.5 million at December 31, 1995 and 1996, respectively.
For 1996, total stockholders equity increased approximately $3.4 million from
$27.9 million to $31.3 million.
In addition to the financial accomplishments, we also moved forward in other
pertinent areas, including the effectuation of a three-for-one stock split and
the establishment of a listing on the NASDAQ National Market Tier of the NASDAQ
Stock Market. Through these actions, your ownership has been favorably affected
as evidenced by an increase in the market price per share from $14.00 on
April 1, 1996, to a high of $27.50 during the fourth quarter.
During the third and fourth quarters of 1996 ,the employee profit sharing and
payroll deferral saving plans were reorganized. After extensive research it was
decided to offer employees a self-directed 401-K plan whereby they can
personally select from several different vehicles to invest their pension
benefits and payroll deferrals. This differs from the previous plan, which was
primarily invested in fixed income securities. The plan took effect in January
1997.
We will be initiating an extensive customer service and product development
training program for all employees in 1997. This program will assist our
employees to better recognize our customers' needs by giving the employees the
tools to fully meet those needs.
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)
The Board of Directors, executive officers, and staff wish to thank you for your
continued support as we reaffirm our tradition of quality service while
enhancing stockholder's value.
Sincerely,
/s/ David L. Baker
David L. Baker
President and
Chief Executive Officer
COMM BANCORP, INC.
NEW DEVELOPMENTS
Long recognized and appreciated for providing excellent personal attention, as
well as a strong history of community involvement, Community Bank and Trust
Company has been directing its efforts toward building a notable reputation for
advanced technology and convenient services. This past year we have worked
diligently to continue that tradition. Because our customers remain the most
important part of our business.
Banking is a business shaped by confidence. Community Bank and Trust's banking
history, as well as our experienced and knowledgeable financial administrators,
customer service representatives, and executive officers have made that
confidence part of our name. Through the years we have expanded our product
lines and service offerings, while keeping in step with new technology to make
banking as convenient as possible for our customers.
Our newest service addition - CHECK IMAGING - is one more reason our customers
can remain confident and trust in our reputation. As part of this
state-of-the-art technology, checking account customers receive a digital image
of their checks in place of a cumbersome stack of canceled checks. Initiated
this past fall, many Community Bank and Trust patrons have already found this
new service to be extremely valuable.
Check Imaging brings new meaning to the convenience of streamlining monthly
finances and provides many benefits to the customer. The imaged statement,
which contains a printed image of each check, makes it easier for personal and
commercial account customers to organize and balance checking and payroll
accounts. Moreover, Community Bank and Trust will begin offering this imaging
product via CD-ROM to commercial clients in 1997.
By reviewing checks at a glance, Check Imaging helps the client confirm every
check written from an account, simplifies recordkeeping and reference, and helps
realize savings in both time and money.
These clear pictures, four to thirty-six per standard letter-size sheet of
paper, are legally accepted copies of actual checks. Imaged checks are accepted
by the IRS, the Commonwealth of Pennsylvania, and the Federal Reserve System,
among others, as proof of payment.
Customers have the option of receiving imaged checks in the order of date paid,
check number, or dollar amount. Although customers receive only images of the
front of the canceled checks, the back sides are also captured and available
from the bank on request. Original checks are stored in the bank vault for six
months then destroyed.
Research and retrieval of check images is faster and less expensive than the
conventional method of searching for account information on microfilm. The new
system allows the bank to retrieve copies of canceled checks and deposit tickets
within minutes; provides image copy quality that is sharper than microfilm; and
permits statements to be printed and delivered to customers within a shorter
timeframe.
COMM BANCORP, INC.
NEW DEVELOPMENTS (CONTINUED)
As a way of introducing the ease of the new system to its customers, Community
Bank and Trust Company furnished each account holder with a free, convenient
financial organizer notebook in which to store imaged statements.
Check Imaging unquestionably fulfills our mission of providing innovative,
state-of-the-art technology while continuing to provide high quality, personal
service. As imaging technology is being introduced in many financial
institutions nationwide, including the Federal Reserve System, we're proud to be
among the very first to offer this progressive system to our customers. With
convenient services such as Check Imaging, it's easy to see why so many people
have made Community Bank and Trust Company their neighborhood bank.
COMM BANCORP, INC.
NEW DEVELOPMENTS (CONTINUED)
COMMUNITY BANK AND TRUST COMPANY
HELPS CREATE A
NEW GENERATION OF SAVERS
Today, America is facing its strongest economic competition from abroad. One
reason for this challenge is that many countries have higher productivity growth
rates than America. However, they have yet to achieve our level of
productivity, which is still the envy of the world. Productivity determines a
nation's quality of life through opportunities for educational excellence,
stimulating well-paying jobs, and an ever-higher standard of living for all its
citizens. Because there is a direct relationship between growth of a country's
productivity and its savings, we must increase our national savings in order to
increase productivity.
The "SAVE FOR AMERICA" campaign, endorsed by the U.S. Department of Education,
has been designed to raise the personal savings rate in our country and create a
new generation of savers. This voluntary program gives students from
kindergarten through sixth grade the opportunity to open and maintain a savings
account while at school, allowing them to take a step toward adult
responsibility. Students learn the principles of saving, how to manage money,
and the importance of investing money for a return. The program involves the
use of computers, which allows participating students to develop computer
banking skills they will need for the next century. Students also learn the
continued relevance of math skills in daily life.
Wise money management is a skill we all need to develop. That is why Community
Bank and Trust has formed a unique partnership with a local school district to
bring elementary students the "SAVE FOR AMERICA" program. Community Bank and
Trust offered twenty-nine schools and Parent-Teacher Organizations ("PTOs")
throughout our quad-county market area the opportunity to participate in this
worthwhile educational program.
Blue Ridge Elementary of New Milford became the first school to join the
program. Their PTO volunteers were trained by bank personnel to operate the
computer software, as they would be responsible for running the program each
week. The volunteers act as the "Banker" and record all deposits on the
school's computer.
Students are awarded an incentive for each deposit and are encouraged to keep
saving for their future. Deposits are transferred to Community Bank and Trust's
mainframe computer and posted to individual accounts from a computer disk.
Students have the opportunity to make subsequent deposits each Wednesday at the
school or at any branch office of the bank.
COMM BANCORP, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income.......................................... $ 25,059 $ 26,467 $ 24,991 $ 24,094 $ 24,022
Interest expense......................................... 13,550 14,994 12,942 12,000 13,514
-------- -------- -------- -------- --------
Net interest income.................................... 11,509 11,473 12,049 12,094 10,508
Provision for loan losses................................ 300 435 800 1,080 1,285
-------- ------ -------- -------- --------
Net interest income after provision for loan losses.... 11,209 11,038 11,249 11,014 9,223
Noninterest income....................................... 1,387 (3,196) 1,005 2,571 1,961
Noninterest expense...................................... 7,383 8,194 7,949 7,852 7,252
-------- -------- -------- -------- --------
Income before income taxes............................. 5,213 (352) 4,305 5,733 3,932
Provision for income taxes............................... 1,013 (552) 980 1,583 1,137
-------- -------- -------- -------- --------
Net income............................................. $ 4,200 $ 200 $ 3,325 $ 4,150 $ 2,795
======== ======== ======== ======== ========
CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities.................................... $105,294 $123,896 $152,656 $149,672 $129,480
Net loans................................................ 231,859 209,932 190,909 173,313 160,146
Other assets............................................. 17,659 17,120 18,898 16,022 19,654
-------- -------- -------- -------- --------
Total assets........................................... $354,812 $350,948 $362,463 $339,007 $309,280
======== ======== ======== ======== ========
Deposits................................................. $320,456 $317,099 $316,169 $297,235 $280,826
Short-term borrowings.................................... 15,956 9,141 2,000
Long-term debt........................................... 46 3,048 5,050 5,800 3,200
Other liabilities........................................ 3,054 2,906 2,599 2,324 2,454
Stockholders' equity..................................... 31,256 27,895 22,689 24,507 20,800
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity............. $354,812 $350,948 $362,463 $339,007 $309,280
======== ======== ======== ======== ========
PER SHARE DATA:
Net income............................................... $ 1.91 $ 0.09 $ 1.51 $ 1.89 $ 1.27
Cash dividends declared.................................. 0.28 0.21 0.21 0.20 0.20
Stockholders' equity..................................... $ 14.21 $ 12.68 $ 10.31 $ 11.14 $ 9.45
Cash dividends declared as a percentage of net income.... 14.83% 231.00% 13.68% 10.70% 15.31%
Average common shares.................................... 2,200,080 2,200,080 2,200,071 2,199,894 2,199,093
SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets............... 1.21% 0.06% 0.95% 1.30% 0.96%
Net income as a percentage of stockholders' equity....... 14.57 0.77 14.26 17.91 14.00
Stockholders' equity as a percentage of total assets..... 8.30 7.25 6.65 7.26 6.68
Tier I capital as a percentage of adjusted total assets.. 8.30 6.95 7.13 6.84 6.11
Net interest income as a percentage of earning assets.... 3.79 3.48 3.68 4.09 3.95
Loans, net as a percentage of deposits................... 69.83% 62.81% 61.01% 60.84% 59.15%
SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-adjusted assets... 15.42% 14.23% 13.82% 13.52% 12.38%
Total capital as a percentage of risk-adjusted assets.... 16.68 15.49 15.68 15.49 14.12
Allowance for loan losses as a percentage of loans, net.. 1.67% 1.83% 1.84% 1.80% 1.54%
Full-time equivalent employees........................... 149 147 153 137 136
Locations................................................ 10 10 10 10 10
</TABLE>
Note: Per share information reflects the retroactive effects of a 3-for-1 stock
split effective April 1996 and a 4-for-1 stock split effective February 1994.
Average balance was calculated using average daily balances and
includes nonaccrual loans. Tax equivalent adjustment was
calculated using the prevailing statutory rate of 34.0 percent.
Management's Discussion and Analysis appearing on the following pages should be
read in conjunction with the Consolidated Financial Statements beginning on page
101 and Management's Discussion and Analysis 1995 versus 1994 beginning on page
137.
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-K 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 Comm Bancorp, Inc. and its subsidiary, Community Bank and Trust
Company, (collectively, 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.
OPERATING ENVIRONMENT:
The United States economy turned in a remarkably favorable performance in 1996,
the
best among all advanced industrial countries in the world. Although the growth
in
gross domestic product, the total output of goods and services, was modest at
2.5
percent as compared to gains registered in some earlier years of the postwar
period,
it was accompanied by low unemployment, inflation and interest rates. The
national
unemployment rate continued its five-year decline to 5.3 percent in 1996, the
lowest rate since 1973. Such rate was 5.6 percent in 1995.
The continued tightness in the labor markets would ordinarily cause inflationary
tendencies in the form of higher-priced goods and services. However, a number
of
factors including job security concerns, higher worker productivity, and
lower-wage
employment of displaced employees helped to deter inflation. Employment costs
represent two-thirds of the total costs of all goods and services. Most
workers,
especially those unionized, have recently witnessed layoffs and as a result, are
using their bargaining powers to ensure job security rather than wage increases.
In
addition, productivity gains through technological advances have offset any wage
increases that might cause increased delivery costs. Moreover, many workers
displaced from manufacturing plant closures are accepting lower- paying
employment in the growing service sector.
Employee wages and benefits rose a moderate 2.9 percent during 1996. As a
result,
the consumer and producer price indexes, measurements of inflation, rose 3.3
percent
and 2.8 percent, respectively, during 1996. Such moderate increases led the
Federal
Reserve Open Market Committee ("FOMC") to take no monetary policy action
throughout
most of 1996. The FOMC's last interest rate adjustment was on January 31, 1996,
when
it reduced the federal funds target rate, the overnight loan rate between banks,
to
5.25 percent from 5.50 percent, and the discount rate for loans to financial
institutions to 5.00 percent from 5.25 percent. This action was taken to ensure
the
resumption of moderate economic growth after the marked economic slowdown and
business inventory buildup during the fourth quarter of 1995.
Intermediate- and long-term interest rates grew moderately in 1996, despite the
stability in near-term rates, as economic growth had become more vigorous than
anticipated. The adverse effects of such increases were more than offset by the
combination of relative price stability and the easing of lending terms at
banks.
The combination of these positive influences with a level of consumer confidence
not
surpassed in seven years, resulted in higher levels of disposable income and led
to
improvements in consumer and business spending. Such economic conditions were
especially meaningful to the national financial sector as they increased loan
and
deposit volumes. Throughout the United States, aggregate consumer and
commercial
loans increased 20.6 percent and 4.4 percent, respectively, while savings
increased
5.4 percent. In addition, there was a significant increase in residential
mortgage
lending in response to record levels of existing home sales and housing starts.
Forecasts for economic activity in 1997 include continued growth and expansion
of job
opportunities if no serious imbalances arise. The only perceived threat to the
expansion's continuation comes from resource constraints that could cause a
recurrence of inflation. The economy is expected to grow by 2.5 percent with
inflation forecasted at 3.0 percent. Output growth of this magnitude is
expected to
result in little change in the unemployment rate, which is projected to be 5.5
percent. Continued strong economic conditions should increase wealth for
businesses
and individuals. Financial institutions would benefit from such pattern through
increases in loan demand and funding sources. Profitability should rise
uniformly as
a result of increased volumes, lower delinquencies and stability of funds costs.
The output of the economy in Northeastern Pennsylvania was slower than the level
experienced nationally based on smaller income gains and higher unemployment.
The
average hourly earnings of a manufacturing worker in the United States increased
43
cents or 3.7 percent during 1996 as compared to 8 cents or 0.7 percent for a
worker
in the Company's quad-county market area. In addition, the market area served
by the
Company reported higher unemployment figures than the nation and the
Commonwealth of
Pennsylvania. The unemployment rates for the United States and Pennsylvania
were 5.3
percent and 4.4 percent, respectively, for December 1996. Lackawanna,
Susquehanna,
Wayne and Wyoming counties reported unemployment rates for the comparable period
of
5.4 percent, 6.6 percent, 8.4 percent and 7.9 percent, respectively. Moreover,
the
civilian labor force, defined as the total number of individuals employed and
those
actively seeking employment, increased by 2.0 percent for the nation and 3.1
percent
for the Commonwealth during 1996. Such gains are a significant factor in
increasing
economic output due to the limitations in resources based on the low
unemployment
statistics. Contrary to such gains, Northeastern Pennsylvania reported a
decline of 5.8 percent in the number of civilian workers.
Factors that can hamper a region's economic growth include high business costs,
low
employee quality, and an aging infrastructure. Although the Company's market
area is
not the most advantageous in the nation, it has achieved significant goals in
business operating costs due to improvements in technological efficiencies. The
quality of the work force and market area's proximity to major markets, such as
New
York and Philadelphia, are significant influences for businesses seeking to
locate in
the area. The Lackawanna Valley Industrial Highway Project, begun in 1994, has
and
will continue to improve the infrastructure for a majority of the counties
served by
the Company. The improved accessibility should have a positive effect on
economic
development and business activity. As a result of such improvements, management
expects the local economy to grow at a pace similar to the rates anticipated for
the nation.
The strong performance of the economy in 1996, characterized by improved growth,
low
unemployment and minimal inflation, was paramount to the banking industry
enjoying
yet another stellar year. Representative of this success was the nation's top
50
commercial banks posting profits of $36.2 billion for 1996, a 12.8 percent
increase
over the 1995 level. The results of 1996 are especially impressive given the
fact
that they followed another significant increase of 9.0 percent in 1995.
Regional
community banks experienced similar success as median earnings per share
increased
15.0 percent in 1996. Strong revenue growth and improved operating efficiencies
were
the primary reasons for the banking industry's success during 1996. Increased
levels
of interest and noninterest income combined for the growth of revenue.
Specifically,
interest income increases were attributed to the strength in loan demand and
banks
capturing new customers from the fallout of consolidations occurring in the
market.
Many financial institutions increased their loan portfolio yields through the
securitization of consumer and mortgage portfolios and redirection of the
proceeds to
commercial loans that typically yield much higher rates than retail loans.
Another
major influence contributing to the 1996 record revenue levels was the rise in
service charges. On April 1, 1996, national electronic payment networks that
link
Automated Teller Machines ("ATMs") began allowing banks and other ATM operators
to
charge access fees to individuals using machines not owned by their bank. Such
change played a significant role in the banking industry recording a 13.8
percent
increase in noninterest income. In addition to the revenue improvements,
financial
institutions increased net income through operating efficiencies. Many banks
have
increased their investments in cost-effective delivery systems and made
technological
changes to improve back-office operations. Supermarket branches, telephone
banking,
personal computer banking and ATMs are among many of the recent enhancements
made for
delivering products and services to customers. The aggregate investment of the
banking industry for upgrading existing systems amounted to $19.0 billion during
1996. In addition, some financial institutions are outsourcing more services or
forming joint ventures to share technology and processing costs.
Asset quality for national and regional commercial banks did not demonstrate a
significant deterioration during 1996. The only noticeable asset quality
deterioration was either borrower-specific or a result of uncontrolled growth
and did
not represent weakness in overall loan portfolios. Although many banks invested
heavily in commercial loans, most were secured wholly or partially by real
estate.
Such credits pose no immediate threat based on the stability in real estate
values.
During 1996, the merger and acquisition activities of financial institutions
were
subdued as compared to the previous year. The number of mergers and
acquisitions
announced in 1996 was less than in the prior two years but average deal values
continued to rise. For northeast commercial banks, the aggregate number and
amount
of mergers and acquisitions fell from 29, accounting for $36.5 billion in 1995,
to 17
accounting for $1.3 billion in 1996. The value of such deals increased from
15.8
times annual earnings or 2.0 times book value in 1995 to 18.2 times annual
earnings
or 2.2 times book value in 1996. Management expects such activities to occur
more
frequently in 1997 as the Interstate Banking Bill goes into effect in the summer
and
middle-sized institutions attempt to better position themselves by building
strategically relevant geographic franchises.
Another significant occurrence in banking during 1996 was the long-awaited
beginning
of consolidation within the financial services industry. The first significant
event
was the announcement that the independent insurance lobby dropped its
long-standing
opposition to allowing banks to affiliate with insurance companies, thus
removing one
of the biggest hurdles to Glass-Steagall Act reform. Subsequent to year-end
1996,
the Chairman of the House Banking Committee introduced a bill, the "Financial
Services Competitive Act of 1997," that would eliminate barriers between
commercial
banking, investment banking and insurance companies. Such bill, if it becomes
law,
will allow commercial banks to reduce risk through diversification, enhance
efficiencies by improving the delivery system of financial services, increase
opportunities for sources of capital, and add to their overall profitability.
During 1996, the major emphasis of regulatory change for the banking industry
centered around risk as regulatory agencies issued a number of documents
addressing
the subject. On May 24, 1996, the Board of Governors of the Federal Reserve
System
("Federal Reserve Board") issued Supervisory Release ("SR") 96-14, "Risk-Focused
Safety and Soundness Examinations and Inspections," to summarize and place in
context
changes made in the examination process and to suggest areas where further
changes
may occur. The SR presents the various techniques adopted in recent years to
sharpen
the focus on risk in Federal Reserve Board examinations of state member banks,
bank
holding companies, and U.S. branches of foreign banking organizations.
According to
the Federal Reserve Board, the following risk types are to be evaluated at
examinations and inspections: (I) credit risk arising from the potential that a
borrower or counterparty will fail to perform on an obligation; (II) market risk
to a
financial institution's condition resulting from adverse changes in interest
rates,
foreign exchange rates, or equity prices; (III) funding liquidity risk where an
institution is unable to meet obligations due to an inability to liquidate
assets or
obtain adequate funding; (IV) market liquidity risk where an institution cannot
easily offset exposures without significantly lowering market prices due to
inadequate market depth or market disruptions; (V) operational risk coming from
inadequate information systems, internal control breaches, fraud, or unforeseen
catastrophes that may result in unexpected losses; (VI) legal risk from
potential
unenforceable contracts, lawsuits, or adverse judgments that may negatively
affect
operations; and (VII) reputational risk from negative publicity related to an
institution's business practices, true or not, that can lead to a reduced
customer
base, costly litigation, or revenue reductions. More comprehensive examinations
and
inspections that minimize supervisory burdens by better focusing transaction
testing activities result from using a risk-focused approach.
On December 19, 1996, the Federal Financial Institutions Examinations Council
("FFIEC") revised its Uniform Financial Institutions Rating System ("UFIRS") to
address changes in the financial services industry and supervisory policies and
procedures since the system's inception in 1979. Such system took effect on
January
1, 1997. The UFIRS, commonly referred to as the CAMEL rating system, is an
internal
rating system used by federal and state supervisory agencies to evaluate the
soundness of financial institutions on a uniform basis. Under the previous
CAMEL
rating system there were five components considered when assessing an
institution's
soundness: capital adequacy, asset quality, management and administration,
earnings,
and liquidity. The revised system, now known as CAMELS, added an "S" component
to
address market-risk sensitivity. The new component stresses better management
in
foreign exchange exposure, trading risk, and interest rate risk. The Company's
exposure to interest rate fluctuation is the only component that will be of
significance to its compliance. Examiners will look for reliable tools that
measure
an institution's earnings and economic value changes with respect to interest
rate
changes. The new system also reformats and clarifies component rating
descriptions
and definitions, as well as the composite ratings definition, while placing
additional emphasis on all rating components, particularly management and
administration. CAMELS ratings range from one to five with one being the
strongest
and five being the weakest. A financial institution's CAMELS rating has a
direct
effect on its deposit insurance rates and allowable activities. The revisions
to the
system are not expected to have a significant effect on conducting examinations
nor
are they expected to add to the regulatory burden of examined institutions as
the
revisions reflect factors that were previously considered by examiners but were
never really explicitly addressed.
The banking industry is expected to have another good year in 1997 as profit
margins
are expected to be supplemented by strong loan growth, stable net interest
margins,
increased fee income and improved operating efficiencies. Key ingredients for
banks
in securing and maintaining market share will be employees, branches and the
efficient delivery of products purchased from others.
REVIEW OF FINANCIAL POSITION:
During 1996, management focused most of its efforts on implementing its
strategic
plan to transform the Company into a "traditional community bank." This type of
bank
ensures safety to depositors while providing a reasonable rate of return to
stockholders by limiting the risk exposure of its assets. Prior to the
development
of such plan, the Company emphasized a significantly higher degree of
involvement
with investment activities. In implementing such plan, management focused on
the
reallocation of its resources from the reconstitution of the Company's
investment
portfolio into funding loan demand. Another key area of concentration was in
lowering the Company's cost of funds. As a result of these efforts, the Company
did not experience significant growth during 1996.
The Company's total assets grew $3.9 million or 1.1 percent from $350.9 million
at
December 31, 1995, to $354.8 million at December 31, 1996. The average total
asset
growth of the peer group of 35 banks located in Northeastern Pennsylvania was
9.8
percent in 1996. The Company's total assets averaged $359.2 million in 1995 as
compared to $347.3 million in 1996, an $11.9 million decrease. Such reduction
was
primarily attributable to the retirement of borrowed funds with proceeds from
the
sale of certain criticized investment securities during the second and third
quarters
of 1995. The composition of the Company's balance sheet changed dramatically as
evidenced by a shift in the ratios of average investments and federal funds sold
and
average loans to average earning assets from 43.1 percent and 56.9 percent,
respectively, in 1995 to 34.6 percent and 65.4 percent, respectively, in 1996.
Investment securities declined from $108.7 million to $102.0 million at
December 31,
1995 and 1996, respectively. Such reduction was a result of the Company
utilizing
the proceeds from repayments on investments to fund loan demand not fulfilled
through
gains in core deposits. Funds expended on securities during 1996 were invested
in
either short-term U.S. Treasury or U.S. Government agency securities or
intermediate-
term obligations of states and municipalities. The short-term investments were
acquired to fund future loan demand and the tax-exempt municipal securities were
acquired to reduce the Company's tax burden.
Total loans, net of unearned income, increased $22.0 million or 10.3 percent
during
1996. The Company had aggregate loans of $19.0 million to certain large
Pennsylvania-based commercial banks at December 31, 1995. The repayments from
these
temporary loans were reinvested into longer-term commitments with local
commercial
and retail customers. Adjusting for such temporary credit extensions, the loan
portfolio growth was significant at $41.0 million or 21.0 percent during 1996.
Such
growth, the greatest in the Company's history, was primarily attributable to the
introduction of the "Loan Sale" marketing program. Such program included
aggressive
product pricing and increased advertising expenditures. Aggregate loans of
$83.3
million having a weighted-average yield of 8.0 percent were originated during
1996.
The yield on these new loans was lower than the yield on existing loans as a
result
of aggressive product pricing. Accordingly, the effect of such volume
improvements
did not have as significant an effect on the Company's results of operations as
it
would have had if the rates on such loans were consistent with existing loans.
The
average loan growth for the peer group approximated 11.0 percent during 1996.
Despite the marked increase in loan volume, the Company's asset quality improved
compared to year-end 1995 as represented by a reduction in the ratios of
nonperforming loans and nonperforming assets as a percentage of loans, net of
unearned income. Such ratios were 1.44 percent and 1.62 percent, respectively,
at
December 31, 1996, compared to 1.75 percent and 1.96 percent, respectively, at
December 31, 1995. The Company's allowance for loan losses as a percentage of
loans,
net, declined from 1.83 percent at December 31, 1995, to 1.67 percent at
December 31, 1996. Such reduction was attributed to the increased loan volume.
Total deposits increased $3.4 million from $317.1 million at December 31, 1995,
to
$320.5 million at December 31, 1996. The slight increase of 1.1 percent
resulted
from the Company's improved liquidity position and less aggressive pricing
behavior
due to its higher cost of funds compared to the peer group. Management
successfully
reduced the Company's cost of funds from 4.86 percent in 1995 to 4.69 percent in
1996
despite a rise in general market rates. The peer group reported deposit growth
of
7.9 percent in 1996 and an increase in their cost of funds from 4.58 percent in
1995 to 4.69 percent in 1996.
The Company experienced a slight decline in its interest sensitivity and
liquidity
positions from year-end 1995 to year-end 1996. Interest sensitivity, as
measured by
the ratio of cumulative one-year, rate-sensitive assets ("RSA") to
rate-sensitive
liabilities ("RSL"), declined from 0.93 to 0.73 at December 31, 1995 and 1996,
respectively. Both ratios exceeded the acceptable guidelines set forth in the
Company's Asset/Liability Management Policy. In addition, the Company reported
a decline in its liquidity position as evidenced by a reduction in the ratio of
temporary investments to volatile liabilities. Such ratio was 118.9 percent at
December 31, 1995, and 54.0 percent at December 31, 1996. The change in the
interest
sensitivity and liquidity positions was primarily due to management's
reallocation of resources from short-term investments to loans.
Stockholders' equity improved from $27.9 million at December 31, 1995, to $31.3
million at December 31, 1996, a $3.4 million increase. Such increase primarily
came
from strong earnings of $4.2 million, partially offset by dividends of $623 and
a
reduction in the net unrealized holding gain of $216. The key regulatory ratio,
defined as Tier I capital as a percentage of total average assets less goodwill,
increased from 7.0 percent to 8.3 percent at the comparable year-ends of 1995
and 1996, respectively. The Company exceeded all relevant regulatory capital
measurements at December 31, 1996, and was considered well capitalized.
Management accomplished a number of significant nonfinancial goals during 1996.
Such
undertakings included the effectuation of a three-for-one stock split, approval
of
the Company's common stock listing on the National Association of Securities
Dealers
Automated Quotation ("NASDAQ") National Market System ("NMS"), and
implementation of
a document imaging system. The three-for-one stock split, declared during the
first
quarter of 1996, became effective April 1, 1996. Such split fulfilled the
minimum
share requirement for NASDAQ NMS listing and should foster additional liquidity
in the Company's common stock.
On June, 17, 1996, the Company began listing on the NASDAQ NMS, the upper-tier
of the
NASDAQ stock market, as CommBcp under the Symbol "CCBP." The NASDAQ stock
market is
a highly-regulated electronic securities market comprised of competing Market
Makers
whose trading is supported by a communications network linking them to quotation
dissemination, trade reporting and order execution systems. This market also
provides specialized automation services for screen-based negotiations of
transactions, on-line comparison of transactions, and a range of informational
services tailored to the needs of the securities industry, investors and
issuers.
The listing of a company's stock on the NASDAQ stock market typically increases
public interest through publishing bid and ask prices on a consistent basis.
The
actions taken in 1996 with respect to the Company's common stock had a favorable
effect on stockholders' total return. Share price appreciation plus reinvested
dividends, commonly referred to as total return, was 89.9 percent for 1996 as
compared to 6.7 percent for 1995.
During the third quarter of 1996, management reinforced its commitment to
progress by
making the Company the first financial institution in its market area to
introduce a
document imaging system. This technology has not only enhanced the
effectiveness and
efficiency in serving customers but reduced operating costs thus improving
profitability. Plans have already been formulated to expand utilization of
imaging
technology into other customer service areas beginning in 1997. In addition,
management introduced a comprehensive customer service training program for all
employees subsequent to year-end 1996 that will provide existing customers with
service improvements and develop new customer relationships. With respect to
matters
affecting stockholders, the Board of Directors voted on February 19, 1997, in
favor
of establishing a Dividend Reinvestment Plan ("DRP"), scheduled to commence
during
the second quarter of 1997. In addition to creating service efficiencies and
effectiveness, developing and improving product lines, and enhancing
stockholders'
value, management's plans for 1997 include, among others, an ongoing
comprehensive assessment of existing and new market area expansions.
INVESTMENT PORTFOLIO:
The Company's investment portfolio performed well considering the moderately
rising
interest rate environment of 1996. The year began with bullish bond market
sentiment, yet the intermediate-range U.S. Treasury yield curve ended 1996 up
approximately 80 basis points. The long bond ended the year up nearly 70 basis
points to yield 6.64 percent, while the short end of the curve also rose, albeit
to a lesser degree.
The bond market ended a volatile year with mediocre performance as evidenced by
the
Lehman Brothers Aggregate Bond Index, which posted a 4.16 percent total return,
down
from a solid 18.47 percent performance in 1995. The Company's investment
portfolio
is primarily a bond portfolio consisting of government securities, obligations
of
states and municipalities, and mortgage backed securities with an effective
duration
slightly greater than two years. Due to its short duration and a rising
interest
rate environment, the Company's bond portfolio outpaced the general market in
1996 by
generating a total return of 5.03 percent, unadjusted for taxes. Such return on
a tax equivalent basis approximated 5.80 percent.
The rising yield curve scenario of 1996 was neither constant nor gradual
throughout
the year. Bond yields actually fell for two months then rose swiftly through
the
summer only to be deflated by a fall market rally, ending the year up slightly.
As
aforementioned, the FOMC cut the overnight discount rate from 5.25 percent to
5.00
percent on January 31, 1996, and held the rate at that level throughout the
year.
However market volatility ensued, as Wall Street and nervous investors attempted
to
gauge the FOMC's next move. Such volatility represents risk to the Company's
investment portfolio.
As aforementioned, regulators have recently placed increased emphasis on the
quality
of risk management practices within financial institutions. Accordingly,
management
monitors and limits various risk elements inherent in the Company's investment
portfolio, particularly market or interest rate risk; credit risk; liquidity
risk;
reinvestment risk; and "timing" or call risk. The Company's Investment Policy
specifies approved investments and sets limits to risk exposure on both
individual
securities and the overall portfolio. Management utilizes quantitative
techniques,
subjective analysis, regulatory guidance, and its Investment Policy in
evaluating and limiting risk exposure.
Market or interest rate risk, relates to the inverse relationship between bond
prices
and market yields. Such risk is defined as the risk that increases in general
market
rates will result in market value losses. Market risk represents the greatest
risk
to bond investors. Management quantifies and limits such exposure through
"stress
test" modeling and by limiting the duration of individual securities and the
portfolio as a whole. Stress test modeling involves measuring the change in
value of
an investment given an immediate and parallel shift in the yield curve or
"shock."
As suggested by the model, management would expect the investment portfolio to
decline in value by approximately 6.1 percent given a rising rate shock of 300
basis
points. Management deems this level of risk to be acceptable considering the
Company's capital position and overall financial well-being.
Market risk had a slightly adverse effect on the Company's investment portfolio
during 1996. As a result of the surprisingly strong economic expansion and the
ensuing increase in interest rates, the net unrealized holding gain on
investment
securities declined from $780, net of deferred income taxes of $401, to $564,
net of
deferred income taxes of $291, from December 31, 1995, to December 31, 1996.
The
unrealized holding gain was 0.85 percent of amortized cost at December 31, 1996,
which exceeded the average gain of 0.51 percent reported by the peer group.
According to the stress test model, the majority of such market risk resides in
the
Company's state and municipal securities portfolio. The excess of fair value
over
amortized cost for such portfolio declined $292, slightly less than 1.0 percent
of
its value, during 1996. This market risk results from the longer effective
duration
of approximately 4.0 years in the state and municipal securities portfolio as
compared to approximately 0.8 years in the remainder of the portfolio at
year-end
1996. Duration measures the percentage change in price per 100 basis point
change in
yield levels, assuming an immediate and parallel shift in the yield curve. The
tax-exempt feature of such investments serves to reduce their effective duration
and
susceptibility to fair value depreciation relative to taxable securities. The
weighted-average life of the state and municipal securities portfolio was 8.1
years at December 31, 1996.
As a result of the state and municipal securities portfolio's susceptibility to
changes in interest rates, management, in conjunction with an external
investment
advisory group, intends to implement a "trigger" strategy in 1997 for such
investments. The portfolio will be monitored for significant value
deteriorations
resulting from increases in general market rates with appropriate action taken
upon the occurrence of some predefined threshold level of deterioration.
Credit risk, referring to the probability that an issuer is unable to meet
principal
and interest payments on a timely basis, was mitigated through the portfolio's
composition. U.S. Treasury and U.S. Government agencies, including mortgage
backed
securities, accounted for 60.1 percent of aggregate investments at
December 31, 1996.
