UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
- --------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
521 MAIN STREET, FOREST CITY, PA 18421
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 785-3181
------------------------------
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(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 twelve 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: 2,205,112 at April 28, 1998.
Page 1 of 39
COMM BANCORP, INC.
FORM 10-Q
MARCH 31, 1998
INDEX
CONTENTS PAGE NO.
PART I. FINANCIAL INFORMATION:
ITEM 1:
Consolidated Statements of Income and Comprehensive Income -
For the Three Months Ended March 31, 1998 and 1997........... 3
Consolidated Balance Sheets - March 31, 1998, and December 31,
1997......................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1998.................... 5
Consolidated Statements of Cash Flows For the Three Months
Ended March 31, 1998 and 1997................................ 6
Notes to Consolidated Financial Statements.................... 7
ITEM 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
PART II. OTHER INFORMATION:
ITEMS 1-6:
Other Information............................................. 38
Signature Page................................................ 39
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................................ $5,094 $4,795
Tax-exempt......................................................................... 98 109
Interest and dividends on investment securities available-for-sale:
Taxable............................................................................ 838 807
Tax-exempt......................................................................... 517 525
Dividends.......................................................................... 29 31
Interest on federal funds sold....................................................... 82 35
------ ------
Total interest income............................................................ 6,658 6,302
------ ------
INTEREST EXPENSE:
Interest on deposits................................................................. 3,422 3,433
Interest on short-term borrowings.................................................... 7 1
Interest on long-term debt........................................................... 1 1
------ ------
Total interest expense........................................................... 3,430 3,435
------ ------
Net interest income.............................................................. 3,228 2,867
Provision for loan losses............................................................ 105 75
------ ------
Net interest income after provision for loan losses.............................. 3,123 2,792
------ ------
NONINTEREST INCOME:
Service charges, fees and commissions................................................ 353 413
------ ------
Total noninterest income......................................................... 353 413
------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................................... 1,094 987
Net occupancy and equipment expense.................................................. 352 300
Other expenses....................................................................... 684 596
------ ------
Total noninterest expense........................................................ 2,130 1,883
------ ------
Income before income taxes........................................................... 1,346 1,322
Provision for income tax expense..................................................... 276 264
------ ------
Net income....................................................................... 1,070 1,058
------ ------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale................ 315 (718)
Income tax expense (benefit) related to other comprehensive income................... 107 (244)
------ ------
Other comprehensive income (loss), net of income tax............................. 208 (474)
------ ------
Comprehensive income............................................................. $1,278 $ 584
====== ======
PER SHARE DATA:
Net income........................................................................... $ 0.49 $ 0.48
Cash dividends declared.............................................................. $ 0.07 $ 0.06
Average common shares................................................................ 2,204,169 2,200,080
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
ASSETS:
--------- ------------
<S> <C> <C>
Cash and due from banks............................................................... $ 7,016 $ 9,040
Federal funds sold.................................................................... 16,800 8,225
Investment securities available-for-sale.............................................. 95,273 105,666
Loans, net of unearned income......................................................... 241,866 250,227
Less: allowance for loan losses..................................................... 3,885 3,798
-------- --------
Net loans............................................................................. 237,981 246,429
Premises and equipment, net........................................................... 4,892 3,772
Accrued interest receivable........................................................... 2,238 2,575
Other assets.......................................................................... 6,163 6,104
-------- --------
Total assets...................................................................... $370,363 $381,811
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing................................................................. $ 29,259 $ 30,703
Interest-bearing.................................................................... 299,790 301,678
-------- --------
Total deposits.................................................................... 329,049 332,381
Short-term borrowings................................................................. 9,575
Long-term debt........................................................................ 43 44
Accrued interest payable.............................................................. 1,805 1,714
Other liabilities..................................................................... 2,179 1,995
-------- --------
Total liabilities................................................................. 333,076 345,709
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
March 31, 1998, 2,204,169 shares; December 31, 1997, 2,202,405 shares................ 727 727
Capital surplus....................................................................... 6,446 6,385
Retained earnings..................................................................... 28,306 27,390
Net unrealized gain on available-for-sale securities.................................. 1,808 1,600
-------- --------
Total stockholders' equity......................................................... 37,287 36,102
-------- --------
Total liabilities and stockholders' equity........................................ $370,363 $381,811
======== ========
</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 TOTAL
COMMON CAPITAL RETAINED UNREALIZED GAIN STOCKHOLDERS'
STOCK SURPLUS EARNINGS ON SECURITIES EQUITY
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997........................ $727 $6,385 $27,390 $1,600 $36,102
Net income........................................ 1,070 1,070
Dividends declared: $0.07 per share............... (154) (154)
Dividend reinvestment plan: 1,764 shares issued... 61 61
Net change in unrealized gain on securities....... 208 208
---- ------ ------- ------ -------
BALANCE, MARCH 31, 1998........................... $727 $6,446 $28,306 $1,808 $37,287
==== ====== ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <S> <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 1,070 $ 1,058
Adjustments:
Provision for loan losses............................................................... 105 75
Depreciation, amortization and accretion................................................ 295 200
Amortization of loan fees............................................................... (54) (50)
Deferred income tax expense (benefit)................................................... (30) 50
Gains on sale of other real estate...................................................... (58)
Changes in:
Accrued interest receivable........................................................... 337 289
Other assets.......................................................................... (195) (295)
Accrued interest payable.............................................................. 91 215
Other liabilities..................................................................... 294 (48)
------- -------
Net cash provided by operating activities........................................... 1,913 1,436
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of available-for-sale securities................................. 13,358 8,471
Purchases of available-for-sale securities................................................ (2,676) (6,261)
Proceeds from sale of other real estate................................................... 352
Net decreases (increases) in lending activities........................................... 8,334 (2,742)
Purchases of premises and equipment....................................................... (1,267) (657)
------- -------
Net cash provided by (used in) investing activities................................. 17,749 (837)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................. (4,954) (1,090)
Time deposits........................................................................... 1,622 (1,562)
Short-term borrowings................................................................... (9,575)
Payments on long-term debt................................................................ (1) (1)
Proceeds from the issuance of common shares............................................... 61
Cash dividends paid....................................................................... (264) (242)
------- -------
Net cash used in financing activities............................................... (13,111) (2,895)
------- -------
Net increase (decrease) in cash and cash equivalents................................ 6,551 (2,296)
Cash and cash equivalents at beginning of year...................................... 17,265 11,032
------- -------
Cash and cash equivalents at end of period.......................................... $23,816 $ 8,736
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest.................................................. $ 3,339 $ 3,220
Noncash items:
Transfers of loans to other real estate................................................. 63 70
Change in net unrealized losses (gains) on available-for-sale securities................ $ (208) $ 474
</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 conformity with
generally accepted accounting principles ("GAAP"). In the opinion of
management, all normal recurring adjustments necessary for fair
presentation of the financial position and results of operations for the
periods have been included. All significant intercompany balances and
transactions have been eliminated in the consolidation. Prior-period
amounts are reclassified when necessary to conform with the current year's
presentation.
The preparation of financial statements in conformity with GAAP 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 estimated. For additional information and
disclosures required under GAAP, reference is made to the Company's Annual
Report on Form 10-K.
2. EARNINGS PER COMMON SHARE AND CAPITAL STRUCTURE:
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," on December 31, 1997. Under SFAS No. 128,
two earnings per share ("EPS") calculations are required, basic EPS, which
is computed by dividing net income by weighted-average common shares
outstanding, and dilutive EPS, which is based on the weighted-average
common shares outstanding plus all dilutive potential common shares
outstanding. The Company had no dilutive potential common shares
outstanding during the quarters ended March 31, 1998 and 1997, therefore
the per share data presented in the accompanying consolidated financial
statements relates to basic per share amounts.
Simultaneously with its adoption of SFAS No. 128, the Company also adopted
SFAS No. 129, "Disclosure of Information about Capital Structure." This
Statement did not establish any new standards but rather codifies certain
previously-required disclosures regarding the pertinent rights and
privileges of the various components of an entity's capital structure.
Since this Statement contained no change in disclosure requirements, the
Company's adoption had no effect on financial statement presentation.
