UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2242292
- ------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
521 MAIN STREET, FOREST CITY, PA 18421
- --------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(717) 785-3181
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,202,405 AT NOVEMBER 6, 1997.
Page 1 of 37
COMM BANCORP, INC.
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
CONTENTS PAGE NO.
PART I. FINANCIAL INFORMATION:
ITEM 1:
Consolidated Statements of Income - For the Three Months and
Nine Months Ended September 30, 1997 and 1996............... 3
Consolidated Balance Sheets - September 30, 1997, and
December 31, 1996........................................... 4
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1997................ 5
Consolidated Statements of Cash Flows For the Nine Months
Ended September 30, 1997 and 1996........................... 6
Notes to Consolidated Financial Statements................... 7
ITEM 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II. OTHER INFORMATION:
ITEMS 1-6:
Other Information............................................ 35
Signature Page............................................... 37
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable.......................................................... $5,005 $4,564 $14,746 $13,826
Tax-exempt....................................................... 123 102 364 209
Interest and dividends on investment securities available for sale:
Taxable.......................................................... 820 983 2,410 3,046
Tax-exempt....................................................... 507 501 1,545 1,474
Dividends........................................................ 32 26 96 79
Interest on deposits with banks.................................... 1 6
Interest on federal funds sold..................................... 101 54 249 251
------ ------ ------- -------
Total interest income.......................................... 6,588 6,231 19,410 18,891
------ ------ ------- -------
INTEREST EXPENSE:
Interest on deposits............................................... 3,536 3,322 10,487 10,048
Interest on short-term borrowings.................................. 1 1 1
Interest on long-term debt......................................... 26 2 92
------ ------ ------- -------
Total interest expense......................................... 3,536 3,349 10,490 10,141
------ ------ ------- -------
Net interest income............................................ 3,052 2,882 8,920 8,750
Provision for loan losses.......................................... 105 75 255 225
------ ------ ------- -------
Net interest income after provision for loan losses............ 2,947 2,807 8,665 8,525
------ ------ ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions.............................. 358 389 1,120 1,097
Litigation recovery................................................ 250
Net investment securities losses................................... (31) (58)
------ ------ ------- -------
Total noninterest income....................................... 358 358 1,370 1,039
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................. 998 826 3,020 2,769
Net occupancy and equipment expense................................ 288 285 888 926
Other expenses..................................................... 660 579 1,972 1,840
------ ------ ------- -------
Total noninterest expense...................................... 1,946 1,690 5,880 5,535
------ ------ ------- -------
Income before income taxes......................................... 1,359 1,475 4,155 4,029
Provision for income tax expense................................... 279 326 855 878
------ ------ ------- -------
Net income..................................................... $1,080 $1,149 $ 3,300 $ 3,151
====== ====== ======= =======
PER SHARE DATA:
Net income......................................................... $0.49 $0.52 $1.50 $1.43
Cash dividends declared............................................ $0.06 $0.06 $0.18 $0.17
Average common shares.............................................. 2,201,245 2,200,080 2,200,473 2,200,080
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 6,756 $ 7,732
Federal funds sold.................................................................. 3,300
Investment securities available for sale............................................ 103,680 101,994
Loans, net of unearned income....................................................... 243,480 235,803
Less: allowance for loan losses................................................... 3,931 3,944
-------- --------
Net loans........................................................................... 239,549 231,859
Premises and equipment, net......................................................... 3,522 3,092
Accrued interest receivable......................................................... 2,467 2,671
Other assets........................................................................ 3,870 4,164
-------- --------
Total assets.................................................................... $359,844 $354,812
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 26,529 $ 26,424
Interest-bearing.................................................................. 293,895 294,032
-------- --------
Total deposits.................................................................. 320,424 320,456
Short-term borrowings............................................................... 1,440
Long-term debt...................................................................... 44 46
Accrued interest payable............................................................ 1,774 1,758
Other liabilities................................................................... 1,449 1,296
-------- --------
Total liabilities............................................................... 325,131 323,556
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding
September 30, 1997, 2,201,245 shares; December 31, 1996, 2,200,080 shares.......... 726 726
Capital surplus..................................................................... 6,350 6,317
Retained earnings................................................................... 26,554 23,649
Net unrealized gain on available for sale securities................................ 1,083 564
-------- --------
Total stockholders' equity...................................................... 34,713 31,256
-------- --------
Total liabilities and stockholders' equity...................................... $359,844 $354,812
======== ========
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED GAIN ON STOCKHOLDERS'
STOCK SURPLUS EARNINGS SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........................ $726 $6,317 $23,649 $ 564 $31,256
Net income........................................ 3,300 3,300
Dividends declared: $0.18 per share............... (395) (395)
Dividend reinvestment plan: 1,165 shares issued... 33 33
Net change in unrealized gain on securities....... 519 519
---- ------ ------- ------ -------
BALANCE, SEPTEMBER 30, 1997....................... $726 $6,350 $26,554 $1,083 $34,713
==== ====== ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 3,300 $ 3,151
Adjustments:
Provision for loan losses............................................................... 255 225
Depreciation and amortization........................................................... 571 536
Amortization of loan fees............................................................... (153) (163)
Deferred income tax benefit............................................................. (6) (599)
Losses on sale of investment securities available for sale.............................. 58
Gains on sale of other real estate...................................................... (50) (2)
Changes in:
Interest receivable................................................................... 204 314
Other assets.......................................................................... (358) 699
Interest payable...................................................................... 16 27
Other liabilities..................................................................... 264 123
------- -------
Net cash provided by operating activities........................................... 4,043 4,369
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities...................................... 1,463
Proceeds from repayments of available for sale securities................................. 21,927 19,411
Purchases of available for sale securities................................................ (22,827) (19,385)
Net disbursements from lending activities................................................. (7,895) (12,888)
Proceeds from sale of other real estate................................................... 380 273
Purchases of premises and equipment....................................................... (837) (409)
------- -------
Net cash used in investing activities............................................... (9,252) (11,535)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................. 667 2,154
Time deposits........................................................................... (699) (4,489)
Short-term borrowings................................................................... 1,440
Payments on long-term debt................................................................ (2) (3,002)
Proceeds from the issuance of common shares............................................... 33
Cash dividends paid....................................................................... (506) (543)
------- -------
Net cash provided by (used in) financing activities................................. 933 (5,880)
------- -------
Net decrease in cash and cash equivalents........................................... (4,276) (13,046)
Cash and cash equivalents at beginning of year...................................... 11,032 21,964
------- -------
Cash and cash equivalents at end of period.......................................... $ 6,756 $ 8,918
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest................................................................................ $10,474 $10,114
Income taxes............................................................................ 712 1,034
Noncash items:
Transfer of loans to other real estate.................................................. 103 250
Change in net unrealized losses (gains) on available for sale securities................ (519) 616
Cash dividends declared................................................................. $ 395 $ 381
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm Bancorp,
Inc. and subsidiary, Community Bank and Trust Company (collectively, the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all
normal recurring adjustments necessary for a fair presentation of the financial
position and results of operations for the periods have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates. For additional information
and disclosures required under generally accepted accounting principles,
reference is made to the Company's Annual Report on Form 10-K for the period
ended December 31, 1996.
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-Q are forward-looking statements that involve
a number of risks and uncertainties. The following factors, among others, may
cause actual results to differ materially from projected results:
Banking is affected, directly and indirectly, by local, domestic and
international economic and political conditions, and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, limited money supply, real estate values, international
conflicts, and other factors beyond the Company's control may adversely affect
its future results of operations. Management, consisting of the Board of
Directors and executive officers, does not expect any particular factor to
affect the Company's results of operations. A downward trend in several
sectors, including real estate, construction, and consumer spending, could
adversely impact the Company's ability to maintain or increase
profitability. Therefore, there is no assurance that the Company will continue
its current income and growth rates.
The Company's earnings are greatly dependent on net interest income, which is
primarily influenced by the relationship between its cost of deposits and
borrowings, or cost of funds, and the yield on its interest-earning assets,
which consist of loans and investments. This relationship, defined as the net
interest spread, is subject to fluctuation and is affected by regulatory,
economic and competitive factors that influence interest rates, the volume,
rate and mix of interest-earning assets and interest-bearing liabilities, and
the level of nonperforming assets. As part of its interest rate risk management
strategy, management seeks to control its exposure to interest rate changes by
managing the maturity and repricing characteristics of interest-earning assets
and interest-bearing liabilities.