The majority of the remaining portion of the portfolio consists primarily of
insured
general obligations of states and municipalities that received a rating of
"AAA"
from Moody's or Standard and Poor's rating services. Management considers
repayment
sources, municipal bond insurance, credit quality, and changes in credit ratings
when dealing in the municipal bond sector.
Liquidity risk refers to the ease at which a security can be converted to cash
at or
near its true value. The spread between the bid price and the ask price quoted
by a
dealer serves as a proxy for such risk. Management considers its liquidity risk
exposure to be low based on the high concentration of U.S. Treasury and related
securities, which tend to offer the greatest liquidity relative to other
investment
vehicles. Management pays particular attention to the bid/ask spread on its
holdings
of mortgage backed securities as such securities tend to be less liquid than
U.S. Treasury securities.
Reinvestment risk concerns reinvested cash flows or the "interest on interest"
component of investment returns. As market rates fall, the coupon payments of a
bond
will be reinvested at lower rates thus reducing total returns. Given the
overall
structure of the Company's balance sheet, where liabilities tend to reprice
quicker
than assets, reinvestment risk, or a decline in interest rates, is generally not
as
great a concern as market risk. Based on the interest sensitivity of the
Company's
overall balance sheet, management feels that the reinvestment risk inherent in
the
investment portfolio will not adversely affect the Company's financial
performance.
Many bonds contain a provision that grants the issuer an option to call the
issue, or
part of the issue, before the maturity date. Other securities, such as mortgage
backed bonds, may prepay earlier or extend longer than expected. Such options
allow
the issuer the flexibility to refinance if market rates fall substantially below
The
investment's coupon rate. Call, prepayment and extension risks are essentially
all
timing risk. Timing risk refers to the uncertainty of the timing of cash flows
for a
given investment or portfolio of investments. Timing risk exists in the
Company's
holdings of U.S. Government agencies, obligations of states and municipalities,
and
mortgage backed securities. Call provisions present three disadvantages from
the
Company's perspective: (I) the cash flow pattern of the investment is uncertain;
(II)
the issuer may call the bond when rates fall, thus increasing the Company's
exposure
to reinvestment risk; and (III) the capital appreciation of the bond will be
truncated since a callable bond's price will not rise much above the price at
which the issuer can call the bond.
The Company limits its cash flow timing risk through policy limitations on the
allowable amount of holdings with such risk. Moreover, the Company utilizes
modeling
techniques to monitor its timing risk exposure. One such model utilizes median
dealer prepayment assumptions on mortgage backed securities to project future
principal and interest cash flow streams under multiple interest rate scenarios.
The
model measures both prepayment and extension risk. Based on interest rate
projections of plus or minus 300 basis points at December 31, 1996, the Company
expects to receive a minimum of $829 or a maximum of $2.7 million in mortgage
related security principal repayments throughout the coming year.
Other sources of risk include regulatory and legal, yield curve, inflation,
event,
sector and volatility. Most of these risks are substantially mitigated through
the
techniques discussed above. For example, management feels that its interest
rate
modeling techniques largely reduce inflation risk. Other risks, such as
regulatory
and legal risk, are considered by management in a more subjective manner and one
addressed in Investment Committee or Asset/Liability Management Committee
("ALCO")
meetings. Additionally, the Company's Investment Policy promotes safety and
soundness in the investment portfolio through the establishment of strict
limitations
on the quality, quantity and maximum maturity of each type of security.
Moreover,
various operational procedures enhance controls and assure adherence to the
Investment Policy.
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain
Investments in Debt and Equity Securities," requires investments to be
classified and
accounted for as either held to maturity, available for sale, or trading account
securities based on management's intent at the time of acquisition. Management
is
required to reassess the appropriateness of such classifications at each
reporting date.
The Company classified debt securities as held to maturity when management had
the
positive intent and ability to hold such securities to maturity. Held to
maturity
securities were stated at cost, adjusted for amortization of premium and
accretion of
discount. All investment securities were designated as available for sale at
December 31, 1996, giving management the option to use such securities to
implement
asset/liability strategies in response to changes in interest rates, prepayment
risk,
liquidity requirements, or other circumstances identified by management.
Securities
that are bought and principally held for the purpose of selling them in the
near-
term, in order to generate profits from market appreciation, should be
classified as
trading account securities. The Company discontinued its trading activities
prior to
the fourth quarter of 1994, thus eliminating its trading account classification.
The appropriateness of the Company's accounting classifications for investment
securities became more significant as a result of the Auditing Standards Board
issuance of Statement on Auditing Standards ("SAS") No. 81, "Auditing
Investments,"
during December 1996. SAS No. 81 requires external auditors to ascertain
whether a
company has adopted accounting policies that conform with generally accepted
accounting principles. Furthermore, the auditors must evaluate whether
management
has appropriately classified investment securities in accordance with its stated
intent. The auditors will be required to examine evidence such as written and
approved records of investment strategies and investment activities,
instructions to
portfolio managers, and minutes of meetings of the Board of Directors or the
Investment Committee. The effective date of SAS No. 81 is for audits of
financial
statements for periods ending on or after December 15, 1997, with earlier
application permitted.
The following table sets forth the carrying values of the major classifications
of
securities as they relate to the total investment portfolio over the past five
years:
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------------- ---------------- --------------- -------------- -------------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities........ $ 12,042 7.89% $13,027 8.96% $ 27,956 25.28%
U.S. Government agencies........ 36,993 24.25 29,306 20.16 3,730 3.37
State and municipals............ 20,616 13.51 20,000 13.75 13,065 11.82
Mortgage backed securities...... 38,015 24.92 28,042 19.29 21,339 19.30
Other securities................ 1,305 0.90 3,125 2.83
-------- ------ ------- ------ -------- ------ ------- ------ -------- ------
Total held to maturity........ 107,666 70.57 91,680 63.06 69,215 62.60
--------- ------ ------- ------ -------- ------ ------- ------ -------- ------
Available for sale:
U.S. Treasury securities........ $ 35,619 34.92% $ 43,751 40.25% 3,366 2.21 2,995 2.06
U.S. Government agencies........ 18,606 18.24 26,213 24.11 7,283 4.77 5,959 4.10
State and municipals............ 38,295 37.55 30,512 28.07
Mortgage backed securities...... 7,058 6.92 6,154 5.66 29,444 19.30 41,854 28.78 41,357 37.40
Other securities................ 2,416 2.37 2,076 1.91 4,807 3.15 2,912 2.00
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total available for sale...... 101,994 100.00 108,706 100.00 44,900 29.43 53,720 36.94 41,357 37.40
-------- ------ -------- ------ -------- ------ ------- -------
Total....................... $101,994 100.00% $108,706 100.00% $152,566 100.00%$145,400 100.00% $110,572 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The investment portfolio was less prominent with respect to the Company's
financial
position in 1996. Average investments declined from 37.4 percent of average
assets
in 1995, to 31.7 percent in 1996. Such reduction was in response to management
transforming the Company's balance sheet to a more traditional community bank
structure, favoring loans over investments. In comparison, the peer group held
33.6
percent of its average assets in investment securities. During 1994, the
Company's investment portfolio comprised 44.8 percent of average assets.
As a result of the reconstitution of the Company's investment portfolio in the
second
and third quarters of 1995, management has not reestablished a held to maturity
classification. The transfer of held to maturity securities to available for
sale
called into question or "tainted" management's intent. In accordance with the
Financial Accounting Standard Board's ("FASB") Special Report, "A Guide to
Implementation on Statement No. 115 on Accounting for Certain Investments in
Debt and
Equity Securities," after securities are reclassified to available for sale in
response to a "taint", an enterprise is prohibited from classifying debt
securities
as held to maturity until such time when management could reestablish
credibility of
its classification policies. Management believes it can credibly assess its
intent
and ability to classify purchases as held to maturity and to transfer securities
into
a held to maturity portfolio. It believes circumstances surrounding the 1995
transfer to be a one-time event as they resulted from the prior investment
practices and actions that significantly exposed the Company to interest rate
risk.
Specifically, the prior investment practices and actions included those that are
referred to as unsuitable pursuant to the Federal Reserve Board's Supervisory
Policy
Statement on Securities Activities effective February 10, 1992, and revised
April 15,
1994, and the Federal Reserve Board's Supervisory Policy Statement on Structured
Notes effective September 21, 1995. The Company's Investment Policy, as
approved by
the Board of Directors on August 30, 1995, specifically prohibits any such
activities, including option and derivative transactions, in the future.
The Company continues to classify its entire investment portfolio as available
for
sale. Such classification affords the Company greater flexibility in its
asset/liability management strategies. Additionally, such classification
simplifies
the decision-making process by aligning accounting methods with the
asset/liability
risk management objective of protecting the Company's economic net worth. A
trend
toward available for sale classification is also evident in the peer group, as
90.3
percent of securities were classified as available for sale at December 31,
1996, an
increase from 87.7 percent at December 31, 1995. Management does not anticipate
classifying any of its investments as held to maturity in the near term.
Proceeds from the sale of securities amounted to $1.5 million and $87.1 million
in
1996 and 1995, respectively. The restructuring of the investment portfolio
accounted
for such proceeds in 1995. The 1996 investment sales consisted of four
variable-
rate, collateralized mortgage obligations ("CMOs"). Such decision by the
Investment
Committee resulted from their reassessment of these investments' appropriateness
with
respect to their structure, composition and characteristics in line with future
investment goals. The Company recognized net losses of $58 and $4,393 in 1996
and 1995 respectively, related to such sales.
Repayments from investment securities totaled $25.2 million in 1996 and $4.9
million
in 1995. The level of repayments increased as a function of management's
establishment of a short-term "liquidity ladder" with the proceeds from the
investment portfolio's reconstitution. Management has constructed a short-term
laddered U.S. Treasury securities portfolio that assists the Company in meeting
its
liquidity needs by structuring principal maturities at regular intervals. A
large
portion of such proceeds was directed toward funding loan growth with the excess
reinvested in short-term securities to satisfy future credit demand. For each
of the
next 21 months, at least $500 is scheduled to mature from this portfolio.
Investment
purchases amounted to $20.2 million and $44.2 million in 1996 and 1995,
respectively.
Invested proceeds were placed in short-term U.S. Treasury and U.S. Government
agency
securities and intermediate-term obligations of states and municipalities, in
conformity with a "barbell" investment strategy. Short-term investments will
provide
liquidity, assuring necessary funding for future loan demand, whereas purchases
of
tax-exempt municipal obligations will lower the Company's effective tax rate.
The
Company expects investment maturities of $25.5 million and $29.7 million in the
next
two years. Management expects to continue following such a barbell investment
strategy through redirecting excess funds not utilized in lending to investments
in
short-term U.S. Government securities and intermediate-term, state and municipal
obligations.
The tax equivalent yield on the investment portfolio in 1996 was relatively
unchanged
from the 6.4 percent level of 1995. U.S. Treasury securities and state and
municipal
bonds comprised 72.5 percent of the investment portfolio at December 31, 1996,
versus
68.3 percent at December 31, 1995. As aforementioned, the credit risk inherent
in
the investment portfolio is limited. Except for U.S. Treasury securities and
U.S.
Government agencies, there were no securities of any individual issuer that
exceeded
10.0 percent of the Company's stockholders' equity at December 31, 1996 or 1995.
All
of the investment securities in the Company's portfolio are considered
"investment
grade," receiving a rating of "Baa" or higher from Moody's or "BBB" or higher
from
Standard and Poor's rating services, except for $2,416 of tax-exempt obligations
of
local municipalities, at December 31, 1996. Investment securities with an
amortized
cost of $35,099 and $33,997 at December 31, 1996 and 1995, respectively, were
pledged
to secure deposits, to qualify for fiduciary powers, and for other purposes
required
or permitted by law. The fair value of such securities was $34,968 and $34,050
at December 31, 1996 and 1995, respectively.
The following table sets forth the maturity distribution of the amortized cost,
fair
value and weighted-average tax equivalent yield of the available for sale
portfolio
at December 31, 1996. The weighted-average yield based on amortized cost has
been
computed for state and municipals on a tax equivalent basis using the statutory
tax
rate of 34.0 percent. The distributions are based on contractual maturity with
the
exception of mortgage backed securities, CMOs and equity securities. Mortgage
backed
securities and CMOs 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 years 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
-------------------------------------------------------------------------------
DECEMBER 31, 1996 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.... $15,034 5.62% $20,643 5.71% $ 35,677 5.67%
U.S. Government agencies.... 8,390 4.64 10,446 4.80 18,836 4.73
State and municipals........ 1,130 5.36 3,903 6.51 $6,150 8.50% $26,509 7.96% 37,692 7.82
Mortgage backed securities.. 923 6.76 5,841 6.35 286 6.26 7,050 6.40
Equity securities........... 1,884 5.78 1,884 5.78
------- ------- ------ ------- --------
Total..................... $25,477 5.33% $40,833 5.65% $6,436 8.40% $28,393 7.82% $101,139 6.35%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $15,020 $20,599 $ 35,619
U.S. Government agencies.... 8,324 10,282 18,606
State and municipals........ 1,131 3,918 $6,404 $26,842 38,295
Mortgage backed securities.. 929 5,891 238 7,058
Equity securities........... 2,416 2,416
------- ------- ------ ------- --------
Total..................... $25,404 $40,690 $6,642 $29,258 $101,994
======= ======= ====== ======= ========
</TABLE>
As a result of successfully implementing the reconstitution plan during 1995,
the
Company's investment portfolio contained no high-risk CMOs, as defined in the
Federal
Reserve Board's Supervisory Policy Statement on Securities Activities at
December 31,
1996 or 1995. Such securities are structured mortgage backed securities that at
the
time of purchase, or at a subsequent testing date, meet any of the average life
or
interest sensitivity tests. A security is classified as a high-risk mortgage
security if it meets any of the following tests: the mortgage product has an
expected
weighted-average life of greater than ten years; the expected weighted-average
life
of the product extends by more than four years or shortens by more than six
years,
assuming interest rate shocks of plus or minus 300 basis points; or the
estimated
change in price of the product is more than 17.0 percent given similar rate
shocks.
The test applies to the Company's CMOs while non-CMO products, such as pooled
mortgage backed securities, are excluded. None of such Federal Reserve Board
defined
high-risk securities met the criteria for high-risk, nonequity CMOs as defined
in
Issue 2 of FASB's Emerging Issues Task Force ("EITF") Issue No. 89-4,
"Accounting for
a Purchased Investment in a Collateralized Mortgage Obligation Instrument or in
a Mortgage Backed Interest-Only Certificate." EITF Issue No. 89-4 defines
high-risk,
nonequity CMOs as those that have the potential for loss of a significant
portion of
their original investments due to changes in interest rates, prepayment rate of
the
assets of the CMO structure, or earnings from temporary reinvestment of cash
collected by the CMO structure but not yet distributed to the holders of its
obligations. The Company held $4.4 million of CMOs at December 31, 1996.
None of
such securities failed any of the high-risk tests at December 31, 1996.
Moreover,
the possibility of any such security failing any of the high-risk tests at some
future date is unlikely. For example, the longest weighted-average life of any
CMO
product held by the Company was three years at December 31, 1996. Additionally,
the
greatest percentage change in weighted-average life was 1.2 percent, given a
rate
shock in either direction. Finally, the most volatile CMO held by the Company
exhibited a percentage price change of no more than 7.3 percent in the stress
test.
The Company sold the majority of its holdings of structured notes during the
1995
sale of certain available for sale securities. As a result, the carrying value
of
structured notes totaled $2.9 million at December 31, 1996 and 1995. After
receiving
a consensus opinion from external investment management consultants and review
by
regulatory agencies, management decided to continue to hold three structured
notes
having maturities of less than three years at December 31, 1995. Specifically,
such
securities include a dual-index floater, a delevered floater, and a multi-step
bond.
Each has a carrying value of approximately $1.0 million. For information with
respect to accounting considerations and treatment of such instruments, refer to
Note 3 of the Notes to Consolidated Financial Statements.
The Company has had no dealings in derivative financial instruments since it
discontinued its writing of covered option contracts on U.S. Treasury securities
during the fourth quarter of 1994. Such instruments were the Company's only
involvement in derivatives according to SFAS No. 119, which excludes mortgage
backed
securities from its definition. The Company's 1995 Investment Policy, as
amended,
prohibits transactions involving high-risk CMOs, structured notes and derivative
instruments.
LOAN PORTFOLIO:
Except for major money center financial institutions that have a higher
percentage of
their loan portfolios invested in commercial activities, loans to finance
one-to-four
family residential properties account for the predominant portion of lending
activities for most banks. The housing market and economic conditions affecting
it
are especially significant to the Company's current and future financial
viability as
residential mortgage lending accounts for approximately two-thirds of its
aggregate lending activities.
For 1996, national residential investment spending rose 4.0 percent, reversing a
decline from the previous year. This growth was aided by favorable weather
conditions, affordable interest rates and improved national economic growth.
Housing
provided a key source of the nation's economic strength in 1996. For the year,
new
homes sold totaled 758 thousand, the largest number since 1978, with the
northeast
region of the country experiencing the greatest increase at 36.4 percent. Sales
of
previously-owned homes also rose sharply to over 4.1 million, breaking an
eighteen-
year record. In addition, housing starts for 1996 moved in a favorable
direction
rising by 8.9 percent for the year nationally and 11.2 percent in the Northeast.
Starts for new homes and apartments increased from 1.35 million units in 1995 to
1.47
million units in 1996. Of these new starts, 1.16 million were for new
single-family
dwellings, marking a 7.8 percent increase over the 1995 figure. The median
selling
prices on new and existing homes rose in 1996 compared to 1995 from $133.9 and
$112.9, respectively, to $145.0 and $118.0, respectively.
Interest rates on thirty-year mortgages also showed a steady increase throughout
1996
as they went from 7.0 percent in January to 7.6 percent in December. Despite
these
increases, housing purchases remained very affordable due to the improving
economic
conditions prevalent throughout 1996. Low mortgage rates, strong job growth,
and
high consumer confidence are all reasons to believe there will be continued
strength
in housing expenditures. Housing plays a key role in the national economy as it
influences employment, manufacturing of building materials, and sales of
products used to equip and furnish homes.
Economic conditions in the Company's market area were also favorable for
mortgage
lending. In the Company's quad-county market area, average annual property
taxes amount to approximately one-half of the average experienced nationally.
Additionally, Northeastern Pennsylvania is rated as the second most affordable
area
to live in the Commonwealth with its metropolitan area also ranked second among
areas
of similar populations across the nation. Finally, according to a nationwide
price
comparison survey the Company's market area is ranked nineteenth in the United
States
in terms of affordable housing. For the area, an average corporate transfer
home,
defined as a single-family home with four bedrooms, a family room, two and
one-half
bathrooms, a two-car garage, and 2,200 square feet, sold for an average of $130.
On a national level this average was $206.
Business lending in the United States also enjoyed the benefits of a strong
economy
in 1996. Encouraged by the prospects of sustained economic expansion and low
inflation, banks displayed a large appetite for business obligations and
appeared
willing to ease compensation requirements for the risk entailed. This easing of
standards led to a 4.5 percent increase in commercial and industrial loans
outstanding as they rose from $536.0 trillion at year-end 1995 to $560.0
trillion at year-end 1996.
With respect to the Company's commercial loan practices, it was ranked second by
the
U.S. Small Business Administration's Office of Advocacy among Pennsylvania banks
with
assets between $300.0 million and $500.0 million for its "small business
friendly"
lending activities. Five criteria are used in ranking banks. They include:
(I) the
ratio of small business loans of less than $250 to assets; (II) the ratio of
small
business loans to total business loans; (III) the ratio of small business loans
to
total deposits; (IV) the total dollar amount of business loans; and (V) the
total number of business loans outstanding.
Contrary to the easing of standards for business lending, national conditions
for
consumer lending tightened. Such tightening came in response to banks reacting
to
the rising volume of credit card delinquencies and charge-offs experienced
throughout
the year. Despite such action by financial institutions, outstanding consumer
loans
rose to $1.23 trillion at year-end 1996 from $1.02 trillion for the same period
of
1995. Such increase resulted from consumers using lower-costing home equity
loans in place of higher-costing installment products.
Loans, net of unearned income, were $235.8 million at December 31, 1996, an
increase
of $22.0 million, or 10.3 percent, over the volume reported at December 31,
1995.
Such increase, adjusted for short-term credit extensions to other financial
institutions, would have approximated $41.0 million in 1996. The Company had
aggregate commercial loans of $19.0 million to certain large Pennsylvania-based
commercial banks at December 31, 1995. The Company had no such loans at
year-end
1996. The increase in aggregate loan demand, after considering such adjustment,
can
be primarily explained by a rise in the volume of loans to finance one-to-four
family
residential properties of $27.6 million and those to finance commercial and
industrial enterprises of $9.2 million. Loans, net of unearned income, as a
percentage of total earning assets were 69.1 percent and 63.3 percent at
December 31,
1996 and 1995, respectively. Such material increase resulted from a combination
of
favorable borrowing conditions for consumers and management placing stronger
emphasis
on fulfilling its strategic goal. During 1996, the peer group's average loans
accounted for 64.0 percent of average assets as compared to the Company's ratio
of
63.0 percent. Management expects loan demand to mirror that of 1996 based on
its
renewed emphasis on making loans a more prominent component of the Company's
asset
mix. However, demand could suffer if interest rates climb or local employment
conditions deteriorate.
The Company's volume of loans with predetermined interest rates increased $16.0
million and represented 79.9 percent of the portfolio while those bearing
floating or
adjustable interest rates rose $6.0 million and represented 20.1 percent of the
portfolio at December 31, 1996. Customers, in protecting against a rise in
interest
rates, opted for fixed-rate products as opposed to variable-rate products. The
tax
equivalent yield on the loan portfolio declined from 8.8 percent in 1995 to 8.6
percent in 1996. Such decrease primarily came during the second and third
quarters
of 1996 when management's aggressive product pricing through its "Loan Sale"
marketing efforts reduced rates to their lowest point for 1996 thus initiating
increased loan demand and leading existing customers to refinance. Rates
increased
for the final quarter of 1996 as the Company became less aggressive in its
product
pricing, which led to loan yields that approached 1995 levels. For the year,
the
Company's volume of refinanced residential mortgages increased significantly
from
$9.5 million in 1995 to $23.1 million in 1996 as customers with existing loans
took
advantage of the Company's favorable interest rate offerings. Management
expects
loan yields to remain level or rise slightly during 1997 as a result of
intensified pressure in competing for deposits.
The composition of the loan portfolio changed during 1996 primarily due to the
favorable conditions for mortgage lending and the removal of short-term credit
extensions made to commercial banks. Commercial loans declined $9.8 million
during
1996 and represented 13.5 percent of loans, net of unearned income. Excluding
the
effects of the $19.0 million in repayments received from commercial bank loans,
such
segment of the loan portfolio would have experienced an increase of $9.2 million
during 1996. The Company experienced a $1.9 million rise in consumer loans from
$19.3 million at December 31, 1995, to $21.2 million at December 31, 1996.
Although
the Company reported a 10.0 percent increase in consumer credit, it lagged the
20.6
percent increase witnessed by commercial banks throughout the nation. The
favorable
mortgage lending conditions for 1996 resulted in loans to finance real estate
taking
a more prominent position in the Company's loan mix at approximately 77.5
percent of total loans outstanding from approximately 71.5 percent a year
earlier.
Based on the Company's asset/liability simulation model, management feels
confident
that it can facilitate loan demand through payments and prepayments on
investments
and loans, and increases in core deposits. Management expects to receive
approximately $50.8 million from repayments on loans and investment securities
during
1997. In the event an unforeseen increase in loan demand arises during 1997,
management could facilitate such demand by aggressively competing for deposits
or
utilizing various credit products available through the Federal Home Loan Bank
of Pittsburgh ("FHLB-Pgh").
At December 31, 1996, the Company had no concentrations of loans exceeding 10.0
percent of total loans, excluding locational concentrations, to individual or
multiple borrowers engaged in similar activities that would cause them to be
similarly affected by changes in economic or other conditions. The Company
limits
its exposure to concentrations of credit risk by the nature of its lending
activities
as approximately 61.9 percent of total loans outstanding are secured by
residential
properties. The average mortgage outstanding on a residential property was
$36.2 at
December 31, 1996. The Company maintains a policy restricting the loan-to-value
ratio at 80.0 percent. The loan portfolio does not consist of any form of
credit
involving highly-leveraged transactions, defined as financing transactions that
involve the buyout, acquisition or recapitalization of an existing business and
include credits extended to highly-leveraged industries.
In the normal course of business, the Company is a party to financial
instruments
with off-balance sheet risk to meet the financing needs of its customers. Such
instruments involve, to varying degrees, elements of credit and interest rate
risk in
excess of the amount recognized in the financial statements. Management does
not
anticipate that losses, if any, which may occur as a result of funding
off-balance
sheet commitments would have a material adverse effect on the Company's results
of operations or financial position.
The Company's involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit, unused portions of home equity and credit card lines, and
commercial
letters of credit is represented by the contractual notional amounts of those
instruments. Commitments to extend credit are agreements to lend to a customer
as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and
may require payment of a fee. Commercial letters of credit are conditional
commitments issued by the Company to support customers in the purchase of
commercial
goods. Such letters of credit are automatically renewable upon their
anniversary date unless cancelled prior to such date at the option of the
Company.
The Company employs the same credit policies and requirements in making
off-balance
sheet credit commitments as it does for on-balance sheet instruments. Provision
for
loan losses, if any, is included in the Company's allowance for loan losses. No
provision was deemed necessary at December 31, 1996 or 1995. Such commitments
are
generally issued for one year or less and often expire unused in whole or part
by the
customer. The amount of collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include property,
plant
and equipment, primary residential properties, and to a lesser extent, income-
producing properties. The Company's exposure to such commitments was $10.9
million at December 31, 1996, and $9.6 million at December 31, 1995.
The following table sets forth the composition of the loan portfolio at year-end
for the past five years:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others.. $ 31,744 13.46% $ 41,593 19.45% $ 29,419 15.13% $ 22,633 12.82% $ 21,754 13.38%
Real estate:
Construction.................... 3,698 1.57 1,014 0.47 2,771 1.42 5,079 2.88 4,980 3.06
Mortgage........................ 179,134 75.97 151,926 71.05 138,379 71.15 125,848 71.31 112,544 69.20
Consumer, net..................... 21,227 9.00 19,302 9.03 23,916 12.30 22,922 12.99 23,365 14.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, net of unearned income... 235,803 100.00% 213,835 100.00% 194,485 100.00% 176,482 100.00% 162,643 100.00%
====== ====== ====== ====== ======
Less: allowance for loan losses... 3,944 3,903 3,576 3,169 2,497
-------- -------- -------- -------- --------
Net loans..................... $231,859 $209,932 $190,909 $173,313 $160,146
======== ======== ======== ======== ========
</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 34.6 percent of the lending portfolio will
reprice
within the next 12 months as management attempts to reduce the average term of
fixed-
rate loans and increase its holdings of variable-rate loans in order to limit
future
interest rate risk. The 34.6 percent falls below the 41.1 percent at
December 31,
1995, but is an improvement over the 33.9 percent recorded at September 30,
1996. In
terms of volume, variable-rate loans have increased $5.9 million, or 14.3
percent,
from $41.4 million at December 31, 1995, to $47.3 million at December 31, 1996.
The following table sets forth the maturity and repricing information of the
loan portfolio by major category at December 31, 1996:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1996 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others........................... $13,586 $ 9,428 $ 8,730 $ 31,744
Real estate:
Construction............................................. 3,698 3,698
Mortgage................................................. 5,295 21,713 152,126 179,134
Consumer, net.............................................. 2,720 11,788 6,719 21,227
------- ------- -------- --------
Total.................................................. $25,299 $42,929 $167,575 $235,803
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates............................... $34,201 $64,486 $ 89,781 $188,468
Floating or adjustable interest rates...................... 47,335 47,335
------- ------- -------- --------
Total.................................................. $81,536 $64,486 $ 89,781 $235,803
======= ======= ======== ========
</TABLE>
The Company does not sell, provide servicing for others, or securitize mortgage
loans. Accordingly, SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
adopted by the Company on January 1, 1996, had no effect on operating results or
financial position.
ASSET QUALITY:
Bankruptcies, delinquencies and bank charge-offs increased during 1996, however
overall asset quality did not experience a significant deterioration. Banks and
credit card companies wrote-off bad debt at record paces despite consumer
confidence
reaching its highest level in seven years. This confidence has led to consumers
taking on debt at a frenzied pace. National charge-off levels rose to near the
levels experienced during the last recession in 1990 and 1991. Such levels
caught
banks off guard as some deterioration in the consumer loan portfolio was
expected but
not to the extent that it occurred. The unexpectedly high levels were
attributable
to an increase in personal bankruptcies of 30.0 percent in 1996. In
Pennsylvania,
personal bankruptcies rose 62.0 percent above the 1995 level, ranking second
only to
Florida in percent increase. This increase stemmed in part from bankruptcy code
changes that went into effect at the beginning of the year.
Credit card delinquencies also experienced a sharp rise as credit card issuers
were
overzealous and indiscriminatory in pursuing customers during the first half of
1996.
Such practices played a major role in credit card late payments during the first
quarter of 1996 reaching their highest levels since 1981 and reaching a
historical
high of 3.7 percent. Banks responded to deteriorating consumer loan portfolios
by
tightening lending standards and terms on consumer loans, particularly credit
card
loans, during the second half of 1996. Conversely, banks eased terms and
conditions
on home equity loans. Most banks have been increasing reserves and limiting
new
credit card issuances, however a severe recession could lead to widespread
delinquencies.
As aforementioned, unemployment rates in the Company's market area remain well
above
the levels reported for the United States and Pennsylvania. The main reason
that
unemployment in the Company's market area is higher than that of Pennsylvania
may lie
in the composition of the local labor force. Blue collar workers comprise 34.0
percent of the laborers in the Company's market area as compared to only 29.0
percent
for the Commonwealth. Job openings for blue collar workers accounted for just
23.0
percent of the total, thus limiting opportunities for employment in the
Company's
market area. Despite the inflated unemployment levels as compared to the nation
and
the Commonwealth, asset quality has improved in the Company's market area. Such
improvement is evidenced by declines in the peer group's ratios of nonaccrual
loans
as a percentage of gross loans and nonperforming loans as a percentage of gross
loans. At December 31, 1996, the peer group's ratios were 0.54 percent and 1.34
percent, respectively, compared to 1.37 percent and 1.71 percent, respectively,
at
December 31, 1995. Management is aware that should local economic conditions
deteriorate in 1997, asset quality may suffer. As a result, management will
place additional emphasis on monitoring asset quality during 1997.
The Company attempts to manage credit risk through diversification of the loan
portfolio and application of policies and procedures designed to foster sound
lending
practices. Such policies include certain standards that assist lenders in
making
judgments related to the character, capacity, capital structure and collateral
of the
borrower. In addition, the lender is to ascertain whether the borrower will be
able
to repay the credit based on prevailing and expected business conditions.
Although
supervised by a central loan committee, each community office is responsible for
credit administration of its loan portfolio, including analyzing credit
applications
and making lending approvals within specified limits, in order to minimize
credit
risk. The lending authority of all credit officers is established by the Board
of
Directors and is reviewed at least annually. Credits beyond the scope of the
community office lending officer are forwarded to a centralized lending
committee.
Such committee, comprised of senior lending management and board members,
attempts to
assure the quality of the loan portfolio through careful analysis of credit
applications, adherence to credit policies, and examination of outstanding loans
and
delinquencies. These procedures aid in the early detection and timely follow-up
of
problem loans. Credits in excess of $500 are subject to approval by the Board
of Directors.
In addition, the Company minimizes credit risk by annually conducting an
internal
loan review and contracting with an external loan review company to
independently
perform such function. Such independent loan review aids management in
identifying
deteriorating financial conditions of borrowers, allowing them to assist
customers in
remedying these situations. The results of an independent loan review conducted
by
an external loan reviewer at June 30, 1996, indicated no material difference
from the assets identified through the Company's loan review program.
In accordance with guidance set forth in SFAS No. 114, "Accounting by Creditors
for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a
Loan - Income Recognition and Disclosures," a loan is considered impaired when,
based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured based on the present value of expected future
cash
flows discounted at a loan's effective interest rate or, as a practical
expedient, at
the loan's observable market price, or the fair value of the collateral if the
loan
is collateral-dependent. When the measure of an impaired loan is less than the
recorded investment in the loan, the impairment is recognized by adjusting the
allowance for loan losses with a corresponding charge to the provision for loan
losses.
Nonperforming assets consist of nonperforming loans and foreclosed assets.
Accruing
loans past due 90 days or more and loans impaired under SFAS Nos. 114 and 118
comprise nonperforming loans. Impaired loans consist of nonaccrual and
restructured
loans. A loan is classified as nonaccrual when it is determined that the
collection
of all or a portion of interest or principal is doubtful or when a default of
interest or principal has existed for 90 days or more, unless such loan is well
secured and in the process of collection. When a loan is placed on nonaccrual,
interest accruals discontinue and uncollected accrued interest is reversed
against
income in the current period. Interest collections after a loan has been placed
on
nonaccrual status are credited to income when received unless the collectibility
of
principal is in doubt, causing all collections to be applied as principal
reductions.
A nonaccrual loan is not returned to performing status until such loan is
current as
to principal and interest and has performed within the contractual terms for a
minimum of six months. Restructured loans are loans with original terms,
interest
rate, or both, that have been modified as a result of a deterioration in the
borrower's financial condition. Interest income on restructured loans is
recognized
as earned, using the interest method. The Company had the same one restructured
loan during 1996 and 1995.
Foreclosed assets are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified
as
in-substance foreclosures. A loan is classified as in-substance foreclosure
when the
Company has taken possession of the collateral regardless of whether formal
foreclosure proceedings take place. Foreclosed assets are recorded at the lower
of
the related loan balance or 80.0 percent of its appraised fair value at the time
of
acquisition. Any excess of the loan balance over the recorded value is charged
to
the allowance for loan losses. Subsequent declines in the recorded value of the
property prior to its disposal and costs to maintain the assets are included in
other
expense. In addition, any gain or loss realized upon disposal is included in
other
income or expense. The historical average holding period for such properties is
less than 12 months.