3. COMPREHENSIVE INCOME:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. This Statement established standards for reporting and
display of comprehensive income. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
and other events and circumstances from nonowner sources. All items
required to be recognized as components of comprehensive income are to be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company elected to disclose
the components of comprehensive income for the quarters ended March 31,
1998 and 1997 in its Consolidated Statements of Income and Comprehensive
Income.
4. SEGMENT DISCLOSURE:
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," on January 1, 1998. This Statement
established standards for the way public companies report information about
operating segments in interim financial reports issued to stockholders. It
also establishes standards for related disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 need not be
applied to interim financial statements in the initial year of its
application, therefore adoption of this Statement had no impact on the
accompanying consolidated financial statements.
5. EMPLOYEE BENEFITS PLANS:
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," on January 1, 1998. This Statement:
(i) revises employers' disclosures about pension and other postretirement
benefit plans; (ii) standardizes the disclosure requirements for benefits
of such plans; (iii) requires additional information on changes in the
benefit obligations and fair value of plan assets that will facilitate
financial analysis; and (iv) eliminates certain disclosures that are no
longer useful. Most of the changes in the disclosure provisions of this
Statement address defined benefit plans. The Company's adoption of SFAS
No. 132 had no effect on disclosure requirements nor did it have any effect
on operating results or financial position.
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-Q are forward-looking statements that
involve numerous risks and uncertainties. The following factors, among
others, may cause actual results to differ materially from projected
results:
Local, domestic and international economic and political conditions, and
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates,
tight money supply, real estate values, international conflicts, and other
factors beyond the control of Comm Bancorp, Inc. and its subsidiary,
Community Bank and Trust Company (collectively, the "Company") may also
adversely affect its future results of operations. Management, consisting
of the Board of Directors and executive officers, expects that no
particular factor will affect the Company's results of operations.
Downward trends in areas such as real estate, construction and consumer
spending, may adversely impact the Company's ability to maintain or
increase profitability. Therefore, the Company cannot assure that it will
continue its current rates of income and growth.
The Company's earnings depend largely upon net interest income. The
relationship between the Company's cost of funds, deposits and borrowings,
and the yield on its interest-earning assets, loans and investments all
influence net interest income levels. This relationship, defined as the
net interest spread, fluctuates and is affected by regulatory, economic and
competitive factors that influence: (i) interest rates; (ii) the volume,
rate and mix of interest-earning assets and interest-bearing liabilities;
and (iii) the level of nonperforming assets. As part of its interest rate
risk ("IRR") management strategy, management monitors the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities to control its exposure to interest rate changes.
In originating loans, some credit losses are likely to occur. This risk of
loss varies with, among other things: (i) general economic conditions;
(ii) loan type; (iii) creditworthiness and debt servicing capacity of the
borrower over the term of the loan; and (iv) 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: (i) historical loan loss experience; (ii) known
inherent risks in the loan portfolio; (iii) adverse situations that may
affect a borrower's ability to repay; (iv) the estimated value of any
underlying collateral; and (v) an evaluation of current economic
conditions.
Management currently believes that the allowance for loan losses is
adequate, but there can be no assurance that nonperforming loans will not
increase in the future.
To a certain extent, the Company's success depends upon the general
economic conditions in the geographic market that it serves. Although the
Company expects economic conditions in its market area to remain favorable,
assurance cannot 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 may have a materially adverse
effect on the consolidated results of operations and financial position.
The banking industry is highly competitive, with rapid changes in product
delivery systems and in consolidation of service providers. The Company
competes with many larger institutions 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
opportunity to offer products and services not offered by the Company. The
Company is constantly striving to meet the convenience and needs of its
customers and to enlarge its customer base. The Company cannot assure that
these efforts will be successful in maintaining and expanding its customer
base.
OVERVIEW:
The national economy began 1998 in the same fashion that it ended 1997,
maintaining its strength. For the first quarter of 1998, the nation's
gross domestic product ("GDP"), the value of goods and services produced in
the United States, grew at a 4.2 percent annual rate, surpassing the 3.7
percent level experienced for the fourth quarter of 1997. While the
economy surged, the GDP price deflator, a measure of price increases rose
at a 0.9 percent annual rate for the quarter ended March 31, 1998, the
smallest increase in 34 years. Another indicator of the continued strong
economy was the increase in the nation's consumer spending. Consumer
spending, which accounts for two-thirds of the nation's economic output,
rose at a 5.7 percent annual pace in the first quarter, the fastest pace
since the 6.4 percent rate experienced in the first quarter of 1992. This
torrid pace of economic expansion is not expected to continue given the
tight labor conditions, however the Federal Open Market Committee ("FOMC")
is poised to raise the overnight funds rate should the expansion fail to
subside.
For its third consecutive year the Company bettered its highest first
quarter earnings from normal operations. Net income for the first quarter
of 1998 amounted to $1,070 or $0.49 per share compared to $1,058 or $0.48
per share for the same period of 1997. The Company's return on average
assets for the first three months of 1998 equaled 1.18 percent compared to
1.22 percent for the same period of 1997. Additionally, the Company's
return on average equity for the three months ended March 31, 1998, was
11.83 percent as compared to 13.67 percent experienced one year earlier.
The primary reason for the increased earnings was an improvement in net
interest income partially offset by increases in noninterest expense
resulting from the opening of the Eynon and Factoryville branch offices in
the fourth quarter of 1997. For the first quarter of 1998, the Company's
comprehensive net income equaled $1,278 compared to $584 for the same
period of 1997. The Company recorded $208 in comprehensive income, net of
$107 in income taxes, related to unrealized gains on investment securities
for the first quarter of 1998. For the same period of 1997, the Company
recorded a $474 loss, net of a $244 tax benefit, related to unrealized
losses on investment securities.
The Company also initiated several other significant nonfinancial
undertakings during the first quarter of 1998. The Company purchased land
in Clarks Summit, Pennsylvania, for the construction of an administrative
center and community branch office. This new facility will centrally
locate several of the Company's divisions, thus improving operating
efficiency and effectiveness. Groundbreaking for this project is scheduled
for June of 1998 with completion expected in the first quarter of 1999.
The Company also introduced new investment-related products in its Trust
and Financial Services Division as competition in financial markets
continues to intensify. The Company now offers mutual fund programs on a
"no-load" basis to its customers. Additionally, the Company now offers
fixed-rate annuity products that earn interest on a tax-deferred basis to
supplement existing investment/retirement portfolios.
The Company is currently developing a program for the selling and
underwriting of certain loan products. During the first quarter of 1998,
the Company hired an experienced secondary market mortgage manager to
oversee loan sales. In order to qualify to sell loans, the Company must
complete applications to the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. Once these applications are
completed, the Company will be eligible to sell one-to-four family
residential mortgage loans. Upon approval to sell these products, the
Company will change some of its loan procedures, such as underwriting,
payment remittance and appraisals. By selling one-to-four family mortgage
loans, customers will benefit from better interest rates. Many financial
institutions relinquish servicing of mortgages upon their sales, however
the Company has chosen to maintain servicing the loans internally for the
convenience of its customers. The Company expects this program to be fully
operational during the second quarter of 1998.
REVIEW OF FINANCIAL POSITION:
At March 31, 1998, the Company's total assets amounted to $370.4 million,
an $11.4 million decline compared to the $381.8 million recorded at
December 31, 1997. The primary reasons for this decline were reductions in
investment and loan volumes partially offset by an increase in federal
funds sold volumes. Investments at March 31, 1998, equaled $95.3 million,
a $10.4 million decline compared to the $105.7 million at December 31,,
1997. Loans, net of unearned income, were $241.9 million at March 31,
1998, compared to $250.2 million at December 31, 1997, an $8.3 million
decline. At March 31, 1998, federal funds totaled $16.8 million, marking an
$8.6 million increase over the $8.2 million at December 31, 1997. For the
first quarter of 1998, asset quality improved as evidenced by a reduction
in the ratio of nonperforming assets to loans, net of unearned income, from
2.41 percent at year-end 1997 to 1.69 percent at March 31, 1998. The
Company continues to exhibit a strong capital position as its Leverage
ratio increased to 8.7 percent at March 31, 1998, as compared to 8.5
percent for the same period last year. Stockholders' equity grew $1.2
million during the first quarter as net income of $1,070 and a $208 change
in the net unrealized gain on available for sale securities was partially
offset by cash dividends distributed to stockholders of $93.