In originating loans, the likelihood exists that some credit losses will occur.
This risk of loss varies with, among other things, general economic conditions,
loan type, creditworthiness and debt servicing capacity of the borrower over the
term of the loan and, in the case of a collateralized loan, the value and
marketability of the collateral securing the loan. Management maintains an
allowance for loan losses based on, among other things, historical loan loss
experience, known inherent risks in the loan portfolio, adverse situations that
may affect a borrower's ability to repay, the estimated value of any underlying
collateral, and an evaluation of current economic conditions. Management
believes that presently the allowance for loan losses is adequate, but that
there can be no assurance that nonperforming loans will not increase in the
future.
To a certain extent, the Company's success is dependent on the general economic
conditions in the geographic market that it serves. Although the Company
expects
that economic conditions will remain favorable in its market area, no assurance
can
be given that such conditions will continue. Adverse changes to economic
conditions
in the Company's geographic market area would likely impair its loan collections
and
could otherwise have a materially adverse 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. The larger size of these
companies affords them the benefits of offering products and services that the
Company does not offer. The Company constantly strives to meet the needs of its
customers while making it more convenient to fulfill these needs. As it is
aiding
its existing customers, the Company is also working towards enlarging its
customer
base. No assurance can be given that these efforts will be successful in
maintaining and expanding the Company's customer base.
OPERATING ENVIRONMENT:
On September 30, 1997, the Federal Reserve Open Market Committee ("FOMC") opted
to
hold the federal funds rate, the rate at which banks lend to each other
overnight, at
5.5 percent. Such rate has been in effect since March 25, 1997. This decision
came
as the country has shown no tangible signs of inflation during the third quarter
to
justify a rate increase. The Commerce Department reported that the economy as
measured by the Gross Domestic Product increased to a 3.5 percent annualized
rate
during the third quarter of 1997 as compared to 3.3 percent during the previous
quarter. Despite the stronger growth, the key inflation indicator that measures
the
price of all goods and services produced in the United States grew at an
insignificant annual pace of 1.4 percent for the third quarter. The national
unemployment rate fell slightly from 5.0 percent at the end of the second
quarter of
1997 to 4.9 percent at the end of the third quarter of 1997. This continued
trend,
suggesting strains in the availability of employable adults and a recent rise of
weekly earnings among workers, increases the odds that the Federal Reserve will
feel
compelled to raise short-term interest rates in the near term to head off any
acceleration in inflation. Such change may have an adverse effect on financial
institutions by curtailing loan demand and increasing fund costs.
Unemployment for the Commonwealth of Pennsylvania remained constant at 5.3
percent
for the end of the third quarter of 1997 as compared to the second quarter. The
unemployment rate for the Company's quad-county market area of Lackawanna,
Susquehanna, Wayne and Wyoming counties experienced a modest improvement.
Average
unemployment for the Company's market area declined to 7.1 percent for the third
quarter of 1997 compared to 7.4 percent for the second quarter. Such
improvement
increased the demand for credit and is expected to have a positive effect on the
level of nonperforming assets in the near term. Management anticipates that the
local economy will continue to improve as it historically lags that of the
nation.
REVIEW OF FINANCIAL POSITION:
The Company's total assets increased $5.0 million to $359.8 million at
September 30,
1997, from $354.8 million at December 31, 1996. The investment portfolio
increased
$1.7 million to $103.7 million at September 30, 1997, from $102.0 million at
December 31, 1996. Proceeds from matured investments and overnight federal
funds were used to
purchase U.S. Treasury, state and municipal and mortgage-backed securities.
For the
nine months ended September 30, 1997, loans increased $7.7 million, an
annualized
rate of 4.4 percent. Deposit volumes declined $3.2 million from $323.6 million
at
June 30, 1997, to $320.4 million at September 30, 1997, as the Company took a
less
aggressive, deposit-pricing approach during the third quarter. Such volumes are
relatively unchanged from year-end 1996. The Company's capital position
strengthened
again in the third quarter as its Leverage ratio reached 9.0 percent, up from
the 8.7
percent and 8.3 percent recorded at June 30, 1997, and December 31, 1996,
respectively. Through the first nine months of 1997, the Company's
stockholders'
equity increased $3,457 due to recording net income of $3,300 coupled with an
appreciation of $519 in the net unrealized holding adjustment on available for
sale
investment securities partially offset by cash dividends paid to shareholders of
$362.
On July 30, 1997, Community Bank and Trust Company entered a definitive
agreement to
acquire two branch offices of First Union National Bank ("First Union"). These
offices are located in Eynon, Lackawanna County, Pennsylvania, and Factoryville,
Wyoming County, Pennsylvania. Management expects these two offices, with
deposits
exceeding $21.0 million, to become fully operational as Community Bank and Trust
Company offices on November 14, 1997. This acquisition gives the Company an
opportunity to extend its delivery system for existing customers and provides a
new customer base with the service afforded through a community bank.
INVESTMENT PORTFOLIO:
At September 30, 1997, the Company's investment securities accounted for 29.9
percent
of its total earning assets. Such percentage was below the 31.9 percent of one
year
earlier and was in line with the Company's earning assets mix strategy of de-
emphasizing the investment portfolio. The two primary components of the
Company's
investment portfolio consist of U.S. Treasury securities and state and municipal
obligations. At September 30, 1997, these categories accounted for $29.6
million or
28.5 percent of total investments and $38.7 million or 37.4 percent of total
investments, respectively. The Company chooses this portfolio structuring as
short-term U.S. Treasury and U.S. Government agency securities supplement
primary sources
of cash flows in providing for future loan demand. In choosing medium-term,
tax-exempt state and municipal obligations, the Company benefits from a reduced
effective
tax rate. Moreover, management believes following this investment strategy,
commonly
referred to as a "barbell" approach, will assist the Company in maximizing the
portfolio's total return. If rates were to rise, thus reducing the value of the
medium-term municipal portfolio, management could offset such depreciation by
the reinvestment of maturing short-term securities at the now higher rates.
The Company reported a net unrealized gain on available for sale securities of
$1,083, net of income taxes of $559, at September 30, 1997. Such amount
represents
an increase as compared to the net unrealized gain on available for sale
securities
of $711, net of income taxes of $367, at June 30, 1997. A continued period of
economic moderation from the second quarter of 1997 prompted the FOMC to
maintain
short-term interest rates at their current levels. The result of such decision
led
to a decline in general market rates, which benefitted the market value of the
Company's investment portfolio.
As the economy continues to prosper, the FOMC may decide that an interest rate
increase would be justified to protect against inflation. The Company's
Investment
Committee regularly monitors the effects interest rate changes may have on the
investment portfolio. Stress tests conducted on the investment portfolio at
September 30, 1997, indicated the investment portfolio would lose approximately
1.8 percent of its value should there be an instantaneous parallel increase of
100 basis points in the yield curve.
The following table sets forth the carrying values of the major classifications
of securities as they relate to the total investment portfolio at
September 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------- ---------------
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury securities............................ $ 29,585 28.53% $ 35,619 34.92%
U.S. Government agencies............................ 14,067 13.57 18,606 18.24
State and municipals................................ 38,728 37.35 38,295 37.55
Mortgage-backed securities.......................... 18,350 17.70 7,058 6.92
Equity securities................................... 2,950 2.85 2,416 2.37
-------- ------ -------- ------
Total............................................. $103,680 100.00% $101,994 100.00%
======== ====== ======== ======
</TABLE>
Similar to the tax-equivalent yield earned during the previous two quarters, the
yield on the investment portfolio during the third quarter of 1997 was 6.6
percent. Repayments on securities amounted to $21.9 million for the nine months
ended September 30, 1997. Purchases of investment securities during such period
amounted to $22.8 million. Specifically, the Company acquired $7.0 million in
short-term U.S. Treasury securities, $2.8 million in intermediate-term state and
municipal obligations, $6.5 million in short-term collateralized mortgage
obligations ("CMOs"), $6.2 million in short-term pooled mortgage-backed
securities, and $275 in Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh") stock.
Management expects a continued implementation of its investing strategy of using
the majority of excess funds not utilized in lending to purchase short-term U.S.
Treasury securities and U.S. Government agency mortgage-backed products during
the remainder of 1997.