The following table sets forth information concerning nonperforming assets for
the
last five years. 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
DECEMBER 31 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and others................................. $ 251 $ 167 $ 45 $ 137 $ 227
Real estate:
Construction...................................................
Mortgage....................................................... 1,018 1,164 1,352 1,497 1,067
Consumer, net.................................................... 40
------ ------ ------ ------ ------
Total nonaccrual loans....................................... 1,269 1,331 1,397 1,674 1,294
------ ------ ------ ------ ------
Restructured loans............................................... 225 262 236 275
------ ------ ------ ------ ------
Total impaired loans......................................... 1,494 1,593 1,633 1,949 1,294
------ ------ ------ ------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others................................. 359 181 33 62 462
Real estate:
Construction...................................................
Mortgage....................................................... 1,247 1,633 1,194 1,130 2,375
Consumer, net.................................................... 291 336 197 374 285
------ ------ ------ ------ ------
Total accruing loans past due 90 days or more................ 1,897 2,150 1,424 1,566 3,122
------ ------ ------ ------ ------
Total nonperforming loans.................................... 3,391 3,743 3,057 3,515 4,416
------ ------ ------ ------ ------
Foreclosed assets................................................ 420 441 226 248 244
------ ------ ------ ------ ------
Total nonperforming assets................................... $3,811 $4,184 $3,283 $3,763 $4,660
====== ====== ====== ====== ======
Ratios:
Impaired loans as a percentage of loans, net..................... 0.63% 0.74% 0.84% 1.10% 0.80%
Nonperforming loans as a percentage of loans, net................ 1.44 1.75 1.57 1.99 2.72
Nonperforming assets as a percentage of loans, net............... 1.62% 1.96% 1.69% 2.13% 2.87%
</TABLE>
Nonperforming assets, consisting of nonperforming loans and foreclosed assets,
totaled $3.8 million at December 31, 1996, compared to $4.2 million at
December 31,
1995. The Company experienced a net decrease of $21 in foreclosed assets during
1996, as transfers of six loans totaling $223 were offset by the sale of six
properties totaling $279, including net gains on such dispositions of $35. Also
included in other real estate was a property originally purchased by the Company
to
be utilized as a site for a new branch office. During 1995, management
reevaluated
its intent for such property and transferred it to other real estate at $220,
which
equals 80.0 percent of its appraised value, with the difference being recorded
in
other losses. Subsequent to year-end 1996, such property was sold with a gain
of $50
being recognized. The carrying values of all properties included in other real
estate were less than 80.0 percent of their collateral values at December 31,
1996.
Nonperforming loans, consisting of accruing loans past due 90 days or more and
impaired loans, declined $352 during 1996 from $3,743 to $3,391. The reduction
in
nonperforming loans was due to the $253 decline in accruing loans past due 90
days or
more with a $99 reduction in impaired loans. The $99 change in impaired loans
included gross loans placed into such category of $428 and gross loans removed
as a
result of charge-offs, transfers to other real estate, and principal repayments
totaling $33, $123 and $371, respectively. Accruing loans past due 90 days or
more
declined from $2,150 at December 31, 1995, to $1,897 at December 31, 1996. Of
the
loans past due 90 days or more, approximately 65.7 percent of these credits are
secured by real estate. The Company's historical loss experience on real estate
loans is extremely low. However, as a preventative measure, management began
emphasizing improved internal procedures with respect to delinquent credits
during
the first quarter of 1996. Such procedures focus on early detection and timely
follow-up of past due loans in order to identify potential problem loans and
correct
them prior to deterioration. The Company experienced improvement in all its
asset
quality ratios in 1996. The impaired loans as a percentage of loans, net, and
nonperforming assets as a percentage of loans, net, ratios were 0.63 percent and
1.62
percent, respectively, at December 31, 1996. The comparable ratios were 0.74
percent
and 1.96 percent, respectively, at December 31, 1995. Such ratios, however,
remained
less favorable than the peer group's ratios of 0.54 percent and 1.34 percent,
respectively, at December 31, 1996. The improvements are by-products of the
Company's stringent controls regarding credit extensions as well as timely
detection and follow-up on problem loans.
The average recorded investment in impaired loans was $1,528 in 1996 and $1,621
in
1995. The recorded investment in impaired loans was $1,494 and $1,593 at
December
31, 1996 and 1995, respectively. Included in these amounts were $1,269 and
$1,331,
respectively, for which there was a related allowance for loan losses of $650
and
$614, respectively. The recorded investment for which there was no related
allowance
for loan losses, was $225 and $262 at December 31, 1996 and 1995, respectively.
In
1996, activity in the allowance for loan losses account related to impaired
loans
included a provision charged to operations of $3, losses charged to the
allowance of
$92 and recoveries of amounts charged-off of $125. The activity during 1995 in
the
allowance for loan losses account related to impaired loans included a provision
charged to operations of $4, losses charged to the allowance of $69 and
recoveries of
amounts charged-off of $191. Interest income related to impaired loans would
have
been $113 and $66 in 1996 and 1995, respectively, had such loans been current
and the
terms of the loans not been modified. Interest income that would have been
recognized on the restructured loan included in such amounts was $12 and $9 in
1996
and 1995, respectively. Interest recognized on impaired loans amounted to $30
in
1996 and $92 in 1995. Included in these amounts was interest recognized on a
cash
basis of $30 and $87, respectively. The restructured loan accounted for $7 in
1996
and $5 in 1995 of interest recognized on impaired loans. Cash received on
impaired
loans applied as a reduction of principal totaled $398 and $595 in 1996 and
1995,
respectively. There were no commitments to extend additional funds to such
parties at December 31, 1996 and 1995.
Classified assets are those assets cited by bank examiners, or by the bank's
internal
rating system, as being at risk to a greater degree than is considered
desirable.
Regulators separate classified assets into three major categories based on
degree of
risk: substandard, doubtful and loss. Accordingly, as part of their routine
annual
examination process, regulators classified assets of the Company at
September 30,
1996. The result of such review indicated an improvement of 31.7 percent in the
ratio of classified assets as a percentage of Tier I capital from the
October 31, 1995, examination.
The allowance for loan losses account is established through charges to earnings
in
the form of a provision for loan losses. Loans, or portions of loans,
determined to
be uncollectible are charged against the allowance account 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 1996 examination, as
regulators considered the Company's allowance for loan losses account adequate
based
on risk characteristics and size of the loan portfolio. Upon its review of the
1996
regulatory report, management was not aware of any significant recommendation
with
respect to the loan portfolio that would materially affect future liquidity or
capital resources.
Management utilizes the federal banking regulatory agencies' Interagency Policy
Statement on the Allowance for Loan and Lease Losses in assessing the adequacy
of its
allowance for loan losses account. The policy statement provides guidance on
the
nature and purpose of the allowance, related responsibilities of management and
examiners, loan review systems, and international transfer risk matters. The
Company
implemented the analytical tool for assessing the reasonableness of the
allowance for
loan losses account included in such policy statement during the first quarter
of
1994. The tool involves a comparison of the reported loss allowance against the
sum
of specified percentages, based on industry averages, applied to certain loan
classifications. The Company was considered adequately reserved at December 31,
1996, based on the results of this regulatory calculation. Management, however,
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.
In general, the allowance for loan losses is available to absorb losses
throughout
the loan portfolio, although in some instances allocation is made for specific
loans
or groups of loans. Accordingly, the following table attempts to allocate this
reserve among the major categories. However, it should not be interpreted as an
indication that charge-offs in
future periods will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends:
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
------------- --------------- -------------- -------------- --------------
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A AS A
% OF % OF % OF % OF % OF
DECEMBER 31 AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others. $1,396 13.46% $1,358 19.45% $1,188 15.13% $ 944 12.82% $ 722 13.38%
Real estate:
Construction................... 1.57 0.47 1.42 2.88 3.06
Mortgage....................... 1,326 75.97 1,333 71.05 1,251 71.15 1,135 71.31 815 69.20
Consumer, net.................... 1,222 9.00 1,212 9.03 1,137 12.30 1,090 12.99 960 14.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........................ $3,944 100.00% $3,903 100.00% $3,576 100.00% $3,169 100.00% $2,497 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth a reconciliation of the allowance for loan losses
and
illustrates the charge-offs and recoveries by major loan category for the past
five years:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period................. $3,903 $3,576 $3,169 $2,497 $1,576
Loans charged-off:
Commercial, financial and others................................. 523 136 243 177 93
Real estate:
Construction...................................................
Mortgage....................................................... 88 171 176 263 233
Consumer, net.................................................... 115 86 131 140 178
------ ------ ------ ------ ------
Total........................................................ 726 393 550 580 504
------ ------ ------ ------ ------
Loans recovered:
Commercial, financial and others................................. 284 80 7 42 52
Real estate:
Construction...................................................
Mortgage....................................................... 130 144 64 69 44
Consumer, net.................................................... 53 61 86 61 44
------ ------ ------ ------ ------
Total........................................................ 467 285 157 172 140
------ ------ ------ ------ ------
Net loans charged-off............................................ 259 108 393 408 364
------ ------ ------ ------ ------
Provision for loan losses........................................ 300 435 800 1,080 1,285
------ ------ ------ ------ ------
Allowance for loan losses at end of period....................... $3,944 $3,903 $3,576 $3,169 $2,497
====== ====== ====== ====== ======
Ratios:
Net loans charged-off as a percentage of average loans
outstanding..................................................... 0.12% 0.05% 0.21% 0.23% 0.22%
Allowance for loan losses as a percentage of period end loans.... 1.67% 1.83% 1.84% 1.80% 1.54%
</TABLE>
The allowance for loan losses, against which loans are charged-off, was $3.9
million
at December 31, 1996, representing 1.67 percent of loans, net. The allowance
was
also $3.9 million in 1995 but represented 1.83 percent of loans, net. The
reduction
in the Company's ratio was primarily a function of its strong loan demand.
However,
such ratio continued to exceed both the peer group and regulatory guidelines.
The
peer group reported ratios of 1.38 percent and 1.43 percent at December 31, 1996
and 1995, respectively.
As a percentage of nonperforming loans, the allowance account covered 116.3
percent
and 104.3 percent at year-end 1996 and 1995, respectively. Relative to all
nonperforming assets, the allowance covered 103.5 percent at December 31, 1996,
and
93.3 percent at December 31, 1995. Despite the decrease in nonperforming assets
and
delinquent credits, management remained cautious and continued to add provisions
to
its allowance. Management expects to maintain the provision at 1996 levels given
the
significant increase in loans and would make a corresponding increase if asset
quality deteriorates.
Past due loans that have not been satisfied through repossession, foreclosure or
related actions, are evaluated on an individual basis to determine if all or
part of
the outstanding balance should be charged against the allowance for loan losses.
Subsequent recoveries, if any, are credited to the allowance account. Net
charge-offs were $259 or 0.12 percent of average loans outstanding in 1996
compared to $108
or 0.05 percent in 1995. The nation's top 50 banks reported net charge-offs to
average loan ratios of 0.63 percent and 0.53 percent, respectively, while the
peer
group reported net charge-offs as a percentage of average loans outstanding of
0.18
percent and 0.20 percent in 1996 and 1995, respectively. Historically, the
Company
has exceeded the delinquency levels of its peers, however such levels do not
appear
to equate the realization of losses, as the Company's net charge-off ratios are
consistently below the peer group ratios. Management expects net charge-offs to
decrease in 1997 if local unemployment continues its downward trend and the
local economy gains strength.
DEPOSITS:
During 1996, the nation witnessed the continuance of strengthened personal
savings
patterns. Personal savings rates, a measure of savings as a percentage of
disposable
after-tax income, rose to 5.4 percent in 1996 compared to 4.4 percent in 1995.
The
national unemployment rate fell to 5.3 percent by year-end 1996 from 5.6 percent
for
the same period of 1995 while hourly wages increased 3.8 percent, marking the
greatest increase since 1990. For the year, personal income rose 5.8 percent
above
1995 levels. This newfound consumer wealth led to a 4.6 percent annual spending
growth rate in 1996, however such rate has fallen steadily since 1993. The
excess
funds did not, however, filter into bank deposit accounts. The "baby boomer"
generation became acutely aware of a need to save for the long term as they
approach
retirement age. This is evidenced by the growing volumes of 401(k) plans and
mutual
funds in 1996. Consumers also looked toward the stock market in 1996 as the Dow
Jones approached 7,000. Mutual funds that invest in stocks received more money
in
1996 than ever before, reaping $221.9 billion as compared to $128.0 billion in
1995.
By year-end 1996, mutual funds of all types recorded $3.5 trillion in assets.
This
did not mean that baby boomers were saving more money, but rather were shifting
funds
from certificates of deposit and personal savings accounts as yields on
traditional
bank deposits paled in comparison to those of equity investments. Such
disintermediation of funds from banks may lead to higher interest rates being
paid on
deposit accounts as they fight to retain and acquire deposits to fund asset
growth.
In turn, this can lead to higher loan rates offered to customers. A major
influence
to aid bank deposit growth would be an economic downturn in the stock market.
Should
there be a fallout in the market, consumers would search for safer investment
products while receiving a stable return, thus leading to an increase in the
volume of certificates of deposit products.
Effective for taxable years beginning after December 31, 1996, the Job Act will
go
into effect. Under the Job Act, deductible IRA contributions, subject to
adjusted
gross income limits, of up to $2 will be permitted for each spouse if the
combined
compensation of both spouses is at least equal to the amount contributed. Prior
to
the implementation of the Job Act, the maximum limit on combined contributions
was
$2.25. Another potential source of deposits for the Company is the percentage
of the
population aged 65 and older. In Pennsylvania, 15.7 percent of the population
is
aged 65 and older, compared to 12.6 percent for the nation as a whole. For the
Company's market area, such figure is approximately 20.7 percent. Accordingly,
the
older population is expected to be a solid source of future deposits as it
controls
more wealth and buys more deposit products than the younger generation.
Management
expects savings levels to rise in 1997 as customers take advantage of the newly
implemented Job Act and build reserves in response to unwariness about
employment security.
Besides the intense competition from mutual funds, the Company also received
strong
competition for deposits from local bank and thrift institutions. For example,
the
average rate paid on a thirty-month certificate of deposit for the Company's
peer
group exceeded 5.3 percent for 1996. Comparatively, the average rate on
thirty-month
certificates paid by commercial banks in the United States was 5.1 percent in
1996.
A final potential factor that may influence the ability of banks to gather
deposits
is the recent legal argument presented by credit unions. The commercial banking
industry and advocates of credit unions have been in a conflict for several
months
concerning the group that credit unions are allowed to pursue. The conflict
centers
around the expansion of membership services by credit unions to multi-member
groups.
Potentially, Pennsylvania may be most affected by the decision as there are 889
credit unions, more than any other state.
The following table sets forth the average amount of, and the rate paid on, the
major classifications of deposits for the past five years:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
YEAR ENDED DECEMBER 31 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing:
Money market accounts..... $ 18,144 2.92% $ 21,869 3.47% $ 23,955 3.31% $ 22,267 3.26% $ 22,819 3.84%
NOW accounts.............. 16,661 2.02 15,550 1.96 15,151 1.96 14,406 2.35 13,742 3.36
Savings accounts.......... 67,144 3.00 71,911 3.25 83,142 3.13 73,400 3.34 56,288 4.21
Time less than $100....... 157,271 5.67 155,183 5.75 139,641 4.94 131,572 5.26 130,753 6.19
Time $100 or more......... 27,755 5.93 29,336 6.04 25,995 5.97 25,960 5.02 25,956 6.11
-------- -------- -------- -------- --------
Total interest-bearing.. 286,975 4.69% 293,849 4.80% 287,884 4.22% 267,605 4.39% 249,558 5.36%
Noninterest-bearing....... 26,329 24,090 21,849 19,657 18,657
-------- -------- -------- -------- --------
Total deposits.......... $313,304 $317,939 $309,733 $287,262 $268,215
======== ======== ======== ======== ========
</TABLE>
Deposit volumes rose a modest 1.1 percent from $317.1 million at December 31,
1995,
to $320.5 million at December 31, 1996, as competition for deposit products
intensified. Total deposits averaged $313.3 million in 1996 as compared to
$317.9
million in 1995, a decrease of 1.4 percent. The average deposit growth
experienced
by Northeastern Pennsylvania banks was 7.9 percent for the comparable period.
The
Company experienced a decline in deposits during the first quarter of 1996 as
modified pricing strategies in light of improved liquidity conditions coupled
with
cyclical trends due to customers foregoing savings to pay for holiday spending,
led
to a $9.1 million downturn in volumes. The majority of the Company's deposit
growth
occurred during the second and fourth quarters of 1996 as deposits grew at
annualized
rates of 9.8 percent and 7.2 percent, respectively. Most of the second quarter
growth was attributable to increases in commercial money market accounts and
interest
checking accounts of $4.7 million and $2.1 million, respectively. The growth in
the
fourth quarter was primarily attributable to an increase in commercial time
deposits.
Deposits from area school districts comprised the major portion of the fourth
quarter growth.
The deposit composition changed, as evidenced by a decline in the average volume
of
transaction accounts as a percentage of average total deposits from 42.0 percent
to
40.9 percent in 1995 and 1996, respectively. Such change was a function of
depositors sacrificing accessibility by transferring funds from lower-yielding
transaction accounts to higher-yielding time deposits. Although beneficial in
funding loan demand, the growth of retail certificates of deposit will further
the
Company's reliance on higher-costing funding sources. For the Company, time
deposits
cost 5.71 percent, which was 289 basis points above the Company's
weighted-average
cost of money market, NOW and savings accounts. Average time deposits accounted
for
53.3 percent of average assets during 1996 as compared to 43.3 percent for the
peer
group. The Company experienced an upward shift in its average core deposits to
average total deposits from 90.8 percent in 1995, to 91.1 percent in 1996. The
Company's cost of funds declined from 4.9 percent in 1995 to 4.7 percent in 1996
as
compared to an increase in the peer group's cost from 4.6 percent to 4.7
percent,
respectively. The primary reason for such decline was the average rate on
retail
certificates of deposit decreasing from 5.8 percent during the first quarter of
1996
to 5.7 percent during the fourth quarter. Management expects an increase in the
Company's cost of funds during 1997 based on increased competition from local
financial institutions and nonbank deposit gatherers.
An integral component in the Company achieving lower funds cost is building its
base
of noninterest-bearing deposits. In 1996, the Company's noninterest-bearing
deposits
grew $1.0 million from $25.4 million at December 31, 1995, to $26.4 million at
December 31, 1996. Average volumes of noninterest-bearing deposits also
increased
from $24.1 million to $26.3 million in 1995 and 1996, respectively, and
comprised 7.6 percent of total average assets for 1996, compared to 6.7 percent
for 1995.
Volatile deposits, time deposits in denominations of $100 or more, increased
from
$29.7 million at December 31, 1995, to $35.9 million at December 31, 1996. As
aforementioned, such increase was due to local school districts transferring
funds
from transaction accounts into time deposits. Despite this increase, the
Company was
less reliant on such funding as compared to the peer group in 1996. Average
volatile
deposits, as a percentage of average assets, was 8.0 percent in 1996 as compared
to
9.1 percent for the peer group. The average cost of such funds fell 11 basis
points
during 1996. Such decline resulted from management being less aggressive in
competing for this type of deposit product due to the stabilized liquidity
position of the Company.
The following table sets forth maturities of time deposits of $100 or more for
the past five years:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
DECEMBER 31 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within three months............................................. $ 8,598 $ 6,466 $ 7,861 $ 5,817 $ 4,529
After three months but within six months........................ 9,958 6,646 4,200 5,447 6,133
After six months but within twelve months....................... 11,262 8,590 10,740 5,957 5,242
After twelve months............................................. 6,047 7,982 7,410 7,060 8,179
------- ------- ------- ------- -------
Total......................................................... $35,865 $29,684 $30,211 $24,281 $24,083
======= ======= ======= ======= =======
</TABLE>
The Company's improved liquidity position effectively eliminated its reliance on
borrowings to fund assets. At December 31, 1996, aggregate borrowings were $46,
as
compared to $3,048 for the same period of 1995. The Company reduced its
long-term
debt in 1996 as it repaid a 4.3 percent fixed-rate advance from the FHLB-Pgh
upon its
maturity. The remaining $46 represents a 7.5 percent fixed-rate, amortizing
advance
from the FHLB-Pgh Community Investment Program that is subject to a prepayment
fee in
the event the advance is repaid prior to maturity. The Company's total
borrowings
averaged $2.2 million with a weighted-average rate of 4.4 percent in 1996 as
compared to $14.7 million at 6.2 percent in 1995.
At December 31, 1996 and 1995, the Company had no short-term borrowings
outstanding.
Short-term borrowings available to the Company consist of a line of credit and
fixed-
rate advances with the FHLB-Pgh secured under terms of a blanket collateral
agreement
by a pledge of FHLB-Pgh stock and certain other qualifying collateral, such as
investment and mortgage backed securities and mortgage loans. Such line has a
maximum borrowing capacity equal to 10.0 percent of total assets and accrues
interest
daily based on the federal funds rate. The line is renewable on the first day
of
each calendar year and carries no associated commitment fees. The FHLB-Pgh has
the
right to reduce or terminate the line at any time without prior notice and the
Company may repay such line at any time without incurring prepayment penalties.
Short-term, fixed-rate advances are issued with maturities less than one year
based
on the FHLB-Pgh's current cost of funds rate. Such advances are limited to the
Company's maximum borrowing capacity based on a percentage of qualifying
collateral
assets. There are no commitment fees and the advance may be prepaid at the
option of
the Company upon payment of a prepayment fee. The prepayment fee applicable to
FHLB-
Pgh advances is equal to the present value of the difference between cash flows
generated at the advance rate from the date of the prepayment until the original
maturity date, and the cash flows that would result from the interest rate
posted by
the FHLB-Pgh on the date of prepayment for an advance of comparable maturity.
The
Company has not entered into repurchase agreements with others during 1996 and
1995.
Repurchase agreements consist of transactions whereby an institution sells
securities
and agrees to repurchase the identical, or substantially the same, securities at
a specified date for a specified price.
The average daily balance and weighted-average rate on aggregate short-term
borrowings was $51 at 5.9 percent in 1996 and $9.9 million at 6.8 percent in
1995.
The maximum amount of all short-term borrowings outstanding at any month-end was
$2.8
million and $28.0 million during 1996 and 1995, respectively. Short-term
borrowings
during 1996 consisted entirely of the FHLB-Pgh line of credit. During 1995, the
FHLB-Pgh line of credit included in total short-term borrowings had an average
daily
balance of $3.6 million and weighted-average rate of 6.2 percent. The maximum
amount of such loan outstanding at any month-end was $17.6 million during 1995.
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 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 utilized a static gap report, which
attempted to
measure the Company's interest rate exposure by calculating the net amount of
RSA and
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
DECEMBER 31, 1996 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $19,882 $ 10,897 $ 36,386 $ 34,829 $101,994
Loans, net of unearned income....... 51,370 30,166 64,486 89,781 235,803
Federal funds sold.................. 3,300 3,300
------- -------- -------- --------- --------
Total............................. $74,552 $ 41,063 $100,872 $ 124,610 $341,097
======= ======== ======== ========= ========
Rate sensitive liabilities:
Money market accounts............... $ 16,168 $ 16,168
NOW accounts........................ 17,915 17,915
Savings accounts.................... $ 66,037 66,037
Time deposits less than $100........ $22,018 71,454 64,545 $ 30 158,047
Time deposits $100 or more.......... 8,598 21,220 6,047 35,865
Long-term debt...................... 2 44 46
------- -------- -------- --------- --------
Total............................. $30,616 $126,759 $136,673 $ 30 $294,078
======= ======== ======== ========= ========
Rate sensitivity gap:
Period............................ $43,936 $(85,696) $(35,801) $ 124,580
Cumulative........................ $43,936 $(41,760) $(77,561) $ 47,019 $ 47,019
RSA/RSL ratio:
Period............................ 2.44 0.32 0.74 4,153.67
Cumulative........................ 2.44 0.73 0.74 1.16 1.16
</TABLE>
At December 31, 1996, the Company had a ratio of cumulative one-year, RSA/RSL of
0.73. Such ratio falls below the 0.93 at December 31, 1995. Based upon the
guidelines set forth in the Company's Asset/Liability Management Policy,
however,
this ratio falls within the 0.7 and 1.3 deemed by management to be acceptable.
The
decline was attributable to the Company's reinvestment of maturing, short-term
credit
extensions to other financial institutions into residential mortgages.
Additionally,
the Company received $25.2 million in securities repayments during 1996. Of
these
repayments, $3.0 million was used to retire long-term borrowings of the
subsidiary
that matured September 9, 1996. The remaining funds were used to purchase $2.9
million in mortgage backed securities, $8.6 million in intermediate-term state
and
municipal securities, $8.6 million in U.S. Treasury securities, and $100 in
equity
securities. Excess funds not utilized for security purchases were used to fund
loan
demand. Commercial time deposits also contributed to the decline in the
cumulative
one-year gap as they increased $8.1 million to $29.8 million at
December 31, 1996,
from $21.7 million at December 31, 1995. Such increase resulted from customers
choosing liquidity over return when investing in commercial time deposits. The
Company also experienced a sharp decline in its three-month ratio. Such ratio
fell
from 3.09 at December 31, 1995, to 2.44 at December 31, 1996. This decline can
be
explained by the same reasons given for the reduction in the cumulative one-year
ratio. The Company was liability rate sensitive for the cumulative one-year
period
based on the results of the December 31, 1996, 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
from
December 31, 1996, indicate similar results to those indicated by the static gap
model. A decline in net interest income of 3.9 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 3.9 percent increase in net
interest income.
Inflation impacts financial institutions differently than it does commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of the Company's assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely
measure the impact of inflation on the Company, however management believes that
its exposure to 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 present and future 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 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
presentand 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 annually develops a liquidity plan for the Company. The mission of
such
plan is to ensure the Company has the ability to generate cash at a reasonable
cost
in order to satisfy commitments to borrowers as well as to meet the demands of
depositors and debtholders. The Company's liquidity plan consists of an
assessment
of its current liquidity position and includes determining appropriate standards
for
the volume, mix, price and maturity of loans, investments and deposits. In
addition,
management ascertains the appropriate level of short-term assets required to
fund
normal day-to-day operations and to ensure the Company's ability to meet
off-balance
sheet commitments and unanticipated deposit withdrawals. The plan includes
controls
and monitoring procedures for evaluating the Company's daily liquidity position.
Finally, the plan introduces strategies to assure future liquidity. Such
strategies,
which the Company considers proprietary in nature, include the maintenance of a
minimum net federal funds sold cushion, a capital contingency strategy, and
enhanced
strategies on loan and deposit pricing. Based on the 1996 liquidity plan, the
Company's ratio of core deposits to total assets is expected to rise from 80.2
percent at December 31, 1996, to 83.8 percent at December 31, 1997.
Although the Company believes its liquidity position remains adequate to meet
present
and future financial obligations and commitments, it has become less favorable
compared to last year. Two primary examples of such unfavorable change are the
ratio
of temporary investments to volatile liabilities and the volatile liabilities
less
temporary investments to total assets less temporary investments ratios. At
December
31, 1996, these ratios were 54.0 percent and 4.9 percent, respectively. This
showed
a regression from the ratios of 118.9 percent and negative 1.8 percent,
respectively,
recorded at December 31, 1995, however they are vastly improved from the 8.7
percent
and 11.8 percent, respectively, recorded at December 31, 1994. These ratios
also
fell below the 91.8 percent and 0.8 percent, respectively, recorded by the peer
group
at year-end 1996. By assuring that the Company's investment portfolio contains
an
adequate amount of short-term investments and by aggressively competing for core
deposits, management feels it can maintain stability in these ratios for future
periods. The maintenance of a high level of core deposits is a major component
in
keeping a strong liquidity position. Core deposits are important as they
represent a
stable and relatively low-costing source of funds. At December 31, 1996, core
deposits funded 80.2 percent of the Company's total assets.
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,
noninterest-bearing deposits with other banks, balances with the Federal Reserve
Bank
of Philadelphia and FHLB-Pgh, and federal funds sold, decreased $11.0 million in
1996. Net cash provided by operating activities totaled $5.4 million and
primarily resulted from the Company's $4.2 million in net income.
The Company's net cash used in investing activities of $16.1 million was the
major
reason for the net decrease in cash and cash equivalents. The primary
components of
the outflow from investing activities were loan disbursements and investment
purchases, partially offset by inflows from repayments on short-term loans to
other
banking institutions and investments. For 1996, the Company's net loan
disbursements
amounted to $22.2 million. Aggregate loan demand of $41.2 million was partially
funded by $19.0 million in net repayments on short-term credit extensions to
financial institutions. The Company also purchased $20.2 million in securities
during 1996. Such purchases were funded with the $25.2 million received in
repayments on securities with the excess of the proceeds being used to retire
$3.0 million in long-term borrowings as well as to fund loan demand.
Net cash used in financing activities totaled $320 in 1996. The decline
primarily
resulted from the Company's repayment on September 9, 1996, of a $3.0 million
fixed-
rate advance with the FHLB-Pgh. The three-year loan bore interest at 4.3
percent.
Partially offsetting this decrease was a $3.4 million increase in deposits.
CAPITAL ADEQUACY:
Stockholders' equity improved $3.4 million during 1996 principally due to the
Company's $4.2 million in net income, partially offset by $623 in dividends and
a
change in the net unrealized holding adjustment of $216. The Company reported a
net
unrealized holding gain of $564 at December 31, 1996, as compared to $780 at
December
31, 1995. Despite the decline from a year ago, such gain improved $400 from
September 30, 1996. In addition, the change in the fair market value of the
Company's investment portfolio was significantly less severe than that of its
peers.
The Company's exposure to interest rate risk has been better protected through
improvements in the quality, composition and structure of the investment
portfolio.
Such improved risk position makes the Company less susceptible to market
depreciation
on available for sale securities resulting from rising interest rates.
The Company declared a dividend of $242 or $0.11 per share for the fourth
quarter of
1996. For the year-ended December 31, 1996, the Company declared dividends of
$623
or $0.28 per share as compared to $462 or $0.21 per share for the same period of
1995. As a percentage of net income, cash dividends declared in 1996 equalled
14.8
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
decisions, capital needs, growth objectives, appropriate dividend restrictions
related to the Company, and other relevant factors may impact these decisions.
The
Company's ability to pay dividends to its stockholders is limited by its ability
to
obtain funds from its subsidiary as specified by federal and state regulations.
Accordingly, the subsidiary without prior approval of bank regulators, may
declare
dividends to the Company in 1997 totaling $3.2 million plus net profits earned
by the
subsidiary for the period from January 1, 1997, through the date of declaration,
less dividends previously paid in 1997.
Other significant events in 1996 affecting the Company's capital included the
effectuation of a three-for-one stock split and the listing of the Company's
common
stock on a national stock market. The April 1, 1996, stock split fulfilled the
minimum share listing requirement for the NASDAQ NMS. The liquidity of the
Company's
common stock improved as a result of its trading on the NASDAQ National Market
Tier of the NASDAQ Stock Market under the Symbol "CCBP" on June 17, 1996.
During the second quarter of 1997, the Company will initiate a DRP. This plan
will
benefit the Company and its stockholders as it will provide a low-cost method
for
raising capital, allow younger, smaller stockholders to participate in the
growth of
the Company, avoid commissions to brokers and allow higher dividends to be paid
as
such dividends are being partially retained. The Company's DRP will include the
following: (I) shares purchased under the DRP will be from original issuances;
(II)
no optional cash payments; (III) eligibility for all registered and street name
participants; (IV) no minimum or maximum number of shares participant
restrictions;
and (V) availability of full or partial dividend reinvestment. The plan will be
administered by a national transfer agent. By introducing a DRP, the Company
expects
to generate more interest in its stock, which could benefit its market value.
Management attempts to assure capital adequacy by monitoring the current and
projected positions of the Company to support future growth, while providing
stockholders with an attractive long-term appreciation of their investments.
The
recent history of bank failures resulted in regulatory agencies adopting minimum
capital adequacy requirements that include mandatory and discretionary
supervisory
actions for noncompliance. At a minimum, banks must maintain a Tier I capital
to
risk-adjusted assets ratio of 4.0 percent and a total capital to risk-adjusted
assets
ratio of 8.0 percent. In addition, banks must maintain a Leverage ratio,
defined as
Tier I capital to total average assets less goodwill, of 3.0 percent. Such
minimum
ratio is applicable only to those institutions with a composite rating of one
under
the Uniform Interagency Bank Rating System, that are not anticipating or
experiencing
significant growth, and have well-diversified risk. An additional 100 to 200
basis
points are required for all but these most highly-rated institutions. At
December
31, 1996 and 1995, the Company's minimum ratios of Tier I capital to adjusted
total
average assets were 4.0 percent and 5.0 percent, respectively. In the event an
institution is deemed to be undercapitalized by such standards, banking law
prescribes an increasing amount of regulatory intervention, including the
required
institution of a capital restoration plan and restrictions on the growth of
assets,
branches or lines of business. Further restrictions are applied to institutions
that
reach the significantly or critically undercapitalized levels, including
restrictions
on interest payable on accounts, dismissal of management and appointment of a
receiver. For well-capitalized institutions, banking law provides authority for
regulatory intervention where the institution is deemed to be engaging in unsafe
and
unsound practices or receives a less than satisfactory examination report rating
for asset quality, management, earnings, liquidity or market-risk sensitivity.