INVESTMENT PORTFOLIO:
During the first quarter of 1998, management continued to de-emphasize the
role of the investment portfolio in the Company's earning assets mix. As
a percentage of earning assets, the investment portfolio amounted to 26.9
percent at March 31, 1998, compared to 29.3 percent at March 31, 1997. The
Company's largest portion of the investment portfolio consists of state and
municipal obligations and mortgage-backed securities. At March 31, 1998,
state and municipal obligations totaled $40.9 million or 42.9 percent of
total investments while mortgage-backed securities totaled $23.7 million or
24.9 percent of total investments. Funds from maturing U.S. Treasury and
U.S. Government agency securities were reinvested into overnight federal
funds, as opposed to being reinvested in investment securities, as the
Company strengthened its liquidity position in preparation for the
impending prime lending season. Funds not invested in overnight federal
funds were directed into medium-term, tax-equivalent state and municipal
obligations to improve the Company's effective tax rate.
At March 31, 1998, the Company reported a net unrealized gain on available
for sale securities of $1,808, net of income taxes of $931. Despite the
economy growing at an annualized rate of 4.2 percent during the first
quarter of 1998, the FOMC held short-term rates at 5.50 percent. This rate
has been unchanged since the FOMC approved a 25 basis points increase on
March 25, 1997. Correspondingly, short-term and long-term interest rates
remained relatively unchanged compared to year-end 1997. The stable
interest rate environment coupled with a reduction in the portfolio's
effective duration led to a $208 positive change in the net unrealized gain
during the first three months of 1998.
If the economy continues growing at this strong pace, it is expected that
the FOMC will invoke monetary policy and will raise rates to mitigate
inflationary effects. The Company's Investment Committee continually
monitors interest rate changes and their effects on the value of the
investment portfolio. Additionally, the committee has formulated
strategies to implement should rates rise thus resulting in deterioration
in the portfolio's market value. These strategies include, but are not
limited to, selling or transferring certain bonds that exhibit a higher
degree of IRR.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio at March 31, 1998, and December
31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES
MARCH 31, DECEMBER 31,
1998 1997
AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $19,068 20.01% $ 28,583 27.05%
U.S. Government agencies............................. 8,112 8.52 10,388 9.83
State and municipals................................. 40,898 42.93 39,887 37.75
Mortgage-backed securities........................... 23,687 24.86 23,746 22.47
Equity securities.................................... 3,508 3.68 3,062 2.90
------- ------ -------- ------
Total.............................................. $95,273 100.00% $105,666 100.00%
======= ====== ======== ======
</TABLE>
At March 31, 1998, the Company's tax-equivalent yield on its investment
portfolio rose to 6.7 percent compared to 6.5 percent for the same period
one year ago. For the first quarter of 1998, the Company received $13.4
million in securities repayments. The Company purchased $1.6 million in
short-term, mortgage-backed securities and $1.1 million in intermediate-
term state and municipal obligations with a portion of these proceeds. The
remaining $10.7 million in repayments were used to purchase overnight
federal funds and to satisfy loan demand. For the near term, management
will continue to invest the majority of excess funds not utilized in
lending in overnight federal funds as well as short-term U.S. Treasury
securities and U.S. Government agency mortgage-backed products.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at March
31, 1998, is summarized in the table that follows. The weighted-average
yield, based on amortized cost, has been computed for state and municipals
on a tax-equivalent basis using the statutory tax rate of 34.0 percent.
The distributions are based on contractual maturity with the exception of
mortgage-backed securities, collateralized mortgage obligations ("CMOs")
and equity securities. Mortgage-backed securities and CMOs have been
presented based upon estimated cash flows, assuming no change in the
current interest rate environment. Equity securities with no stated
contractual maturities are included in the after ten year maturity
distribution. Expected maturities may differ from contracted maturities
because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
MARCH 31, 1998 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..... $14,994 5.84% $ 4,031 5.87% $19,025 5.85%
U.S. Government agencies..... 7,500 4.65 648 3.94 8,148 4.59
State and municipals......... 795 6.05 7,159 7.50 $6,373 8.84% $25,160 8.23% 39,487 8.15
Mortgage-backed securities... 9,112 6.49 14,004 6.37 575 6.50 23,691 6.42
Equity securities............ 2,183 5.41 2,183 5.41
------- ------- ------ ------- -------
Total...................... $32,401 5.75% $25,842 6.55% $6,948 8.65% $27,343 8.01% $92,534 6.86%
======= ======= ====== ======= =======
Fair value:
U.S. Treasury securities..... $15,024 $ 4,044 $19,068
U.S. Government agencies..... 7,480 632 8,112
State and municipals......... 795 7,207 $6,729 $26,167 40,898
Mortgage-backed securities... 9,113 13,997 577 23,687
Equity securities............ 3,508 3,508
------- ------- ------ ------- -------
Total...................... $32,412 $25,880 $7,306 $29,675 $95,273
======= ======= ====== ======= =======
</TABLE>
LOAN PORTFOLIO:
As the economy remained strong during the first quarter of 1998, so did the
demand for housing. Interest rates on 30-year mortgages stabilized at 7.0
percent throughout the first quarter. Additionally, the empowered economy
continued to create an abundance of jobs, vaulting consumer confidence to
its highest level in 30 years thus inspiring people to purchase homes.
Housing starts for March of 1998 occurred at a seasonally-adjusted annual
rate of 1.6 million, an 8.2 percent increase over the previous year.
Overall, housing starts increased 9.9 percent for the first three months of
1998 as compared to the same period one year ago. The increase in housing
starts is attributed to the effects of El Nino on the nation's climate as
the United States experienced the warmest winter on record. This resulted
in builders getting a much earlier start than normal on new construction.
Sales of existing homes also continued to thrive. For the first quarter of
1998, sales of existing, single-family homes rose to a 30-year high. Based
on the first quarter results, sales for the year would equal 4.35 million,
a 3.1 percent increase over the 4.22 million record experienced in 1997.
The composition of the Company's loan portfolio at March 31, 1998, and
December 31, 1997, is summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
MARCH 31, DECEMBER 31,
1998 1997
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others............ $ 30,032 12.42% $ 38,996 15.58%
Real estate:
Construction.............................. 2,040 0.84 2,096 0.84
Mortgage.................................. 180,947 74.81 180,123 71.98
Consumer, net............................... 28,847 11.93 29,012 11.60
-------- ------ -------- ------
Loans, net of unearned income............. 241,866 100.00% 250,227 100.00%
Less: allowance for loan losses............. 3,885 ====== 3,798 ======
-------- --------
Net loans............................... $237,981 $246,429
======== ========
</TABLE>
The Company experienced a decline in loan volumes of $8.4 million during
the first quarter of 1998. The primary source of this decrease was a
decline in commercial loan volumes. Commercial loans decreased $9.0
million as the Company had aggregate short-term loans of $7.0 million to
certain large Pennsylvania-based banks mature during the quarter. Loans
secured by residential properties represented 65.4 percent of total loans,
net of unearned income, at March 31, 1998. For the first quarter of 1998,
the Company's loan volumes averaged $245.7 million as compared to $236.5
million for the same period of 1997. The tax-equivalent yield on the loan
portfolio increased from 8.5 percent for the first three months of 1997 to
8.7 percent for the comparable period of 1998. Management expects no
significant fluctuations in loan yields for the remainder of 1998 if market
rates do not exhibit any further decline and if competition does not
intensify. The Company expects to facilitate loan demand with increases in
core deposits and repayments on loans and investments.
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and liquidity
strains. Approximately 30.6 percent of the lending portfolio is expected
to reprice within the next twelve 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 variable-rate loans in attempting to
reduce IRR in the loan portfolio.