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 September 30, 1997. The weighted-average yield based on amortized
cost has been computed for state and municipals on a tax-equivalent basis using
the statutory tax rate of 34.0 percent. Except for equity securities, the
distributions are based on contractual maturity with the exception of mortgage-
backed securities and CMOs, which have been presented based upon estimated cash
flows, assuming no change in the current interest rate environment. Expected
maturities will differ from contracted maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties:
MATURITY DISTRIBUTION OF AVAILABLE FOR SALE PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-----------------------------------------------------------------------------
SEPTEMBER 30, 1997 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities..... $19,515 5.59% $10,045 5.96% $ 29,560 5.72%
U.S. Government agencies..... 11,499 4.41 2,648 4.92 14,147 4.51
State and municipals......... 975 5.03 5,448 6.25 $ 5,939 8.49% $25,466 7.72% 37,828 7.56
Mortgage-backed securities... 12,798 6.42 5,529 6.45 18,327 6.43
Equity securities............ 2,176 5.87 2,176 5.87
------- ------- ------- ------- --------
Total...................... $31,989 5.15% $30,939 6.11% $11,468 7.51% $27,642 7.57% $102,038 6.36%
======= ======= ======= ======= ========
Fair value:
U.S. Treasury securities..... $19,529 $10,056 $ 29,585
U.S. Government agencies..... 11,449 2,618 14,067
State and municipals......... 974 5,467 $6,244 $26,043 38,728
Mortgage-backed securities... 12,816 5,534 18,350
Equity securities............ 2,950 2,950
------- ------- ------- ------- --------
Total...................... $31,952 $30,957 $11,778 $28,993 $103,680
======= ======= ======= ======= ========
</TABLE>
LOAN PORTFOLIO:
Community banks are highly dependent on the housing industry for business
sustainability as nearly 67.0 percent of their lending activities are related to
financing real estate properties. Accordingly, management continually monitors
information related to such activities.
In September 1997, housing starts surged to 7.9 percent. Also for September
1997, new home and apartment constructions reached an annualized rate of 1.5
million homes with all regions of the country experiencing increases. Such
growth was attributable to consumer confidence bolstered by the strong job
market and wage increases as well as continued low interest rates on mortgages.
National unemployment levels remained low at 4.9 percent for September while
average hourly earnings were 3.6 percent above September 1996 levels. Consumers
also saw rates on 30-year, fixed-rate mortgages fall to a 19-month low during
the final week of September. Management anticipates a slowdown in loan demand
during the fourth quarter of 1997 due to cyclical trends and an overall
saturation in the real estate market. However, the Company's overall loan
demand may improve during the final quarter of 1997, because of its entrance
into new market areas resulting from the opening of the aforementioned branch
offices.
The Company's objective of placing more emphasis on the role of the loan
portfolio in its earning assets mix continued in the third quarter of 1997.
Loans, net of unearned income accounted for 70.1 percent of earning assets at
September 30, 1997, as compared to 68.1 percent at September 30, 1996. Loans
secured by residential properties continue to gain more importance in the loan
portfolio as evidenced by their increase to 62.8 percent of such portfolio at
September 30, 1997, compared to 61.9 percent at December 31, 1996. During the
third quarter of 1997, the loan portfolio increased $5.9 million, a 9.9 percent
annualized rate. The primary causes of such increase were a $3.2 million
increase in one-to-four family residential mortgages coupled with a $2.2 million
increase in tax-exempt commercial loans. Average loan volumes for the nine
months ended September 30, 1997 and 1996, were $239.3 million and $215.0
million, respectively. The tax-equivalent yield on the loan portfolio for the
nine months ended September 30, 1997, was 8.5 percent and was below the 8.8
percent for the same period of 1996. Such yield also falls below the 8.8
percent recorded by the Company's peer group of 35 banks located in Northeastern
Pennsylvania. Such variance resulted from the Company's implementation of
pricing strategies in light of increased market competition. Management expects
little change in loan yields for the remainder of 1997, as any rise in general
market rates is expected to be offset by management's interest in enhancing loan
demand through its competitive pricing strategies. Such demand is expected to
be facilitated by increases in the Company's core deposits as well as receipt of
repayments on loans and investments. Specifically, management will emphasize
utilization of funds acquired through the branch acquisitions to fund loan
demand.
For the nine months ended September 30, 1997, loans, net of unearned income
increased $7.7 million, a 4.4 percent annualized rate. Adjusting for the $3.4
million sale of student loans to a servicing agent during the second quarter of
1997, loan volumes would have grown $11.1 million or 6.3 percent for 1997. Such
increase is slightly less than the comparable $13.6 million growth experienced
during the same period of 1996. The loan categories primarily responsible for
the year-to-date growth were the same as those aforementioned for the third
quarter of 1997.
The following table sets forth the major categories of the loan portfolio at
September 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------- --------------------
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others.......... $ 34,306 14.09% $ 31,744 13.46%
Real estate:
Construction............................ 1,823 0.74 3,698 1.57
Mortgage................................ 188,370 77.37 179,134 75.97
Consumer, net............................. 18,981 7.80 21,227 9.00
-------- ------ -------- ------
Loans, net of unearned income........... 243,480 100.00% 235,803 100.00%
Less: allowance for loan losses........... 3,931 ====== 3,944 ======
-------- --------
Net loans............................. $239,549 $231,859
======== ========
</TABLE>
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit interest rate risk and
liquidity strains. Approximately 32.4 percent of the Company's loan portfolio
is expected to reprice within the next 12 months. Management will price loan
products in the near term in order to reduce the average term of fixed-rate
loans and increase its holdings of adjustable-rate loans in an attempt to lower
the future interest rate risk of the loan portfolio.
The following table sets forth the maturity and repricing schedule of the loan
portfolio at September 30, 1997:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
SEPTEMBER 30, 1997 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $15,295 $ 9,160 $ 9,851 $ 34,306
Real estate:
Construction....................... 1,823 1,823
Mortgage........................... 4,955 25,221 158,194 188,370
Consumer, net........................ 2,758 11,919 4,304 18,981
------- ------- -------- --------
Total............................ $24,831 $46,300 $172,349 $243,480
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $36,824 $67,565 $ 97,080 $201,469
Floating or adjustable interest rates 42,011 42,011
------- ------- -------- --------
Total............................ $78,835 $67,565 $ 97,080 $243,480
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
National unemployment experienced a modest improvement during the third quarter
of 1997 as the seasonally-adjusted unemployment ratio fell to 4.9 percent at the
end of the quarter as compared to 5.0 percent at the end of the second quarter.
Pennsylvania's unemployment rate at the end of the third quarter of 1997 was
unchanged from the second quarter at 5.3 percent. For the area served by the
Company, unemployment rates experienced a significant decline in all but Wyoming
County where the rate remained constant compared to the second quarter.
Unemployment rates for Lackawanna, Susquehanna, Wayne and Wyoming counties were
7.0 percent, 6.1 percent, 6.2 percent and 7.2 percent, respectively at the end
of the third quarter of 1997. These rates were 7.7 percent, 7.3 percent, 7.4
percent and 7.2 percent, respectively at the end of the second quarter of 1997.
Despite the overall improvement, such unemployment rates remained above national
and Pennsylvania levels. This persistence of local unemployment levels above
national levels has led to a deterioration in asset quality for the third
quarter of 1997. Nonperforming assets increased to $4.9 million or 2.0 percent
of loans, net of unearned income at September 30, 1997, compared to $3.8 million
or 1.6 percent of loans, net of unearned income at June 30, 1997, and December
31, 1996, respectively. The majority of this $1.1 million increase can be
attributed to one commercial, nonaccrual loan of $891. Such loan is currently
performing according to its original contractual terms and is being monitored by
the Company. Management assessed the collateral value of such loan and feels
confident that the credit is adequately secured in order to minimize losses.
Should the loan continue performing in accordance with its contractual terms,
consideration will be made as to reinstating the loan to accrual status.
Management expects the Company's nonperforming assets position to improve for
the remainder of 1997 as local employment conditions continue to strengthen.
The following table sets forth information concerning impaired and nonperforming
loans and nonperforming assets at September 30, 1997, and December 31, 1996. The
table includes credits classified for regulatory purposes and all material
credits that cause management to have serious doubts as to the borrowers'
ability to comply with present loan repayment terms:
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
Nonaccrual loans:
Commercial, financial and others............................... $1,193 $ 251
Real estate:
Construction.................................................