Under SFAS No. 115, banks not subject to a supervisory directive will exclude
unrealized holding gains and losses, net of income taxes, on available for sale
debt
securities when calculating Tier I capital. However, net unrealized holding
losses
on available for sale marketable equity securities will continue to be deducted
from
Tier I capital. Such regulatory accounting rule does not affect reporting for
financial statement purposes. Accordingly for financial accounting
presentations,
banks will continue to report available for sale debt and equity securities at
fair
value, with unrealized holding gains and losses, net of income taxes, excluded
from earnings and reported in a separate component of stockholders' equity.
The following table presents the Company's capital ratios at December 31, 1996
and
1995, 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
------------------------------------------------------------------
DECEMBER 31 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets... $ 28,692 $ 24,845 $ 7,443 $ 6,983 $11,164 $10,475
Total capital to risk-adjusted assets.... 31,038 27,048 14,886 13,966 18,607 17,458
Tier I capital to total average assets
less goodwill........................... 28,692 24,845 $13,830 $17,871 $17,287 $17,871
Risk-adjusted assets..................... 180,809 170,089
Risk-adjusted off-balance sheet items.... 5,261 4,489
Average assets for Leverage ratio........ $345,738 $357,410
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 15.4% 14.2% 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................. 16.7 15.5 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.3% 7.0% 4.0% 5.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at
December 31,
1996, 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: a 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 showed marked improvement in its capital level as
evidenced by
its improved Leverage ratio. Such ratio was 8.3 percent at December 31, 1996,
compared to 7.0 percent at December 31, 1995.
The significance of maintaining a "well capitalized" regulatory classification
became
increasingly important as a result of the deregulation provisions in the Bank
Insurance Fund ("BIF")/Savings Association Insurance Fund ("SAIF") legislation
enacted September 30, 1996. The Federal Reserve Board's adoption of regulations
under such legislation made it easier for bank holding companies having such
classification to engage in certain nonbanking activities. Under the new rules,
bank
holding companies are: (I) allowed to begin offering securities sales, trust
services, leasing, loan servicing, management consulting, data processing, and
futures commission merchant activities without prior regulatory approval; (II)
no
longer subject to application requirements to acquire businesses that already
offer
the aforementioned services; and (III) able to enter an activity other than
those
services listed above. The only requirement set forth in the rule is that the
bank
holding company notify the regulators of its intent within a certain time frame.
As part of the Company's overall strategic plan, management developed a capital
plan
during 1996. The plan addressed: (I) the current and expected capital
requirements
of the Company, including the maintenance of capital ratios well in excess of
minimum
regulatory guidelines; (II) the market value of the Company's securities and
the
resulting effect on the Company's capital; (III) any planned growth in the
Company's
assets; (IV) the Company's anticipated level of net earnings, taking into
account the
Company's projected asset/liability position and exposure to changes in market
interest rates; and (V) the source and timing of additional funds to fulfill
future
capital requirements. The submitted plan covered the period from July 1, 1996,
to
June 30, 1999, taking into account the market value of the Company's securities
and
the resulting effect on its capital position under four different interest rate
scenarios. Also included in the plan were contingency strategies that could be
followed in the event the Company's ratios did fall below regulatory guidelines.
Such strategies, which the Company considers proprietary in nature, include
capital generation techniques.
The Federal Reserve Board issued a final rule revising risk-based capital
standards
to implement section 305 of the Federal Deposit Insurance Corporation
Improvement Act
of 1991 regarding interest rate risk ("IRR"). Such ruling went into effect on
September 1, 1995. This allows regulatory agencies to consider the potential
negative effects that changes in interest rates may have on the economic value
of a
company's capital when determining its economic needs. This amendment created a
standardized supervisory measurement system model that will measure the risk of
banks
not exempt from reporting additional information on their IRR exposure. In
addition, banks are encouraged to report the results of their internal IRR
systems.
The regulatory agencies will consider both a rising and falling rate scenario
based
on a 200 basis point parallel change in market interest rates for all maturities
when
measuring a bank's IRR exposure level for adequacy. Such scenarios may be
modified
based on current and historical interest rate levels and volatilities as well as
other relevant market and supervisory considerations. For model purposes, banks
need
to report assets, liabilities and off-balance sheet item maturities for various
time
intervals. The appropriate time interval is determined by using guidelines set
forth
by the regulatory agencies. Once the bank's assets, liabilities and off-balance
sheet items have been classified into the appropriate time intervals, they are
multiplied by IRR risk weights. The result is the bank's IRR exposure. The
risk
weights are designed to approximate the percentage change in the value of the
reported position that would result from a 200 basis point instantaneous and
uniform
movement in market interest rates. Banks having fixed-rate residential
mortgages
exceeding 20.0 percent of total assets or adjustable-rate residential mortgage
holdings exceeding 10.0 percent of total assets must provide additional
disclosures to the agencies.
Upon review of the supervisory model and the bank's internal model, examiners
will
determine the amount of capital needed to be held by the bank should such bank
have
high levels of measured exposure or weak management systems. This determination
as
well as the examiners' overall IRR conclusions will be discussed with management
at
the end of the bank's examination. During interim periods, the agencies will
use the
model to monitor a bank's IRR exposure changes, making decisions as to
supervisory
actions when warranted. Based on the results of the Company's internal IRR
system,
it is management's opinion that the Company was adequately capitalized at
December 31, 1996.
REVIEW OF FINANCIAL PERFORMANCE:
The Company earned the highest net income in its existence totaling $4,200 or
$1.91
per share in 1996. This achievement becomes more impressive considering that
such
earnings level was solely attributable to income from normal operations. The
Company's previous high earnings of $4,150 or $1.89 per share recorded in 1993
included $1,558 of nonrecurring net investment securities gains and trading
account
profits. Net income, excluding the effects of such nonrecurring gains and
losses,
would have totaled $3,431 or $1.56 per share in 1993, as compared to $4,238 or
$1.93
per share in 1996. Additionally, the 1996 net income significantly surpasses
the
comparable 1995 level, adjusted for the effects of net investment securities
losses of $4,393 from the reconstitution of the investment portfolio.
The Company's return on assets and return on equity ratios were 1.21 percent and
14.57 percent, respectively, in 1996. For the Company's peer group, such ratios
were
1.31 percent and 12.96 percent, respectively. The Company's record earnings for
1996
were primarily attributable to higher net interest income and noninterest income
combined with improved noninterest expense levels. Net interest income on a tax
equivalent basis increased $476 from $12,215 in 1995 to $12,691 in 1996. This
increase was primarily due to an increase in loan volumes and the Company's
controlling of funds cost. Since the second quarter of 1995 when the Company
instituted its plan to become a more traditional banking institution, it has
been
successful in improving the Company's financial position as loans comprised 69.1
percent of earning assets at December 31, 1996, as compared to 57.4 percent at
June
30, 1995. The Company was also successful in reducing its cost of funds from
4.86
percent in 1995 to 4.69 percent in 1996. Improvements in liquidity allowed the
Company to be more stringent in controlling funds cost. The Company's cost of
funds
increased from 4.71 percent during the first quarter of 1995 to 4.88 percent
during
the fourth quarter. Compared to the same periods of 1996, these costs were 4.74
percent and 4.69 percent, respectively. This was no small achievement as
general
market rates on U.S. Treasury securities went up during 1996. Yields on one-
and
five-year U.S. Treasury instruments averaged 5.12 percent and 5.58 percent,
respectively, in the first quarter of 1996 and 5.48 percent and 6.10 percent,
respectively, in the fourth quarter of 1996.
For the year-ended December 31, 1996, the Company's provision for loan losses
declined $135 to $300. Such decline came as the Company chose to reduce its
provision from $70 per month to $25 per month at the beginning of the second
quarter
of 1995. This decision came in response to the Company reaching a loan loss
reserve
level believed by management to be adequate to absorb future charge-offs.
The Company also had a dramatic rise in noninterest income in 1996 as compared
to
1995. The majority of such increase was attributable to a reduction in
securities
losses from $4,393 for the year-ended December 31, 1995, to $58 for the same
period
of 1996. The loss in 1995 came primarily during the second and third quarters
as a
result of management's decision to reconstitute the investment portfolio in
working toward its goal of becoming a more traditional community bank.
Noninterest expense for the Company showed a marked improvement over 1995
levels.
Such expenses declined $811 from $8,194 for the year-ended December 31, 1995, to
$7,383 for the same period of 1996. The Company took better control of other
expenses in 1996 and benefitted from its improved financial position by earning
lower
Federal Deposit Insurance Corporation ("FDIC") insurance rates and reducing
legal and
administrative costs associated with the Memorandum of Understanding that was
removed on February 16, 1996.
On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
128, "Earnings per Share." The objective of the SFAS is to issue a standard on
earnings per share that will simplify generally accepted accounting principles
in the
United States and, at the same time, will be compatible with international
standards.
According to the Statement, the presentation of primary Earnings Per Share
("EPS")
currently required by Accounting Principles Board ("APB") Opinion No. 15,
"Earnings
per Share," would no longer be required. Basic EPS, which represents income
available to common stockholders divided by the weighted-average number of
common
shares outstanding during the period, effectively replaces primary EPS. Diluted
EPS,
previously referred to as fully-diluted EPS, would be calculated in a similar
manner
as that prescribed by APB Opinion No. 15. SFAS No. 128 will be effective for
financial statements for fiscal years ending after December 15, 1997. The
Company's
adoption of such Statement in 1997 is not expected to have a material effect on
operating results or financial position.
On June 20, 1996, the FASB issued an Exposure Draft of a proposed SFAS,
"Reporting
Comprehensive Income." The proposed Statement, expected to be adopted as a
final
SFAS during the second quarter of 1997, would be effective for fiscal years
beginning
after December 15, 1996, with earlier application permitted. Such Statement
would
establish standards for reporting and displaying of comprehensive income and its
components in a full set of general-purpose financial statements and does not
address
matters of recognition and measurement. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other
events and circumstances from nonowner sources. It includes all changes in
equity
during a period except those resulting from investments by owners and
distributions
to owners. The purpose of reporting comprehensive income is to report a measure
of
overall enterprise performance by displaying all changes in equity of an
enterprise
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. Such Statement
will
affect an enterprise's display of earnings per share on the face of the
Statement of
Financial Performance by requiring single or dual presentation of comprehensive
income per share based on its capital structure. Aside from a change in
presentation, the issuance of the final SFAS is not expected to have an effect
on the Company's operating results or financial position.
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 rose to $12,691 in 1996, an
increase of
$476 or 3.9 percent, compared to 1995. Such increase was due almost entirely to
the
Company's improved net interest margin. The Company's 1996 net interest margin
was
3.79 percent. This marked a 31 basis point increase over the 3.48 percent
margin
recorded in 1995. The combination of an improved yield on earning assets and a
lower
cost associated with interest-bearing deposits accounted for the improvement.
In
1996, the Company experienced an increase of 10 basis points in its yield on
earning
assets as such rate was 7.85 percent for the year-ended December 31, 1996, as
compared to 7.75 percent for the year-ended December 31, 1995. Additionally,
the
Company's cost of funds declined 17 basis points to 4.69 percent for the
year-ended
December 31, 1996, from 4.86 percent for the same period of 1995. These changes
accounted for the $462 positive rate variance recorded for 1996. Such
favorable
results were by-products of implementing transitional asset/liability
strategies.
The Company also reaped the rewards of its improved liquidity position in 1996
as it
was not pressured into aggressively competing for funds nor was it reliant on
high-
cost borrowings to fund loan demand. Management expects an increase in the
Company's
net interest margin based on the higher average volume of loans. However, such
increase may be partially offset by increases in funds cost as a result of more
intense competition and increases in general market rates. In addition,
management
is aware, that higher levels of impaired loans may result if local unemployment
conditions deteriorate thus diluting such positive influence.
Reductions in the volumes of interest-bearing liabilities in excess of average
earning assets resulted in a positive influence of $14 on net interest income.
Total
average earning assets decreased $16.7 million to $334.5 million in 1996 while
average interest-bearing liabilities decreased $19.4 million to $289.1 million
in
1996. The Company experienced an 18.1 percent decrease in its volume of average
investments from $134.5 million to $110.2 million in 1995 and 1996,
respectively.
This reduction was a direct result of management changing its earning asset
preference. Such decrease was responsible for $1,535 of the reduction in
interest
income as a result of volume changes. Partially offsetting this decline was a
9.6
percent increase in average loan volumes to $218.8 million in 1996 from $199.7
million in 1995. This accounted for a $1,249 positive influence on income due
to
volume changes. The other major contributor to the unfavorable volume variance
in
interest income was the reduced average volume of federal funds sold in 1996.
Such
decline accounted for a $689 reduction in interest income. Average federal
funds
sold decreased $11.5 million during 1996 as management used proceeds from the
sales
of securities to fund the increased loan demand and to retire a long-term note
held
with the FHLB-Pgh. The favorable volume variance of $998 in interest expense
offset
the unfavorable volume variance of $984 in interest income. Lower average
volumes of
short-term borrowings were the primary contributor to such variance. Average
short-
term borrowing volumes fell from $9.9 million in 1995 to $51 in 1996 as the
Company,
through its success in reconstituting the investment portfolio, eliminated its
need for borrowings to fund asset growth.
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
1996 VS. 1995 1995 VS. 1994
---------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
---------------------------- ---------------------------
TOTAL TOTAL
CHANGE RATE VOLUME CHANGE RATE VOLUME
-------- ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Taxable......................................... $ 1,206 $ (19) $ 1,225 $ 1,477 $ 638 $ 839
Tax-exempt...................................... 106 82 24 92 16 76
Investments:
Taxable......................................... (2,767) (35) (2,732) (1,037) 305 (1,342)
Tax-exempt...................................... 1,187 (10) 1,197 1 (14) 15
Interest-bearing deposits with banks.............. (9) (9) (8) (1) (7)
Federal funds sold................................ (691) (2) (689) 982 5 977
------- ----- ------- ------- ------ -------
Total interest income......................... (968) 16 (984) 1,507 949 558
------- ----- ------- ------- ------ -------
Interest expense:
Money market accounts............................. (229) (110) (119) (34) 37 (71)
NOW accounts...................................... 32 9 23 8 8
Savings accounts.................................. (320) (172) (148) (266) 97 (363)
Time deposits less than $100...................... 2 (62) 64 2,018 1,202 816
Time deposits $100 or more........................ (124) (31) (93) 218 18 200
Short-term borrowings............................. (674) (60) (614) 132 198 (66)
Long-term debt.................................... (131) (20) (111) (24) (8) (16)
------- ----- ------- ------- ------ -------
Total interest expense........................ (1,444) (446) (998) 2,052 1,544 508
------- ----- ------- ------- ------ -------
Net interest income........................... $ 476 $ 462 $ 14 $ (545) $ (595) $ 50
======= ===== ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
1996 1995
---------------------------- ----------------------------
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..................................... $213,071 $18,444 8.66% $195,047 $17,238 8.84%
Tax-exempt.................................. 5,724 470 8.21 4,649 364 7.83
Investments:
Taxable..................................... 74,233 4,022 5.42 113,675 6,789 5.97
Tax-exempt.................................. 35,923 3,005 8.37 20,775 1,818 8.75
Interest-bearing deposits with banks.......... 90 9 10.00
Federal funds sold............................ 5,508 300 5.45 16,980 991 5.84
-------- ------- -------- -------
Total earning assets...................... 334,459 26,241 7.85% 351,216 27,209 7.75%
Less: allowance for loan losses............... 4,014 3,816
Other assets.................................. 16,834 11,770
-------- --------
Total assets.............................. $347,279 $359,170
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 18,144 529 2.92% $ 21,869 758 3.47%
NOW accounts.................................. 16,661 337 2.02 15,550 305 1.96
Savings accounts.............................. 67,144 2,016 3.00 71,911 2,336 3.25
Time deposits less than $100.................. 157,271 8,925 5.67 155,183 8,923 5.75
Time deposits $100 or more.................... 27,755 1,647 5.93 29,336 1,771 6.04
Short-term borrowings......................... 51 3 5.88 9,935 677 6.82
Long-term debt................................ 2,122 93 4.38 4,715 224 4.75
-------- ------- -------- -------
Total interest-bearing liabilities........ 289,148 13,550 4.69% 308,499 14,994 4.86%
Noninterest-bearing deposits.................. 26,329 24,090
Other liabilities............................. 2,968 547
Stockholders' equity.......................... 28,834 26,034
-------- ------- -------- -------
Total liabilities and stockholders' equity $347,279 13,550 $359,170 14,994
======== ------- ======== -------
Net interest/income spread................ $12,691 3.16% $12,215 2.89%
======= =======
Net interest margin....................... 3.79% 3.48%
Tax equivalent adjustments:
Loans......................................... $ 160 $ 124
Investments................................... 1,022 618
------- -------
Total adjustments......................... $ 1,182 $ 742
======= =======
Note: Average balance was calculated using average daily balances and includes
nonaccrual loans. Available for sale securities, included in
investment securities, are stated at amortized cost with the related
unrealized holding gain of $337 in 1996 and unrealized holding loss
of $1,272 and $4,217 in 1995 and 1994, respectively, included in other
assets. Tax equivalent adjustment was calculated using the
prevailing statutory rate of 34.0 percent.
<CAPTION>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
1994 1993
----------------------------- ----------------------------
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..................................... $185,318 $15,761 8.50% $172,416 $15,748 9.13%
Tax-exempt.................................. 3,657 272 7.44 2,343 226 9.65
Investments:
Taxable..................................... 136,386 7,826 5.74 113,380 6,962 6.14
Tax-exempt.................................. 20,609 1,817 8.82 16,841 1,588 9.43
Interest-bearing deposits with banks.......... 190 18 9.47 2,255 79 3.50
Federal funds sold............................ 194 8 4.12 3,281 108 3.29
-------- ------- -------- -------
Total earning assets...................... 346,354 25,702 7.42% 310,516 24,711 7.96%
Less: allowance for loan losses............... 3,540 2,886
Other assets.................................. 7,586 11,784
-------- --------
Total assets.............................. $350,400 $319,414
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 23,955 792 3.31% $ 22,267 726 3.26%
NOW accounts.................................. 15,151 297 1.96 14,406 338 2.35
Savings accounts.............................. 83,142 2,602 3.13 73,400 2,450 3.34
Time deposits less than $100.................. 139,641 6,905 4.94 131,572 6,925 5.26
Time deposits $100 or more.................... 25,995 1,553 5.97 25,960 1,304 5.02
Short-term borrowings......................... 11,186 545 4.87 1,005 33 3.28
Long-term debt................................ 5,050 248 4.91 3,866 224 5.79
-------- ------- -------- -------
Total interest-bearing liabilities........ 304,120 12,942 4.26% 272,476 12,000 4.40%
Noninterest-bearing deposits.................. 21,849 19,657
Other liabilities............................. 1,120 4,104
Stockholders' equity.......................... 23,311 23,177
-------- ------- -------- -------
Total liabilities and stockholders' equity $350,400 12,942 $319,414 12,000
======== ------- ======== -------
Net interest/income spread................ $12,760 3.16% $12,711 3.56%
======= =======
Net interest margin....................... 3.68% 4.09%
Tax equivalent adjustments:
Loans......................................... $ 93 $ 77
Investments................................... 618 540
------- -------
Total adjustments......................... $ 711 $ 617
======= =======
<CAPTION>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
1992
-----------------------------
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable...................................... $157,674 $15,573 9.88%
Tax-exempt.................................. 5,169 456 8.82
Investments:
Taxable..................................... 96,964 7,181 7.41
Tax-exempt.................................. 10,581 1,021 9.65
Interest-bearing deposits with banks.......... 694 39 5.62
Federal funds sold............................ 7,936 254 3.20
-------- -------
Total earning assets...................... 279,018 24,524 8.79%
Less: allowance for loan losses............... 2,114
Other assets.................................. 15,399
--------
Total assets.............................. $292,303
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 22,819 876 3.84%
NOW accounts.................................. 13,742 462 3.36
Savings accounts.............................. 56,288 2,369 4.21
Time deposits less than $100.................. 130,753 8,088 6.19
Time deposits $100 or more.................... 25,956 1,586 6.11
Short-term borrowings......................... 797 24 3.00
Long-term debt................................ 1,817 109 6.00
-------- -------
Total interest-bearing liabilities........ 252,172 13,514 5.36%
Noninterest-bearing deposits.................. 18,657
Other liabilities............................. 1,513
Stockholders' equity.......................... 19,961
-------- -------
Total liabilities and stockholders' equity $292,303 13,514
======== -------
Net interest/income spread................ $11,010 3.43%
=======
Net interest margin....................... 3.95%
Tax equivalent adjustments:
Loans......................................... $ 155
Investments................................... 347
-------
Total adjustments......................... $ 502
=======
</TABLE>
PROVISION FOR LOAN LOSSES:
Provision for loan losses for the nation's top 50 banks increased 34.6 percent
in
1996 to $10.5 billion. Such increase came in response to a rise in net
charge-offs
for the year of 29.1 percent to $11.1 billion, which pushed net charge-offs as a
percentage of average loans outstanding for such institutions to 0.63 percent in
1996
from 0.54 percent in 1995. Bankruptcies, delinquencies and charge-offs
primarily
from revolving consumer credit increased in 1996. Even after taking higher
provisions, net charge-offs still outdistanced the provision for the year by
$600.0
million, resulting in a 1.0 percent reduction in the allowance for loan losses
account. Charge-off ratios may continue to climb in 1997 as credit card
charge-offs
continue to increase and recoveries decline. This occurrence, coupled with a
quicker
pace of loan growth, may prompt the banking industry to take greater loan loss
provisions in 1997.
The Company makes provisions for loan losses through evaluating the adequacy of
its
allowance for loan losses account. In making its decision management considers
such
factors as previous loan experience, overall loan portfolio characteristics,
prevailing economic conditions and other relevant factors. Based on its most
current
valuation, management believes that the allowance is adequate to absorb any
known and inherent losses in the portfolio.
Contrary to the stance taken by the banking industry, the Company reduced its
provision for loan losses by $135 to $300 in 1996 from the $435 taken in 1995.
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 of 1996 continues or nonperforming asset levels deteriorate,
management will consider adjusting the monthly provision amount for 1997.
NONINTEREST INCOME:
The Company reported noninterest income of $1,387 for the year-ended
December 31,
1996, as compared to a loss of $3,196 for the same period of 1995. The $4,583
turnaround primarily resulted from reporting net losses on investment securities
of
$58 in 1996 compared to net losses of $4,393 in 1995. Such losses in 1995 were
the
result of completing the reconstitution of the investment portfolio during the
second
and third quarters. The net investment securities losses of $58 for 1996
resulted
from the disposition of four variable-rate CMOs with a carrying value of $1,487.
Such dispositions resulted from a decision by the Investment Committee based on
a reassessment of their appropriateness with respect to structure, composition
and characteristics in line with investment goals.
Service charges, fees and commissions increased $248 or 20.7 percent from $1,197
for
the year-ended December 31, 1995, to $1,445 for the same period of 1996. The
primary
reason for such increase stemmed from management's decision, effective
April 1, 1996,
to adjust general service charges on deposit accounts. Management expects
noninterest income to increase based upon increased opportunities from service
charges and commissions on nonbank activities upon legislative changes.
NONINTEREST EXPENSE:
Generally, noninterest expense includes the costs of providing salaries and
necessary
employee benefits, maintaining facilities and general operating costs such as
insurances, supplies, advertising, data processing, taxes and other related
expenses.
Several of these costs and expenses are variable while others are fixed.
Management
uses budgets and other related strategies in an effort to control variable
expenses.
Noninterest expense totaled $7,383 in 1996, a decrease of $811, or 9.9 percent,
compared to 1995. The Company had a net overhead expense to average assets
ratio of
1.7 percent, an improvement over the 1.9 percent recorded in 1995. In relation
to
the peer group ratio of 2.7 percent, the Company continues to demonstrate a
greater
efficiency level. Productivity is also measured by the operating efficiency
ratio.
Such ratio is defined as noninterest expense, excluding other real estate
expense, as
a percentage of net interest income and noninterest income less nonrecurring
gains
and losses. The Company's operating efficiency ratio showed an improvement from
64.1
percent at December 31, 1995, to 56.4 percent at December 31, 1996. Reduced
levels
of noninterest expense coupled with the increase in net interest income and
service
charges, fees and commissions were responsible for the positive change in such
ratio.
The Company's salaries and benefits expense composed 51.6 percent of noninterest
expense and totaled $3,808 in 1996, a $220 or a 5.5 percent decrease compared to
1995. The majority of such decrease was attributable to the Company's Board of
Directors exercising its termination option of the former President and Chief
Executive Officer's written employment agreement during the second quarter of
1995.
The cost of exercising such agreement approximated $207. The Company had a
defined
compensation plan for certain senior management employees that it discontinued
during
the third quarter of 1996. Costs for such plan were recognized monthly in
salaries
and benefits expense on an accrual basis. The Company had no recognition of
gain or loss from the discontinuance of such plan.
Net occupancy and equipment expense aggregated $1,213 for the year-ended
December 31,
1996, similar to the amount recorded for the same period last year. Such
expenses,
as well as other noninterest expenses, are expected to increase slightly for
1997 as
the Company introduced a document imaging system during the fourth quarter of
1996.
The system will eliminate the requirement of returning cancelled checks to
customers
by replacing them with computer-generated facsimiles. Such technology will
enhance
the Company's effectiveness and efficiency in serving customers and will reduce
ongoing operating costs. The Company has no pending material commitment for
capital expenditures other than those incurred in the normal course of business.
Other expenses totaled $2,362 in 1996, a decrease of $582 or 19.8 percent
compared to
the $2,944 recorded in 1995. Such decline was due in large part to a reduction
in
FDIC premiums paid by the Company in 1996. Under the new structure approved by
the
FDIC Board of Directors on November 14, 1995, and put into effect on
January 1, 1996,
the Company was assessed the $2 minimum annual FDIC insurance payment for 1996
based
on its current risk characteristic. As a product of maintaining this rating,
the
Company's FDIC insurance expense decreased $369 for 1996 from $417 in 1995 to
$48 in 1996.
At the end of the third quarter of 1996, the President signed into law the
Deposit
Insurance Funds Act of 1996. This law included the FDIC approval of a one-time
special assessment that SAIF members were required to pay to recapitalize the
fund.
The assessment brought the SAIF to a level of $1.25 for every one hundred
dollars in
insured deposits. This one-time assessment had no effect on the Company's
noninterest expenses as it had no such deposits. Also under the new law,
effective
January 1, 1997, SAIF members will recapitalize the thrift insurance fund
through the
assessment, and the measure anticipates that the insurance funds will eventually
be
merged. As a final component of this new law, BIF-insured institutions will be
responsible for part of the $780.0 million annual Finance Corporation ("FICO")
interest payments. For the three-year period from January 1, 1997, through
December
31, 1999, the BIF assessment rate for FICO will be one-fifth of the SAIF rate.
The
assessment rate for the first semiannual period of 1997 was set at 1.30 basis
points
annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-
assessable deposits. The rates may be adjusted quarterly to reflect changes in
the
assessment bases for the BIF and the SAIF. By law, the FICO rate on
BIF-assessable
deposits must be one-fifth the rate on SAIF-assessable deposits until the merger
of
the two funds occurs or until January 1, 2000, whichever occurs first. The
Company
estimates an increase of $39 in FDIC insurance premiums for 1997 based on the
provisions of this law.
The following table sets forth the major components of noninterest expense for
the past five years:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes........................................ $3,251 $3,429 $3,022 $2,585 $2,432
Employee benefits................................................. 557 599 760 746 614
------ ------ ------ ------ ------
Salaries and employee benefits expense.......................... 3,808 4,028 3,782 3,331 3,046
------ ------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense............................................. 602 684 784 680 579
Equipment expense................................................. 611 538 465 654 781
------ ------ ------ ------ ------
Net occupancy and equipment expense............................. 1,213 1,222 1,249 1,334 1,360
------ ------ ------ ------ ------
Other expenses:
Marketing expense................................................. 242 281 201 211 177
Other taxes....................................................... 218 200 191 127 199
Stationery and supplies........................................... 226 250 262 338 337
Contractual services.............................................. 871 879 727 597 682
Insurance including FDIC assessment............................... 84 480 717 807 630
Other............................................................. 721 854 820 1,107 821
------ ------ ------ ------ ------
Other expenses.................................................. 2,362 2,944 2,918 3,187 2,846
------ ------ ------ ------ ------
Total noninterest expense..................................... $7,383 $8,194 $7,949 $7,852 $7,252
====== ====== ====== ====== ======
</TABLE>
INCOME TAXES:
The Company reported tax expense of $1,013 in 1996 compared to a tax benefit of
$552
in 1995. The effective tax rate for 1996 at 19.4 percent was the lowest rate
recorded for any year with taxable income. Such rate was significantly better
than
the effective tax rate of the peer group at 25.0 percent during the comparable
period. Management increased emphasis on acquiring tax-exempt loans and
investments
and utilized investment tax credits to effectuate the favorable tax rate. The
tax
benefit reported in 1995 was 156.8 percent of the loss before tax and above the
marginal tax rate due to the effect of tax-exempt income. The Company was able
to
utilize the tax benefit because of taxable income in previous years and
expectations
of the future realization of the benefit. Management expects the Company's
effective
tax rate for 1997 to remain near the 1996 level for the same reasons given for
the
previous year. The Company's investment in a limited partnership interest in a
residential housing program designed for the elderly and for low- to
moderate-income
families provided it with tax credits of $160 in 1996. The aggregate amount of
tax
credits available from such project that will be recognized over ten years
ending 2003 is $895.
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.
INDEPENDENT AUDITORS' REPORT
Board of Directors
and Stockholders
Comm Bancorp, Inc.
Forest City, Pennsylvania
We have audited the accompanying consolidated balance sheets of Comm Bancorp,
Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the
years in the three-year period ended December 31, 1996. These consolidated
financial
statements are the responsibility of the Company's management. Our
responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Comm Bancorp, Inc.
and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and
their cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
February 6, 1997
/s/Kronick Kalada Berdy & Co.
KRONICK KALADA BERDY & CO., P.C.
Kingston, Pennsylvania
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................... $ 18,444 $17,238 $15,761
Tax-exempt................................................................ 310 240 179
Interest on investment securities held to maturity:
Taxable................................................................... 3,830 4,134
Tax-exempt................................................................ 895 1,199
Interest and dividends on investment securities available for sale:
Taxable................................................................... 3,914 2,839 3,518
Tax-exempt................................................................ 1,983 305
Dividends................................................................. 108 120 79
Interest on trading account securities...................................... 95
Interest on deposits with banks............................................. 9 18
Interest on federal funds sold.............................................. 300 991 8
--------- ------- -------
Total interest income................................................... 25,059 26,467 24,991
--------- ------- -------
INTEREST EXPENSE:
Interest on deposits........................................................ 13,454 14,093 12,149
Interest on short-term borrowings........................................... 3 677 545
Interest on long-term debt.................................................. 93 224 248
--------- ------- -------
Total interest expense.................................................. 13,550 14,994 12,942
--------- ------- -------
Net interest income..................................................... 11,509 11,473 12,049
Provision for loan losses................................................... 300 435 800
--------- ------- -------
Net interest income after provision for loan losses..................... 11,209 11,038 11,249
--------- ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions....................................... 1,445 1,197 1,166
Net investment securities gains (losses).................................... (58) (4,393) 495
Trading account losses...................................................... (656)
--------- ------- -------
Total noninterest income (losses)....................................... 1,387 (3,196) 1,005
--------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense...................................... 3,808 4,028 3,782
Net occupancy and equipment expense......................................... 1,213 1,222 1,249
Other expenses.............................................................. 2,362 2,944 2,918
--------- ------- -------
Total noninterest expense............................................... 7,383 8,194 7,949
--------- ------- -------
Income (loss) before income taxes........................................... 5,213 (352) 4,305
Provision for income tax expense (benefit).................................. 1,013 (552) 980
--------- ------- -------
Net income.............................................................. $ 4,200 $ 200 $ 3,325
========= ======= =======
PER SHARE DATA:
Net income.................................................................. $ 1.91 $ 0.09 $ 1.51
Cash dividends declared..................................................... $ 0.28 $ 0.21 $ 0.21
Average common shares....................................................... 2,200,080 2,200,080 2,200,071
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks.............................................................. $ 7,732 $ 6,890
Interest-bearing deposits with banks................................................. 90
Federal funds sold................................................................... 3,300 15,100
Investment securities available for sale............................................. 101,994 108,706
Loans, net of unearned income........................................................ 235,803 213,835
Less: allowance for loan losses.................................................... 3,944 3,903
-------- --------
Net loans............................................................................ 231,859 209,932
Premises and equipment, net.......................................................... 3,092 3,070
Accrued interest receivable.......................................................... 2,671 2,872
Other assets......................................................................... 4,164 4,288
-------- --------
Total assets..................................................................... $354,812 $350,948
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing................................................................ $ 26,424 $ 25,423
Interest-bearing................................................................... 294,032 291,676
-------- --------
Total deposits................................................................... 320,456 317,099
Long-term debt....................................................................... 46 3,048
Accrued interest payable............................................................. 1,758 1,761
Other liabilities.................................................................... 1,296 1,145
-------- --------
Total liabilities................................................................ 323,556 323,053
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding
2,200,080 shares.................................................................... 726 733
Capital surplus...................................................................... 6,317 6,310
Retained earnings.................................................................... 23,649 20,072
Net unrealized gain on available for sale securities................................. 564 780
-------- --------
Total stockholders' equity....................................................... 31,256 27,895
-------- --------
Total liabilities and stockholders' equity....................................... $354,812 $350,948
======== ========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED GAIN (LOSS) ON STOCKHOLDERS'
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 STOCK SURPLUS EARNINGS SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............................. $733 $6,310 $17,464 $24,507
Net income............................................ 3,325 3,325
Dividends declared: $0.21 per share.................... (455) (455)
Net unrealized loss on securities...................... $(4,688) (4,688)
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1994............................. 733 6,310 20,334 (4,688) 22,689
Net income............................................. 200 200
Dividends declared: $0.21 per share.................... (462) (462)
Net unrealized gain on securities:
Securities transferred to available for sale........... 1,249 1,249
Other.................................................. 4,219 4,219
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1995............................. 733 6,310 20,072 780 27,895
Net income............................................. 4,200 4,200
Dividends declared: $0.28 per share.................... (623) (623)
Net unrealized loss on securities...................... (216) (216)
Three-for-one stock split.............................. (7) 7
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1996............................. $726 $6,317 $23,649 $ 564 $31,256
==== ====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 4,200 $ 200 $ 3,325
Adjustments:
Provision for loan losses................................................... 300 435 800
Depreciation and amortization............................................... 714 645 667
Amortization of loan fees................................................... (215) (179) (173)
Deferred income tax benefit................................................. (66) (140) (193)
(Gains) losses on sale of investment securities available for sale.......... 58 4,393 (495)
Gains on sale of loans...................................................... (72)
Gains on sale of other real estate.......................................... (35) (36) (9)
Changes in:
Trading account securities................................................ 287
Interest receivable....................................................... 201 (236) (322)
Other assets.............................................................. 61 (783) (173)
Interest payable.......................................................... (3) 205 316
Other liabilities......................................................... 203 95 (48)
-------- -------- --------
Net cash provided by operating activities............................... 5,418 4,527 3,982
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities.......................... 1,472 87,103 13,618
Proceeds from repayments of investment securities:
Held to maturity............................................................ 2,970 13,833
Available for sale.......................................................... 25,183 1,887 1,532
Purchases of investment securities:
Held to maturity............................................................ (179) (9,597)
Available for sale.......................................................... (20,237) (44,028) (29,284)
Proceeds from sale of loans................................................... 5,591
Proceeds from sale of other real estate....................................... 279 457 291
Net increases in lending activities........................................... (22,235) (25,434) (18,483)
Purchases of premises and equipment........................................... (518) (204) (860)
-------- -------- --------
Net cash provided by (used in) investing activities..................... (16,056) 28,163 (28,950)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts................. (1,842) (13,946) 4,560
Time deposits............................................................... 5,199 14,877 14,374
Short-term borrowings....................................................... (15,956) 6,815
Proceeds from the issuance of long-term debt.................................. 50
Payments on long-term debt.................................................... (3,002) (2,002) (800)
Cash dividends paid........................................................... (675) (456) (448)
-------- -------- --------
Net cash provided by (used in) financing activities..................... (320) (17,483) 24,551
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.................... (10,958) 15,207 (417)
Cash and cash equivalents at beginning of year.......................... 21,990 6,783 7,200
-------- -------- --------
Cash and cash equivalents at end of year................................ $ 11,032 $ 21,990 $ 6,783
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest.................................................................... $ 13,553 $ 14,789 $ 12,626
Income taxes................................................................ 1,315 114 1,511
Noncash items:
Transfers of:
Loans to other real estate................................................ 223 636 260
Investments from held to maturity to available for sale................... 105,799
Investments from available for sale to held to maturity................... 17,470
Investments from trading account to held to maturity or available for sale 3,676
Change in net unrealized losses (gains) on available for sale securities.... $ 216 $ (5,468) $ 4,688
</TABLE>
See notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of operations:
Comm Bancorp, Inc., a bank holding company incorporated under the laws of
Pennsylvania, has one wholly-owned subsidiary, Community Bank and Trust Company
("Community Bank"), through which it provides a full range of banking and
related
financial services to individuals and commercial customers within four counties
of
Pennsylvania. Susquehanna and Wyoming counties account for the predominant
portion
of Comm Bancorp's business activities, with Lackawanna and Wayne counties
contributing to a lesser degree. The primary product of the subsidiary is the
extension of credit to finance one-to-four family residential properties. Other
products include loans to customers who are small- and middle-market businesses
and
middle-income individuals. The subsidiary funds its loans by offering time,
savings,
money market and demand deposit accounts to commercial enterprises and
individuals.