The maturity and repricing information of the loan portfolio by major
classification at March 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
MARCH 31, 1998 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $14,030 $ 9,577 $ 6,425 $ 30,032
Real estate:
Construction....................... 2,040 2,040
Mortgage........................... 16,739 55,683 108,525 180,947
Consumer, net........................ 10,492 14,263 4,092 28,847
------- ------- -------- --------
Total............................ $43,301 $79,523 $119,042 $241,866
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $28,626 $67,576 $100,174 $196,376
Floating or adjustable interest rates 45,490 45,490
------- ------- -------- --------
Total............................ $74,116 $67,576 $100,174 $241,866
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
The Company's nonperforming asset levels improved from $6,035 or 2.41
percent of loans, net of unearned income, at December 31, 1997, to $4,085
or 1.69 percent of loans, net of unearned income, at March 31, 1998.
Declines in accruing loans past due 90 days or more and nonaccrual loans
provided the major influences for the improvements.
Accruing loans past due 90 days or more improved from $3,169 at December
31, 1997, to $2,005 at March 31, 1998, due, in part, to increased
collection efforts. The Company also experienced improvements in
nonaccrual loan levels from $2,272 at December 31, 1997, to $1,427 at March
31, 1998. The $845 positive change is almost entirely related to one
commercial loan that was returned to accrual status based on the customer's
efforts to bring the loan current with respect to principal and interest
and to comply with the contracted loan terms. Management expects further
improvement in nonperforming loan levels for 1998 as the Company employs
more stringent collection efforts. The possibility exists, however, that
these levels may deteriorate should economic conditions in the Company's
market area fail to improve thus limiting the borrowers' ability to make
timely loan payments.
Information concerning nonperforming assets at March 31, 1998, and December
31, 1997, is summarized as follows. The table includes loans or other
extensions of credit classified for regulatory purposes and all material
loans or other extensions of credit that cause management to have serious
doubts as to the borrowers' ability to comply with present loan repayment
terms.
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
MARCH 31, DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 200 $ 197
Real estate:
Construction.................................................
Mortgage..................................................... 1,215 2,063
Consumer, net.................................................. 12 12
------ ------
Total nonaccrual loans..................................... 1,427 2,272
------ ------
Restructured loans............................................. 185 189
------ ------
Total impaired loans....................................... 1,612 2,461
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 257 321
Real estate:
Construction.................................................
Mortgage..................................................... 1,479 2,536
Consumer, net.................................................. 269 312
------ ------
Total accruing loans past due 90 days or more.............. 2,005 3,169
------ ------
Total nonperforming loans.................................. 3,617 5,630
------ ------
Foreclosed assets.............................................. 468 405
------ ------
Total nonperforming assets................................. $4,085 $6,035
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 0.67% 0.98%
Nonperforming loans as a percentage of loans, net.............. 1.50 2.25
Nonperforming assets as a percentage of loans, net............. 1.69% 2.41%
</TABLE>
Information relating to the Company's recorded investment in impaired loans
at March 31, 1998, and December 31, 1997, is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance....................................... $1,427 $2,272
With no related allowance...................................... 185 189
------ ------
Total........................................................ $1,612 $2,461
====== ======
</TABLE>
Impaired loans include a $185 restructured loan to one commercial customer.
This loan continued to perform in accordance with its modified terms during
the first quarter of 1998.
The analysis of changes affecting the allowance for loan losses related to
impaired loans at March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
- ---------------------------------------------------------------------------------------
<S> <C>
Balance at January 1.............................................................. $541
Provision for loan losses......................................................... 1
Loans charged-off................................................................. 32
Loans recovered................................................................... 8
----
Balance at period-end............................................................. $518
====
</TABLE>
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loan not been modified, the
aggregate amount of interest income recognized and the amount recognized
using the cash-basis method and the average recorded investment in impaired
loans for the three months ended March 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Gross interest due under terms................................. $ 34 $ 34
Interest income recognized..................................... 20 3
------ ------
Interest income not recognized................................. $ 14 $ 31
====== ======
Interest income recognized (cash-basis)........................ $ 20 $ 3
Average recorded investment in impaired loans.................. $2,348 $1,486
</TABLE>
Cash received on impaired loans applied as a reduction of principal totaled
$43 for the quarter ended March 31, 1998, and $74 for the same period of
1997. There were no commitments to extend additional funds to such parties
at March 31, 1998. For the Company's peer group of 35 banks in
Northeastern Pennsylvania, the impaired loans as a percentage of loans, net
of unearned income, ratio equaled 0.71 percent while its nonperforming
loans as a percentage of loans, net of unearned income, ratio was 1.22
percent at March 31, 1998.
The allowance for loan losses account is established through charges to
earnings as a provision for loan losses. Loans, or portions of loans,
determined to be uncollectible are charged against the allowance account
with any subsequent recoveries being credited to the account. Nonaccrual,
restructured and large delinquent commercial and real estate loans are
reviewed monthly to determine if carrying value reductions are warranted.
Consumer loans are considered losses when they are 120 days past due,
except those expected to be recovered through insurance or collateral
disposition proceeds. Under Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," the
allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair
value of the collateral for certain collateral-dependent loans. Management
uses historical loss experience as a starting point for evaluating the
adequacy of the Company's allowance account. However, it also considers a
number of relevant factors that would likely cause estimated credit losses
associated with the Company's current portfolio to differ from historical
loss experience. These factors include changes in, among others: (i)
lending policies and procedures; (ii) economic conditions; (iii) nature
and volume of the portfolio; (iv) loan review system; (v) volumes of past
due and classified loans; (vi) concentrations; (vii) borrowers' financial
status; and (viii) collateral value.
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. These agencies may require the
Company to recognize additions to the allowance, beyond normal monthly
provisions, based on their judgments concerning information available to
them at the time of their examination. No such charge was deemed necessary
upon conclusion of the latest examination, conducted during the third
quarter of 1997, as regulators considered the Company's allowance for loan
losses account adequate based on risk characteristics and size of the loan
portfolio. Upon reviewing the 1997 report, management was unaware of any
significant recommendation with respect to the loan portfolio that would
materially affect future liquidity or capital resources.
Management utilizes the federal banking regulatory agencies' Interagency
Policy Statement on the Allowance for Loan and Lease Losses in assessing
the adequacy of its allowance for loan losses account. The policy
statement provides guidance on the nature and purpose of the allowance,
related responsibilities of management and examiners, loan review systems
and international transfer risk matters. The analytical tool for assessing
the reasonableness of the allowance for loan losses account included in
this policy statement has been used on a consistent basis by the Company
since the first quarter of 1994. The tool involves a comparison of the
reported loss allowance against the sum of specified percentages, based on
industry averages, applied to certain loan classifications. Management
considered the Company adequately reserved at March 31, 1998, based on the
results of this regulatory calculation. Management, however, will continue
to perform a thorough analysis of the Company's loan portfolio since the
calculation does not take into account differences between institutions,
their portfolios, and their underwriting, collection and credit-rating
policies.
The allowance for loan losses can generally absorb losses throughout the
loan portfolio, although in some instances allocation is made for specific
loans or groups of loans. Accordingly, the following table attempts to
allocate this reserve among the major categories. However, it should not be
interpreted as an indication that charge-offs in future periods will occur
in these amounts or proportions, or that the allocation indicates future
charge-off trends.
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
MARCH 31, DECEMBER 31,
1998 1997
---------------- --------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others................... $1,438 12.42% $1,322 15.58%
Real estate:
Construction..................................... 0.84 0.84
Mortgage......................................... 1,234 74.81 1,277 71.98
Consumer, net...................................... 1,213 11.93 1,199 11.60
------ ------ ------ ------
Total.......................................... $3,885 100.00% $3,798 100.00%
====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and illustration of
charge-offs and recoveries by major loan category for the quarter ended
March 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
MARCH 31,
1998
- --------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $3,798
Loans charged-off:
Commercial, financial and others............................................... 75
Real estate:
Construction.................................................................
Mortgage..................................................................... 24
Consumer, net.................................................................. 26
------
Total...................................................................... 125
------
Loans recovered:
Commercial, financial and others............................................... 51
Real estate:
Construction.................................................................