Mortgage..................................................... 1,166 1,018
Consumer, net.................................................. 15
------ ------
Total nonaccrual loans..................................... 2,374 1,269
------ ------
Restructured loans............................................. 202 225
------ ------
Total impaired loans....................................... 2,576 1,494
------ ------
Loans past due 90 days or more:
Commercial, financial and others............................... 155 359
Real estate:
Construction.................................................
Mortgage..................................................... 1,711 1,247
Consumer, net.................................................. 314 291
------ ------
Total loans past due 90 days or more....................... 2,180 1,897
------ ------
Total nonperforming loans.................................. 4,756 3,391
------ ------
Foreclosed assets.............................................. 193 420
------ ------
Total nonperforming assets................................. $4,949 $3,811
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 1.06% 0.63%
Nonperforming loans as a percentage of loans, net.............. 1.95 1.44
Nonperforming assets as a percentage of loans, net............. 2.03% 1.62%
</TABLE>
The Company's recorded investment in impaired loans, consisting of nonaccrual
and restructured loans, was $2,576 at September 30, 1997, $1,502 at June 30,
1997, and $1,494 at December 31, 1996. The average recorded investments in
impaired loans during the three and nine month periods ended September 30, 1997,
were $2,152 and $1,950, respectively. The averages for the comparable periods
of 1996 were $1,816 and $1,797, respectively. Impaired loans included a $202
restructured loan to one commercial customer at September 30, 1997. Such credit
continued to perform in accordance with its modified terms during the third
quarter of 1997. Had such loans been current and the terms not modified,
interest income on impaired loans would have been $16 and $82 for the quarter
and nine months ended September 30, 1997, respectively, and $27 and $69 for the
comparable periods of last year, respectively. For the quarter ended September
30, 1997, interest recognized on impaired loans was $29 and was $3 for the
comparable period last year. Interest recognized on impaired loans totaled $33
for the first nine months of 1997 and $26 for the same period last year. For
the quarters ended September 30, 1997 and 1996, cash receipts on impaired loans
amounted to $148 and $26, respectively. Cash received on impaired loans and
applied as a reduction of principal aggregated $267 and $269 for the nine months
ended September 30, 1997 and 1996, respectively. There were no commitments to
extend additional funds to such parties at September 30, 1997.
Accruing loans past due 90 days or more amounted to $2,180 at September 30,
1997, and $1,897 at December 31, 1996. The Company attributes this $283
increase to cyclical delinquency trends. Nonperforming loans as a percentage of
loans, net, increased to 1.95 percent from 1.53 percent and 1.44 percent at June
30, 1997, and December 31, 1996, respectively. The ratio recorded for the
Company's peer group was 1.49 percent at September 30, 1997.
The allowance for loan losses account is established through charges to earnings
in the form of a provision for loan losses. Loans, or portions of loans,
determined to be uncollectible are charged against the allowance account and
subsequent recoveries, if any, are credited to the account. The allowance is
maintained at a level believed adequate by management to absorb estimated
potential credit losses. While historical loss experience provides a reasonable
starting point in assessing the adequacy of the allowance account, management
also considers a number of relevant factors likely to cause estimated credit
losses associated with the Company's current portfolio to differ from historical
loss experience. Such factors include changes in lending policies and
procedures, economic conditions, nature and volume of the portfolio, loan review
system, volumes of past due and classified loans, concentrations, borrowers'
financial status, collateral value, and other factors deemed relevant by
management. In addition to management's assessment, various regulatory
agencies, as an integral part of their routine annual examination process,
review the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance, beyond normal monthly
provisions, based on their judgements concerning information available to them
at the time of their examination. As of the latest regulatory examination,
conducted at July 31, 1997, no such charge was deemed necessary.
In general, the allowance for loan losses account is available to absorb losses
throughout the loan portfolio, although in some instances allocation is made for
specific loans or groups of loans. Accordingly, the following table attempts to
allocate this reserve among the major categories. However, it should not be
interpreted as an indication that charge-offs in future periods will occur in
these amounts or proportions, or that the allocation indicates future charge-off
trends:
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others................... $1,388 14.09% $1,396 13.46% Real
estate:
Construction..................................... 0.74 1.57
Mortgage......................................... 1,323 77.37 1,326 75.97
Consumer, net...................................... 1,220 7.80 1,222 9.00
------ ------ ------ ------
Total.......................................... $3,931 100.00% $3,944 100.00%
====== ====== ====== ======
</TABLE>
The following table sets forth a reconciliation of the allowance for loan losses
account and illustrates the charge-offs and recoveries by major loan category
for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30,
1997
- ---------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $3,944
Loans charged-off:
Commercial, financial and others............................................... 175
Real estate:
Construction.................................................................
Mortgage..................................................................... 77
Consumer, net.................................................................. 113
------
Total...................................................................... 365
------
Loans recovered:
Commercial, financial and others............................................... 12
Real estate:
Construction.................................................................
Mortgage..................................................................... 3
Consumer, net.................................................................. 82
------
Total...................................................................... 97
------
Net loans charged-off.......................................................... 268
------
Provision charged to operating expense......................................... 255
------
Allowance for loan losses at end of period..................................... $3,931
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............ 0.11%
Allowance for loan losses as a percentage of period end loans................. 1.63%
</TABLE>
Management utilizes the federal banking regulatory agencies' Interagency Policy
Statement on the Allowance for Loan and Lease Losses in assessing the adequacy
of its allowance for loan losses account. This policy statement provides
guidance regarding the nature and purpose of the allowance, related
responsibility of management and examiners, loan review systems, and
international transfer risk matters. Such tool involves a comparison of the
reported loss allowance against the sum of specified percentages, based on
industry averages, applied to certain loan classifications. Based on the
results of this regulatory calculation, the Company was considered adequately
reserved at September 30, 1997. Despite these favorable results, management will
continue performing a thorough analysis of the Company's loan portfolio as such
calculation fails to account for differences between institutions, their
portfolios, underwriting and collection policies, and credit-rating policies.
The allowance for loan losses account was $3,931 at September 30, 1997, as
compared to $3,944 at December 31, 1996. As a percentage of nonperforming
loans, the allowance account covered 82.7 percent at September 30, 1997, and
116.3 percent at December 31, 1996. Relative to all nonperforming assets, the
allowance account covered 79.4 percent at September 30, 1997, and 103.5 percent
at December 31, 1996. The Company's allowance for loan losses account as a
percentage of period-end loans was 1.63 percent at September 30, 1997. Such
ratio has declined from the 1.67 percent recorded at December 31, 1996, as a
result of the increased size of the loan portfolio.
At September 30, 1997, June 30, 1997, and December 31, 1996, the Company's
allowance account included amounts for impaired loans of $2,374, $1,285, and
$1,269, respectively. The related allowance for loan losses for these periods
was $635, $634 and $650, respectively. The recorded investment for which there
was no related allowance for loan losses totaled $202 at September 30, 1997,
$217 at June 30, 1997, and $225 at December 31, 1996. For the nine months ended
September 30, 1997, activity in the allowance for loan losses account related to
impaired loans consisted of a $3 provision charged to operations and $18 in
losses charged to the allowance. There were no recoveries of such loans for the
first nine months of 1997.
Past due loans that have not been satisfied through repossession, foreclosure,
or related actions are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan losses
account. Subsequent recoveries, if any, are credited to the allowance account.
Net charge-offs equaled $268 compared to $80 for the nine months ended September
30, 1997 and 1996, respectively.
DEPOSITS:
The Company's average deposits totaled $320.2 million for the nine months ended
September 30, 1997, a $7.5 million or 2.4 percent increase compared to $312.7
million for the same period of 1996. For the quarter ended September 30, 1997,
the Company experienced a decrease in average deposits of $1.2 million or 1.5
percent annualized from $322.6 million in the second quarter of 1997. Such
reduction primarily resulted from declines in short-term deposits of local
school districts. Management chose not to aggressively compete for such funds
in light of the pending influx of core deposits from the branch office
acquisition due in the final quarter of 1997.