Comm Bancorp, Inc. and Community Bank (collectively, the "Company") are subject
to
regulations of certain federal and state agencies and accordingly, undergo
periodic examinations from such regulatory agencies.
Basis of presentation:
The consolidated financial statements of the Company have been prepared in
conformity
with generally accepted accounting principles, Regulation S-X, Item 302 of
Regulation
S-K, and reporting practices applied in the banking industry. The Company also
presents herein condensed parent company only financial information regarding
Comm
Bancorp, Inc. (the "Parent Company"). All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Prior
period amounts are reclassified when necessary to conform with the current
year's presentation.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reporting amounts of assets and liabilities and disclosure of
contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. Significant estimates that are
particularly susceptible to material change in the next year relate to the
allowance
for loan losses, foreclosed assets, and certain intangible assets, such as
goodwill
and the assumptions used to determine fair value. It is at least reasonably
possible that these estimates will change within the next year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The allowance is maintained at a level believed adequate by management to absorb
estimated potential credit losses. While historical loss experience
provides a reasonable starting point in assessing the adequacy of the allowance
account, management also considers a number of relevant factors that are likely
to
cause estimated credit losses associated with the Company's current portfolio to
differ from historical loss experience. Such factors include changes in lending
policies and procedures, economic conditions, nature and volume of the
portfolio,
loan review system, volumes of past due and impaired loans, concentrations,
borrowers' financial status, collateral value, and other factors deemed relevant
by
management. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change. The
Company employs the December 21, 1993, federal banking regulatory agencies'
Interagency Policy Statement on the Allowance for Loans and Lease Losses as the
primary analytical tool in assessing the adequacy of the allowance account.
Additionally, regulatory agencies, as an integral part of their examination
process,
periodically review the Company's allowance for loan losses and foreclosed real
estate. Such agencies may require the Company to recognize additions to the
allowance based on information available to them at the time of their
examination.
Management is unaware of any such requirements based on the results of the
Company's latest regulatory examination at September 30, 1996.
The valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans is written-down to the lower of the related loan balance
or
eighty percent of fair market value based upon estimates derived through
independent
appraisals. However, realization of sales proceeds may ultimately be higher or
lower than those estimates.
Substantially all outstanding goodwill resulted from the 1993 acquisition of The
First National Bank of Nicholson. However if the future benefits are not
derived,
estimated amortization may increase and/or a charge for impairment may be
recognized.
Investment securities:
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain
Investments in Debt and Equity Securities," requires investments to be
classified and
accounted for as either held to maturity, available for sale, or trading account
securities based on management's intent at the time of acquisition. Management
is
required to reassess the appropriateness of such classifications at each
reporting date.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company classifies debt securities as held to maturity when management has
the
positive intent and ability to hold such securities to maturity. Held to
maturity
securities are stated at cost, adjusted for amortization of premium and
accretion of discount.
Investment securities are designated as available for sale when they are to be
held
for indefinite periods of time as management intends to use such securities to
implement asset/liability strategies or to sell them in response to changes in
interest rates or resultant prepayment risk, liquidity requirements, or other
circumstances identified by management. Available for sale securities are
reported
at fair value, with unrealized gains and losses, net of income taxes, excluded
from
earnings and reported in a separate component of stockholders' equity. All
marketable
equity securities are accounted for at fair value. Restricted investment
securities
of the Federal Home Loan Bank ("FHLB-Pgh") and Federal Reserve Bank ("FRB") are
carried at cost. Estimated fair values for investment securities are based on
quoted market prices from a national electronic pricing service.
Management periodically evaluates each investment security to determine whether
a
decline in fair value below the amortized cost basis is other than temporary.
If a
decline is judged to be other than temporary, the cost basis of the individual
security is written-down to fair value with the amount of the write-down
included in
earnings. Realized gains and losses are computed using the specific
identification
method and are included in noninterest income. Premiums are amortized and
discounts
are accreted using the interest method over the contractual lives of investment
securities, except for mortgage backed securities, where amortization and
accretion are based on principal repayments.
Securities that are bought and held principally for the purpose of selling them
in
the near term, in order to generate profits from market appreciation, are
classified
as trading account securities. Trading account securities are carried at market
value. Interest on trading account securities is included in interest income.
Profits or losses on trading account securities are included in noninterest
income.
The Company discontinued its trading activities prior to the fourth quarter of
1994, thus eliminating its trading account classification.
Transfers of securities between categories are recorded at fair value at the
date of
the transfer, with the accounting treatment of unrealized gains or losses
determined by the category into which the security is transferred.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans:
Loans are stated at principal amounts outstanding, net of unearned interest and
net unamortized loan fees. Interest income is accrued on the principal
amount outstanding, except for discounted loans, with interest recognized over
the
respective loan terms utilizing the effective interest method. Loan origination
fees, net of certain direct loan origination costs, are deferred and recognized
over the contractual life of the related loan as an adjustment of yield.
The Company does not sell, provide servicing for others, or securitize mortgage
loans. Accordingly, SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
adopted
by the Company on January 1, 1996, had no effect on operating results or
financial position.
Nonperforming assets:
In accordance with the guidance set forth in SFAS No. 114, "Accounting by
Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment
of a Loan - Income Recognition and Disclosures," a loan is considered impaired
when,
based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured based on the present value of expected future
cash
flows discounted at a loan's effective interest rate or, as a practical
expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is
collateral-dependent. When the measure of an impaired loan is less than the
recorded
investment in the loan, the impairment is recognized by adjusting the allowance
for
loan losses with a corresponding charge to the provision for loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed assets.
Accruing
loans past due 90 days or more and loans impaired under SFAS Nos. 114 and 118
comprise nonperforming loans. Impaired loans consist of nonaccrual and
restructured
loans. A loan is classified as nonaccrual when it is determined that the
collection
of all or a portion of interest or principal is doubtful or when a default of
interest or principal has existed for 90 days or more, unless such loan is well
secured and in the process of collection. When a loan is placed on nonaccrual,
interest accruals discontinue and uncollected accrued interest is reversed
against
income in the current period. Interest collections after a loan has been placed
on
nonaccrual status are credited to income when received unless the collectibility
of
principal is in doubt, causing all collections to be applied as principal
reductions.
A nonaccrual loan is not returned to performing status until such loan is
current as
to principal and interest and has performed with the contractual terms for a
minimum of six months.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Restructured loans are loans with original terms, interest rate, or both, that
have
been modified as a result of a deterioration in the borrower's financial
condition.
Interest income on restructured loans is recognized as earned, using the
interest
method. The Company had the same one restructured loan during 1996 and 1995.
Foreclosed assets are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified
as
in-substance foreclosures. The Company includes such properties in other
assets. A
loan is classified as in-substance foreclosure when the Company has taken
possession
of the collateral regardless of whether formal foreclosure proceedings take
place.
Foreclosed assets are recorded at the lower of the related loan balance or 80.0
percent of its appraised fair value at the time of acquisition. Any excess of
the
loan balance over the recorded value is charged to the allowance for loan
losses.
Subsequent declines in the recorded value of the property prior to its disposal
and
costs to maintain the assets are included in other expense. In addition, any
gain or
loss realized upon disposal is included in other income or expense. The
historical average holding period for such properties is less than twelve
months.
Allowance for loan losses:
The allowance for loan losses account is established through charges to earnings
in
the form of a provision for loan losses. Loans, or portions of loans,
determined to
be uncollectible are charged against the allowance account and subsequent
recoveries,
if any, are credited to the account. Nonaccrual, restructured and large
delinquent
commercial and real estate loans are reviewed monthly to determine if carrying
value
reductions are warranted. Consumer loans are considered losses when they are
120 days
past due, except loans that are expected to be recovered through insurance or
collateral disposition proceeds. Under SFAS No. 114, the allowance for loan
losses
related to impaired loans is based on discounted cash flows using the loan's
initial
effective interest rate or the fair value of the collateral for certain
collateral-dependent loans.
Off-balance sheet financial instruments:
In the ordinary course of business, the Company has entered into off-balance
sheet
financial instruments consisting of commitments to extend credit, commitments
under
home equity and credit card arrangements, and commercial letters of credit.
Such
financial instruments are recorded in the financial statements when they are
exercised.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Premises and equipment, net:
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to noninterest expense over the estimated useful lives
of the
assets and is computed by using the straight-line method. Useful lives of up to
45 years for premises and up to 12 years for equipment are utilized. Leasehold
improvements are amortized on a straight-line basis over the terms of the leases
or
the estimated useful lives of the improvements, whichever is shorter. Land is
carried at cost. Expenditures for maintenance and repairs are expensed as
incurred.
The costs of significant replacements, renewals and betterments are capitalized.
When assets are retired or otherwise disposed of, the cost and related
accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in noninterest income or noninterest expense.
Long-lived and intangible assets:
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived
Assets to be Disposed of," establishes accounting standards for the impairment
of
long-lived assets, certain identifiable intangibles and goodwill related to
those
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for
impairment whenever events or changes in circumstances indicate that the
carrying
amount of an asset may not be recovered. The excess cost over the net assets
acquired accounted for as a purchase, goodwill, is included in other assets and
amortized on a straight-line basis over 15 years. The Company's adoption of
SFAS No.
121 on January 1, 1996, had no material effect on operating results or financial
position.
Employee benefit plans:
The Company has a defined contribution plan covering all employees who have
completed
1,000 hours of service, attained 21 years of age and have been employed by the
Company for at least one year. Contributions to the plan are determined by the
Board
of Directors and are based on a prescribed percentage of the annual compensation
of
all participants. Pension costs are accrued monthly to salaries and benefits
expense with the plan being funded annually.
In addition, the Company had a defined compensation plan for certain senior
management employees that it discontinued during the third quarter of 1996.
Costs
for such plan were recognized monthly in salaries and benefits expense on an
accrual
basis. The Company had no recognition of gain or loss from the discontinuance
of such plan in 1996.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Trust assets:
Assets held in a fiduciary or agency capacity for customers are not included in
the
accompanying consolidated balance sheets, since such assets are not assets of
the
Company. Trust income is recorded on a cash basis, which is not materially
different than if reported on an accrual basis.
Fair value of financial instruments:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
such
instruments are recognized on the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the
discount rate and estimates of future cash flows. In that regard, the derived
fair
value estimates cannot be substantiated by comparison to independent markets.
In
many cases, these values cannot be realized in immediate settlement of the
instrument.
Fair value estimates are based on existing financial instruments without
attempting
to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial. Accordingly, such assets and
liabilities are excluded from disclosure requirements. For example, no benefit
is
recorded for the value of low cost funding subsequentially discussed. In
addition,
the subsidiary's trust department contributes fee income annually. Trust assets
or
liabilities are not considered financial instruments for this disclosure, and
their
values have not been incorporated into the fair value estimates. Other
significant
items that are not considered financial instruments include deferred tax assets,
premises and equipment, foreclosed assets and certain intangibles. Accordingly,
the
net aggregate fair value amounts presented do not represent the underlying value
of
the Company. At December 31, 1996 and 1995, approximately 98.0 percent of the
Company's assets and 99.6 percent of its liabilities were considered financial
instruments as defined in SFAS No. 107.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying values of cash, noninterest-bearing balances due from banks, and
federal funds sold as reported on the balance sheet approximate fair value.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Interest-bearing deposits with banks:
The carrying value of interest-bearing deposits with banks as reported on the
balance sheet approximates fair value.
Investment securities:
The fair value of investment securities is based on quoted market prices. The
carrying values of restricted equity securities approximate fair values.
Loans:
For variable rate loans that reprice frequently and with no significant credit
risk,
fair values are based on carrying values. The fair values of all other loans
are
estimated using discounted cash flow analysis, using interest rates currently
offered
for loans with similar terms to borrowers of similar credit risk. Fair values
for
impaired loans are estimated using discounted cash flow analyses determined by
the loan review function or underlying collateral values, where applicable.
Accrued interest receivable:
The carrying value of accrued interest receivable as reported on the balance
sheet approximates fair value.
Deposits without stated maturities:
The fair value of demand deposits, savings accounts and certain money market
accounts
as required by SFAS No. 107 is the amount payable on demand at the reporting
date.
The fair value estimates do not include the benefit that results from such
low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market.
Deposits with stated maturities:
The carrying value of variable rate, fixed-term time deposits approximates their
fair
value at the reporting date. The present value of future cash flows for
fixed-rate
time deposits is used to estimate fair value. The discount rates used are the
current rates offered for time deposits with similar maturities.
Long-term debt:
The fair value of the fixed-rate, long-term debt is estimated based on rates
currently available to the Company for debt with similar terms.
Accrued interest payable:
The carrying value of accrued interest payable as reported on the balance sheet
approximates fair value.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Commitments:
The majority of the Company's commitments to extend credit, unused portions of
home
equity and credit card lines, and letters of credit carry current market
interest
rates if converted to loans. Because such commitments are generally
unassignable by
either the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts and is included in net loans.
Statements of cash flows:
The statements of cash flows are presented using the indirect method. For the
purpose of cash flow, cash and cash equivalents include cash on hand, cash items
in
the process of collection, noninterest-bearing deposits with other banks,
balances
with the FRB and FHLB-Pgh, and federal funds sold. Federal funds sold are
highly liquid investments sold for one-day periods.
Charitable contributions:
SFAS No. 116, "Accounting for Contributions Received and Contributions Made,"
requires that the entire amount of contributions in the form of unconditional
promises to pay must be accrued and reflected as contribution expense in the
year of
the pledge. The measurement of the accrual required is based on the present
value of
future cash flows using the current market discount rate. The Company had no
such
commitments prior to 1996. Charitable pledges payable at December 31, 1996,
calculated as required under SFAS No. 116, amounted to $13.
Advertising costs:
The Company expenses advertising costs as incurred. Advertising costs totaled
$240, $280 and $201 in 1996, 1995 and 1994, respectively.
Income taxes:
The Company recognizes the current and deferred tax consequences of all
transactions
that have been recognized in the financial statements using the provisions of
the
enacted tax laws. Deferred tax assets and liabilities are recognized for the
estimated future tax effects of temporary differences by applying enacted
statutory
tax rates to differences between the financial statement carrying amounts and
the tax
bases of existing assets and liabilities. The amount of deferred tax assets is
reduced, if necessary, to the amount that, based on available evidence, will
more
likely than not be realized. As changes in tax laws or rates are enacted,
deferred
tax assets and liabilities are adjusted through the provision for income taxes.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Parent Company and its subsidiary file a consolidated federal income tax
return.
The subsidiary provides for income taxes on a separate return basis, and remits
to the Parent Company amounts determined to be currently payable.
Earnings per common share:
Earnings per common share is based on the weighted-average number of common
shares
outstanding during the period. Retroactive effect is given in the financial
statements for a three-for-one stock split effectuated April 1, 1996, which
changed the par value from $1.00 per share to $0.33 per share.
On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
128, "Earnings per Share." The objective of the SFAS is to issue a standard on
earnings per share that will simplify generally accepted accounting principles
in the
United States and, at the same time, will be compatible with international
standards.
According to the Statement, the presentation of primary Earnings Per Share
("EPS")
currently required by Accounting Principles Board ("APB") Opinion No. 15,
"Earnings
per Share," would no longer be required. Basic EPS, which represents income
available to common stockholders divided by the weighted-average number of
common
shares outstanding during the period, effectively replaces primary EPS. Diluted
EPS,
previously referred to as fully-diluted EPS, would be calculated in a similar
manner
as that prescribed by APB Opinion No. 15. SFAS No. 128 will be effective for
financial statements for fiscal years ending after December 15, 1997. The
Company's
adoption of such Statement in 1997 is not expected to have a material effect on
operating results or financial position.
2. CASH AND CASH EQUIVALENTS:
The Federal Reserve Act, as amended by the Monetary Control Act of 1980,
requires
that reserve balances on certain deposits of depository institutions be
maintained at
the FRB. The reserve balances were $1,194 and $1,057 at December 31, 1996 and
1995,
respectively. Such reserve balances averaged $1,159 in 1996 and $1,079 in 1995.
In
addition, compensating balances are maintained with various correspondent banks,
most
of which are not required, but are used to offset specific charges for
check
clearing and other services. The Company maintained compensating balances with
these
banks of $2,308 and $2,890 at December 31, 1996 and 1995, respectively.
Compensating
balances for correspondent banks averaged $3,750 in 1996 and $3,124 in 1995.
3. INVESTMENT SECURITIES:
SFAS No. 115 requires an enterprise to reassess the appropriateness of its
accounting
and reporting classifications of debt and equity securities at each reporting
date.
Accordingly, management transferred its entire held to maturity classification
to
available for sale at September 30, 1995. Such decision was made after reviewing
a
comprehensive analysis of the risk profile of its held to maturity
classification and
based on asset/liability management considerations. The transfer occurred for a
reason other than those that would not call into question the Company's intent
to
hold other debt securities to maturity. The securities transferred had an
amortized
cost of $105,799 and a fair value of $103,906 at the date of the transfer. The
Company recognized unrealized holding losses of $1,249, net of applicable income
taxes of $644, in a separate component of stockholders' equity as a result of
such
transfer. In conjunction with its review of the analysis, management made the
decision to sell certain available for sale securities at a loss after
September 30,
1995, some of which were transferred from the held to maturity portfolio. The
resulting loss of $2,500 on the sale was recognized in earnings in the third
quarter
of 1995, the period in which the decision to sell was made. The portion of such
loss
attributable to the securities transferred from the held to maturity portfolio
was
$1,825. Prior to the aforementioned transfer, the Company did not sell or
transfer any securities from its held to maturity classification.
Pursuant to SFAS No. 115, sales or transfers from the held to maturity
classification
for reasons other than those specified, call into question or taint an
enterprise's
intent to hold other debt securities to maturity. An enterprise would be
subject to
this tainting until such time when circumstances have changed so that management
can
assert with a greater degree of credibility that it now has the intent and
ability to
either classify security purchases as held to maturity or to transfer any
securities
into the held to maturity classification. The Company's transfer of held to
maturity
securities in 1995 occurred prior to the October 18, 1995, issuance of the FASB
Special Report, "A Guide to Implementation of Statement No. 115 on Accounting
for
Certain Investments in Debt and Equity Securities." Concurrent with the initial
adoption of the guidance set forth in the Special Report, the FASB temporarily
suspended the rule prohibiting sales or transfers from the held to maturity
classification allowing enterprises a one-time opportunity during the fourth
quarter
of 1995 to reassess the appropriateness of the classifications of all securities
without calling into question the intent of the enterprise. For enterprises
that
previously sold or transferred held to maturity securities for reasons that call
into
question their intent to hold other debt securities to maturity in the future,
this
one-time reassessment did not remove any existing limitations on an enterprise's
use
of the held to maturity classification. Accordingly, the Company did not
reestablish a held to maturity classification for purchases or transfers during
1996.
3. INVESTMENT SECURITIES (CONTINUED):
Management believes it can credibly assess its intent and ability to classify
purchases as held to maturity and to transfer existing securities into the held
to
maturity portfolio. It believes circumstances surrounding the 1995 transfer to
be a
one-time event as they resulted from the prior investment practices and actions
that
placed a significant exposure to interest rate risk on the Company.
Specifically,
the prior investment practices and actions included those that are referred to
as
unsuitable pursuant to the Board of Governors of the Federal Reserve System's
("Federal Reserve Board's") Supervisory Policy Statement on Securities
Activities
effective February 10, 1992, and revised April 15, 1994, and the Federal Reserve
Board's Supervisory Policy Statement on Structured Notes effective September 21,
1995. The Company's investment policy, as approved by the Board of Directors on
August 30, 1995, specifically prohibits any such activities, including option
and derivative transactions, from occurring in the future.
The following tables set forth the amortized cost and fair value of securities
classified as available for sale at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 35,677 $ 44 $102 $ 35,619
U.S. Government agencies.................... 18,836 1 231 18,606
State and municipals........................ 37,692 696 93 38,295
Mortgage backed securities.................. 7,050 32 24 7,058
Equity securities........................... 1,884 532 2,416
-------- ------ ---- --------
Total..................................... $101,139 $1,305 $450 $101,994
======== ====== ==== ========
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 43,494 $ 267 $ 10 $ 43,751
U.S. Government agencies.................... 26,516 21 324 26,213
State and municipals........................ 29,617 954 59 30,512
Mortgage backed securities.................. 6,124 53 23 6,154
Equity securities........................... 1,774 302 2,076
-------- ------ ---- --------
Total..................................... $107,525 $1,597 $416 $108,706
======== ====== ==== ========
</TABLE>
Proceeds from the sales of available for sale securities amounted to $1,472,
$87,103
and $13,618 in 1996, 1995 and 1994, respectively. The Company realized gross
gains
from securities sales of $8 in 1996, $320 in 1995 and $549 in 1994. Gross
losses on
securities sales of $66, $4,713 and $54 were realized in 1996, 1995 and 1994,
respectively. Income tax benefits related to net realized investment securities
losses of $58 in 1996 and $4,393 in 1995 were $20 and $1,494, respectively. The
Company incurred income tax expenses of $168 on $495 of net investment
securities
gains in 1994. The net unrealized holding gain, included as a separate
component of
stockholders' equity, amounted to $564, net of income taxes of $291, at
December 31, 1996. Such gain represents a change in the net
3. INVESTMENT SECURITIES (CONTINUED):
unrealized adjustment of $216, net of income tax benefits of $110, from
December 31,
1995. The net unrealized holding gain totaled $780, net of income taxes of
$401, at December 31, 1995.
The Company held collateralized mortgage obligations ("CMOs") during 1995 and
1994
deemed to be high-risk as defined in the Federal Reserve Board's Supervisory
Policy
Statement on Securities Activities. High-risk CMOs are defined as any mortgage
backed security that at the time of purchase, or at a subsequent testing date,
meets
any of the average life or interest sensitivity tests. The Company held no such
securities at December 31, 1996 and 1995, as all securities determined to be
high-risk CMOs and those that had the potential to become high-risk were
disposed of
during 1995. Proceeds from the sale of high-risk CMOs amounted to $27,674 in
1995
and $8,611 in 1994. Gross gains on such sales of $66 and $338 were realized in
1995
and 1994, respectively. Gross losses of $1,621 were realized on the sale of
Federal
Reserve Board defined high-risk CMOs in 1995. None of such Federal Reserve
Board
defined high-risk securities met the criteria for high-risk, nonequity CMOs as
defined in Issue 2 of FASB's Emerging Issues Task Force ("EITF") Issue No. 89-4,
"Accounting for a Purchased Investment
in a Collateralized Mortgage Obligation Instrument or in a Mortgage-Backed
Interest-Only Certificate." EITF Issue No. 89-4 defines high-risk, nonequity
CMOs as
those that have the potential for loss of a significant portion of their
original
investments due to changes in interest rates, prepayment rate of the assets of
the
CMO structure, or earnings from temporary reinvestment of cash collected by the
CMO
structure but not yet distributed to the holders of its obligations.
Accordingly
management, after considering whether such securities satisfied any of the three
subtests outlined above, did not discount these CMOs to the present value of
estimated future cash flows at a risk-free rate to determine whether or not an
other
than temporary impairment existed. Management applied the guidance to each type
of
CMO instrument, including those with unusual or unique terms or features, in
formulating its conclusion that such securities did not meet the EITF 89-4
definition of a high-risk, nonequity CMO.
At its November 14, 1996, meeting, the FASB EITF reached a consensus on Issue
No. 96-
12, "Recognition of Interest Income and Balance Sheet Classification of
Structured
Notes," requiring investors to use the retrospective interest method for
recognizing
income on structured notes that are classified as available for sale or held to
maturity securities and that meet one or more of three specified conditions.
Such
conditions relate to the risk of the contractual principal amount or the
original
investment amount of the note, the variability of the note's return on
investment,
and the basis of the note's contractual maturity. Such EITF provides guidance
for
purposes of determining the effective yield at which income will be recognized
under
the retrospective interest method for qualifying structured notes. Furthermore,
the EITF requires an enterprise
3. INVESTMENT SECURITIES (CONTINUED):
to determine whether an individual structured note security has experienced a
decline
in value below amortized costs that is other than temporary requiring a
write-down of
amortized cost, with the amount of the write-down included in earnings.
The Company sold the majority of its holdings of structured notes during the
1995
sale of certain available for sale securities. As a result, the carrying value
of
structured notes totaled $2.9 million at December 31, 1996 and 1995. After
receiving
a consensus opinion from external investment management consultants and review
by
regulatory agencies, management decided to continue to hold three structured
notes
having maturities of less than three years at December 31, 1995. Specifically,
such
securities include a dual-index floater, a delevered floater, and a multi-step
bond.
Each has a carrying value of approximately $1.0 million. The delevered floater
and
multi-step bond are not within the scope of EITF Issue No. 96-12 as their coupon
rates move in the same direction as market-based interest rates. However, the
coupon
rate on the dual-index floater is determined by the spread between two different
indices that will not necessarily move in the general direction of a specific
interest rate or index causing such instrument to be within the scope of EITF
Issue
No. 96-12. Management considered the guidance in accounting for the interest
income
of such security and determined it was not significantly different than the
method used.
Investment securities with an amortized cost of $35,099 and $33,997 at
December 31,
1996 and 1995, respectively, were pledged to secure deposits, to qualify for
fiduciary powers, and for other purposes required or permitted by law. The fair
value of such securities was $34,968 and $34,050 at December 31, 1996 and 1995,
respectively.
The following table sets forth the maturity distribution of the amortized cost,
fair
value and weighted-average tax equivalent yield of the available for sale
portfolio
at December 31, 1996. The weighted-average yield based on amortized cost has
been
computed for state and municipals on a tax equivalent basis using the statutory
tax
rate of 34.0 percent. The distributions are based on contractual maturity with
the
exception of mortgage backed securities, CMOs and equity securities. Mortgage
backed
securities and CMOs 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 years 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.
3. INVESTMENT SECURITIES (CONTINUED):
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
DECEMBER 31, 1996 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.... $15,034 5.62% $20,643 5.71% $ 35,677 5.67%
U.S. Government agencies.... 8,390 4.64 10,446 4.80 18,836 4.73
State and municipals........ 1,130 5.36 3,903 6.51 $6,150 8.50% $26,509 7.96% 37,692 7.82
Mortgage backed securities.. 923 6.76 5,841 6.35 286 6.26 7,050 6.40
Equity securities........... 1,884 5.78 1,884 5.78
------- ------- ------ ------- --------
Total..................... $25,477 5.33% $40,833 5.65% $6,436 8.40% $28,393 7.82% $101,139 6.35%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $15,020 $20,599 $ 35,619
U.S. Government agencies.... 8,324 10,282 18,606
State and municipals........ 1,131 3,918 $6,404 $26,842 38,295
Mortgage backed securities.. 929 5,891 238 7,058
Equity securities........... 2,416 2,416
------- ------- ------ ------- --------
Total..................... $25,404 $40,690 $6,642 $29,258 $101,994
======= ======= ====== ======= ========
</TABLE>
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of
Financial Instruments," established disclosures concerning derivatives and other
financial instruments. Derivatives are instruments
used to construct a transaction derived from and reflecting the underlying value
of
assets, other instruments or various indices. The main purpose of derivatives
is to
transfer price risk associated with the fluctuations in asset values as opposed
to
borrowing or lending funds. Because SFAS No. 119 excludes mortgage backed
securities
from its definition of derivative financial instruments, the Company's
involvement
was limited to its writing of covered option contracts on U.S. Treasury
securities,
which were subsequently exercised or expired. Such options were used to limit
the
Company's exposure to market fluctuations on investment securities and were not
used
for trading purposes. The writing of an option effectively limits the Company's
ability to hold the underlying security beyond the short-term, which
necessitates the
transfer of such assets to the trading account classification. The Company
recognized gross gains of $24 and gross losses of $110 in 1994 as a result of
transferring securities from the available for sale classification into the
trading
account. The Company did not recognize any such gains or losses in 1996 and
1995 as
a result of the discontinuance of writing option contracts prior to the fourth
quarter of 1994. Furthermore, the revised investment policy adopted in 1995
prohibits future option and trading activities.
Except for U.S. Treasury securities and U.S. Government agencies, there were no
securities of any individual issuer that exceeded 10.0 percent of the Company's
stockholders' equity at December 31, 1996 and 1995. All of
the investment securities in the Company's portfolio are considered "investment
grade," receiving a rating of "Baa" or higher from Moody's or "BBB" or higher
from
Standard and Poor's rating services, except for $2,416 of tax-exempt obligations
of local municipalities, at December 31, 1996.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES:
The following table sets forth the composition of the loan portfolio, net of
unearned
interest of $2,318 and $2,682 and net unamortized loan fees of $925 and $801 at
December 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and other................................... $ 31,744 $ 41,593
Real estate:
Construction.................................................... 3,698 1,014
Mortgage........................................................ 179,134 151,926
Consumer, net..................................................... 21,227 19,302
-------- --------
Total......................................................... $235,803 $213,835
======== ========
</TABLE>
Loans with fixed interest rates totaled $188,468 and $172,480, while loans with
variable interest rates totaled $47,335 and $41,355 at December 31, 1996 and
1995, respectively.
The following table sets forth maturity information of the loan portfolio by
major category at December 31, 1996:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1996 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and other...... $13,586 $ 9,428 $ 8,730 $ 31,744
Real estate:
Construction....................... 3,698 3,698
Mortgage........................... 5,295 21,713 152,126 179,134
Consumer, net........................ 2,720 11,788 6,719 21,227
------- ------- -------- --------
Total............................ $25,299 $42,929 $167,575 $235,803
======= ======= ======== ========
</TABLE>
Loans outstanding to directors, executive officers, principal stockholders, or
to any
of their associates, that are made in the ordinary course of business and on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others, totaled $5,006
at
December 31, 1996, and $3,157 at December 31, 1995. Originations totaled $4,037
while repayments totaled $2,188 for such loans during 1996. At
December 31, 1996 and
1995, none of such loans were classified as nonaccrual, past due, restructured
or potential problem loans.
At December 31, 1996, the Company had no concentrations of loans exceeding 10.0
percent of total loans, excluding locational concentrations, to individual or
multiple borrowers engaged in similar activities that would cause them to be
similarly affected by changes in economic or other conditions. During 1995, the
Company sold student loans with a carrying value of $5,519 to its servicing
agent.