Mortgage..................................................................... 33
Consumer, net.................................................................. 23
------
Total...................................................................... 107
------
Net loans charged-off.......................................................... 18
------
Provision charged to operating expense......................................... 105
------
Allowance for loan losses at end of period..................................... $3,885
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.01%
Allowance for loan losses as a percentage of period end loans.................. 1.61%
</TABLE>
The allowance for loan losses was $3,885 and equaled 1.61 percent of loans,
net of unearned income, at March 31, 1998, as compared to $3,798 and 1.52
percent of loans, net of unearned income, at December 31, 1997. The
slight increase resulted from the first quarter provision for loan losses
exceeding the Company's net charge-offs. As a percentage of nonperforming
loans, the allowance account covered 107.4 percent at March 31, 1998, and
67.5 percent at December 31, 1997. Relative to all nonperforming assets,
the allowance covered 95.1 percent at March 31, 1998, and 62.9 percent at
December 31, 1997.
The Company evaluates past due loans that have not been satisfied through
repossession, foreclosure or related actions, individually to determine if
all or part of the outstanding balance should be charged against the
allowance for loan losses account. Any subsequent recoveries are credited
to the allowance account. Net charge-offs were $18 or 0.01 percent of
average loans outstanding for the quarter ended March 31, 1998, compared to
$225 or 0.10 percent for the quarter ended March 31, 1997.
DEPOSITS:
The average amount of, and the rate paid on, the major classifications of
deposits for the quarters ended March 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
MARCH 31, MARCH 31,
1998 1997
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ------- ------- -------
<S> <C> <C> <S> <C>
Interest-bearing:
Money market accounts....................... $ 16,833 2.99% $ 15,424 3.05%
NOW accounts................................ 20,534 2.21 17,743 2.17
Savings accounts............................ 64,012 2.69 65,581 3.03
Time deposits less than $100................ 174,431 5.64 158,322 5.69
Time deposits $100 or more.................. 23,233 5.90 34,131 6.05
-------- --------
Total interest-bearing.................... 299,043 4.64% 291,201 4.78%
Noninterest-bearing......................... 29,763 25,570
-------- --------
Total deposits............................ $328,806 $316,771
======== ========
</TABLE>
The Company's total deposit volumes decreased $3.4 million from $332.4
million at December 31, 1997, to $329.0 million at March 31, 1998. This
decline was primarily due to reductions in commercial interest checking and
money market accounts held by local school districts. The Company's
deposits averaged $328.8 million for the first quarter of 1998, a $12.0
increase compared to the $316.8 million recorded for the same period of
1997. The Company's average cost of deposits declined from 4.78 percent in
the first quarter of 1997 to 4.64 percent in the first quarter of 1998.
The decline resulted from the Company's decision not to actively compete
for time deposits of $100 or more in its efforts to bring the cost of funds
to a more acceptable level. The Company's cost of funds for the first
quarter of 1998 declined eight basis points as compared to the cost of
funds for the fourth quarter of 1997. Competitive pressures may have a
negative effect on the Company's cost of funds for the remainder of 1998,
however these pressures may be counteracted through the Company's newly-
implemented, fixed-rate annuity program.
By building its base of noninterest-bearing deposits, the Company can
achieve lower funds cost. Average volumes of noninterest-bearing deposits
rose $4.2 million from $25.6 million for the first quarter of 1997 to $29.8
million for the first quarter of 1998. At March 31, 1998, noninterest-
bearing deposits as a percentage of total deposits equaled 8.9 percent as
compared to 8.3 percent at March 31, 1997.
Volatile deposits, time deposits in denominations of $100 or more,
increased $2.2 million from $20.8 million at December 31, 1997, to $23.0
million at March 31, 1998. This increase resulted from the redirection of
a portion of interest checking and money market funds held by local school
districts into the higher-yielding certificate of deposit product. The
average cost of these deposits declined 34 basis points from 6.24 percent
for the fourth quarter of 1997 to 5.90 percent for the first quarter of
1998.
Maturities of time deposits of $100 or more at March 31, 1998, and December
31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Within three months......................................... $ 5,611 $ 3,195
After three months but within six months.................... 2,751 2,819
After six months but within twelve months................... 5,059 6,334
After twelve months......................................... 9,603 8,484
------- -------
Total..................................................... $23,024 $20,832
======= =======
</TABLE>
INTEREST RATE SENSITIVITY:
Interest rate sensitivity management attempts to limit and, to the extent
possible, control the effects interest rate fluctuations have on net
interest income. The responsibility of this management has been delegated
to the Asset/Liability Management Committee ("ALCO"). Specifically, ALCO
utilizes a number of computerized modeling techniques to monitor and
attempt to control influences that market changes have on the Company's
rate-sensitive assets and liabilities. One such technique utilizes a
static gap report, which attempts to measure the Company's interest rate
exposure by calculating the net amount of rate-sensitive assets ("RSA") and
rate-sensitive liabilities ("RSL") that reprice within specific time
intervals. A positive gap, indicated by a RSA/RSL ratio greater than 1.0,
implies that earnings will be impacted favorably if interest rates rise and
adversely if interest rates fall during the period. A negative gap, a
RSA/RSL ratio less than 1.0, tends to indicate that earnings will be
affected inversely to interest rate changes.
The Company's interest rate sensitivity gap position, illustrating RSA and
RSL at their related carrying values, is summarized as follows. The
distributions in the table are based on a combination of maturities, call
provisions, repricing frequencies and prepayment patterns. Variable-rate
assets and liabilities are distributed based on the repricing frequency of
the instrument. Mortgage instruments are distributed in accordance with
estimated cash flows, assuming there is no change in the current interest
rate environment.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
MARCH 31, 1998 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $ 6,890 $ 16,369 $ 28,057 $ 43,957 $ 95,273
Loans, net of unearned income....... 50,287 18,371 69,453 103,755 241,866
Federal funds sold.................. 16,800 16,800
------- -------- -------- -------- --------
Total............................. $73,977 $ 34,740 $ 97,510 $147,712 $353,939
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 16,646 $ 16,646
NOW accounts........................ 20,054 20,054
Savings accounts.................... $ 64,130 64,130
Time deposits less than $100........ $35,269 46,396 94,022 $ 249 175,936
Time deposits $100 or more.......... 5,611 7,810 9,603 23,024
Long-term debt...................... 1 1 8 33 43
------- -------- -------- -------- --------
Total............................. $40,881 $ 90,907 $167,763 $ 282 $299,833
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $33,096 $(56,167) $(70,253) $147,430
Cumulative........................ $33,096 $(23,071) $(93,324) $ 54,106 $ 54,106
RSA/RSL ratio:
Period............................ 1.81 0.38 0.58 523.80
Cumulative........................ 1.81 0.82 0.69 1.18 1.18
</TABLE>
The Company's one year RSA/RSL ratio improved from 0.74 at March 31, 1997,
to 0.82 at March 31, 1998. Based upon the Company's Asset/Liability
Management Policy guidelines, this ratio falls within the 0.7 and 1.3
deemed by management to be acceptable. The improvement in this ratio
compared to March 31, 1997, is attributable to changes in time deposits
less than $100 as well as time deposits $100 or more maturing or repricing
within one year. The volume of time deposits less than $100 maturing or
repricing within one year declined $15.3 million compared to March 31,
1997. This change came as a result of customers taking advantage of
special, intermediate-term deposit product offerings. Deposit volumes in
time deposits $100 or more maturing or repricing within one year also
experienced a significant decline. At March 31, 1998, time deposits $100
or more repricing or maturing within one year equaled $13.4 million, a
$13.8 million decline compared to March 31, 1997. Because of the higher
cost compared to other deposit products, the Company took a less aggressive
pricing stance in competing for these deposits during the first quarter of
1998.
The Company also experienced an increase in its three-month ratio at March
31, 1998, as compared to one year earlier. At March 31, 1998, the three-
month ratio equaled 1.81 as compared to 1.41 at March 31, 1997. This
increase is explained by primarily the same reasons given for the
cumulative one-year increase.
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 affected. Conversely, a
decline in market rates would likely have a favorable effect on net
interest income. However, these forward-looking statements are qualified
in the aforementioned section entitled "Forward-Looking Discussion" in this
Management's Discussion and Analysis.