The cost of interest-bearing deposits remained constant at 4.78 percent for the
first three quarters of 1997. Such ratio was well above the third quarter cost
of funds of 4.24 percent reported by the Company's peer group. Local
competitors disregarded a reduction in general interest rates during the third
quarter of 1997 by increasing rates paid on deposits. Accordingly management,
concerned that it would lose customers, offered a special retail certificate of
deposit product during the second quarter of 1997 that caused the Company's cost
of funds to remain at the unfavorable level. Management, recognizing that its
higher cost of funds is the Company's main obstacle in profit improvement, is in
the process of formulating a customer account relationship analysis aimed at
decreasing its cost of funds for the future. The Company continually analyzes
its pricing strategies with respect to prevailing market conditions. Factors
such as changes in general market rates, loan demand and liquidity position are
all taken into consideration in making decisions for future actions regarding
deposit pricing.
The following table sets forth the average amount of, and the rate paid on, the
major classifications of deposits for the nine months ended September 30, 1997,
and September 30, 1996:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 16,331 3.14% $ 18,425 2.83%
NOW accounts................................ 18,054 2.19 16,190 1.98
Savings accounts............................ 65,254 2.96 67,290 2.98
Time less than $100......................... 163,471 5.71 157,626 5.68
Time $100 or more........................... 30,114 6.15 26,927 5.99
-------- --------
Total interest-bearing.................... 293,224 4.78% 286,458 4.68%
Noninterest-bearing......................... 27,021 26,218
-------- --------
Total deposits............................ $320,245 $312,676
======== ========
</TABLE>
Average volumes of noninterest-bearing deposits increased $800 or 3.1 percent
from $26.2 million for the nine months ended September 30, 1996, to $27.0
million for the same period of 1997. Such volumes as a percentage of average
assets totaled 7.6 percent for the nine months ended September 30, 1997 and
1996, respectively. Such ratio remained below the local peer group average of
9.5 percent thus effectively increasing the Company's cost of funds. As part of
the aforementioned customer account relationship analysis, management will
review loan customer deposit relationships with the Company in order to improve
the volume of noninterest bearing deposits.
Volatile liabilities, time deposits in denominations of $100 or more, declined
minimally to $25.8 million at September 30, 1997, from $26.0 million at June 30,
1997. The Company's average cost of such deposits rose slightly to 6.2 percent
for the nine months ended September 30, 1997, as compared to 6.0 percent for the
same period last year. The following table sets forth maturities of time
deposits of $100 or more for September 30, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
SEPTEMBER 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Within three months......................................... $12,221 $ 8,598
After three months but within six months.................... 1,811 9,958
After six months but within twelve months................... 4,019 11,262
After twelve months......................................... 7,766 6,047
------- -------
Total..................................................... $25,817 $35,865
======= =======
</TABLE>
INTEREST RATE SENSITIVITY:
Interest rate sensitivity is the relationship between prevailing interest rates
and earnings volatility based on the repricing characteristics of interest-
earning assets and interest-bearing liabilities. Interest rate sensitivity
management attempts to limit, and to the extent possible, control the effects
interest rate fluctuations have on net interest income as such income plays a
vital role in the Company's financial performance. The responsibility of
interest rate sensitivity management has been delegated to the Asset/Liability
Management Committee ("ALCO"). Specifically, ALCO utilizes several computerized
modeling techniques to monitor and attempt to control influences that market
changes have on the Company's rate sensitive assets and liabilities. One such
technique utilizes a static gap report, which attempts to measure the Company's
interest rate exposure by calculating the net amount of rate sensitive assets
("RSA") and rate sensitive liabilities ("RSL") that reprice within specific time
intervals. A positive gap, indicated by an RSA/RSL ratio greater than 1.0, means
that earnings will be impacted favorably if interest rates rise and adversely if
interest rates fall during the period. A negative gap tends to indicate that
earnings will be affected inversely to interest rate changes.
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
SEPTEMBER 30, 1997 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $ 9,147 $ 28,820 $ 30,239 $ 35,474 $103,680
Loans, net of unearned income....... 54,937 23,718 67,745 97,080 243,480
------- -------- -------- -------- --------
Total............................. $64,084 $ 52,538 $ 97,984 $132,554 $347,160
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 18,744 $ 18,744
NOW accounts........................ 18,044 18,044
Savings accounts.................... 216 $ 63,678 63,894
Time deposits less than $100........ $42,143 51,243 73,765 $ 245 167,396
Time deposits $100 or more.......... 12,221 5,830 7,766 25,817
Short-term borrowings............... 1,440 1,440
Long-term borrowings................ 6 18 20 44
------- -------- -------- -------- --------
Total............................. $55,810 $ 94,095 $145,229 $ 245 $295,379
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $ 8,274 $(41,557) $(47,245) $132,309
Cumulative........................ $ 8,274 $(33,283) $(80,528) $ 51,781 $ 51,781
RSA/RSL ratio:
Period............................ 1.15 0.56 0.67 541.04
Cumulative........................ 1.15 0.78 0.73 1.18 1.18
</TABLE>
At September 30, 1997, the Company's ratio of cumulative one year rate sensitive
assets to rate sensitive liabilities declined to 0.78 from 0.83 at June 30,
1997. With respect to the guidelines set forth in the Company's asset/liability
management policy, this ratio falls within the 0.7 and 1.3 deemed by management
to be acceptable. Such decline was attributable to the Company's aforementioned
strategy of reinvesting repayments on short-term investments into the loan
portfolio. Partially offsetting the regression in the cumulative one-year ratio
was a decline in retail time deposits maturing in one year. At September 30,
1997, such deposit volumes were at $93.4 million, $3.7 million or 15.1 percent
annualized below the $97.1 million recorded at June 30, 1997. Such shift
resulted from customers foregoing greater liquidity in favor of enhanced yields
when investing in these deposits.
The Company also experienced a decline in its three-month ratio falling to to
1.15 at September 30, 1997, as compared to 2.13 at June 30, 1997. This change
can be explained by a reduction in the amount of investment securities and loans
and an increase in the volume of time deposits repricing within such interval.
According to the results of the static gap report, the Company was liability
rate sensitive for the cumulative one-year period. This indicates that should
general market rates increase, the likelihood exists that net interest income
would be adversely impacted. Conversely, a decline in general market rates
would likely have a favorable impact on net interest income. However, these
forward-looking statements are qualified by the aforementioned section entitled,
"Forward-Looking Discussion" in this Management's Discussion and Analysis.
Static gap analytics, although a credible measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes normally do not equally or simultaneously affect all categories of
assets and liabilities. Second, assets and liabilities that can contractually
reprice within the same period may not do so at the same time or to the same
magnitude. Third, the interest rate sensitivity table presents a one-day
position; variations occur daily as the Company adjusts its rate sensitivity
throughout the year. Finally, assumptions must be made in constructing such a
table. For example, the conservative nature of the Company's Asset/Liability
Management Policy assigns money market and NOW accounts to the due after three
but within 12 months repricing interval. In reality, these items may reprice
less frequently and in different magnitudes than changes in general interest
rate levels.
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, the Company enhances its
asset/liability management by using a simulation model. Such model is used to
create pro forma net interest income scenarios under various interest rate
shocks. Model results at September 30, 1997, produced similar results to those
indicated by the static gap model. Should a parallel and instantaneous rise in
interest rates of 100 basis points occur, a decline in net interest income of
6.9 percent is expected. Conversely, a 100 basis point decline in market rates
would cause a 6.8 percent increase in net interest income.
Financial institutions are impacted differently by inflation than are commercial
and industrial companies that have significant investments in fixed assets and
inventories. Most of the Company's assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely measure the impact of inflation on the Company, however management
believes that its exposure to inflation can be mitigated through asset/liability
management.
LIQUIDITY:
Liquidity is defined as a company's ability to generate cash at a reasonable
cost in order to satisfy commitments to borrowers as well as to meet the demands
of depositors and debtholders. The Company's principal sources of liquidity are
its core deposits and loan and investment payments and prepayments. Providing a
secondary source of liquidity is the Company's available for sale portfolio. As
a final source of liquidity, the Company has the ability to exercise existing
credit arrangements. As specified in the Company's Asset/Liability Management
Policy, such borrowings will only be used on a contingency basis. The reliance
on these borrowings to fund temporary deficiencies is limited to a maximum of
five consecutive business days before management is required to take appropriate
action to remedy the shortfall through normal operations. The Company manages
liquidity daily, thus enabling management to effectively monitor fluctuations in
the Company's liquidity position and to adapt its position according to market
fluctuations. Management believes the Company's liquidity position is adequate
to meet both present and future shifts in loan demand and deposit withdrawals on
a timely basis. There are presently no known trends, demands, commitments,
events or uncertainties that have resulted or are reasonably likely to result in
material changes with respect to the Company's liquidity.