The Company recognized a gain of $72 on such sale. The Company did not sell
loans in 1996 and had no loans for sale at December 31, 1996 and 1995.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The following table sets forth information concerning nonperforming assets at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others.................................... $ 251 $ 167
Real estate:
Construction......................................................
Mortgage.......................................................... 1,018 1,164
Consumer, net.......................................................
------- ------
Total nonaccrual loans.......................................... 1,269 1,331
------- ------
Restructured loans.................................................. 225 262
------- ------
Total impaired loans............................................ 1,494 1,593
------- ------
Accruing loans past due 90 days or more:
Commercial, financial and others.................................... 359 181
Real estate:
Construction......................................................
Mortgage.......................................................... 1,247 1,633
Consumer, net....................................................... 291 336
------ ------
Total accruing loans past due 90 days or more................... 1,897 2,150
------ ------
Total nonperforming loans....................................... 3,391 3,743
------ ------
Foreclosed assets................................................... 420 441
------ ------
Total nonperforming assets...................................... $3,811 $4,184
====== ======
</TABLE>
The average recorded investment in impaired loans was $1,528 in 1996 and $1,621
in
1995. The recorded investment in impaired loans was $1,494 and $1,593 at
December
31, 1996 and 1995, respectively. Included in these amounts were $1,269 and
$1,331,
respectively, for which there was a related allowance for loan losses of $650
and
$614, respectively. The recorded investment for which there was no related
allowance
for loan losses, was $225 and $262 at December 31, 1996 and 1995, respectively.
In
1996, activity in the allowance for loan losses account related to impaired
loans
included a provision charged to operations of $3, losses charged to the
allowance of
$92 and recoveries of amounts charged-off of $125. The activity in 1995 in the
allowance for loan losses account related to impaired loans included a provision
charged to operations of $4, losses charged to the allowance of $69 and
recoveries of
amounts charged-off of $191. Interest income related to impaired loans would
have
been $113, $66 and $136 in 1996, 1995 and 1994, respectively, had such loans
been
current and the terms of the loans not been modified. Interest income that
would
have been recognized on the restructured loan included in such amounts was $12
and $9
in 1996 and 1995, respectively. Interest recognized on impaired loans amounted
to
$30 in 1996, $92 in 1995 and $45 in 1994. Included in these amounts was
interest
recognized on a cash basis of $30, $87 and $40, respectively. The restructured
loan
accounted for $7 in 1996 and $5 in 1995 of interest recognized on impaired
loans.
Such impaired loan was included in nonaccrual loans in 1994. Accordingly,
interest
income that would have been recognized and amounts recognized were recorded as
part of
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
the nonaccrual amounts. Cash received on impaired loans applied as a reduction
of
principal totaled $398, $595 and $183 in 1996, 1995 and 1994, respectively.
There
were no commitments to extend additional funds to such parties at
December 31, 1996 and 1995.
The following table sets forth an analysis of changes affecting the allowance
for loan losses account for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1............................................. $3,903 $3,576 $3,169
Provision for loan losses...................................... 300 435 800
Loans charged-off.............................................. (726) (393) (550)
Loans recovered................................................ 467 285 157
------ ------ ------
Balance, December 31........................................... $3,944 $3,903 $3,576
====== ====== ======
</TABLE>
The Company generally lends within its quad-county trade area of Lackawanna,
Susquehanna, Wayne and Wyoming. To a great extent, the Company makes loans that
are
collateralized at least in part by real estate. Therefore, changes in the
general
economy, local economy, or on real estate values could have an effect on the
Company's lending activities.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES:
In the normal course of business, the Company is a party to financial
instruments
with off-balance sheet risk to meet the financing needs of its customers. Such
instruments involve, to varying degrees, elements of credit and interest rate
risk in
excess of the amount recognized in the financial statements. Management does
not
anticipate that losses, if any, which may occur as a result of funding
off-balance
sheet commitments would have a material adverse effect on the Company's results
of operations or financial position.
The following table identifies the contractual amounts of off-balance sheet
commitments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit........................................... $ 8,919 $7,191
Unused portions of home equity and credit card lines................... 1,349 1,382
Commercial letters of credit........................................... 635 1,009
------- ------
Total................................................................ $10,903 $9,582
======= ======
</TABLE>
The Company's involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit, unused portions of home equity and credit card lines and
commercial
letters of credit is represented by the contractual notional amounts of those
instruments. Commitments to extend
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
credit are agreements to lend to a customer as long as there is no violation of
any
condition established in the contract. Commitments generally have fixed
expiration
dates or other termination clauses and may require payment of a fee. Commercial
letters of credit are conditional commitments issued by the Company to support
customers in the purchase of
commercial goods. Such letters of credit are automatically renewable upon their
anniversary date unless cancelled prior to such date at the option of the
Company.
The Company employs the same credit policies and requirements in making
off-balance
sheet credit commitments as it does for on-balance sheet instruments. Provision
for
losses, if any, is included in the Company's allowance for loan losses. No
provision
was deemed necessary at December 31, 1996 and 1995. Such commitments are
generally
issued for one year or less and often expire unused in whole or in part by the
customer.
The Company provides deposit and loan products and other financial services to
consumer and corporate customers in its quad-county market area of Lackawanna,
Susquehanna, Wayne and Wyoming. There are no significant concentrations of
credit
risk from any individual counterparty or groups of counterparties, except for
locational concentrations. The concentrations of the credit portfolio by loan
type
are set forth in Note 4. The Company requires collateral on all real estate
exposure
and most other loans, including off-balance sheet commitments upon extension of
credit, and maintains loan-to-value ratios of no greater than 80.0 percent,
except in
the case of loans secured by deposits or U.S. Government securities. The amount
of
collateral obtained is based on management's credit evaluation of the customer.
Collateral held varies but may include property, plant and equipment, primary
residential properties, and to a lesser extent, income-producing properties.
Although the credit portfolio is diversified, the Company and its borrowers are
dependent on the continued viability of the Northeastern Pennsylvania economy.
The
loan portfolio does not consist of any form of credit involving highly-leveraged
transactions, defined as financing transactions that involve the buyout,
acquisition
or recapitalization of an existing business, including credits extended to
highly-leveraged industries.
Securities and short-term investment activities are conducted with a diverse
group of
government entities, corporations and depository institutions. The Company
evaluates
the counterparty's creditworthiness and the need for collateral on a
case-by-case
basis. At December 31, 1996 and 1995, there were no significant concentrations
of
credit risk from any one issuer with the exception of U.S. Treasury securities
and U.S. Government agencies.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
There is no material legal proceeding to which the Company is a party, or to
which
any of its property is the subject, except proceedings that arise in the normal
course of business. Management, after consultation with
legal counsel, does not anticipate that the ultimate liability, if any, arising
out
of pending and threatened lawsuits will have a material effect on the Company's
results of operations or financial position.
6. PREMISES AND EQUIPMENT, NET:
The following table sets forth the major components of premises and furniture
and equipment at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Land.................................................................... $ 187 $ 187
Premises................................................................ 4,715 4,416
Leasehold improvements.................................................. 243 166
Furniture and equipment................................................. 3,156 3,032
------ ------
8,301 7,801
Less: accumulated depreciation.......................................... 5,209 4,731
------ ------
Total................................................................. $3,092 $3,070
====== ======
</TABLE>
Amounts charged to noninterest expense for depreciation amounted to $496, $428
and $450 in 1996, 1995 and 1994, respectively.
Certain facilities and equipment are leased under operating lease agreements
expiring
at various dates until the year 2009. Two leases contain escalation clauses
that
provide for cost of living adjustments, and several contain renewal options.
The
realty leases require the Company to pay real estate taxes, insurances and
repair
costs. Rental expense on all such operating leases amounted to $281 in 1996,
$304 in
1995 and $308 in 1994. Minimum required annual rentals for each of the years
1997
through 2001 are $128, $69, $69, $70 and $66, respectively, and $412,
thereafter, totaling $814.
7. OTHER ASSETS:
The following table sets forth the major components of other assets at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill................................................................ $1,440 $1,659
Deferred income taxes................................................... 1,051 875
Foreclosed assets....................................................... 420 441
Other................................................................... 1,253 1,313
------ ------
Total................................................................. $4,164 $4,288
====== ======
</TABLE>
Total amortization expense on goodwill amounted to $218 per year for 1996, 1995
and 1994.
8. DEPOSITS:
The following table sets forth the major components of interest-bearing and
noninterest-bearing deposits at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing deposits:
Money market accounts............................................ $ 16,168 $ 19,252
NOW accounts..................................................... 17,915 14,989
Savings accounts................................................. 66,037 68,722
Time deposits less than $100..................................... 158,047 159,029
Time deposits $100 or more....................................... 35,865 29,684
-------- --------
Total interest-bearing deposits................................ 294,032 291,676
Noninterest-bearing deposits....................................... 26,424 25,423
-------- --------
Total deposits................................................. $320,456 $317,099
======== ========
</TABLE>
The Company accepts deposits of its directors, executive officers, principal
stockholders or any of their associates on the same terms and at the prevailing
interest rates offered at the time of deposit for comparable transactions with
unrelated parties. The aggregate amount of deposits of such related parties was
$1,522 and $1,419 at December 31, 1996 and 1995, respectively.
The following table sets forth maturities of time deposits $100 or more at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within three months................................................... $ 8,598 $ 6,466
After three months but within six months.............................. 9,958 6,646
After six months but within twelve months............................. 11,262 8,590
After twelve months................................................... 6,047 7,982
------- -------
Total............................................................... $35,865 $29,684
======= =======
</TABLE>
Interest expense on time deposits $100 or more amounted to $1,647, $1,771 and
$1,553
in 1996, 1995 and 1994, respectively. The aggregate amounts of maturities for
all
time deposits at December 31, 1996, were $118,506 in 1997, $30,332 in 1998,
$20,638
in 1999, $16,394 in 2000, $6,519 in 2001 and $1,523 thereafter. The aggregate
amount
of transaction accounts reclassified as loans was $212 and $126 at
December 31, 1996
and 1995, respectively. The Company had no deposits that were received on terms
other than those available in the normal course of business in 1996 and 1995.
9. SHORT-TERM BORROWINGS:
Short-term borrowings available to the Company consist of a line of credit and
fixed-
rate advances with the FHLB-Pgh secured under terms of a blanket collateral
agreement
by a pledge of FHLB-Pgh stock and certain other qualifying collateral, such as
investment and mortgage backed securities and mortgage loans. Such line has a
maximum borrowing capacity equal to
9. SHORT-TERM BORROWINGS (CONTINUED):
10.0 percent of total assets and accrues interest daily based on the federal
funds
rate. The line is renewable on the first day of each calendar year and carries
no
associated commitment fees. The FHLB-Pgh has the right to reduce or terminate
the
line at any time without prior notice and the Company may repay such line at any
time
without incurring prepayment penalties. Short-term, fixed-rate advances are
issued
with maturities less than one year based on the FHLB-Pgh's current cost of funds
rate. Such advances are limited to the Company's maximum borrowing capacity
based on
a percentage of qualifying collateral assets. There are no commitment fees and
the
advance may be prepaid at the option of the Company upon payment of a prepayment
fee.
The prepayment fee applicable to FHLB-Pgh advances is equal to the present value
of
the difference between cash flows generated at the advance rate from the date of
the
prepayment until the original maturity date, and the cash flows that would
result
from the interest rate posted by the FHLB-Pgh on the date of prepayment for an
advance of comparable maturity. The Company has not entered into repurchase
agreements with others during 1996 and 1995. Repurchase agreements consist of
transactions whereby an institution sells securities and agrees to repurchase
the
identical, or substantially the same securities, at a specified date for a
specified price.
At December 31, 1996, and December 31, 1995, the Company had no short-term
borrowings
outstanding. The average daily balance and weighted-average rate on aggregate
short-
term borrowings was $51 at 5.9 percent in 1996 and $9,935 at 6.8 percent in
1995.
The maximum amount of all short-term borrowings outstanding at any month-end was
$2,750 and $28,000 during 1996 and 1995, respectively. Short-term borrowings
during
1996 consisted entirely of the FHLB-Pgh line of credit. During 1995, the
FHLB-Pgh
line of credit included in total short-term borrowings had an average daily
balance
of $3,589 and weighted-average rate of 6.2 percent. The maximum amount of such
loan outstanding at any month-end was $17,600 during 1995.
On June 28, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial
assets and extinguishments of liabilities. Implementation guidance is provided
in
SFAS No. 125 for assessing isolation of transferred assets and for accounting
for
transfers of partial interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables, securities
lending
transactions, repurchase and reverse-repurchase agreements, dollar-roll
transactions,
wash sales, loan syndications and participations, risk participations in
banker's
acceptances, factoring arrangements, transfers of receivables with recourse, and
extinguishments of liabilities. The accounting and reporting standards in SFAS
No.
125 are based on consistent application of a financial-components approach that
focuses on control.
9. SHORT-TERM BORROWINGS (CONTINUED):
Under such approach, after a transfer of financial assets, an enterprise
recognizes
the financial and servicing assets it controls and the liabilities it has
incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes
liabilities when extinguished. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are
secured borrowings. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, except as amended in SFAS No. 127, "Deferral of the Effective Date of
Certain
Provisions of FASB Statement No. 125." SFAS No. 125 is to be applied
prospectively
with earlier or retroactive application prohibited. Specifically, the
provisions
identified as being deferred under SFAS No. 127 include secured borrowings,
collateralizations and transfers of financial assets that are part of repurchase
agreements, dollar-rolls, securities lending and similar transactions. The
adoption
of SFAS No. 125 standards in 1997 and those standards deferred by SFAS No. 127
until
1998 are not expected to have a material effect on operating results or
financial position.
10. LONG-TERM DEBT:
The following table sets forth the components of long-term debt at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
4.3% note due September 9, 1996.......................................... $3,000
7.5% note due September 2, 2009.......................................... $ 46 48
----- ------
Total.................................................................. $ 46 $3,048
===== ======
</TABLE>
The Company redeemed a 5.7 percent fixed-rate note due in 1997 in October 1995,
at
100.0 percent of the principal outstanding plus accrued interest. No prepayment
fee was required upon redemption of such note as the interest
rate on the advance approximated the prevailing interest rate at the date of the
prepayment for advances from the same amount and terms. The 4.3 percent
fixed-rate
advance of the FHLB-Pgh matured September 9, 1996, and was repaid in accordance
with
its contracted terms. The 7.5 percent FHLB-Pgh note is a fixed-rate, amortizing
advance from the FHLB-Pgh Community Investment Program that is subject to a
prepayment fee in the event the advance is repaid prior to maturity. The
scheduled
principal payments on such note total $2 for each of the five years 1997 through
2001. The prepayment fee applicable to FHLB-Pgh advances is aforementioned in
Note 9
to these financial statements. Such advances are secured under terms of a
blanket
collateral agreement by a pledge of qualifying investment and mortgage backed
securities, certain mortgage loans, and a lien on FHLB-Pgh stock. The average
daily
balance and weighted-average yield on long-term debt for 1996 were $2,122 and
4.38
percent, respectively. For 1995, the average daily balance and weighted-average
yield on long-term debt were $4,715 and 4.75 percent, respectively.
11. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution plan covering all employees who meet the
age
and service requirements. Salaries and employee benefits expense included $67
in 1996, $50 in 1995 and $87 in 1994 for the plan.
As aforementioned in Note 1 of these financial statements, the Company
discontinued
its deferred compensation plan for certain senior management employees in 1996.
Expense for such plan amounted to $16 in 1996, $29 in 1995 and $29 in 1994.
Funding for such plan was provided by life insurance contracts.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table represents the carrying value and estimated fair value of
financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................... $ 11,032 $ 11,032 $ 21,990 $ 21,990
Interest-bearing deposits with banks......... 90 90
Investment securities........................ 101,994 101,994 108,706 108,706
Net loans.................................... 231,859 230,579 209,932 214,595
Accrued interest receivable.................. 2,671 2,671 2,872 2,872
-------- -------- -------- --------
Total...................................... $347,556 $346,276 $343,590 $348,253
======== ======== ======== ========
Financial liabilities:
Deposits without stated maturities........... $126,544 $126,544 $128,386 $128,386
Deposits with stated maturities.............. 193,912 194,412 188,713 190,071
Long-term debt............................... 46 46 3,048 3,028
Accrued interest payable..................... 1,758 1,758 1,761 1,761
-------- -------- -------- --------
Total...................................... $322,260 $322,760 $321,908 $323,246
======== ======== ======== ========
</TABLE>
13. INCOME TAXES:
The following table sets forth the current and deferred amounts of the provision
for income tax expense (benefit) for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current......................................................... $1,079 $(412) $1,173
Deferred........................................................ (66) (140) (193)
------ ----- ------
Total......................................................... $1,013 $(552) $ 980
====== ===== ======
</TABLE>
13. INCOME TAXES (CONTINUED):
The following is a reconciliation between the effective income tax expense
(benefit)
and the amount of income taxes (benefit) that would have been provided at the
federal statutory rate of 34.0 percent for the three years ended
December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate............................ $1,773 $(120) $1,464
Differences resulting from:
Tax-exempt interest, net...................................... (668) (416) (408)
Excess of cost over net assets acquired....................... 74 74 74
Residential housing program tax credit........................ (160) (71)
Other......................................................... (6) (90) (79)
------ ----- ------
Total....................................................... $1,013 $(552) $ 980
====== ===== ======
</TABLE>
The sources of the change in deferred income taxes and the related tax effects
are as follows for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses...................................... $ (14) $ (111) $ (139)
Loans, net of unearned income.................................. (43) 18 (40)
Accrued interest receivable.................................... (26) (15) 20
Premises and equipment, net.................................... (28) (37) (30)
Other, net..................................................... 45 5 (4)
----- ------ -------
Change in deferred income taxes affecting the statements of
income...................................................... (66) (140) (193)
Deferred income taxes on investment securities recognized in
stockholders' equity.......................................... (110) 2,816 (2,415)
----- ------ -------
Total change in deferred income taxes...................... $(176) $2,676 $(2,608)
===== ====== =======
</TABLE>
The significant components of temporary differences between the financial
statement
carrying amounts and tax bases of deferred tax assets and liabilities are as
follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................. $1,174 $1,160
Loans, net of unearned income......................................... 315 272
Accrued interest receivable........................................... 160 134
Other................................................................. 45
------ ------
Total............................................................... 1,649 1,611
------ ------
Deferred tax liabilities:
Investment securities................................................. 291 401
Premises and equipment, net........................................... 307 335
------ ------
Total............................................................... 598 736
------ ------
Net deferred tax assets............................................. $1,051 $ 875
====== ======
</TABLE>
13. INCOME TAXES (CONTINUED):
The Company has determined that it is not required to establish a valuation
reserve
for the deferred tax assets since it is more likely than not that the net
deferred
tax assets could be principally realized through carryback to taxable income in
prior
years and by future reversals of existing taxable temporary differences, or to a
lesser extent, through future taxable income. The Company reviews the tax
criteria related to the recognition of deferred tax assets on a quarterly basis.
Banks in Pennsylvania are not subject to state or local income taxes, however
they pay a tax on capital. Such tax is included in other expenses.
14. PARENT COMPANY FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary...................................... $ 753 $ 821 $1,617
Management fees from subsidiary................................ 176 180 180
Other income................................................... 69 51 64
------ ------ ------
Total income................................................. 998 1,052 1,861
------ ------ ------
Expense:
Interest....................................................... 4
Other expenses................................................. 565 654 601
------ ------ ------
Total expenses............................................... 565 654 605
------ ------ ------
Income before income taxes and undistributed income of
subsidiary.................................................... 433 398 1,256
Income tax benefits............................................ (200) (127) (130)
------ ------ ------
Income before undistributed income of subsidiary............... 633 525 1,386
Equity in undistributed income of subsidiary................... 3,567 (325) 1,939
------ ------ ------
Net income................................................... $4,200 $ 200 $3,325
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash................................................................... $ 253 $ 7
Investment in bank subsidiary.......................................... 30,240 27,337
Investment securities available for sale............................... 1,113 826
Other assets........................................................... 600 441
------- -------
Total assets......................................................... $32,206 $28,611
======= =======
Liabilities:
Dividends payable...................................................... $ 242 $ 293
Other liabilities...................................................... 708 423
------- -------
Total liabilities.................................................... 950 716
Stockholders' equity................................................... 31,256 27,895
------- -------
Total liabilities and stockholders' equity........................... $32,206 $28,611
======= =======
</TABLE>
14. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED):
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 4,200 $ 200 $ 3,325
Adjustments:
Equity in undistributed income of subsidiary................ (3,567) (1,939)
Distributions in excess of earnings of subsidiary........... 325
Gains on sale of investment securities...................... (8)
Changes in:
Other assets.............................................. 136 1 239
Other liabilities......................................... 208 (54) (103)
------- ------- -------
Net cash provided by operating activities............... 969 472 1,522
------- ------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities.................. 25
Purchases of investment securities............................ (73) (17) (388)
------- ------- -------
Net cash used in investing activities................... (48) (17) (388)
------- ------- -------
Cash flows from financing activities:
Payments of long-term debt.................................... (800)
Cash dividends paid........................................... (675) (455) (448)
------- ------ -------
Net cash used in financing activities................... (675) (455) (1,248)
------- ------ -------
Net increase (decrease) in cash......................... 246 (114)
Cash at beginning of year............................... 7 7 121
------- ------- -------
Cash at end of year..................................... $ 253 $ 7 $ 7
======= ======= =======
Supplemental disclosure:
Noncash item:
Change in net unrealized losses (gains) on available for
sale securities............................................ $ 216 $(5,468) $ 4,688
======= ======= =======
</TABLE>
15. REGULATORY MATTERS:
Under the Pennsylvania Business Corporation Law of 1988, as amended, the Company
may
not pay a dividend if, after giving effect thereto, either the Company would be
unable to pay its debts as they become due in the usual course of business, or
the
Company's total assets would be less than its total liabilities. The
determination
of total assets and liabilities may be based upon: financial statements prepared
on
the basis of generally accepted accounting principles; financial statements that
are
prepared on the basis of other accounting practices and principles that are
reasonable under the circumstances; or a fair valuation or other method that is
reasonable under the circumstances.
In addition, the Company is subject to Federal Reserve Regulation H, which
restricts
state member banks, such as Community Bank, from paying a dividend if the total
of
all dividends declared by Community Bank in any calendar year exceeds the total
of
its net profits, as defined, for that year combined with its retained net
profits, as defined, of the preceding
15. REGULATORY MATTERS (CONTINUED):
two calendar years, less any required transfers to surplus, unless Community
Bank has
received the prior approval from the Federal Reserve Board. Accordingly, the
subsidiary, without prior approval of bank regulators, may declare dividends to
the
Company in 1997 totaling $3,166 plus net profits earned by the subsidiary for
the
period from January 1, 1997, through the date of declaration, less dividends
previously paid in 1997.
Under the Pennsylvania Banking Code of 1965, as amended, cash dividends may be
declared and paid by Community Bank only out of accumulated net earnings. Prior
to
the declaration of any dividend, if the surplus of Community Bank, as defined,
is less than the amount of its capital, as defined, Community Bank shall, until
surplus
is equal to such amount, transfer to surplus an amount that is at least 10.0
percent
of the net earnings of Community Bank for the period since the end of the fiscal
year
or for any shorter period since the declaration of a dividend. If the surplus
of
Community Bank is less than 50.0 percent of the amount of the capital, no
dividend
may be declared or paid without prior approval of the Department until such
surplus is equal to 50.0 percent of Community Bank's capital.
The Company has paid cash dividends since its formation as a bank holding
company in
1983. It is the present intention of the Company's Board of Directors to
continue
this dividend payment policy; however, further dividends must necessarily depend
upon earnings, financial condition, appropriate legal restrictions, and other
factors
relevant at the time the Company's Board of Directors considers payment of
dividends.
The provisions of section 23A of the Federal Reserve Act require that "covered
transactions," as defined, engaged in by insured banks and their subsidiaries
with
certain affiliates, including the Parent Company, be at arm's length and limited
to
20.0 percent of capital and surplus, as defined, and "covered transactions" with
any
one such affiliate be limited to 10.0 percent of capital and surplus. Covered
transactions are defined to include, among other things, loans and other
extensions
of credit to such an affiliate and guarantees, acceptances and letters of credit
issued on behalf of such an affiliate. Such loans, other extensions of credit,
guarantees, acceptances and letters of credit must be secured.
At December 31, 1996, the maximum amount available for transfer from the
subsidiary
to the Parent Company in the form of loans amounted to $3,168. There were no
loans or
advances to the Parent Company from its subsidiary during 1996 and 1995, nor
were there any such amounts outstanding.
15. REGULATORY MATTERS (CONTINUED):
The Company is also required to maintain certain capital to total risk-weighted
asset
ratios as defined by Section 38 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). In the event an institution is deemed to be
undercapitalized by such standards, FDICIA prescribes an increasing amount of
regulatory intervention, including the required institution of a capital
restoration
plan and restrictions on the growth of assets, branches or lines of business.
Further restrictions are applied to institutions that reach the significantly or
critically undercapitalized levels including restrictions on interest payable on
accounts, dismissal of management, and appointment of a receiver. For well-
capitalized institutions, FDICIA provides authority for regulatory intervention
where
the institution is deemed to be engaging in unsafe and unsound practices or
receives
a less than satisfactory examination report rating for asset quality,
management,
earnings or liquidity. The Company is required to have minimum Tier I and total
capital ratios of 4.0 percent and 8.0 percent, respectively. At December 31,
1996,
the Company's Tier I and total capital ratios were 15.4 percent and 16.7
percent,
respectively. At December 31, 1995, such ratios were 14.2 percent and 15.5
percent,
respectively. Furthermore, the Federal Reserve Board has established a minimum
level
of Tier I capital to adjusted total average assets, referred to as the Tier I
Leverage ratio, at 3.0 percent. Such minimum ratio is applicable only to those
institutions with a composite rating of one under the Uniform Interagency Bank
Rating
System, that are not anticipating or experiencing significant growth, and have
well-
diversified risk. An additional 100 to 200 basis points are required for all
but
these most highly-rated institutions. At December 31, 1996 and 1995, the
Company's
minimum ratios of Tier I capital to adjusted total average assets were 4.0
percent
and 5.0 percent, respectively. The Company's Tier I capital to adjusted total
average assets ratio at December 31, 1996 and 1995 was, 8.3 percent and 7.0
percent,
respectively. At September 30, 1996, the most recent notification from the FRB
categorized the Company as well capitalized under the regulatory framework for
prompt
corrective action. To be categorized as well capitalized, the Company must
maintain
minimum Tier I, total and Tier I Leverage ratios as set forth in the table.
There
are no conditions or events since that notification that management believes
have changed the Company's category.
15. REGULATORY MATTERS (CONTINUED):
The following table presents the Company's capital ratios at December 31, 1996
and
1995, as well as the required minimum ratios for capital adequacy purposes and
to be well capitalized under the prompt corrective action provisions:
<TABLE>
<CAPTION> MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
DECEMBER 31 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets... $ 28,692 $ 24,845 $ 7,443 $ 6,983 $11,164 $10,475
Total capital to risk-adjusted assets.... 31,038 27,048 14,886 13,966 18,607 17,458
Tier I capital to total average assets
less goodwill........................... 28,692 24,845 $13,830 $17,871 $17,287 $17,871
Risk-adjusted assets..................... 180,809 170,089
Risk-adjusted off-balance sheet items.... 5,261 4,489
Average assets for Leverage ratio........ $345,738 $357,410
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 15.4% 14.2% 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................. 16.7 15.5 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.3% 7.0% 4.0% 5.0% 5.0% 5.0%
</TABLE>
Prior to February 16, 1996, the Company was subject to a written supervisory
agreement in the form of a Memorandum of Understanding ("MOU") with the FRB.
Such
agreement included various operating restrictions on capital, among others.
Specifically, under the terms of the MOU, the Company was required to:
(I) obtain the
prior written approval of the FRB to declare or pay any dividends; (II) obtain
the prior written approval of
the FRB before the Company incurs any debt other than normal operating expenses;
(III) obtain the prior written approval of the FRB before the Company redeems
its own
stock; (IV) submit to the FRB a written plan to maintain capital ratios well in
excess of minimum regulatory guidelines; (V) submit to the FRB a written plan to
ensure appropriate authority over and oversight of the Company's investment
practices; (VI) prohibit the Company from additional purchases of high-risk
securities and structured notes as well as securities not in compliance with the
Federal Reserve Board's Supervisory Policy Statement on Securities Activities;
(VII)
retain an independent consultant to review the Company's securities activities
and
investments in the context of the Company's overall interest rate risk and
liquidity
position and provide a written report to the FRB thereon; (VIII) submit to the
FRB
revised investment policies and procedures to correct deficiencies cited in the
FRB's
examinations with respect to prior investment practices involving the investment
portfolio; (IX) submit to the FRB a written liquidity plan to provide for an
adequate
level of assets to fund operations and meet customer needs; (X) submit quarterly
progress reports to the FRB to assure compliance with the MOU; and (XI) submit
the
written plans, policies and procedures to the FRB for review and approval.
15. REGULATORY MATTERS (CONTINUED):
Significant steps taken by the Company to comply with the MOU in 1995 included
the
divestiture of criticized investment securities, development of formalized
plans,
policies and procedures, and reorganization of management oversight. The costs
associated with the MOU included in noninterest expense approximated $500 in
1995.
The agreement was terminated on the aforementioned date as a result of the
significant improvement in the Company's overall financial condition and
substantial compliance with such agreement.
16. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................ $4,625 $4,637 $4,564 $4,618 $4,121 $ 4,274 $ 4,320 $4,523
Tax-exempt......................... 50 57 102 101 48 81 59 52
Interest on investment securities
held to maturity:
Taxable............................ 1,296 1,290 1,244
Tax-exempt......................... 301 298 296
Interest and dividends on investment
securities available for sale:
Taxable............................ 1,026 1,037 983 868 777 715 384 963
Tax-exempt......................... 485 488 501 509 305
Dividends.......................... 25 28 26 29 32 5 54 29
Interest on deposits with banks...... 3 2 2 2
Interest on federal funds sold....... 126 76 55 43 32 294 665
------ ------ ------ ------ ------ ------- ------- ------
Total interest income............ 6,337 6,323 6,231 6,168 6,578 6,697 6,653 6,539
------ ------ ------ ------ ------ ------- ------- ------
INTEREST EXPENSE:
Interest on deposits................. 3,399 3,327 3,322 3,406 3,266 3,483 3,695 3,649
Interest on short-term borrowings.... 1 2 334 343
Interest on long-term debt........... 33 33 26 1 60 63 62 39
------ ------ ------ ------ ------ ------- ------- ------
Total interest expense........... 3,432 3,360 3,349 3,409 3,660 3,889 3,757 3,688
------ ------ ------ ------ ------ ------- ------- ------
Net interest income.............. 2,905 2,963 2,882 2,759 2,918 2,808 2,896 2,851
Provision for loan losses............ 75 75 75 75 210 75 75 75
------ ------ ------ ------ ------ ------- ------- ------
Net interest income after
provision for loan losses....... 2,830 2,888 2,807 2,684 2,708 2,733 2,821 2,776
------ ------ ------ ------ ------ ------- ------- ------
NONINTEREST INCOME:
Service charges, fees and
commissions......................... 336 372 389 348 328 286 271 312
Net investment securities losses..... (27) (31) (1,885) (2,508)
------ ------ ------ ------ ------ ------- ------- ------
Total noninterest income (loss).. 336 345 358 348 328 (1,599) (2,237) 312
------ ------ ------ ------ ------ ------- ------- ------
NONINTEREST EXPENSE:
Salaries and employee benefits
expense............................. 962 981 826 1,039 1,002 1,219 998 809
Net occupancy and equipment expense.. 327 314 285 287 312 296 304 310
Other expenses....................... 598 663 579 522 723 898 682 641
------ ------ ------ ------ ------ ------- ------- ------
Total noninterest expense........ 1,887 1,958 1,690 1,848 2,037 2,413 1,984 1,760
------ ------ ------ ------ ------ ------- ------- ------
Income (loss) before income taxes.... 1,279 1,275 1,475 1,184 999 (1,279) (1,400) 1,328
Provision for income tax expense
(benefit)........................... 278 274 326 135 231 (253) (889) 359
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)................ $1,001 $1,001 $1,149 $1,049 $ 768 $(1,026) $ (511) $ 969
====== ====== ====== ====== ====== ======= ======= ======
Per share data:
Net income (loss).................... $ 0.45 $ 0.46 $ 0.52 $ 0.48 $ 0.35 $ (0.47) $ (0.23) $ 0.44
Cash dividends declared.............. $ 0.05 $ 0.06 $ 0.06 $ 0.11 $ 0.08 $ 0.13
</TABLE>
OVERVIEW:
On May 24, 1995, the Board of Directors of Comm Bancorp, Inc. and subsidiary,
Community Bank and Trust Company (collectively, the "Company"), entered into a
Memorandum of Understanding ("MOU") with the Federal Reserve Bank of
Philadelphia
("FRB") in recognition of their common goals to restore and maintain the
financial
soundness of the Company and to improve the overall financial condition of
Community
Bank and Trust Company. The MOU was a direct result of regulatory concerns
about
prior investment practices and noncompliance with previously issued informal
supervisory actions. Such supervisory actions placed a significant
administrative
and reporting burden on the Company and increased both monetary and opportunity
costs.
On February 16, 1996, management received a letter from the FRB terminating this
supervisory action as a result of the marked improvement in the Company's
financial
position through a reduction in its overall risk profile. During the latter
part of
1994 and early portion of 1995, the Company was subject to an inordinate amount
of
risk from changing interest rates as a result of the composition of its balance
sheet. The Company was funding long-term assets with short-term liabilities,
exposing itself to significant loss from upward pressure in short-term interest
rates. In addition, the Company's liquidity posture was such that it was
completely
reliant on short-term borrowings from the Federal Home Loan Bank of Pittsburgh
("FHLB-Pgh") to fund normal operations. Significant steps taken to relieve such
adverse pressures included the divestiture of criticized investment securities,
development of formalized plans, policies and procedures, and reorganization of
management oversight.