Static gap analysis, 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 twelve 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. This
model is used to create pro forma net interest income scenarios under
various interest rate shocks. Model results at March 31, 1998, produced
results contrary to those indicated by the one-year static gap position.
Should a parallel and instantaneous rise in interest rates of 100 basis
points occur, net interest income should increase 1.4 percent. Conversely,
a similar decline in interest rates would result in a 1.4 percent decrease
in net interest income.
Financial institutions are affected 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 can 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
changes. Management believes the Company's liquidity is adequate to meet
both present and future financial obligations and commitments 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.
As compared to 1996, the Company continues to exhibit considerable
improvement in its liquidity position. The best illustration 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, time deposits
$100 or more and brokered time deposits less than $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 March 31, 1998, the net noncore
funding dependence ratio equaled negative 5.2 percent. This same ratio
equaled 2.1 percent one year earlier. The Company's net short-term noncore
funding dependence ratio totaled negative 8.3 percent at March 31, 1998,
while this same ratio equaled negative 0.1 percent at March 31, 1998.
Management believes that by maintaining adequate volumes of short-term
investments and remaining competitive in pricing medium-term certificates
of deposit, these ratios will continue to improve. Maintaining a high
level of core deposits is important in keeping a sound liquidity position.
Core deposits are important as they represent a stable and relatively low-
costing source of funds.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents, consisting of cash on hand, cash items in the process
of collection, noninterest-bearing deposits with other banks, balances with
the Federal Reserve Bank of Philadelphia ("FRB") and the Federal Home Loan
Bank of Pittsburgh ("FHLB-Pgh"), and federal funds sold, increased $6.6
million in the first quarter of 1998. Net cash provided by operating
activities totaled $1.9 million, primarily due to the Company's net income
of $1,070 earned in the first three months of 1998.
Net cash provided by investing activities amounted to $17.7 million and was
the primary reason for the first quarter net cash inflow. The majority of
this inflow came from $13.4 million in repayments on investments with $8.3
million in loan repayments contributing to a lesser degree. A portion of
these funds was used to repay a $9.6 million short-term loan taken with the
FHLB-Pgh. The remaining funds will be used to fund future loan demand.
Partially offsetting the increase in cash due to operating and investing
activities was a $13.1 million cash decrease due to financing activities.
The primary cause of this decrease was the repayment of the afforementioned
$9.6 million loan. The Company also experienced a decline in deposit
volumes of $3.3 million as a result of a decrease in school district funds.
CAPITAL ADEQUACY:
The Company's stockholders' equity improved $1.2 million for the first
quarter of 1998. The components of this increase were net income of
$1,070, partially offset by dividends of $154, additional capital of $61
from the Company's Dividend Reinvestment Program ("DRP") and a $208
positive change in the unrealized gain on available-for-sale securities.
Through its continued efforts in improving the quality, composition and
structure of the investment portfolio, the Company has become less
susceptible to market depreciation on available-for-sale securities
resulting from changing interest rates.
The Company's dividends declared as a percentage of net income equaled 14.4
percent for the first quarter of 1998 compared to 12.5 percent for the same
period of 1997. It is the present intention of the Company's Board of
Directors that dividends will be paid in the future. However, the
following factors, among others, may affect these decisions: (i) operating
results; (ii) financial and economic decisions; (iii) capital needs; (iv)
growth objectives; and (v) appropriate dividend restrictions related to the
Company.
The Company initiated the DRP beginning with the 1997 second quarter
dividend. The DRP allows stockholders to automatically reinvest their
dividends in shares of the Company's common stock. At March 31, 1998,
approximately 22.2 percent of the Company's outstanding shares were
participating in this plan.
Management attempts to assure capital adequacy by monitoring the current
and projected positions of the Company to support future growth, while
providing stockholders with an attractive long-term appreciation of their
investments. A recent history of bank failures prompted regulatory
agencies to adopt minimum capital adequacy requirements that include
mandatory and discretionary supervisory actions for noncompliance. At a
minimum, banks must maintain a Tier I capital to risk-adjusted assets ratio
of 4.0 percent and a total capital to risk-adjusted assets ratio of 8.0
percent. Additionally, banks must maintain a Leverage ratio, defined as
Tier I capital to total average assets less intangibles, of 3.0 percent.
The minimum Leverage ratio of 3.0 percent only applies to institutions with
a composite rating of one under the Uniform Interagency Bank Rating System,
that are not anticipating or experiencing significant growth and have well-
diversified risk. An additional 100 to 200 basis points are required for
all but these most highly-rated institutions. The Company's minimum ratio
of Tier I capital to adjusted total average assets was 4.0 percent at March
31, 1998 and 1997. If an institution is deemed to be undercapitalized
under these standards, banking law prescribes an increasing amount of
regulatory intervention, including the required institution of a capital
restoration plan and restrictions on the growth of assets, branches or
lines of business. Further restrictions are applied to significantly or
critically undercapitalized institutions, including restrictions on
interest payable on accounts, dismissal of management and appointment of a
receiver. For well capitalized institutions, banking law provides
authority for regulatory intervention where the institution is deemed to be
engaging in unsafe and unsound practices or receives a less than
satisfactory examination report rating.
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," banks not subject to a supervisory directive will exclude
unrealized holding gains and losses, net of income taxes, on available-for-
sale debt securities when calculating Tier I capital. However, net
unrealized holding losses on available-for-sale marketable equity
securities will continue to be deducted from Tier I capital. This
regulatory accounting rule does not effect reporting for financial
statement purposes. Accordingly, for financial accounting presentations,
banks will continue to report available-for-sale and debt and equity
securities at fair value, with unrealized holding gains and losses, net of
income taxes, excluded from earnings and reported in a separate component
of stockholders' equity.
The Company's capital ratios at March 31, 1998 and 1997, as well as the
required minimum ratios for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions as defined by the
Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") are summarized
as follows:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
MARCH 31 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basis for ratios:
Tier I capital to risk-adjusted assets... $ 31,811 $ 29,684 $ 7,578 $ 7,566 $11,366 $11,349
Total capital to risk-adjusted assets.... 34,198 32,066 15,155 15,132 18,944 18,915
Tier I capital to total average assets
less goodwill........................... 31,811 29,684 $14,615 $13,990 $18,268 $17,487
Risk-adjusted assets..................... 182,388 182,248
Risk-adjusted off-balance sheet items.... 7,050 6,902
Average assets for Leverage ratio........ $365,363 $349,746
Ratios:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 16.8% 15.7% 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................. 18.1 17.0 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.7% 8.5% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at March
31, 1998, 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: (i) a Tier I
risk-based ratio of at least 6.0 percent; (ii) a total risk-based ratio of
at least 10.0 percent; and (iii) a Leverage ratio of at least 5.0 percent.
The Company has shown continued improvement in its capital level as
evidenced by the positive change in its Leverage ratio. At March 31, 1998,
this ratio was 8.7 percent as compared to 8.5 percent at March 31, 1997.
REVIEW OF FINANCIAL PERFORMANCE:
For the three months ended March 31, 1998, the Company surpassed its 1997
record for first quarter earnings, marking three consecutive years of
increases. Net income totaled $1,070 or $0.49 per share for the first
quarter of 1998 compared to $1,058 or $0.48 per share for the same period
of 1997. Improved net interest income partially offset by increased other
expenses related to the Company's Eynon and Factoryville branches, which
opened as Community Bank and Trust Company branches during the fourth
quarter of 1997, were the main reasons for the positive change.
In its preparation for the Year 2000 ("Y2K"), management has initiated an
enterprise-wide program to address the effects of this date change on the
Company. In summary, the Y2K issue is a result of computer programs being
written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This can result in a system failure or in miscalculations causing a
disruption in operations that could include, among other things, a
temporary inability to process transactions or engage in normal business
activities. An extensive internal assessment of all operational systems,
including all date-sensitive materials, has been made to identify the
Company's exposure to the Y2K issue.