Although the Company's liquidity position remains adequate, it has become
slightly less favorable at September 30, 1997, as compared to June 30, 1997.
The best illustrations of this change are the Company's net noncore funding
dependence and net short-term noncore funding dependence ratios. The net
noncore funding dependence ratio is defined as the difference between noncore
funds, consisting of time deposits over $100 and brokered time deposits under
$100, and short-term investments to long-term assets. The net short-term
noncore funding dependence ratio is defined as the difference between noncore
funds maturing within one year, including borrowed funds, less short-term
investments to long-term assets. At September 30, 1997, such ratios were
negative 1.7 percent and negative 4.2 percent, respectively, compared to
negative 4.8 percent and negative 7.5 percent, respectively, at June 30, 1997.
Despite the decline, both ratios continued to outperform the 8.6 percent and 4.7
percent, respectively, recorded by the Company's peer group. Management
believes that by maintaining adequate volumes of short-term investments and
remaining competitive in medium-term certificate of deposit pricing, such ratios
will remain stable.
The consolidated statements of cash flows present the change in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, noninterest-bearing deposits with other banks, balances with the
Federal Reserve Bank of Philadelphia and the FHLB-Pgh, and federal funds sold,
decreased $4.3 million for the nine months ended September 30 1997, from $11.0
million at December 31, 1996. Net cash provided by operating activities totaled
$4.0 million due principally to the Company's recognition of net income of $3.3
million for the first three quarters of 1997.
The major component of the Company's net decrease in cash and cash equivalents
was net cash used in investing activities. Such activities accounted for a $9.3
million cash outflow for the first nine months of 1997. This decline was
primarily attributable to the Company's increased loan demand with $7.9 million
in net loan disbursements occurring in the first three quarters of 1997.
Net cash provided by financing activities aggregated $933 for the three quarters
ended September 30, 1997. The major contributing factor to such inflow was
$1,440 in overnight funds borrowed by the Company from another financial
institution. Such increase was partially offset by the Company's cash dividend
payments of $506 to its shareholders for the period between January 1, 1997, and
September 30, 1997.
CAPITAL ADEQUACY:
The Company's stockholders' equity increased $3,457 or 14.8 percent annualized
from $31,256 at December 31, 1996, to $34,713 at September 30, 1997. The
primary component of such improvement was the Company's generation of $3,300 in
net income partially offset by dividends declared for the nine months ended
September 30, 1997, totalling $395. Another beneficial influence to the
Company's capital level was a $519 increase in its unrealized holding gain for
1997. For the second consecutive quarter the Company experienced an improvement
in its unrealized holding gain. The improvement in the unrealized holding gain
for the third quarter of 1997 was $372. Management's continued efforts towards
improving the quality, composition and structure of the investment portfolio
have aided the Company in minimizing the impact of market depreciation on the
investment portfolio resulting from changes in interest rates.
The Company's third quarter dividend remained unchanged at $132 or $0.06 per
share as compared to the first and second quarters of 1997. Through September
30, 1997, the aggregate dividends declared by the Company in 1997 amounted to
$395 or $0.18 per share as compared to $381 or $0.17 per share for the same
period last year. For the three quarters ended September 30, 1997, dividends
declared as a percentage of net income equalled 12.0 percent. It is the present
intention of the Company's board of directors that dividends will be paid in the
future. However, factors such as operating results, financial and economic
conditions, capital needs, growth objectives, appropriate dividend restrictions
related to the Company and other relevant factors may influence these decisions.
On April 2, 1997, the Company filed a registration statement with the Securities
and Exchange Commission ("SEC") to register 300 thousand shares of common stock
to be utilized for the Dividend Reinvestment Plan ("DRP"). The plan went into
effect beginning with the Company's second quarter dividend and affords
stockholders the opportunity to automatically reinvest their dividends in shares
of the Company's common stock. Stockholder participation in such plan rose to
27.0 percent of outstanding shares during the third quarter of 1997.
The following table presents the Company's capital ratios at September 30, 1997
and 1996, as well as the required minimum ratios for capital adequacy purposes
and to be "well capitalized" under the prompt corrective action provisions:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
SEPTEMBER 30 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets... $ 31,830 $ 27,817 $ 7,658 $ 7,144 $11,487 $10,716
Total capital to risk-adjusted assets.... 34,242 30,069 15,317 14,288 19,146 17,861
Tier I capital to total average assets
less goodwill........................... 31,830 27,817 $14,199 $13,802 $17,749 $17,253
Risk-adjusted assets..................... 183,997 173,097
Risk-adjusted off-balance sheet items.... 7,461 5,509
Average assets for Leverage ratio........ $354,979 $345,052
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 16.6% 15.6% 4.0% 4.0% 6.0% 6.0%
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items................. 17.9 16.8 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 9.0% 8.1% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at September
30, 1997, and was considered "well capitalized." Regulatory agencies define
institutions not under a written directive to maintain certain capital levels as
"well capitalized" if they exceed the following: Tier I risk-based ratio of at
least 6.0 percent, a total risk-based ratio of at least 10.0 percent and a
Leverage ratio, defined as Tier I capital to total average assets less goodwill,
of at least 5.0 percent. The Company continued improving its capital level as
illustrated by an increase in its Leverage ratio. Such ratio was at 9.0 percent
at September 30, 1997, rising above the 8.7 percent recorded at June 30, 1997,
and the 8.3 percent recorded at December 31, 1996.
REVIEW OF FINANCIAL PERFORMANCE:
For the third quarter of 1997, the Company recorded net income of $1.1 million
or $0.49 per share, making total earnings for the year to date $3.3 million or
$1.50 per share. This marks a 4.7 percent increase over net income recorded for
the nine months ended September 30, 1996. The Company's return on average total
assets and return on average stockholders' equity were 1.24 percent and 13.62
percent, respectively, for the first nine months of 1997 compared to 1.21
percent and 14.94 percent recorded for the same period last year. Such
earnings levels were primarily a result of increased loan revenues coupled with
greater levels of noninterest income. The Company maintained its focus on
establishing a more prominent role for loans in its earning assets mix. This is
evidenced by an increase in the ratio of average loans to average earning assets
from 64.4 percent for the nine months ended September 30, 1996, to 69.6 percent
for the same period of 1997.
NET INTEREST INCOME:
The major source of the Company's operating income is derived from net interest
income. Net interest income is defined as the excess amount of interest and
fees on loans and other investments over interest expense incurred on deposits
and other funding sources used to support such assets. Net interest margin is
the percentage of net interest income on a tax- equivalent basis to average
earning assets. Variations in volumes and rates of earning assets and
liabilities, in response to changes in general market rates, are the primary
factors affecting net interest income. Net interest levels are also influenced
by the composition of earning assets and interest-bearing liabilities as well as
the level of nonperforming asset volumes.
The Company experienced a 3.0 percent increase in net interest income on a tax-
equivalent basis for the nine months ended September 30, 1997, as compared to
the same period of 1996. The major contributing factor to such increase was the
Company's greater average loan volumes partially offset by reduced average
investment volumes and greater average volumes of time deposits. Through the
first nine months of 1997, the Company's average loan volumes totalled $239.2
million, a $24.2 million increase over the $215.0 million recorded for the same
period of 1996. Such volume increase accounted for a $1,342 positive variance
in interest income due to loan volumes. The Company, in working towards
localizing a larger portion of its earning assets into the loan area, greatly
reduced its investment volumes. For the nine months ended September 30, 1997,
average investment volumes equalled $98.5 million. Such amount marks a $13.9
million or 12.4 percent decrease from the $112.4 million for the same period of
1996. In making this strategic decision, the Company's interest income related
to average investment volumes was negatively influenced by $694 for the nine
months ended September 30, 1997. Partially offsetting the Company's positive
$635 change in interest income was a $349 rise in interest expenses for the
period. The primary sources of such increase were larger volumes of retail and
commercial time deposits. Through the first nine months of 1997, average
volumes of retail and commercial time deposits totalled $163.5 million and $30.1
million, respectively. For the same period of 1996, such volumes were $157.6
million and $26.9 million, respectively. For the three quarters ended September
30, 1997, the Company experienced a negative change in net interest income of
$178 related to interest rates as compared to the same period of 1996. The
primary causes of this effect were rate increases in money market and retail and
commercial time deposits. Interest rates on money market accounts rose 31 basis
points to 3.14 percent for the nine months ended September 30, 1997, as compared
to 2.83 percent one year ago. Retail and commercial time deposits also
increased in cost for the three quarters ended September 30, 1997. Rates paid
on these deposits were 5.71 percent and 6.15 percent, respectively, for the nine
month period ended September 30, 1997. Comparatively, such rates were 5.68
percent and 5.99 percent, respectively, for the same period of 1996. The
cumulative effect of the rate changes in these three deposit products was a
negative $120 to net interest income. For the three quarters ended September
30, 1997, the Company's net interest margin remained unchanged at 3.85 percent
as compared to the same period of 1996. The more influential role of the loan
portfolio in the Company's earning assets mix helped to neutralize its increased
cost of funds related to the highly competitive deposit-gathering environment.
