UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1997
_________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
____________ ___________________________________
Commission file number 0-17455
____________
COMM BANCORP, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
__________________________________ _____________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
521 MAIN STREET, FOREST CITY, PA 18421
________________________________________ _____________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 785-3181
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
___________________________________ _________________________________________
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.33 PER SHARE
________________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing sale price: $63,036,234 AT FEBRUARY 3, 1998.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 2,204,169 AT FEBRUARY 3, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1997, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 1998 Proxy Statement are incorporated by
reference in Part III of this Annual Report.
Page 1 of 230
Exhibit Index on Page 42
COMM BANCORP, INC.
FORM 10-K INDEX
PART I Page
Item 1. Business................................................. 3
Item 2. Properties............................................... 23
Item 3. Legal Proceedings........................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...... *
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 25
Item 6. Selected Financial Data.................................. 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk..................................................... 26
Item 8. Financial Statements and Supplementary Data.............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... *
PART III
Item 10. Directors and Executive Officers of the Registrant....... 27
Item 11. Executive Compensation................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 36
Item 13. Certain Relationships and Related Transactions........... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 39
Signatures........................................................ 40
Exhibit Index..................................................... 42
*Not Applicable
COMM BANCORP, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Comm Bancorp, Inc. ("Company") is a Pennsylvania business corporation,
incorporated
on May 20, 1983, and is a bank holding company, registered with and supervised
by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
The Company has one wholly-owned subsidiary, Community Bank and Trust Company
("Community Bank"). The deposits of Community Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF").
The
Company's business has consisted of managing and supervising Community Bank
and its
principal source of income has been dividends paid by Community Bank. At
December 31, 1997, the Company had approximately total consolidated assets of
$381.8 million, deposits of $332.4 million and stockholders' equity of $36.1
million. During 1997, the Company and Community Bank employed approximately 161
persons on a full-time equivalent basis.
Community Bank is a Pennsylvania state-chartered commercial bank and a member of
the Federal Reserve System. As of December 31, 1997, Community Bank had twelve
branch locations, including its main office in Forest City, Susquehanna County,
Pennsylvania. Community Bank's branch offices are located in the Northeastern
Pennsylvania counties of Lackawanna, Susquehanna, Wayne and Wyoming.
SUPERVISION AND REGULATION - COMPANY
The Company is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of its
securities.
The Company is currently subject to the SEC's rules and regulations relating to
periodic reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934.
The Company is also subject to the provisions of the Bank Holding Company Act of
1956 ("Bank Holding Company Act") as amended, and to supervision by the Federal
Reserve Board. The Bank Holding Company Act will require the Company to secure
the
prior approval of the Federal Reserve Board before it owns or controls, directly
or indirectly, more than 5.0 percent of the voting shares or substantially all
of the assets of any institution, including another bank.
A bank holding company is prohibited from engaging in, or acquiring direct or
indirect control of, more than 5.0 percent of the voting shares of any company
engaged in nonbanking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
this
determination, the Federal Reserve Board considers whether the performance of
these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisition of control of a bank
holding company, such as the Company, without prior notice to the Federal
Reserve
Board. Control is defined for this purpose as the power, directly or
indirectly,
to influence the management or policies of a bank holding company or to vote
25.0
percent, or 10.0 percent if no other person or persons acting in concert holds a
greater percentage, of the common stock or more of the Company's common stock.
The Company is required to file an annual report with the Federal Reserve Board
and
any additional information that the Federal Reserve Board may require pursuant
to
the Bank Holding Company Act. The Federal Reserve Board may also make
examinations
of the Company and Community Bank. Subject to certain exceptions, a bank
holding
company and its subsidiaries are generally prohibited from engaging in certain
tie-
in arrangements in connection with any extension of credit or provision of
credit
or provision of any property or service. The so-called "Anti-tie-in" provisions
state generally that a bank may not extend credit, lease, sell property or
furnish
any service to a customer on the condition that the customer provide additional
credit or service to the bank, to its bank holding company, or to any other
subsidiary of its bank holding company or on the condition that the customer not
obtain other credit or service from a competitor of the bank, its bank holding
company, or any subsidiary of its bank holding company. Subsidiary banks of a
bank
holding company are subject to certain restrictions imposed by the Federal
Reserve
Act on any extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities of the bank
holding
company, and on taking of such stock or securities as collateral for loans to
any borrower.