The Company, dependent on third party providers for their data processing
software, strive to remain current in software technology. This practice
has mitigated the Company's exposure to the Y2K problem. A number of the
Company's mission critical software applications are currently Y2K
compliant. The major operating systems are either currently Y2K compliant
or will be Y2K compliant by the end of 1998. Significant testing has been
done on all software and hardware that has been designated as Y2K compliant
to ensure that this is the case. As other applications become compliant
during 1998, future testing will be performed. Based on its current
assessments, the Company estimates expenditures of $100.0 to become fully
compliant. The Y2K problem is not expected to have a material adverse
affect on the Company's products, services or competitive position.
Moreover, compliance with the Y2K problem is not reasonably likely to
affect the Company's future financial results or cause the reported
financial information not to be necessarily indicative of future operating
results or financial position. Management presently believes that with
modifications to the existing software and conversions to new software, the
Y2K problem can be mitigated.
NET INTEREST INCOME:
The major source of the Company's operating income is derived from net
interest income. Net interest income is defined as the excess amount of
interest and fees on loans and other investments over interest expense
incurred on deposits and other funding sources used to support such assets.
Net interest margin is the percentage of net interest income on a tax-
equivalent basis to average earning assets. Variations in volumes and
rates of earning assets and liabilities, in response to changes in general
market rates, are the primary factors affecting net interest income. Net
interest income levels are also influenced by the composition of earning
assets and interest-bearing liabilities as well as the level of
nonperforming assets.
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 statutory tax rate of 34.0 percent. The net
change attributable to the combined impact of rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
MARCH 31,
1998 VS. 1997
---------------------
INCREASE (DECREASE)
ATTRIBUTABLE TO
---------------------
TOTAL
CHANGE RATE VOLUME
------ ---- ------
<S> <C> <C> <C>
INTEREST INCOME:
Loans:
Taxable........................................................ $ 299 $ 73 $226
Tax-exempt..................................................... (17) 16 (33)
Investments:
Taxable........................................................ 29 60 (31)
Tax-exempt....................................................... (11) (79) 68
Federal funds sold............................................... 47 3 44
----- ----- ----
Total interest income........................................ 347 73 274
----- ----- ----
INTEREST EXPENSE:
Money market accounts............................................ 8 (14) 22
NOW accounts..................................................... 17 2 15
Savings accounts................................................. (66) (54) (12)
Time deposits less than $100..................................... 201 (130) 331
Time deposits $100 or more....................................... (171) (12) (159)
Short-term borrowings............................................ 6 (2) 8
----- ----- ----
Total interest expense....................................... (5) (210) 205
----- ----- ----
Net interest income.......................................... $ 352 $ 283 $ 69
===== ===== ====
</TABLE>
Tax-equivalent net interest income improved $352 from $3,193 for the three
months ended March 31, 1997, to $3,545 for the same period of 1998. This
improvement was primarily due to the Company's improved net interest spread
with the growth in average earning assets volumes exceeding the growth in
average interest-bearing liability volumes also contributing, albeit to a
lesser degree. For the first quarter of 1998, the Company's average, tax-
equivalent interest rate on earning assets equaled 8.06 percent, a 14 basis
point increase over the 7.92 percent earned one year earlier. This
improvement accounted for a $283 positive variance related to interest
rates. The majority of this change was primarily due to improvements in
the costs associated with time deposits less than $100 and the tax-
equivalent yield on the loan portfolio. The Company took better control of
its rates paid on interest-bearing liabilities as evidenced by a 14 basis
point decline from 4.78 percent for the three months ended March 31, 1997,
to 4.64 percent for the same period of 1998. The major contributor to this
improvement was a decline in rates paid on time deposits less than $100.
For the first quarter of 1998, the Company's average annualized rate paid
on time deposits less than $100 equaled 5.64 percent. This marked an
improvement compared to the 5.69 percent paid one year earlier and
accounted for a $130 decline in interest expense related to interest rates.
The improvement is due to the declining interest rate environment along
with management's emphasis of tightening controls on rates paid for
deposits. The Company also experienced improvement in its loan yields
during the first quarter of 1998. For the three months ended March 31,
1998, the Company's annualized, tax-equivalent loan yield equaled 8.65
percent. This was a 14 basis point improvement over the 8.51 percent
earned for the same period of 1997 and accounted for an $89 positive rate
variance.
While the Company experienced an improvement in its net interest spread
during the first three months of 1998, it also experience an improvment in
its net average earning assets to average interest-bearing liability
volumes. For the first quarter of 1998, the Company had a $69 increase in
net interest income due to volumes. Overall, average earning assets grew
$10.4 million from $339.3 million for the first quarter of 1997 to $349.7
million for the same period of 1998. This increase outdistanced the $8.2
million increase in average interest-bearing liabilities from $291.3
million for the first three months of 1997 to $299.5 million for the same
period of 1998. Higher loan volumes and reduced volumes of time deposits
$100 or more, partially offset by larger volumes of time deposit less than
$100, were the primary causes of the positive volume variance. For the
first three months of 1998, the Company's average loan volumes equaled
$245.7 million, a $9.2 million increase over the $236.5 million for the
same period of 1997. This increase accounted for a $193 positive impact to
net interest income related to average loan volumes. For the quarter ended
March 31, 1998, the Company's time deposits $100 or more averaged $23.2
million. This was a $10.9 million decline compared to the $34.1 million
average volumes for 1997 and accounted for a $159 decline in interest
expense related to volumes of these products. The Company chose not to
aggressively compete for time deposits $100 or more in its efforts to
better control its overall deposit costs. Partially offsetting the
favorable influences of the increased loan volumes and lower volumes of
time deposits $100 or more was an increase in volumes of time deposits less
than $100. For the three months ended March 31, 1998, the Company's
average volumes of time deposits less than $100 increased to $174.4
million, a $16.1 million increase from the $158.3 million experienced one
year earlier. This change accounted for a $331 negative impact to net
interest income related to time deposits less than $100 volumes.
Management expects the restructuring of its earning assets portfolio and
strengthened controls on funds costs to have a positive effect on its net
interest income. However, an increase in general market rates or a
heightened intensity in deposit-gathering may hinder net interest income
levels. Additionally, management is aware that any deterioration in local
employment conditions that may lead to higher nonaccrual loan levels may
also dilute the positive net interest income influences.
Net interest income for major categories of earning assets and interest-
bearing liabilities for the quarters ended March 31, 1998 and 1997, are
summarized as follows:
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
MARCH 31, 1998 MARCH 31, 1997
--------------------------- ---------------------------
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..................................... $238,624 $5,094 8.66% $227,886 $4,795 8.53%
Tax-exempt.................................. 7,114 148 8.44 8,591 165 7.79
Investments:
Taxable..................................... 59,227 867 5.86 61,915 838 5.49
Tax-exempt.................................. 38,914 784 8.06 38,226 795 8.43
Federal funds sold............................ 5,855 82 5.68 2,681 35 5.29
-------- ------ -------- ------
Total earning assets...................... 349,734 6,975 8.06% 339,299 6,628 7.92%
Less: allowance for loan losses............... 3,908 3,941
Other assets.................................. 22,858 15,801
-------- --------
Total assets.............................. $368,684 $351,159
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 16,833 124 2.99% $ 15,424 116 3.05%
NOW accounts.................................. 20,534 112 2.21 17,743 95 2.17
Savings accounts.............................. 64,012 424 2.69 65,581 490 3.03
Time deposits less than $100.................. 174,431 2,424 5.64 158,322 2,223 5.69
Time deposits $100 or more.................... 23,233 338 5.90 34,131 509 6.05
Short-term borrowings......................... 425 7 6.68 52 1 7.80
Long-term debt................................ 43 1 9.43 45 1 9.01
-------- ------ -------- ------
Total interest-bearing liabilities........ 299,511 3,430 4.64% 291,298 3,435 4.78%
Noninterest-bearing deposits.................. 29,763 25,570
Other liabilities............................. 2,743 2,909
Stockholders' equity.......................... 36,667 31,382
-------- ------ -------- ------
Total liabilities and stockholders' equity $368,684 3,430 $351,159 3,435
======== ------ ======== ------
Net interest/income spread................ $3,545 3.42% $3,193 3.14%
Net interest margin....................... ====== 4.11% ====== 3.82%
Tax equivalent adjustments:
Loans......................................... $ 50 $ 56
Investments................................... 267 270
------ ------
Total adjustments......................... $ 317 $ 326
====== ======
Note: Average balances were calculated using average daily balances. Average balances for loans include
nonaccrual loans. Available-for-sale securities, included in investment securities, are stated at
amortized cost with the related average unrealized holding gain of $2,617 for the first quarter of
1998 and $1,174 for the first quarter of 1997 included in other assets. Tax-equivalent adjustments
were calculated using the prevailing statutory tax rate of 34.0 percent.