For the quarter ended September 30, 1997, tax-equivalent net interest income
increased $183 compared to the same period of 1996. This increase continued the
linear improvement of the quarterly change in net interest income. For example,
the Company recorded an increase of $13 in the first quarter of 1997 followed by
a second quarter increase of $90. Greater average loan volume levels offset by
the reduced average investment levels and the increased costs of funds were the
major reasons for the favorable change. For the final quarter of 1997,
management expects net interest margins to improve based on greater loan
volumes. However, an increase in general market rates or a more competitive
environment related to deposit gathering could hinder margin increases.
Management is also aware that a deterioration in local unemployment levels could
occur thus constricting margin improvements.
Management analyzes interest income and interest expense by segregating rate and
volume components of earning assets and interest-bearing liabilities. The
following table demonstrates the impact changes in the interest rates earned and
paid on assets and liabilities, along with changes in the volume of earning
assets and interest-bearing liabilities, have on net interest income. Earning
assets averages include nonaccrual loans. Investment averages include available
for sale securities at amortized cost. Investment securities and loans are
adjusted to a tax- equivalent basis using a 34.0 percent tax rate. The net
change attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume:
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 VS. 1996 1997 VS. 1996
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
--------------------- -----------------------
TOTAL TOTAL
CHANGE RATE VOLUME CHANGE RATE VOLUME
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Taxable............................. $ 441 $ (17) $ 458 $ 920 $(169) $ 1,089
Tax-exempt.......................... 32 11 21 235 (18) 253
Investments:
Taxable............................. (157) 119 (276) (619) 211 (830)
Tax-exempt.......................... 8 (49) 57 107 (29) 136
Interest-bearing deposits with banks.. (1) (1) (6) (6)
Federal funds sold.................... 47 3 44 (2) 7 (9)
----- ----- ----- ------- ----- -------
Total interest income............. 370 67 303 635 2 633
----- ----- ----- ------- ----- -------
Interest expense:
Money market accounts................. 11 61 (50) (8) 54 (62)
NOW accounts.......................... 17 13 4 56 27 29
Savings accounts...................... (60) (39) (21) (58) (10) (48)
Time deposits less than $100.......... 203 62 141 270 33 237
Time deposits $100 or more............ 43 26 17 179 33 146
Short-term borrowings................. (1) (1)
Long-term debt........................ (26) (26) (90) 43 (133)
----- ----- ----- ------- ----- --------
Total interest expense............ 187 123 64 349 180 169
----- ----- ----- ------- ----- --------
Net interest income............... $ 183 $ (56) $ 239 $ 286 $(178) $ 464
===== ===== ===== ======= ===== ========
</TABLE>
The following table sets forth a summary of net interest income for major
categories of earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $230,105 $14,746 8.57% $210,018 $13,826 8.79%
Tax-exempt.................................. 9,145 552 8.07 4,980 317 8.49
Investments:
Taxable..................................... 60,773 2,506 5.51 76,897 3,125 5.43
Tax-exempt.................................. 37,697 2,340 8.30 35,539 2,233 8.39
Interest-bearing deposits with banks.......... 94 6 8.53
Federal funds sold............................ 6,022 249 5.53 6,192 251 5.41
-------- ------- -------- -------
Total earning assets...................... 343,742 20,393 7.93% 333,720 19,758 7.91%
Less: allowance for loan losses.............. 3,910 4,012
Other assets.................................. 16,506 16,912
-------- --------
Total assets.............................. $356,338 $346,620
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 16,331 383 3.14% $ 18,425 391 2.83%
NOW accounts.................................. 18,054 296 2.19 16,190 240 1.98
Savings accounts.............................. 65,254 1,445 2.96 67,290 1,503 2.98
Time deposits less than $100.................. 163,471 6,977 5.71 157,626 6,707 5.68
Time deposits $100 or more.................... 30,114 1,386 6.15 26,927 1,207 5.99
Short-term borrowings......................... 20 1 6.68 25 1 5.34
Long-term debt................................ 44 2 6.08 2,815 92 4.37
-------- ------- -------- -------
Total interest-bearing liabilities........ 293,288 10,490 4.78% 289,298 10,141 4.68%
Noninterest-bearing deposits.................. 27,021 26,218
Other liabilities............................. 3,634 2,925
Stockholders' equity.......................... 32,395 28,179
-------- ------- -------- -------
Total liabilities and stockholders' equity $356,338 10,490 $346,620 10,141
======== ------- ======== -------
Net interest/income spread................ $ 9,903 3.15% $ 9,617 3.23%
======= =======
Net interest margin....................... 3.85% 3.85%
Tax equivalent adjustments:
Loans......................................... $ 188 $ 108
Investments................................... 795 759
------- -------
Total adjustments......................... $ 983 $ 867
======= =======
</TABLE>
Note: Average balance was calculated using average daily balances and
includes nonaccrual loans. Available for sale securities,
included in investment securities, are stated at amortized cost with
the related average unrealized holding gain of $952 and
$259 at September 30, 1997 and 1996, respectively, included in other
assets. Tax-equivalent adjustment was calculated using
the prevailing statutory rate of 34.0 percent.
PROVISION FOR LOAN LOSSES:
The Company makes provisions for loan losses based on evaluations of its
allowance for loan losses account. Factors such as previous loan experience,
overall loan portfolio characteristics, prevailing economic conditions, and
other relevant factors are taken into consideration when determining the
provision. Based on its most current evaluation, management believes the
allowance is adequate to absorb any known and inherent losses in the portfolio.
For the three and nine months ended September 30, 1997, the Company's provision
for loan losses was $105 and $255, respectively, compared to $75 and $225,
respectively, for the same period of 1996. Management decided to increase its
monthly provision to $35 effective July 1, 1997, based on the greater amount of
credit extensions and the adverse change in nonperforming asset levels.
NONINTEREST INCOME:
For the nine months ended September 30, 1997, the Company's noninterest income
totaled $1,370, a $331 or 31.9 percent increase compared to the same period last
year. The discernable increase primarily resulted from a $250 litigation
settlement paid by a securities broker to the Company's wholly-owned subsidiary,
Community Bank and Trust Company. The $250 settlement was awarded with respect
to the subsidiary's business relationship with this broker prior to 1995. This
one-time addition to noninterest income had a $148.5 positive impact on 1997
earnings after applicable income taxes and legal fees. Service charges, fees
and commissions increased a modest $23 or 2.1 percent to $1,120 for the three
quarters ended September 30, 1997, compared to the same period one year ago.
The major contributing factor to such increase was an increase on fees collected
from insufficiently-funded customer accounts. The net investment securities
losses of $58 for the nine months ended September 30, 1996, resulted from the
disposition of four variable rate CMOs with a carrying value of $1,487. Such
disposition resulted from a decision made by the investment committee based on a
reassessment of their appropriateness with respect to their structure,
composition and characteristics in line with future investment goals. For the
quarters ended September 30, 1997 and 1996, noninterest income equaled $358.
For the third quarter of 1997, service charges, fees and commissions equalled
$358, a $31 decline compared to the same period of 1996. Such decline was
offset as the Company realized securities losses of $31 during the third quarter
of 1996 while it incurred no such losses for the same period of 1997.
NONINTEREST EXPENSE:
The general components of noninterest expense are the costs of providing
salaries and necessary employee benefits, maintaining facilities and general
operating costs such as insurance, supplies, advertising, data processing and
other related expenses. Several of these costs and expenses are variable while
the remainder are fixed. In its efforts to control the variable portion of
these expenses, management employs budgets and other related strategies.