During the second quarter of 1995, the Company's reliance on short-term
borrowings to
fund long-term earning assets elevated to 15.2 percent. The buildup in such
funding
was primarily attributable to the structure and composition of the investment
portfolio. Rising interest rates in 1994 and the first quarter of 1995 made
principal payments on mortgage backed securities virtually nonexistent and
limited
the Company's ability to create liquidity through investment dispositions due to
their deteriorating market values. Management alleviated the Company's
liquidity
crisis through the sale of certain investment securities and loans and by
aggressively competing for retail deposits. Such actions had a positive
influence on
the Company's interest sensitivity posture as it allowed management to eliminate
the
Company's reliance on short-term funding and to reinvest the proceeds so the
Company
could reduce its exposure to changes in interest rates. As required by the MOU,
management developed formalized capital, liquidity and interest rate risk plans
and
investment and asset/liability policies to provide a framework in meeting the
Company's strategic goal of becoming a "traditional community bank." This type
of
bank ensures safety to depositors while providing a reasonable rate of return to
stockholders by limiting the risk exposure of its assets. The Board of
Directors reorganized management oversight of the Company through increased
emphasis on director participation on committees, utilization of external
consultants
to assure independence, and by naming a new President and Chief Executive
Officer.
OPERATING ENVIRONMENT:
The Commerce Department reported the economy grew during 1995 at its slowest
pace
since the 1991 recession. The nation's gross domestic product, the total output
of
goods and services, declined to 2.1 percent in 1995 as compared to 3.5 percent
in
1994. Such reduction in economic activity was not expected based on the
strength
demonstrated during the fourth quarter of 1994 when growth rates were at 4.0
percent
annualized. Gains in personal consumption expenditures, plant and equipment
spending, and net exports during January of 1995 prompted the Federal Reserve
Open
Market Committee ("FOMC") to continue tightening its monetary policy, which
began
February 4, 1994. Accordingly the FOMC, concerned that high levels of business
activity would be inflationary, increased the overnight federal funds and
discount
rates 50 basis points each on February 1, 1995. However, the pace of the
economy
began to falter at the end of the first quarter and throughout the second
quarter of
1995, causing the FOMC to cut the federal funds rate by 25 basis points on
July 6,
1995. Weak motor vehicle sales and housing starts, sluggish retail sales, and
reduced levels of business spending in the fourth quarter of 1995 caused the
FOMC to
continue easing by reducing the overnight federal funds rate another 25 basis
points
on December 19, 1995. Despite the slowdown in economic activity, unemployment
and
inflation rates remained strong throughout 1995 at 5.6 percent and 2.8 percent,
respectively.
The 0.5 percent rate of economic expansion for Northeastern Pennsylvania during
1995
lagged behind both the state and the nation. Slower population growth and
higher
unemployment and costs were principally responsible for the lower level of
activity.
Population throughout the Company's quad-county market area increased slightly
at 1.0
percent based on a comparison of 1995 estimates to the 1990 census. Census
growth
rates for Pennsylvania and the nation were 1.7 percent and 5.6 percent,
respectively.
Unemployment rates in 1995 for the areas served by the Company continued to be
higher
than Pennsylvania's overall rate of 5.9 percent. Lackawanna, Susquehanna, Wayne
and
Wyoming counties experienced unemployment rates of 6.2 percent, 7.2 percent, 8.7
percent and 7.1 percent, respectively.
The economic slowdown in 1995 had no material adverse effect on commercial banks
as
evidenced by marked improvements in profitability, loan demand, asset quality
and
capitalization. The nation's top fifty commercial banks reported increases in
net
income, loan volume and capital of 9.2 percent, 12.3 percent and 8.7 percent,
respectively. In addition, such institutions experienced reductions in
nonperforming
loans and assets of 7.8 percent and 15.2 percent, respectively. Banks in the
FRB's
Third District, comprised of two-thirds of Pennsylvania, Delaware and southern
New
Jersey, followed these national trends. The earnings improvement and
corresponding
capital appreciation were primarily attributable to higher noninterest income
and
lower noninterest expense partially offset by a reduction in net interest
margin.
Reductions in the rates charged to borrowers, as a result of a decrease in
general
market rates and an aggressive competitive environment, increased loan demand
and improved asset quality.
REVIEW OF FINANCIAL POSITION:
Total assets declined $11.6 million or 3.2 percent, from $362.5 million at
December
31, 1994, to $350.9 million at December 31, 1995. Such decline was in response
to
management's decision to sell investment securities criticized by regulators and
those demonstrating a high degree of risk in order to eliminate the Company's
reliance on short-term borrowings to fund normal operations. In addition to
being
relieved of its debt burden, the Company's liquidity, capital and interest
sensitivity positions improved as management redirected excess proceeds from the
sale
of such assets. Liquidity, as defined by the net amount of liquid assets and
volatile liabilities, increased from $20.3 million at December 31, 1994, to
$62.2
million at December 31, 1995. The capital level strengthened as indicated by an
improvement in the ratio of stockholders' equity to total assets at
December 31, 1994
and 1995, from 6.3 percent to 8.0 percent. The depressed capital position at
year-
end 1994 was primarily a reflection of the risk inherent throughout the
investment
portfolio. The Company reported net unrealized holding losses of $4.7 million
at
December 31, 1994, as compared to net unrealized holding gains of $780 at
December
31, 1995. Such actions also improved the Company's exposure to changes in
interest
rates as reflected by having approximately equal amounts of rate sensitive
assets and rate sensitive liabilities repricing within the next year.
The reduced volume of local economic activity had a direct reflection on the
demand
for credit during 1995. Adjusting for short-term credit extensions to other
financial institutions and the sale of student loans, average loans increased
$10.3
million in 1995, a reduction from the $14.2 million level experienced in 1994.
Employment conditions deteriorated in Northeastern Pennsylvania as evidenced by
a
reduction in average weekly earnings resulting from a decline in the average
number
of hours worked. The average weekly earnings of a manufacturing worker in the
Company's market area declined from four hundred forty-eight dollars at December
1994, to four hundred two dollars at December 1995. Similarly, the average
weekly hours worked decreased from 39.8 in 1994 to 33.3 in 1995.
Such weakness in local economic conditions also affected the Company's asset
quality
during 1995. Nonperforming assets increased 27.4 percent from $3.3 million to
$4.2
million at December 31, 1994 and 1995, respectively. Net charge-offs during
1995 approximated 27.5 percent of the 1994 level.
Regulatory authorities characterized the Company's investment portfolio during
1994 as one exhibiting an inordinate amount of risk while being an inadequate
source of
secondary liquidity. Such riskiness was demonstrated by the aggregate fair
value of
the portfolio being $12.0 million below amortized cost at December 31, 1994.
Additionally, the weighted-average life of all investments held approximated
10.3
years at year-end 1994. Moreover, nearly half of the portfolio was invested in
lower-quality mortgage backed securities exhibiting greater risk due to the
structure
and composition of such holdings. Management took significant steps in
addressing
regulatory concerns through restructuring its oversight of the investment
function,
hiring an external investment management consultant group, and formulating and
implementing a portfolio reconstitution plan. As a result of such action,
management
constructed a portfolio that provides a reasonable rate of return with
considerably
less risk while assuring a continuous flow of cash to fund normal operations.
At
December 31, 1995, the investment portfolio fair value exceeded its amortized
cost by
$1.2 million. The weighted-average life of such portfolio was 3.2 years with an
expected average term until cash flows are received of 2.4 years. The amount of
investment repayments from maturities and principal payments due within one year
increased substantially from $1.4 million at December 31, 1994, to $21.6 million
at
December 31, 1995. Attestation of the improved quality and elimination of risk
in
the investment portfolio was the removal of the aforementioned supervisory
action, which was a direct result of the past problems with such asset base.
Average deposit volumes grew $8.2 million from $309.7 million in 1994 to $317.9
million in 1995, a 2.6 percent increase. The deposit increase for 1995 falls
below
the increase for the comparable period of 1994 of $22.5 million or 7.8 percent
and
the favorable change of 7.6 percent in the Company's peer group of thirty-five
banks
in Northeastern Pennsylvania. The Company's reduced rate of deposit growth in
1995
was attributable to less aggressive competition for funds during the latter part
of the year in light of its improved liquidity position.
Stockholders' equity increased $5.2 million from $22.7 million at
December 31, 1994,
to $27.9 million at December 31, 1995. The 22.9 percent rise in capital was
directly
attributable to a reversal in the unrealized holding adjustment on available for
sale
investment securities of $5.5 million during 1995. In accordance with Statement
of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments
in Debt and Equity Securities," reductions in the fair values of available for
sale
investments below their amortized costs are recorded as adjustments, net of
income
taxes, to stockholders' equity. The 300 basis point rise in general market
rates
during 1994 caused stockholders' equity to be reduced $4.7 million at
December 31, 1994.
INVESTMENT PORTFOLIO:
Actions taken during 1995 involving the investment portfolio were the most
significant factors in restoring the strength of the Company's financial
position.
As aforementioned, the investment portfolio, prior to such actions, was subject
to
harsh regulatory criticism for exposing the Company to inordinate amounts of
risk
while providing insufficient liquidity to fund normal operations. Although
containing minimal credit risk, the portfolio was subject to an excessive amount
of
interest rate, extension, call and marketability risk. Rises in general market
rates
during 1994 and the first quarter of 1995 caused strains on the Company's
liquidity
position as a significant portion of the investment portfolio could not be
disposed
of without realizing significant losses. The aggregate market value
deteriorated
from a gain of $1.5 million at December 31, 1993, to a loss of $12.0 million at
December 31, 1994. Moreover, such changes in general market rates caused a
significant slowdown in the cash flows received from mortgage backed securities
and
extended the weighted-average life of the portfolio. Monthly cash receipts from
mortgage backed securities declined from $3.5 million in January of 1994 to $133
in December of 1994. Such slowdown also adversely affected the Company's
asset/liability sensitivity position as it restricted management's ability to
reinvest such receipts at higher interest rates. Many securities included
embedded
options, allowing the issuer to call the debt if interest rates declined, thus
restricting the Company to only obtaining the contractual premium rate when
market
rates exceed such premium rate, making it less attractive by comparison. In
addition, poor quality with respect to the structure and composition of the
holdings
subjected the Company to marketability risk. Management experienced difficulty
in
determining the value at which a security could actually be sold because of the
size
of the spread between the bid price and offer price. As a direct result of the
excessive amount of these types of risks prevalent throughout the portfolio, the
Company was placed under an MOU from May 24, 1995, to February 16, 1996.
In order to address regulatory concerns and significantly mitigate the
portfolio's
risk, management formulated an action plan. Such plan included restructuring
management oversight of the investment function, hiring an external investment
management consultant group, developing a formalized investment policy and
procedures, and formulating and implementing a portfolio reconstitution plan.
During
the second quarter of 1995, the Board of Directors restructured the investment
committee and replaced the individual primarily responsible for the oversight
and
authority of the investment function. Shortly after its restructuring, the
committee
hired an external investment management consultant group. Such group, a
division of
a large international certified public accounting firm, was hired primarily to
assist
management in assessing the amount and degree of the portfolio's risk and in
formulating a sound investment policy and procedures to be followed
consistently.
The investment policy prohibits unsuitable securities activities and promotes
safety
and soundness through establishment of strict limitations to the quality,
quantity
and maximum maturity for each type of security. Moreover, various operational
procedures were adopted to enhance internal controls and assure adherence with
the investment policy.
Management took the first step in reconstituting the investment portfolio during
the
end of the second quarter and early part of the third quarter of 1995 by
disposing of
thirty-two available for sale securities having an amortized cost and fair value
of
$31.1 million and $29.2 million, respectively. Specifically, the sale consisted
of
twenty-six high-risk collateralized mortgage obligations ("CMOs") having an
amortized
cost of $25.0 million and a fair value of $23.4 million and six structured notes
having an amortized cost of $6.1 million and a fair value of $5.8 million. The
$1.9
million loss arising from such sale was recognized in the second quarter of
1995, the
period in which the decision to sell was made. Subsequent to the aforementioned
sale,
the Company held the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") defined high-risk CMOs with an amortized cost and fair value of
$4.3
million and structured notes with an amortized cost of $18.0 million and a fair
value
of $17.6 million at June 30, 1995. Specifically, the remaining structured notes
consisted of $15.0 million of step-up bonds, $1.0 million of dual index notes,
and $2.0 million of de-leveraged bonds.
The second phase of the investment portfolio's reconstitution was more difficult
as
it considered the reclassification of securities designated as held to maturity
to available for sale. SFAS No. 115 requires an enterprise to reassess the
appropriateness of its accounting and reporting classifications of debt and
equity
securities at each reporting date. Accordingly, management prepared a
comprehensive
analysis to the effects of such action from both a regulatory and accounting
position. Pursuant to the MOU, the Company was required to maintain a Tier I
Leverage ratio exceeding 5.0 percent after adjusting for market depreciation,
net of
taxes, in securities classified as available for sale and those high-risk CMOs
and
structured notes classified as held to maturity. An enterprise not subject to
such
supervisory action excludes such adjustments in calculating its Tier I Leverage
ratio. In addition to the regulatory consideration, management had to consider
the
effects of such action on a financial accounting basis. Contrary to standard
regulatory accounting treatment, whereby an institution not subject to
supervisory
actions can exclude the unrealized holding adjustment on available for sale
securities, financial accounting requires such adjustment to be included as a
separate component of stockholders' equity. The Board of Directors, after an
extensive examination of the results set forth in such analysis on September 30,
1995, voted unanimously to transfer the entire held to maturity portfolio to
available for sale. In conjunction with its review of the analysis, the Board
of
Directors made the decision to sell specific securities that were transferred
from
the held to maturity portfolio to the available for sale portfolio, which it did
in
the beginning of October 1995. The resulting loss of $2.5 million on the sale
was
recognized in earnings in the third quarter of 1995, the period in which the
decision
to sell was made. Securities disposed of during the second phase of the
portfolio
reconstitution plan had an amortized cost of $59.5 million and a fair value of
$57.0
million. As a result of completing the second phase, management eliminated all
CMOs
designated as high-risk and those that had the possibility of meeting any of the
average life or interest sensitivity tests in the future. In addition, the
carrying value of structured notes was reduced through sales from $21.1 million
at December 31, 1994, to $2.9 million at December 31, 1995. After a discussion
with an
external investment management consultant and review by the FRB, management
decided to retain
three structured notes with maturities of less than three years. The decision
to hold these securities was based on their market values being less than their
economic
value at the analysis date. Another major group of securities sold during the
second
phase of the reconstitution was long-term, variable rate securities.
Unattractive
coupons relative to alternatives and the existence of embedded caps, which
restrict
the coupon rate from exceeding a certain level regardless of rises in general
market
rates, were principally responsible for the divestiture of such securities. The
Company's holdings of variable rate securities declined from $52.0 million at
December 31, 1994, to $17.3 million at December 31, 1995. The weighted-average
life
of such securities decreased significantly from 13.2 years to 2.5 years at
year-end 1994 and 1995, respectively.
Pursuant to SFAS No. 115, sales or transfers from the held to maturity
classification
for reasons other than those specified, call into question an enterprise's
intent to
hold other debt securities to maturity in the future. Accordingly, the
successful
implementation of the reconstitution plan, which benefited the Company by
materially
reducing its risk posture, prohibited it from reestablishing a held to maturity
classification for purchases or transfers in the near term.
The investment portfolio represented 32.2 percent of earning assets at
December 31,
1995, compared with 43.9 percent a year earlier. Proceeds from the sale of
available
for sale securities amounted to $87.1 million and $13.6 million in 1995 and
1994,
respectively. The Company realized net securities losses of $4.4 million in
1995 and
net securities gains of $495 in 1994 as a result of such sales. The proceeds
were
used primarily to retire short-term debt and fund loan demand. For the years
ended
December 31, 1995 and 1994, the Company had repayments from maturities, calls
and
principal payments on securities totaling $4.9 million and $15.4 million,
respectively. Securities purchases amounted to $44.2 million and $38.9 million
during 1995 and 1994, respectively. Purchases during 1995 consisted principally
of
short-term U.S. Treasury securities to provide future liquidity in funding the
loan
portfolio and medium-term obligations of states and municipalities to lower the
Company's effective tax rate. The net unrealized holding gain amounted to $780,
net
of income taxes of $401, at December 31, 1995. Such gain represents a change in
the
net unrealized adjustment of $5.5 million, net of income taxes of $2.8 million,
from
December 31, 1994. The net unrealized holding loss totaled $4.7 million, net of
income taxes of $2.4 million, at December 31, 1994.
The tax equivalent yield on the investment portfolio improved from 6.1 percent
in
1994 to 6.4 percent in 1995. The improvement was principally due to the Company
replacing lower-yielding, variable-rate securities with higher-yielding,
fixed-rate
securities. As a result of the portfolio reconstitution, U.S. Treasury and tax-
exempt municipal securities accounted for 68.3 percent of total investments at
December 31, 1995, as compared to 23.6 percent at December 31, 1994. The
investment
portfolio contains minimal credit risk since the majority of its holdings are
issued
and/or guaranteed by the U.S. Government or federally-sponsored agencies.
Except for
U.S. Treasury securities and U.S. Government agencies, there were no securities
of
any individual issuer that exceeded 10.0 percent of the Company's stockholders'
equity at December 31, 1995 and 1994. All of the securities in the Company's
portfolio were considered "investment grade," receiving a rating of "Baa" or
higher
from Moody's or "BBB" or higher from Standard and Poor's rating services, except
for
$2.4 million of tax-exempt obligations of local municipalities, at
December 31, 1995.
Investment securities with an amortized cost of $34.0 million and $39.0 million
at
December 31, 1995 and 1994, respectively, were pledged to secure deposits, to
qualify
for fiduciary powers, and for other purposes required or permitted by law. The
fair
value of such securities was $34.1 million and $36.7 million at December 31,
1995 and 1994, respectively.
LOAN PORTFOLIO:
Despite the modest level of economic expansion, bank loan portfolios grew in
response
to the conducive interest rate environment. Loan volumes for all commercial
banks in
the United States grew 9.4 percent during 1995 while the volumes for the
Company's
peer group increased 7.8 percent over the same period. Lower interest rates
provided
a more favorable environment for purchasing homes while reducing costs
associated
with business loans, as well as costs related to the purchase of other goods on
credit. The favorable impact of declining interest rates was partially offset
by
consumer anxiety over adding to their already high debt burdens, given the
uncertainty of job and income growth.
For the year consumer lending, consisting of household debt not secured by real
estate, grew 13.4 percent for all commercial banks in the United States and
represented 45.0 percent of bank lending. Consumers took on debt at an average
annual rate of 10.8 percent in the second half of 1995, somewhat less than the
15.0
percent annualized rate for the first half of the year. By year-end, consumer
installment debt reached $1.05 trillion, marking an increase of 39.0 percent
over the
1990 level. Commercial lending also increased in 1995, rising 8.2 percent over
1994
volumes. Reductions in the cost of financing investments in new capital
provided
some offset to the slowing tendencies that normally accompany a moderation in
economic growth.
The interest rate environment also encouraged growth in the mortgage sector.
Average
mortgage rates began 1995 at 9.2 percent and dropped to 7.1 percent by year-end.
Reductions in mortgage interest rates have put the cost of financing a house
within
reach for a greater number of families and made it possible for a significant
number
of households to ease their debt-service burdens by refinancing their homes at
lower
rates. Refinancing accounted for 51.5 percent of conventional home loans made
by
banks in 1995. Reductions in the construction of new homes and apartments by
7.3
percent in 1995 was offset by sales of existing homes of 3.8 million units
accounting
for the 5.0 percent rise in median home prices. Home prices in the Northeast
contradicted such trend declining 0.7 percent during 1995.
Loans, net of unearned income, were $213.8 million at December 31, 1995, an
increase
of $19.4 million, or 9.9 percent, over the volume reported at December 31, 1994.
Such increase, adjusted for short-term credit extensions to other financial
institutions and the disposition of student loans, would have amounted to $5.9
million in 1995. The Company had aggregate loans of $19.0 million to certain
large
Pennsylvania-based commercial banks at December 31, 1995. None of such loans
had
maturities greater than six months. In addition, management, in response to
liquidity strains, sold student loans with a carrying value of $5.6 million to
its
servicing agent during the second quarter of 1995. The increase in aggregate
loan
demand, after considering such adjustments, can be explained by a rise in the
volume
of loans to finance one-to-four family residential properties of $8.6 million
and
those to finance commercial real estate properties of $3.2 million offset
primarily
by a decline in commercial and industrial loans. Loans, net of unearned income,
as a
percentage of total earning assets were 63.3 percent and 56.0 percent at
December 31,
1995 and 1994, respectively. During 1995, the peer group's average loans
accounted
for 62.2 percent of average assets as compared to the Company's ratio of 55.6
percent.
The Company's volume of loans with predetermined interest rates increased $5.7
million and represented 80.7 percent of the portfolio while those bearing
floating or
adjustable interest rates rose $13.7 million and represented 19.3 percent of the
portfolio at December 31, 1995. Customers, in taking advantage of declining
interest
rates, opted for variable-rate products as opposed to higher-costing, fixed-rate
products. The tax equivalent yield on the loan portfolio rose from 8.5 percent
in
1994 to 8.8 percent in 1995. Such increase occurred during the first half of
1995
when interest rates were at their highest point. With the decline in rates, the
Company's yield remained level throughout the second half of 1995. Contrary to
the
large volume of refinancings nationwide, the volume of refinanced residential
mortgages declined significantly from $14.4 million in 1994 to $9.5 million in
1995.
The composition of the loan portfolio changed during 1995 primarily due to the
effects of the short-term credit extensions made to commercial banks and the
disposition of student loans. Commercial loans increased $12.2 million during
1995
and represented 19.5 percent of loans, net of unearned income. Excluding the
commercial bank loans, such segment of the loan portfolio would have experienced
a decline of $6.8 million during 1995. Although banks throughout the nation
experienced a marked increase in consumer credit, the Company experienced a drop
in
such loans. The $4.6 million decline in consumer loans from $23.9 million at
December 31, 1994, to $19.3 million at December 31, 1995, was primarily
attributable
to the Company's sale of student loans to a servicing agent in the second
quarter of
1995. Had such sale not occurred, the Company would have had an increase of
$1.0
million in consumer loans for 1995. Despite such nonrecurring effects, loans to
finance real estate remained at approximately 72.0 percent of total loans
outstanding. A favorable interest rate climate coupled with declining home
prices in
the Northeast were the primary reasons for the increased residential mortgage
lending. The Company's interest rates on mortgage loans peaked at 9.5 percent
during
the first quarter of 1995. By the end of the fourth quarter, rates as low as
7.0 percent were being offered on the same products.
At December 31, 1995 and 1994, the Company had no loan concentrations exceeding
10.0
percent of total loans. The Company limits its exposure to concentrations of
credit
risk by the nature of its lending activities as approximately 56.6 percent of
total
loans outstanding were secured by residential properties. The average mortgage
outstanding on a residential property was $32.9 at December 31, 1995. In
addition,
the loan portfolio did not consist of any form of credit involving
highly-leveraged
transactions, defined as financing transactions that involve the buyout,
acquisition
or recapitalization of an existing business and include credits extended to
highly-leveraged industries, at December 31, 1995 or 1994.
In the ordinary course of business, the Company has entered into off-balance
sheet
financial commitments consisting of commitments to extend credit, unused
portions of
home equity and credit card lines, and commercial letters of credit. The
Company's
exposure to such commitments remained constant at $9.6 million at
December 31, 1995
and 1994. No provision for losses on these off-balance sheet commitments was
deemed necessary for 1995 or 1994.
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit interest rate risk. At
December 31, 1995, management determined that approximately 41.1 percent of the
lending portfolio was scheduled to reprice within twelve months. The 41.1
percent
surpassed the 30.3 percent at December 31, 1994, as a result of an increased
level of
short-term funding and a slight improvement towards achieving management's goal
of generating variable-rate loans.
The Company does not sell loans secured by real estate. Accordingly,
SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which was required to be applied
prospectively in fiscal years beginning after December 31, 1995, will not have
any effect on future operating results or financial position.
ASSET QUALITY:
Banking industry credit problems were low during 1995 as evidenced by declines
in the
levels of nonperforming loans and nonperforming assets of 7.8 percent and 15.2
percent, respectively. Nonperforming assets, as a percentage of loans, net, was
1.6
percent at December 31, 1994, as compared to 1.2 percent at December 31, 1995.
Net
charge-offs as a percentage of average loans outstanding increased slightly from
0.24
percent at year-end 1994 to 0.28 percent at year-end 1995. Such increase was a
result of mounting credit card deficiency ratios. Of the credit card loans
extended in 1995, 4.3 percent were written-off as losses.
Higher unemployment levels in the Company's market area as compared to
Pennsylvania
and the United States resulted in asset quality deteriorations as indicated by
1995
statistics. The peer group's ratio of nonperforming assets as a percentage of
loans,
net, increased from 1.51 percent at December 31, 1994, to 1.71 percent at
December
31, 1995. Moreover, the peer group reported deteriorating levels of net
charge-offs
as a percentage of average loans outstanding from 0.27 percent in 1994 to 0.20
percent in 1995.
Nonperforming assets, consisting of nonperforming loans and foreclosed assets,
totaled $4.2 million at December 31, 1995, compared to $3.3 million at
December 31,
1994. The Company experienced a net increase of $215 in foreclosed assets
during
1995, as transfers of six loans from nonaccrual status totaling $452 were offset
by
the sale of six properties totaling $457, including net gains on such
dispositions of
$36. Also included in other real estate was a property originally purchased by
the
Company to be used as a site for a new branch office. As a result of the
downturn in
the Company's financial position prior to management's corrective actions,
management
decided to suspend its plan and transferred such property to other real estate
at
$220, which equals 80.0 percent of its appraised value with the difference being
recorded in other losses. The carrying values of all properties included in
other
real estate were less than 80.0 percent of their collateral values at
December 31, 1995.
Nonperforming loans, consisting of accruing loans past due 90 days or more and
impaired loans, increased $686 during 1995. The increase in nonperforming loans
was
principally due to the $726 rise in accruing loans past due 90 days or more,
offset
by a $40 decline in impaired loans. The $40 change in impaired loans included
gross
loans placed into such category of $1,081 and gross loans removed as a result of
charge-offs, transfers to other real estate, and principal repayments totaling
$69,
$457 and $595, respectively. Accruing loans past due 90 days or more increased
from
$1.4 million at December 31, 1994, to $2.2 million at December 31, 1995. The
ratios
of nonperforming assets and loans past due 90 days or more as a percentage of
total
loans, net, of 1.96 percent and 1.01 percent, respectively, at December 31,
1995,
compared unfavorably to ratios of the peer group of 1.71 percent and 0.34
percent,
respectively. The ratio of assets classified by bank examiners in 1995 as a
percentage of Tier I capital declined 2.3 percent from the comparable ratio of
1994.
The Company's recorded investment in impaired loans, consisting of nonaccrual
and
restructured loans, was $1,593 and $1,633 at December 31, 1995 and 1994,
respectively. The average recorded investment in impaired loans was $1,621 for
1995
and $2,075 for 1994. Impaired loans included a $262 restructured loan to one
commercial customer. Such credit has been performing in accordance with its
modified
terms since the initial restructuring of $315 in 1993 and the additional
restructuring of $64 of an existing loan to the same customer in 1995, with $38
in
repayments received in 1995. As a result of a 1994 reevaluation of the
collateral
value of such loan, management feels confident that the credit is adequately
secured
in order to eliminate any possibility of loss. Interest income related to
impaired
loans would have been $66 and $136 in 1995 and 1994, respectively, had such
loans
been current and the terms not been modified. Interest recognized on impaired
loans
amounted to $92 in 1995 and $45 in 1994. Included in these amounts is interest
recognized on a cash basis of $87 and $40, respectively. Cash received on
impaired
loans applied as a reduction of principal totaled $595 in 1995 and $183 in 1994.
There were no commitments to extend additional funds to such parties at
December 31, 1995 or 1994.
The allowance for loan losses, against which loans are charged-off, was $3.9
million
at December 31, 1995, representing 1.83 percent of loans, net, compared to $3.6
million and 1.84 percent at December 31, 1994. Improved success rates in loan
collections coupled with monthly provisions to the allowance account provided
the
greatest influence to the increased volume. In comparison, the peer group
reported
ratios of 1.43 percent and 1.46 percent at December 31, 1995 and 1994,
respectively.
Management and external examiners deemed the Company's allowance for loan losses
account to be adequate at December 31, 1995 and 1994.
Included in the allowance account were amounts for impaired loans of $1,331 in
1995
and $1,397 in 1994 for which there are related allowances for loan losses of
$614 and
$488, respectively. The recorded investment, for which there was no related
allowance for loan losses, was $262 and $236 at December 31, 1995 and 1994,
respectively. In 1995, activity in the allowance for loan losses account
related to
impaired loans included a provision charged to operations of $4, losses charged
to the allowance of $69 and recoveries of amounts charged-off of $191.
As a percentage of nonperforming loans, the allowance account covered 104.3
percent
and 117.0 percent at year-end 1995 and 1994, respectively. Relative to all
nonperforming assets, the allowance covered 93.3 percent at December 31, 1995,
and 108.9 percent at December 31, 1994.
Net charge-offs were $108 or 0.05 percent of average loans outstanding in 1995
compared to $393 or 0.21 percent in 1994. The peer group reported net
charge-offs as
a percentage of average loans outstanding of 0.20 percent and 0.27 percent in
1995
and 1994, respectively. Approximately 36.4 percent of the gross charge-off
activity
in 1995 resulted from recognizing write-downs upon reappraisals of collateral
securing nonaccrual loans in accordance with maintaining appropriate
loan-to-value ratios.
DEPOSITS:
In 1995, banks throughout the nation experienced a rebirth in personal savings
patterns despite a decline in the interest rate environment. Personal savings
rates,
a measure of savings as a percentage of disposable after-tax income, rose to 4.4
percent in 1995 compared to 3.8 percent in 1994. Demographics played an
instrumental
role in this increase as the "baby boomer" generation approached its peak
earning
years and began to increase savings in preparation for retirement. Increased
savings
levels cause consumer spending levels to slow at a greater rate but may aid in
controlling inflation and reducing interest rates. Such reductions in interest
rates
occur because there is more money being deposited into savings accounts, which
leads
to banks having greater access to funds for lending, thus lowering borrowing
costs
for consumers and businesses. The falling interest rate environment caused a
change
in the deposit structure of banks as customers chose shorter-term deposit
products in
place of those products having longer maturities. One-year certificates of
deposit
had only a 76 basis point decrease compared to 1994 while the five-year product
declined by nearly double that amount, closing 1995 at 5.31 percent. Overall,
retail
time deposits grew over $100.0 billion during 1995, approximately twice the
amount of
1994. Aggregate deposit growth for United States financial institutions was
6.6 percent in 1995.
Total deposits averaged $317.9 million in 1995 as compared to $309.7 million in
1994,
an increase of 2.6 percent. The average growth experienced by Northeastern
Pennsylvania banks was 7.6 percent for the comparable period. The majority of
the
Company's deposit growth occurred during the second quarter as deposits grew at
an
annualized rate of 12.6 percent. Most of the second quarter growth was
attributable
to an increase in retail time deposits as management aggressively competed for
funds
in order to reduce its reliance on FHLB-Pgh short-term borrowings to fund normal
daily operations. Once management resolved the Company's liquidity problem, it
became less competitive with respect to product pricing as evidenced by a
significantly slower growth rate in deposit volumes of 4.4 percent annualized
during
the third quarter of 1995. Management made further reductions in rates during
the
fourth quarter of 1995 as the proceeds from the investment portfolio
reconstitution
resulted in a liquidity surplus. Such action, coupled with normal cyclical
deposit
reductions caused by increased spending during the holiday season, resulted in
the
Company reporting an annualized decline of 8.8 percent in deposits during the
fourth
quarter of 1995. The deposit composition changed as evidenced by a decline in
the
average volume of transaction accounts as a percentage of average total deposits
from
46.5 percent to 42.0 percent in 1994 and 1995, respectively. Such change is a
function of depositors sacrificing accessibility by transferring funds from
lower-
yielding transaction accounts to higher-yielding time deposits. Although
beneficial
in funding loan demand, the growth of retail certificates of deposit increased
the
Company's reliance on higher-costing funding sources. Average time deposits
accounted for 51.4 percent of average assets during 1995 as compared to 36.9
percent
for the peer group. The Company also experienced a downward shift in its
average
core deposits to average total deposits from 91.6 percent in 1994, to 90.8
percent in
1995. The Company's cost of deposits rose from 4.2 percent in 1994 to 4.8
percent in
1995 as compared to the peer group's cost from 3.7 percent to 4.5 percent,
respectively. The average rate on certificates of deposit less than $100
increased
from 5.5 percent during the first quarter of 1995 to 5.9 percent during the
fourth quarter of 1995.
An integral part of achieving lower costs is the Company's ability to build its
base
of noninterest-bearing deposits. The Company's noninterest-bearing deposits
grew
$1.9 million from $23.5 million at December 31, 1994, to $25.4 million at
December
31, 1995. Average volumes of noninterest-bearing deposits increased from $21.8
million to $24.1 million in 1994 and 1995, respectively, and comprised 6.7
percent of
total average assets for 1995, compared to 6.2 percent for 1994. Such
improvement
resulted from building stronger relationships with local businesses and
municipalities.
Volatile deposits, time deposits in denominations of $100 or more, decreased
from
$30.2 million at December 31, 1994, to $29.7 million at December 31, 1995,
however
the Company exhibited a lesser reliance on such funding as compared to the peer
group
during 1995. Average volatile deposits, as a percentage of average assets, was
8.2
percent in 1995 as compared to 8.7 percent for the peer group. The average cost
of
such funds rose 14 basis points during 1995. The slight decline in the volume
of
Volatile deposits resulted from management choosing not to aggressively compete
for
these deposits during 1995 due to their higher cost and the Company's improved
liquidity position.