</TABLE>
PROVISION FOR LOAN LOSSES:
The Company makes provisions for loan losses based on evaluations of its
allowance for loan losses account. Factors such as previous loan
experience, overall loan portfolio characteristics, prevailing economic
conditions and other relevant factors are considered when determining the
provision. Based on its most recent evaluation, management believes that
the allowance is adequate to absorb any known and inherent losses in the
portfolio.
The Company increased its provision for loan losses from $75 for the three
months ended March 31, 1997, to $105 for the same period of 1998. Despite
the improvement in nonperforming asset levels and the slowed loan demand,
management believes that maintaining a standard monthly charge to
operations in the form of a provision is warranted. If loan demand
intensifies or nonperforming asset levels deteriorate, management will
consider adjusting the monthly provision amount for the remainder of 1998.
NONINTEREST INCOME:
The Company's noninterest income for the first quarter of 1998 declined $60
or 14.5 percent to $353 from $413 for the same period of 1997. This
decline is primarily related to the Company's other real estate activity.
During the first quarter of 1997, the Company sold other real estate
properties totaling $274 with gains on the sales of $58 being recognized.
For the first quarter of 1998, the Company had no sales of properties held
in other real estate.
NONINTEREST EXPENSE:
The general components of noninterest expense include 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 first quarter of 1998, noninterest expense totaled $2,130, a $247
or 13.1 percent increase over the $1,883 recorded for the same period one
year earlier. The Company also experienced a higher overhead to average
assets ratio for the first quarter of 1998. This ratio equaled 2.0 percent
for the first three months of 1998 compared to 1.7 percent for the same
period of 1997. A company can also measure its efficiency with the
operating efficiency ratio. This 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 ratio for the first quarter of 1998 was
less favorable as compared to one year earlier. For the first three months
of 1998, this ratio rose to 59.1 percent as compared to 57.1 percent for
the same period of 1997. The adverse changes to these ratios are primarily
due to the higher noninterest expense levels related to the Company's Eynon
and Factoryville offices that were purchased during the fourth quarter of
1997.
The majority of the Company's noninterest expense comes from salaries and
benefits. For the quarter ended March 31, 1998, these expenses amounted to
$1,094 or 51.4 percent of noninterest expenses. This was a $107 or 10.8
percent increase compared to the $987 recorded for the first quarter of
1997. The primary cause of this increase was related to personnel
performance appraisals in the form of merit increases with the remaining
portion being attributed to the additional staff members from the branch
acquisitions.
Aggregate net occupancy and equipment expenses amounted to $352 for the
first three months of 1998, a $52 or 17.3 percent increase compared to the
same period of 1997. This increase was primarily attributable to increased
depreciation expenses associated with new equipment necessary to operate
the Eynon and Factoryville offices as well as expenses associated with
meeting the Company's Y2K compliance requirements. On January 2, 1998, the
Company acquired land in Clarks Summit, Pennsylvania at a cost of $1.2
million for the construction of an administrative center and branch
facility. This project, with an estimated aggregate cost of $4.0 million,
should be completed during the first quarter of 1999. Funding for this
project will be provided through the Company's normal operations.
Other expenses amounted to $684 for the first quarter of 1998, an $88 or
14.8 percent increase over the $596 reported for the same period of 1997.
The primary cause of this increase is attributable to the amortization of
the core deposit intangible obtained from the Eynon and Factoryville branch
purchases. For the three months ended March 31, 1998, the Company's core
deposit intangible expense totaled $68.
On November 12, 1997, the Federal Deposit Insurance Corporation ("FDIC")
issued a press release announcing that existing insurance premiums would be
retained for the first half of 1998. Risk-related assessment rates for
both the Bank Insurance Fund ("BIF") and Savings Association Insurance Fund
("SAIF") will remain in the 0 to 27 basis point range on an annual basis.
The FDIC noted that: (i) over 95.0 percent of all BIF-member institutions
are estimated to be in the lowest risk category thus paying no premiums.
Only 0.1 percent are estimated to be in the 27 cents per 100 dollars in
deposits premium category. On average, the annual assessment rate is
projected to be 0.08 cents per 100 dollars. The FDIC-approved rate
schedule is expected to maintain the BIF's reserve ratio above the
Congressional mandated 1.25 percent through June 30, 1998; (ii) over 90.0
percent of all SAIF-member institutions are estimated to pay no premiums.
On average, the annual assessment rate is estimated to be 0.32 cents per
100 dollars, which is expected to maintain SAIF reserves over the mandated
1.25 percent ratio; (iii) a separate levy will be assessed on all FDIC-
insured institutions to bear the cost of bonds sold by the Finance
Corporation ("FICO") between 1987 and 1989 in support of the former Federal
Savings and Loan Insurance Corporation. The 1996 law requires the FICO
rate on BIF-assessable deposits to be one-fifth the rate for SAIF-
assessable deposits until January 1, 2000, or earlier if the two funds
merge.
Major components of noninterest expense for the quarters ended March 31,
1998, and March 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED
MARCH 31,
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
SALARIES AND EMPLOYEE BENEFITS EXPENSE:
Salaries and payroll taxes........................................ $ 935 $ 824
Employee benefits................................................. 159 163
------ ------
Salaries and employee benefits expense.......................... 1,094 987
------ ------
NET OCCUPANCY AND EQUIPMENT EXPENSE:
Net occupancy expense............................................. 138 160
Equipment expense................................................. 214 140
------ ------
Net occupancy and equipment expense............................. 352 300
------ ------
OTHER EXPENSES:
Marketing expense................................................. 51 48
Other taxes....................................................... 63 71
Stationery and supplies........................................... 87 98
Contractual services.............................................. 223 186
Insurance including FDIC assessment............................... 19 20
Other............................................................. 241 173
------ ------
Other expenses.................................................. 684 596
------ ------
Total noninterest expense..................................... $2,130 $1,883
====== ======
</TABLE>
INCOME TAXES:
The Company reported tax expense of $276 for the first quarter of 1998
compared to $264 for the same period of 1997. The effective tax rate rose
slightly to 20.5 percent for the three months ended March 31, 1998, from
20.0 percent for the same period of 1997. A lower amount of tax exempt
income and greater level of net income before tax were the primary reasons
for the higher tax rate. Management expects the Company's effective tax
rate to remain relatively stable for the remainder of 1998 through
emphasizing income on tax-exempt investments and loans as well as utilizing
investment tax credits available through its 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
these 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 monthly 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) NONE
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date May 12, 1998 /s/ David L. Baker
------------------------------ --------------------------------
David L. Baker
Chief Executive Officer
Date May 12, 1998 /s/ Scott A. Seasock
------------------------------ --------------------------------
Scott A. Seasock
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,016
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,273
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 241,866
<ALLOWANCE> 3,885
<TOTAL-ASSETS> 370,363
<DEPOSITS> 329,049
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,984
<LONG-TERM> 43
0
0
<COMMON> 727
<OTHER-SE> 36,560
<TOTAL-LIABILITIES-AND-EQUITY> 370,363
<INTEREST-LOAN> 5,192
<INTEREST-INVEST> 1,384
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 6,658
<INTEREST-DEPOSIT> 3,422
<INTEREST-EXPENSE> 3,430
<INTEREST-INCOME-NET> 3,228
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,130
<INCOME-PRETAX> 1,346
<INCOME-PRE-EXTRAORDINARY> 1,346
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,070
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 8.06
<LOANS-NON> 1,427
<LOANS-PAST> 2,005
<LOANS-TROUBLED> 185
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,798
<CHARGE-OFFS> 125
<RECOVERIES> 107
<ALLOWANCE-CLOSE> 3,885
<ALLOWANCE-DOMESTIC> 3,885
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