For the three quarters ended September 30, 1997, noninterest expenses totaled
$5,880, an increase of $345 or 6.2 percent compared to the same period of 1996.
The Company's net overhead ratio for the nine months ended September 30, 1997,
was 1.8 percent, slightly above the 1.7 percent recorded for the corresponding
period of 1996. Such ratio remains more favorable than the 2.6 percent
experienced by the Company's peer group. A company can also measure its
productivity with the operating efficiency ratio. Such ratio is defined as a
company's noninterest expense, excluding other real estate expense, as a
percentage of net interest income and noninterest income less nonrecurring gains
and losses. The Company's operating efficiency ratio for the nine months ended
September 30, 1997, was slightly less favorable at 56.8 percent as compared to
55.6 percent for the same period last year. It is reasonably likely that the
acquisition of the two branch offices will increase the level of noninterest
expense and cause a corresponding adverse affect to the Company's efficiency
ratios.
The majority of the Company's noninterest expense is salaries and benefits
expense. Such expenses totaled $3,020 or 51.4 percent of noninterest expense.
This marked a $251 or 9.1 percent increase over the $2,769 recorded for the same
period last year. During the third quarter of 1996, the Company discontinued
the deferred compensation plan for certain senior management employees. Such
action accounted for a $159 reduction in salaries and benefits expense for the
nine months ended September 30, 1996. The remainder of the difference is due to
the addition of personnel to the Company's employee base in its efforts to
better serve its expanding customer base coupled with the implementation of 1996
merit raises issued during the first half of 1997.
For the three quarters ended September 30, 1997, the Company's occupancy and
equipment expense aggregated $888, a $38 or 4.1 percent decline from the $926
recorded for the same period of 1996. Lower maintenance costs associated with
equipment used in normal banking operations and bank facilities provide the
major reason for such decline. Presently the Company has no pending commitment
to make any material capital expenditures other than those associated with the
newly acquired branch offices and those incurred in the normal course of
business. Capital expenditures on the newly acquired branch offices are
estimated to be $300.
Through the nine months ended September 30, 1997, the Company's other expense
amounted to $1,972, a $132 or 7.2 percent increase from the same period of 1996.
Such unfavorable variance was related to a nonrecurring increase in stationery
and supplies expense during the second quarter associated with the
centralization of the Company's purchasing department as well as supply expenses
related to the introduction of the Company's imaging system. Also contributing
to the increased other expense was an increase in the Company's marketing
expense incurred as a result of its efforts to build its customer base. A final
important factor in the rise in other expenses was an increase in Federal
Deposit Insurance Corporation premiums for 1997 due to the Deposit Insurance
Fund Act of 1996, signed into law by the President during the third quarter of
1996. This law provides Bank Insurance Fund ("BIF")-insured institutions the
responsibility of paying a portion of the $780.0 million annual Finance
Corporation ("FICO") interest payments. The rate for BIF-insured institutions
for the period beginning January 1, 1997, through December 31, 1999, will equal
one-fifth of the Savings Association Insurance Fund ("SAIF") rate. The rates
for the first half of 1997 were set at 1.30 basis points and 6.48 basis points,
respectively. For the second half of 1997, such rates were set at 1.26 basis
points and 6.30 basis points, respectively. Rates may be adjusted quarterly to
reflect changes in the assessment bases for the BIF and the SAIF. The law
requires the FICO rate on BIF-assessable deposits to be one-fifth the rate on
SAIF-assessable deposits until the funds merge or until January 1, 2000,
whichever comes first.
For the quarter ended September 30, 1997, the Company's noninterest expenses
increased $256 as compared to the same period of 1996. The quarterly increase
can be accounted for by reasons similar to those stated for the year-to-date
increase.
The following table sets forth the major components of noninterest expenses for
the three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $ 858 $ 823 $2,531 $2,452
Employee benefits.............................. 140 3 489 317
------ ------ ------ ------
Salaries and employee benefits expense....... 998 826 3,020 2,769
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 136 149 436 470
Equipment expense.............................. 152 136 452 456
------ ------ ------ -------
Net occupancy and equipment expense.......... 288 285 888 926
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 77 52 221 171
Other taxes.................................... 58 56 188 168
Stationery and supplies........................ 84 91 262 216
Contractual services........................... 204 197 644 658
Insurance including FDIC assessment............ 19 4 60 71
Other.......................................... 218 179 597 556
------ ------ ------ ------
Other noninterest expenses................... 660 579 1,972 1,840
------ ------ ------ ------
Total noninterest expense.................. $1,946 $1,690 $5,880 $5,535
====== ====== ====== ======
</TABLE>
INCOME TAXES:
The Company's effective tax rates for the three and nine months ended September
30, 1997, were 20.5 percent and 20.6 percent, respectively. These rates show
improvement over the 22.1 percent and 21.8 percent, respectively, reported for
the same periods of 1996. The Company's advantageous tax position is a result
of management's efforts to reduce its tax burden acquiring tax-exempt
investments and loans as well as its use of investment tax credits available
through the Company's investment in a residential housing program for elderly
and low-to moderate-income families.
It is management's determination that a valuation reserve need not be
established for the deferred tax assets as it is more likely than not that such
assets could be principally realized through carryback to taxable income in
prior years and by future reversals of existing taxable temporary differences
or, to a lesser extent, through future taxable income. The Company performs
quarterly reviews on the tax criteria related to the recognition of deferred tax
assets.
COMM BANCORP, INC.
OTHER INFORMATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE
(b) Reports on Form 8-K during the quarter
(i) July 31, 1997 - The following events were reported:
Item 5. - The Company announced that Community Bank entered
into a definitive agreement on July 30, 1997, to acquire the
Eynon, Lackawanna County, Pennsylvania, and Factoryville,
Wyoming County, Pennsylvania, branch offices of First Union.
Item 7. (c) - Form of Press Release that Community Bank has
entered into a definitive agreement to acquire the Eynon,
Lackawanna County, Pennsylvania, and Factoryville, Wyoming
County, Pennsylvania, branch offices of First Union.
(ii) September 18, 1997 - The following events were reported:
Item 5. - An amendment to Article 16 of the Company's
Amended Articles of Incorporation went into effect on
September 18, 1997. The amendment relaxed the 75.0 percent
supermajority voting requirement to approve a Fundamental
Transaction in which the Company is the surviving or
continuing entity to an affirmative vote of a majority of
the outstanding shares of the Registrant's common stock. In
all other Fundamental Transactions, holders of 75.0 percent
of the shares of the Company's common stock shall
affirmatively vote to approve such transaction.
COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)
Item 7. (c) - Copy of amended Item 16 from the Company's
Amended Articles of Incorporation as of September 18, 1997.
Item 7. (c) - Summary of the results of matters submitted
for vote at the Company's Stockholder Meeting conducted on
September 12, 1997.
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: November 12, 1997 /s/ David L. Baker
David L. Baker
Chief Executive Officer
Date: November 12, 1997 /s/ Scott A. Seasock
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1997 /s/ John B. Errico
John B. Errico, Comptroller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLODATED INCOME STATEMENTS AND CONSOLODATED BALANCE SHEETS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,756
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 103,680
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 243,480
<ALLOWANCE> 3,931
<TOTAL-ASSETS> 359,844
<DEPOSITS> 320,424
<SHORT-TERM> 1,440
<LIABILITIES-OTHER> 3,223
<LONG-TERM> 44
0
0
<COMMON> 726
<OTHER-SE> 33,987
<TOTAL-LIABILITIES-AND-EQUITY> 359,844
<INTEREST-LOAN> 15,110
<INTEREST-INVEST> 4,051
<INTEREST-OTHER> 249
<INTEREST-TOTAL> 19,410
<INTEREST-DEPOSIT> 10,487
<INTEREST-EXPENSE> 10,490
<INTEREST-INCOME-NET> 8,920
<LOAN-LOSSES> 255
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,880
<INCOME-PRETAX> 4,155
<INCOME-PRE-EXTRAORDINARY> 4,155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,300
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 7.93
<LOANS-NON> 2,374
<LOANS-PAST> 2,180
<LOANS-TROUBLED> 202
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,944
<CHARGE-OFFS> 365
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 3,931
<ALLOWANCE-DOMESTIC> 3,931
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