As a result of the aforementioned actions taken to improve the liquidity posture
of
the Company, management effectively eliminated its reliance on short-term
borrowings
to fund normal operations. During the second quarter of 1995, the Company's
reliance
on borrowed funds peaked at $34.6 million, funding 10.2 percent of earning
assets.
At December 31, 1995, aggregate borrowings amounted to $3.1 million or 0.9
percent of
earning assets. The Company's total borrowings averaged $14.7 million with a
weighted-average rate of 6.2 percent in 1995 as compared to $16.2 million at 4.9
percent in 1994. The higher cost of such funding was a result of an increase in
the
cost of short-term borrowings from 4.9 percent in 1994 to 6.8 percent in 1995.
At December 31, 1995, the Company had no short-term borrowings outstanding. At
December 31, 1994, total short-term borrowings amounted to $16.0 million at 6.6
percent. Short-term borrowings consisted of a line of credit and fixed-rate
advances
with the FHLB-Pgh secured under terms of a blanket collateral agreement by a
pledge
of FHLB-Pgh stock and certain other qualifying collateral, such as investment
and
mortgage backed securities and mortgage loans. The average daily balance of
aggregate short-term borrowings was $9.9 million in 1995 and $11.2 million in
1994.
The maximum amount of all short-term borrowings outstanding at any month-end was
$28.0 million and $19.4 million during 1995 and 1994, respectively. The
FHLB-Pgh
line of credit included in total short-term borrowings had an average daily
balance
of $3.6 million and weighted-average rate of 6.2 percent during 1995. The
maximum
amount of such loan outstanding at any month-end was $17.6 million during 1995.
Short-term borrowings during 1994 consisted entirely of the FHLB-Pgh line of
credit.
In addition, the Company reduced its long-term debt by $2.0 million during 1995
as a
5.7 percent fixed-rate advance was redeemed at the option of management. No
prepayment fee was required upon redemption of such note as the interest rate on
the
advance approximated the prevailing interest rate at the date of the prepayment
for advances of the same amount and terms.
INTEREST RATE SENSITIVITY:
Pursuant to the guidelines set forth in the MOU, management submitted to the FRB
a
written plan to limit and/or reduce the Company's overall exposure to interest
rate
risk. Such plan was required to consider the Company's earning capacity,
capitalization and funding profile. According to the FRB, such plan provided a
very
comprehensive assessment of the Company's overall exposure to interest rate
risk,
including a summary of how changes in interest rates would impact the Company's
earnings performance, liquidity provisions and capital position. Also addressed
were
actions taken to reduce the Company's overall exposure and management's plans to
further mitigate the Company's risks through the reconstitution of the available
for
sale portfolio and the restructuring of the Company's balance sheet. Additional
strategies outlined in the plan, which the Company considers proprietary in
nature,
included the disposition of securities having a high degree of market value and
liquidity risk, development and enhancement of monitoring and reporting systems
to
demonstrate that the Company has an understanding and ability to manage risk,
and the
development of investment policies and procedures and an asset/liability policy
to control and monitor the Company's interest rate exposure.
Management effectively lessened the Company's exposure to changing interest
rates as
represented by an improvement in its ratio of rate sensitive assets to rate
sensitive
liabilities repricing within one year from 0.84 at December 31, 1994, to 0.93 at
December 31, 1995. Based upon the guidelines set forth in the Company's
asset/liability management policy, these ratios fell within the 0.7 and 1.3
deemed by
management to be acceptable. Such an improvement was directly attributable to
the
Company's disposal of long-term investment securities. The proceeds from such
sales
were used to retire short-term debt and invest in short-term securities and
loans.
The Company's cumulative one-year gap position improved as a result of such
action,
partially offset by an increase in the volume of retail time deposits repricing
within one year. Such deposits amounted to $79.4 million at December 31, 1994,
as compared to $90.3 million at December 31, 1995.
As a result of gap analysis failures to address 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 assumptions ("shocks"). Model
results
from December 31, 1995, indicated that a decline in net interest income of 5.4
percent was expected had a parallel and instantaneous rise in interest rates of
100
basis points occurred. Conversely, a similar decline in interest rates would
have resulted in a 4.9 percent increase in net interest income.
LIQUIDITY:
In accordance with the requirement of the MOU, the Company developed a liquidity
plan
during the third quarter of 1995. The mission of such plan is to ensure the
Company
has the ability to generate cash at a reasonable cost in order to satisfy
commitments
to borrowers as well as to meet the demands of depositors and debtholders. The
Company's liquidity plan consists of an assessment of its current liquidity
position
and includes a determination of appropriate standards for the volume, mix, price
and
maturity of loans, investments and deposits. In addition, management ascertains
the
appropriate level of short-term assets required to fund normal day-to-day
operations
and to ensure the Company's ability to meet off-balance sheet commitments and
unanticipated deposit withdrawals. The plan developed control and monitoring
procedures for evaluating the Company's daily liquidity position. Finally, the
plan
introduced strategies to assure future liquidity. Such strategies, which the
Company
considers proprietary in nature, include the maintenance of a minimum net
federal
funds sold cushion, a capital contingency strategy, and enhanced strategies on
loan and deposit pricing.
The most significant action taken during 1995 in improving the liquidity
position of
the Company occurred on September 30, 1995, when the Board of Directors voted
unanimously to reconstitute the entire investment portfolio. Such action
eliminated
the Company's reliance on short-term borrowings and certain securities having
long
average lives that exhibited high degrees of market price volatility and those
securities that were exposed to extension risk. The reconstituted portfolio
consists
of securities that are of significantly higher quality with lower average lives
and
that demonstrate more stable cash flows. This type of portfolio will assure the
Company of a secondary source of liquidity without incurring severe losses in
market
value during a rising interest rate environment. Other actions taken in 1995 to
alleviate the Company's liquidity strains included the introduction of a program
to
aggressively compete for deposits during the second quarter of 1995 and the
disposition of its student loan portfolio.
As a result of such actions and the institution of the liquidity plan, the
Company
showed a marked improvement in its liquidity position in 1995 compared to 1994.
The
Company's temporary investments to volatile liabilities and its volatile
liabilities
less temporary investments to total assets less temporary investments ratios
improved
dramatically from 8.7 percent and 11.8 percent at December 31, 1994,
respectively, to
118.9 percent and negative 1.8 percent at December 31, 1995, respectively.
These
ratios were also well above the 110.9 percent and 0.7 percent ratios
respectively, recorded by the peer group at year-end 1995.
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents, consisting of cash and due from banks and federal funds sold,
increased
$15.2 million in 1995. Net cash provided by operating activities totaled $4.6
million and resulted primarily from net income adjusted for deferred income
taxes and securities losses.
Net cash provided by investing activities of $28.1 million was the major
component of
the net increase in cash and cash equivalents. The major component of the
inflow
from investing activities was investment sales and repayments in excess of
investment
purchases, partially offset by the net increase in lending activities. The
$47.7
million in net cash provided through security activities resulted primarily from
receiving proceeds from sales of available for sale investment securities of
$87.1
million. Such sales were in line with the Company's efforts to reconstitute the
portfolio to mitigate risk through higher-quality investments with shorter
average
lives and more stable cash flows. The $25.4 million net outflow from lending
activities consisted almost entirely of short-term loans issued to various banks
during the fourth quarter of 1995.
Net cash used in financing activities totaled $17.5 million in 1995, principally
as a
result of the Company reducing its short-term borrowings by $16.0 million for
the
year as well as paying off a $2.0 million long-term note in the fourth quarter.
Partially offsetting these decreases was an increase in deposits of $1.0
million.
CAPITAL ADEQUACY:
Stockholders' equity improved $5.2 million during 1995 principally due to the
reversal in the Company's unrealized holding adjustment. The Company reported a
net
unrealized holding loss of $4.7 million at December 31, 1994, and a net
unrealized
holding gain of $780 at December 31, 1995. The implementation of the
reconstitution
plan during 1995 limited the Company's exposure to interest rate risk through
improvements in the quality, composition and structure of the investment
portfolio.
Such improved risk position made the Company less susceptible to market
depreciation
on available for sale securities resulting from rising interest rates.
In accordance with the MOU, which became effective May 24, 1995, and was
terminated
on February 16, 1996, the Company was required to maintain a Tier I Leverage
ratio of
no less than 5.0 percent after adjusting for unrealized holding losses, net of
income
taxes, in securities classified as available for sale and those high-risk
securities
and structured notes classified as held to maturity. At December 31, 1995, the
Company classified all securities as available for sale, which had an unrealized
holding gain, net of income taxes, of $780. At December 31, 1994, the Company
exceeded all requirements of the well-capitalized regulatory classification that
include a total risk-based ratio of at least 10.0 percent, a Tier I ratio of at
least
6.0 percent, and a Leverage ratio of at least 5.0 percent. Although the Company
exceeded the required ratio levels to be considered well-capitalized at
December 31,
1995, such designation could not be given as a result of the MOU provision
requiring
it to meet and maintain the specified capital level. Subsequent to the
termination date of the MOU, the Company regained its well-capitalized status.
In accordance with the MOU, the Company submitted a written plan to maintain an
adequate capital position acceptable to the FRB, taking into account the risk
inherent in the Company's securities portfolio. The plan addressed: (I) the
current
and future capital requirements of the Company, including the maintenance of
capital
ratios well in excess of minimum regulatory guidelines; (II) the market value of
the
Company's securities and the resulting effect on its capital; (III) the
maintenance
of a Tier I Leverage ratio of no less than 5.0 percent after adjusting for
market
depreciation, net of applicable taxes, in securities classified as available for
sale
and those high-risk securities and structured notes classified as held to
maturity;
(IV) any planned growth in the Company's assets; (V) the Company's anticipated
level
of net earnings, taking into account the projected asset/liability position and
exposure to changes in market interest rates; and (VI) the source and timing of
additional funds to fulfill the future capital requirement set forth in the MOU.
The
submitted plan covered the period from July 1, 1995, to June 30, 1998, taking
into
account the market value of the Company's securities and the resulting effect on
capital position under four different interest rate scenarios.
The Company's dividends declared increased from $455 to $462 for the years of
1994
and 1995, respectively. The capital appreciation of the Company's common stock
amounted to 5.0 percent for the year ended December 31, 1995.
REVIEW OF FINANCIAL PERFORMANCE:
The nation's top fifty commercial banks posted a $32.1 billion profit for 1995,
a 9.0
percent increase over the 1994 level. Higher noninterest income and lower
noninterest expenses were the major components in improved earnings partially
offset
by a tightening of the net interest margin. Noninterest income levels,
excluding
securities transactions and nonrecurring income, increased 11.0 percent over
1994
recorded levels while noninterest expenses were confined to a 5.0 percent rise.
The
net interest margin of such banks narrowed from 4.1 percent in 1994 to 3.9
percent in 1995.
Over $42.0 billion in bank mergers occurred in 1995, nearly four times the
activity
of 1994. An easing of interstate banking laws, in response to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, made bank mergers a
more
attractive option. In addition, consolidations and restructuring within the
industry
continued during 1995 as institutions anticipate interstate branching. Such
activities influence earnings levels of the banking industry in several ways.
Mergers often lead to higher service charges as larger banks tend to charge
higher
fees and usually require larger minimum balances than smaller banks. Over the
past
two years, large bank service charges have risen at twice the inflation rate.
Also,
services that were free to customers in the past now carry charges. Mergers
also
reduce noninterest expenses for banks. Expense benefits associated with bank
mergers
are cost reductions from the consolidation of offices, elimination of branches,
and
personnel downsizing. On average, banks that made acquisitions during 1995
reduced
the expenses of the acquired bank by 38.0 percent. Noninterest expenses were
also
aided by the August 8, 1995, decision by the FDIC to reduce insurance premiums
paid
by banks. This decision provided savings of approximately $4.0 billion for the
banking industry.
The beneficial effects from the improvements in noninterest income and expenses
were
partially offset by tighter net interest margins. As market interest rates fell
in
1995, the importance of deposits as a funding source and the value of customer
relationships, as openings to offer other products, kept institutions from
lowering rates to the same degree as experienced in general market rates.
The Company's reported net income for the year ended December 31, 1995, was $200
compared to $3,325 in 1994. On a per share basis, earnings were $0.09 for the
year,
compared with $1.51 reported in 1994. The material reduction in net income was
a
direct result of the Company's recognition of nonrecurring losses from
restructuring
the investment portfolio and nonrecurring costs associated with its compliance
to the
MOU. Net income, excluding such one-time adjustments, would have totaled $3.4
million in 1995 similar to the comparable net income of 1994. The return on
average
assets and return on average stockholders' equity were 0.06 percent and 0.77
percent
in 1995, respectively, as compared to 0.95 percent and 14.26 percent in 1994,
respectively. Adjusting for the aforementioned nonrecurring charges, return on
average assets and return on average equity would have been 0.95 percent and
13.17
percent, respectively, in 1995. The comparable ratios of the peer group were
1.11 percent and 11.18 percent in 1995, respectively.
Net interest income on a tax equivalent basis declined from $12,760 in 1994 to
$12,215 in 1995. Such reduction was a result of the Company's cost of funds
increasing at a greater rate than its yield on earning assets. Interest income
on a
tax equivalent basis increased $1,507 from $25,702 in 1994 to $27,209 in 1995.
Interest expense increased $2,052 from $12,942 in 1994 to $14,994 in 1995.
As a result of being adequately reserved after consideration of the Company's
loan
volume and asset quality, management reduced its monthly provision charged to
operations during 1995. Accordingly, the loan loss provision declined from $800
in 1994 to $435 in 1995.
Noninterest income recorded a loss of $3,196 in 1995, a decrease of $4,201
compared
to 1994. The majority of such decrease was attributable to reporting investment
securities losses of $4,393 in 1995 as opposed to net investment and trading
securities losses of $161 in 1994. Revenue from service charges, fees and
commissions increased $31 from 1994 to 1995.
Noninterest expense totaled $8,194 in 1995, an increase of $245, or 3.1 percent,
compared to 1994. During 1995, the rise in salaries and employee benefits
expense
and other expenses of $246 and $26, respectively, was partially offset by a
decline
in net occupancy and equipment expense of $27. The unfavorable variance of $245
includes nonrecurring expenses of approximately $500 associated with compliance
to the MOU.
NET INTEREST INCOME:
Net interest income on a tax equivalent basis decreased to $12,215 in 1995, a
reduction of $545 or 4.3 percent, compared to 1994. Such reduction resulted
from a
decline in the Company's net interest margin partially offset by the growth in
average earning assets exceeding that of interest-bearing liabilities.
Changes in the volumes of average earning assets in excess of average interest-
bearing liabilities resulted in a positive influence of $50 on net interest
income.
Total average earning assets increased $4.9 million to $351.2 million in 1995
while
average interest-bearing liabilities increased $4.4 million to $308.5 million in
1995. The Company experienced a 5.7 percent increase in its volume of average
loans
from $189.0 million to $199.7 million in 1994 and 1995, respectively. Such
increase
was responsible for $915 of the improvement in interest income as a result of
volume
changes. The other major contributor to the favorable rise in interest income
was
the higher average volume of federal funds sold in 1995, which contributed $977
to
the rise in interest income. Average federal funds sold increased $16.8 million
during 1995 as management invested proceeds from the sales of securities into
such
funds in response to a flattening yield curve. The decision to reconstitute the
investment portfolio led to a $1,327 unfavorable volume variance in investments.
The
average volume of investments declined $22.5 million or 14.3 percent to $134.5
million during 1995. The unfavorable volume variance of $508 in interest
expense
partially offset the favorable volume variance of $558 in interest income.
Increased
volumes of retail and commercial time deposits, partially offset by decreased
savings
volumes, were the major contributors to such variance. Average aggregate time
deposits grew from $165.6 million in 1994 to $184.5 million in 1995 as customers
sacrificed accessibility to obtain higher yields.
The Company's unfavorable rate variance of $595 in net interest income for the
comparable years of 1994 versus 1995 resulted from a decline in the Company's
net
interest margin as earning assets yield rose at a slower pace than cost of
funds.
The Company's net interest margin decreased by 20 basis points from 3.68 percent
in
1994 to 3.48 percent in 1995 while its net interest spread fell 27 basis points
from
3.16 percent to 2.89 percent for the same period. Earning assets yield rose
from
7.42 percent to 7.75 percent while funds cost rose from 4.26 percent to 4.86
percent
for the comparable years of 1994 and 1995. The cost of funds increase came in
response to the Company's aggressive retail time deposit product pricing in
light of
prior liquidity strains. Such pricing was responsible for $1,202 of the $1,544
negative rate variance in interest expense. A $949 positive rate variance
associated
with interest income partially offset the negative rate impact on interest
expense.
Such increase came primarily from the loan portfolio as it accounted for $654 of
the
increase. Loan yields rose 33 basis points in 1995 from 8.48 percent to 8.81
percent.
PROVISION FOR LOAN LOSSES:
Provisions for loan losses for the nation's top 50 banks increased 10.0 percent
in
1995 to $7.8 billion. Such increase came in response to a rise in net
charge-offs
for the year of 13.0 percent to $8.6 billion, which pushed net charge-offs as a
percentage of average loans outstanding to 0.54 percent in 1995 from 0.53
percent in
1994. Even after taking higher provisions, net charge-offs still outdistanced
the
provision for the year by $800.0 million, resulting in a 1.0 percent reduction
in the allowance for loan losses account.
Contrary to the provision stance taken by the banking industry, the Company
reduced
its provision for loan losses by $365 to $435 in 1995 from the $800 taken in
1994.
As net charge-off levels rose nationwide, the Company experienced an improvement
in
its level. Net charge-offs for the Company declined to $108 from $393 for the
comparable periods of 1995 and 1994.
NONINTEREST INCOME:
The Company reported a loss of $3,196 in noninterest income for the year ended
December 31, 1995, as compared to income totaling $1,005 for the year ended
December
31, 1994. The $4,201 decline was primarily a result of reporting net losses on
investment securities of $4,393 in 1995 compared to net losses of $161 in 1994
on
investment and trading account securities. The divestiture of high-risk CMOs,
structured notes and other highly criticized investments provided the major
component of the 1995 securities losses.
An increased volume of service charges, fees and commissions partially offset
the net
security losses incurred in 1995. The $31 or 2.7 percent increase over the
previous
year was principally due to fees recognized during the first six months of 1995
from
forfeitures on certificates of deposit as customers took advantage of higher
yields offered on longer-term instruments.
NONINTEREST EXPENSE:
Noninterest expense totaled $8,194 in 1995, an increase of $245, or 3.1 percent,
compared to 1994. The Company had a net overhead expense to average assets
ratio of
1.9 percent, an improvement over the 2.0 percent recorded in 1994. In relation
to
the peer group ratio of 2.8 percent, the Company continues to demonstrate a
greater
efficiency level. In addition, the Company's operating efficiency ratio showed
an
increase from 59.6 percent at December 31, 1994, to 64.1 percent at December 31,
1995. Reduced levels of net interest income, coupled with the increase in
noninterest expense, were responsible for the adverse change in such ratio.
Salaries and benefits composed 49.2 percent of noninterest expense and totaled
$4,028
in 1995, representing a $246 or a 6.5 percent increase compared to 1994. The
majority of such increase was attributable to the Company's Board of Directors
exercising its termination option of the former President and Chief Executive
Officer's written employment agreement during the second quarter of 1995. The
one-time cost of exercising such agreement approximated $207.
Net occupancy and equipment expense amounted to $1,222, a decrease of $27, or
2.2
percent, compared to 1994. The reduction is a reflection of lower costs
associated
with the maintenance of bank facilities partially offset by greater costs
related to the maintenance of equipment used in normal bank operations.
Other expenses totaled $2,944 in 1995, an increase of $26 compared to the 1994
level.
Such increase came as a direct result of the Company's compliance with the MOU.
The
aggregate costs associated with compliance approximated $500 for the year ended
December 31, 1995. Had the Company not been under this written directive, other
expenses would have declined $474 for 1995 as compared to 1994.
Partially offsetting the increase in other expenses associated with the MOU was
a
reduction in the Company's FDIC insurance expense. Effective August 8, 1995,
the
FDIC's Board of Directors put its proposal to lower bank deposit insurance
premiums
into effect. Such reduction came in response to the recapitalization of the
Bank
Insurance Fund during the second quarter of 1995. Under the plan, rates ranging
from
4 to 31 cents per every one hundred dollars of insured deposits were assessed
dependent upon risk characteristics of each institution. Based on the
evaluation of
its risk characteristics, the Company's insurance rate was reassessed from 26
cents
per every one hundred dollars of insured deposits to 7 cents per every one
hundred
dollars of insured deposits. This reevaluation led to a $261 reduction in the
Company's FDIC insurance premiums for 1995.
INCOME TAXES:
As a result of the loss before income taxes, the Company reported a tax benefit
for
1995. The tax benefit was 156.8 percent of the loss before tax and above the
marginal tax rate due to the effect of tax-exempt income. The Company was able
to
utilize the tax benefit because of taxable income in previous years and
expectations
of the future realization of the benefit. During 1994, the Company's effective
tax rate was 22.8 percent.
As required by SFAS No. 109, "Accounting for Income Taxes," the Company has
determined that it was not required to establish a valuation reserve for the
deferred
tax assets in 1995 or 1994 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.
COMM BANCORP, INC.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
COMM BANCORP, INC.
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Comm Bancorp, Inc. and
Community Bank and Trust Company
DONALD R. EDWARDS, SR.
Owner, Mountain View Inn
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
JOHN P. KAMEEN
SECRETARY
Publisher, Forest City News
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT MCDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
CORPORATE OFFICERS
COMM BANCORP, INC.
DAVID L. BAKER
President and
Chief Executive Officer
THOMAS M. CHESNICK
Assistant Secretary
WILLIAM F. FARBER, SR.
Chairman of the Board
JOHN P. KAMEEN
Secretary
J. ROBERT McDONNELL
Vice President
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer<PAGE>
BOARD OF DIRECTORS
COMMUNITY BANK AND TRUST COMPANY
ROBERT BABCOCK
Retired
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Comm Bancorp, Inc. and
Community Bank and Trust Company
DONALD R. EDWARDS, SR.
Owner, Mountain View Inn
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
MICHAEL T. GOSKOWSKI
SECRETARY
Owner, Kartri Sales Mfg.
ALLAN A. HORNBECK
President, Allan Hornbeck Chevrolet
JOHN P. KAMEEN
Publisher, Forest City News
ERWIN KOST
Owner, Kost Tire and Muffler
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE POROSKY
Owner, Porosky Lumber
ROBERT T. SEAMANS
Owner, Seamans Airport
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)
ADVISORY BOARDS
COMMUNITY BANK AND TRUST COMPANY
CARBONDALE OFFICE
JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home
JOHN J. CERRA
Attorney
Walsh and Cerra
ROBERT W. FARBER
R.W.F. Computer Consulting Co.
HENRY E. DEECKE
Henry E. Deecke Real Estate
HAROLD McGOVERN
McGovern Insurance Agency
Gantar Insurance
CLIFFORD OFFICE
DONALD R. EDWARDS, SR.
Owner, Mountain View Inn
WILLIAM F. FARBER, JR.
Manager, Farber's Restaurants
THOMAS J. LOPATOFSKY, JR.
Lenox Propane
JOSEPH T. McGRAW
Attorney
McGraw and McGraw
ERIC STEPHENS
Auto Dealer,
H.L. Stephens and Son
EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK OFFICES
ROD AZAR
Azar Insurance Agency
JUDD B. FITZE
Attorney
Farr, Davis & Fitze
DOUG GAY
Gay's True Value
THOMAS KUKUCHKA
Sheldon-Kukuchka Funeral Home
GLEN LAYAOU
Eaton Hills Development Corp.
Layaou Construction Co.
HOWARD TRAUGER
Trauger's, Inc.
MONTROSE OFFICE
ROBERT BABCOCK
Retired
EDGAR B. BAKER
Consultant
DUANE JERAULD
Montrose Beverage
TOM KERR
Tom Kerr Chevrolet
ROBERT LEE
Lee's Furniture Store
DONNA WILLIAMS
Livestock Dealer/Farmer
NICHOLSON OFFICE
RICHARD LOCHEN
Lochen's Market
MARK NOVITCH
Kram Trucking
DAVID SCHMIDT, JR.
Schmidt's Valley Farm Market
CHARLES SPENCER
Retired
SIMPSON OFFICE
WILLIAM A. KERL
Kerl's Coal and Oil
FRANCIS LAPERA
Lapera Oil Company
SUSAN MANCUSO
Accountant
Mancuso and Mancuso
GERALD SALKO, D.D.S.
Dentist
COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)
OFFICERS
COMMUNITY BANK AND TRUST COMPANY
DEBORAH AYERS
Acting Tunkhannock
Branch Manager
DAVID L. BAKER
President and
Chief Executive Officer
WILLIAM R. BOYLE
Vice President
Branch Administrator
Carbondale Branch Manager
MARK E. CATERSON
Vice President
Senior Trust Officer
THOMAS M. CHESNICK
Vice President, Cashier
Forest City Branch Manager
JOHN B. ERRICO
Comptroller
CRAIG FISCHER
Lakewood Branch Manager
VALERIE HITE
Simpson Branch Manager
RANDOLPH LaCROIX
Clifford Branch Manager
PAMELA S. MAGNOTTI
Compliance Officer
JOELYN MARK
Vice President
Marketing
MARY ANN MUSHO
Assistant Cashier
Human Resource Officer
IRENE Y. O'MALLEY
Senior Loan Administrator
JANICE NESKY
Nicholson Branch Manager
M. EVELYN PANTZAR
Vice President
Internal Auditor
RUBY SANDS
Lake Winola Branch Manager
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS W. SHEPPARD
Vice President
Senior Loan Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer
RONALD K. SMITH
Vice President
Montrose Branch Manager
TAMI L. SNYDER
Vice President
Information Services
STEVEN URSICH
Carbondale Assistant Branch Manager
GEORGE WEISS
Eaton Township Branch Manager
COMM BANCORP, INC.
GLOSSARY OF TERMS
BASIS POINT - Unit of measure equal to one hundredth of one percent.
BOOK VALUE PER COMMON SHARE - Value of one share of common stock calculated by
dividing stockholders' equity by the total number of common shares outstanding.
COMMON SHARES OUTSTANDING - The total number of common shares issued less any
shares held in the treasury.
CORE DEPOSITS - Total deposits excluding time deposits of $100,000 or more.
EARNING ASSETS - Assets that generate interest income and/or yield-related fee
income. Such assets include loans, securities and short-term investments.
EARNINGS PER SHARE - Net income divided by the average number of common shares
outstanding.
FULLY TAX EQUIVALENT - An adjustment made for tax-exempt instruments equal to
the
amount of taxes that would have been paid had these instruments been taxable at
the statutory rate of 34.0 percent.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid for the use
of funds. Such liabilities include interest checking, savings, time deposit
accounts and borrowed funds.
INTEREST SENSITIVE ASSETS/LIABILITIES - Interest-bearing assets and liabilities
adjustable within a specified period due to maturity or contractual agreements.
These agreements typically relate stated interest rates to the prime rate.
INTEREST SENSITIVITY - A measurement of the effect on net interest income due to
changes in interest rates.
LEVERAGE RATIO - Determined by dividing total stockholders' equity less
intangible
assets and unrealized holding gains and losses by current average tangible
assets.
LIQUIDITY - A corporation's ability to meet cash requirements. Deposits,
borrowings,
capital and/or asset conversions are all items used for the raising of cash.
MORTGAGE BACKED SECURITIES - Securities collateralized by pools of residential
mortgages having cash flows serviced by repayment activity on the underlying
mortgages.
NET CHARGE-OFFS - The amount of loans charged against the allowance for loan
loss account less any recoveries on loans previously charged-off.
COMM BANCORP, INC.
GLOSSARY OF TERMS (CONTINUED)
NET INTEREST INCOME - Income earned on earning assets less interest expense paid
on interest-bearing liabilities.
NET INTEREST MARGIN - Net interest income on a fully tax equivalent basis
divided by total average earning assets.
NET INTEREST SPREAD - Difference between the average tax equivalent rate
received on
earning assets and the average rate paid on interest-bearing liabilities.
NONACCRUAL LOANS - Loans that have had interest accruals interrupted due to the
financial difficulties of the borrower.
NONPERFORMING ASSETS - Assets consisting of nonperforming loans and foreclosed
assets. Nonperforming loans are defined as accruing loans past due 90 days or
more,
loans on which interest is currently not being accrued or loans on which the
rate or
term has been altered due to the deteriorated financial condition of the
borrower.
OVERHEAD RATIO - Used as a measurement of the relationship between operating
expenses
and revenues. It is total noninterest expenses divided by the total of tax
equivalent net interest income and noninterest income.
PAST DUE LOANS - Loans that are still accruing interest but are past due 90 days
or more with respect to the collection of principal or interest.
PROVISION FOR LOAN LOSSES - A charge against income made to estimate the expense
related to management's estimated losses with respect to the loan portfolio.
RESERVE FOR LOAN LOSSES - A valuation allowance charged against the loan
portfolio
representing the amount considered by management to be adequate to cover
estimated losses.
RETURN ON AVERAGE TOTAL ASSETS - Net income divided by the average total assets
for the period.
RETURN ON AVERAGE TOTAL EQUITY - Net income divided by the average total
stockholders' equity for the period.
RISK-ADJUSTED ASSETS - Assets and credit-equivalent amounts of off-balance sheet
items that have been adjusted according to regulatory guidelines into their
assigned risk weights.
RISK-BASED CAPITAL RATIOS - Guidelines set forth by regulatory agencies as to
the
measurement of capital and how total assets and certain off-balance sheet items
are to be risk-adjusted to reflect levels of credit risk.
COMM BANCORP, INC.
GLOSSARY OF TERMS (CONTINUED)
SENSITIVITY GAP - The difference between rate sensitive assets and rate
sensitive
liabilities for a designated period. Assets exceeding liabilities reflect a
positive
or net asset position. Liabilities exceeding assets reflect a negative or a net
liability position.
STOCKHOLDERS' EQUITY - Total investment by holders of common stock plus retained
earnings.
STOCKHOLDERS' EQUITY PER COMMON SHARE - The value of a common share of stock
calculated by dividing total common stockholders' equity by the total number of
outstanding common shares at the end of the period.
TIER I RISK-BASED CAPITAL - Stockholders' equity less goodwill and any other
intangible items.
TOTAL RISK-BASED CAPITAL - The sum of Tier I capital and the allowance for loan
losses (restricted by certain regulatory limitations).
COMM BANCORP, INC.
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS:
521 Main Street
Forest City, PA 18421
LEGAL COUNSEL:
Schnader Harrison Segal & Lewis
Suite 700
30 North Third Street
Harrisburg, PA 17101-1713
INDEPENDENT AUDITORS:
Kronick Kalada Berdy & Co., P.C.
190 Lathrop Street
Kingston, PA 18704
TRANSFER AGENT:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
MARKET MAKERS:
Robert W. Baird & Co., Inc.
777 E. Wisconsin Avenue
Milwaukee, WI 53202-5391
414-765-3500
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
201-325-3000
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17604-4548
717-560-3015
SEC REPORTS AND ADDITIONAL INFORMATION:
Copies of Comm Bancorp Inc.'s Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q
to the Securities and Exchange Commission or
additional financial information concerning
Comm Bancorp, Inc. may be obtained without
charge by writing to Scott A. Seasock, Chief
Financial Officer, at corporate headquarters.
COMMUNITY REINVESTMENT:
Copies of Community Bank and Trust Company's
community reinvestment statement may be
obtained without charge by writing to Pamela
Magnotti, Compliance Officer, at corporate
headquarters.
COMMON STOCK MARKET INFORMATION:
Shares of Comm Bancorp, Inc. common stock
began listing on the National Association of
Securities Dealers Automated Quotation
("NASDAQ") National Market Tier of the NASDAQ
Stock Market as CommBcp under the Symbol
"CCBP" on June 17, 1996. Prior to June 17,
1996, the Company's common stock was quoted on
the Over-the-Counter Electronic Bulletin Board
Interdealer System. As of March 1, 1997,
three firms were listed on the NASDAQ system
as market makers for the Company's common
stock. The following table sets forth: (1)
the high and low closing sale prices for a
share of the Company's common stock during the
periods indicated and (2) dividends on a share
of the common stock with respect to each
dividend declared since January 1, 1995.
Retroactive effect is given in sale price and
dividend information for a three-for-one stock
split effectuated April 1, 1996.
<TABLE>
<CAPTION>
CASH DIVIDENDS
1996: HIGH LOW DECLARED
------ ------ --------------
<S> <C> <C> <C>
First Quarter... $14.00 $14.00 $.05
Second Quarter.. 23.75 14.00 .06
Third Quarter... 25.50 21.50 .06
Fourth Quarter.. $27.50 $25.00 $.11
1995:
First Quarter... $13.38 $13.38
Second Quarter.. 13.38 13.38
Third Quarter... 13.38 13.38 $.08
Fourth Quarter.. $14.00 $13.38 $.13
</TABLE>
Holders of Comm Bancorp, Inc. common stock are
entitled to receive dividends when declared by
the Board of Directors out of funds legally
available. Comm Bancorp, Inc. has paid cash
dividends since its formation as a bank
holding company in 1983. It is the present
intention of the Board of Directors to
continue this dividend payment policy;
however, further dividends must necessarily
depend upon earnings, financial condition,
appropriate legal restrictions and other
factors relevant at the time the Board of
Directors of Comm Bancorp, Inc. considers
payment of dividends. For information with
respect to dividend restrictions of Comm
Bancorp, Inc., refer to Note 15 of the Notes
to Consolidated Financial Statements.
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Community Bank and Trust Company, incorporated under the laws of the
Commonwealth of
Pennsylvania as a state-chartered commercial banking institution and trust
company.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED BALANCE SHEETS FOUND ON
PAGES 102 AND 103 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
0
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</TABLE>