PERMITTED NONBANKING ACTIVITIES
The Federal Reserve Board permits bank holding companies or their subsidiaries
to
engage in nonbanking activities so closely related to banking or managing or
controlling banks as to be a proper incident thereto. While the types of
permissible activities are subject to change by the Federal Reserve Board, the
principal nonbanking activities that presently may be conducted by a bank
holding
company or its subsidiary without prior approval of the Federal Reserve Board
are:
1. EXTENDING CREDIT AND SERVICING LOANS: Making, acquiring, brokering or
servicing
loans or other extensions of credit (including factoring, issuing letters of
credit
and accepting drafts) for the company's account or for the account of others.
2. ACTIVITIES RELATED TO EXTENDING CREDIT: Any activity usual in connection with
making, acquiring, brokering or servicing loans or other extensions of credit as
determined by the Federal Reserve Board. The Federal Reserve Board has
determined
that the following activities are usual in connection with making, acquiring,
brokering or servicing loans or other extensions of credit: (i) performing
appraisals of real estate and tangible and intangible personal property,
including
securities; (ii) acting as intermediary for the financing of commercial or
industrial income-producing real estate by arranging for the transfer of the
title,
control and risk of such a real estate project to one or more investors, if the
bank holding company and its affiliates do not have an interest in, or
participate
in managing or developing, a real estate project for which it arranges equity
financing, and do not promote or sponsor the development of the property; (iii)
authorizing a subscribing merchant to accept personal checks tendered by the
merchant's customers in payment for goods and services, and purchasing from the
merchant validly authorized checks that are subsequently dishonored; (iv)
collecting overdue accounts receivable, either retail or commercial; (v)
maintaining information related to the credit history of consumers and providing
the information to a credit grantor who is considering a borrower's application
for
credit or who has extended credit to the borrower; (vi) engaging under contract
with a third party in asset management, servicing and collection of assets of a
type that an insured depository institution may originate and own, if the
company
does not engage in real property management or real estate brokerage services as
part of these services; (vii) acquiring debt that is in default at the time of
acquisition under certain conditions; and (viii) providing real estate
settlement services.
3. LEASING PERSONAL OR REAL PROPERTY: Leasing personal or real property or
acting
as agent, broker or adviser in leasing such property under certain conditions.
4. OPERATING NONBANK DEPOSITORY INSTITUTIONS: (i) Owning, controlling or
operating
an industrial bank, Morris Plan bank or industrial loan company, so long as the
institution is not a bank; and (ii) owning, controlling or operating a savings
association, if the savings association engages only in deposit-taking
activities,
lending, and other activities that are permissible for bank holding companies.
5. TRUST COMPANY FUNCTIONS: Performing functions or activities that may be
performed by a trust company, including activities of a fiduciary, agency or
custodial nature, in the manner authorized by federal or state law, so long
as the company is not a bank for purposes of the Bank Holding Company Act.
6. FINANCIAL AND INVESTMENT ADVISORY ACTIVITIES: Acting as investment or
financial
advisor to any person including, without in any way limiting, the foregoing:
(i)
serving as investment adviser as defined in section 2(a)(20) of the Investment
Company Act of 1940, 15 U.S.C. 80a-2(a)(20), to an investment company registered
under that act, including sponsoring, organizing and managing a closed-end
investment company; (ii) furnishing general economic information and advice,
general economic statistical forecasting services and industry studies; (iii)
providing advice in connection with mergers, acquisitions, divestitures,
investments, joint ventures, leveraged buyouts, recapitalizations, capital
structurings, financing transactions and similar transactions, and conducting
financial feasibility studies; (iv) providing information, statistical
forecasting
and advice with respect to any transaction in foreign exchange, swaps and
similar
transactions, commodities, forward contracts, options, futures, options on
futures
and similar instruments; (v) providing educational courses and instructional
materials to consumers on individual financial management matters; and (vi)
providing tax-planning and tax-preparation services to any person.
7. AGENCY TRANSACTIONAL SERVICES FOR CUSTOMER INVESTMENTS: (i) Providing
securities brokerage services including securities clearing and/or securities
execution services on an exchange, whether alone or in combination with
investment
advisory services, and incidental activities including related securities credit
activities and custodial services, if the securities brokerage services are
restricted to buying and selling securities solely as agent for the account of
customers and do not include securities underwriting or dealing; (ii) buying and
selling in the secondary market all types of securities on the order of
customers
as a "riskless principal" to the extent of engaging in a transaction in which
the
company, after receiving an order to buy or sell a security from a customer,
purchases or sells the security for its own account to offset a contemporaneous
sale to or purchase from the customer. This does not include: (a) selling bank-
ineligible securities at the order of a customer that is the issuer of the
securities, or selling bank-ineligible securities in any transaction where the
company has a contractual agreement to place the securities as agent of the
issuer;
or (b) acting as a riskless principal in any transaction involving a bank-
ineligible security for which the company or any of its affiliates acts as
underwriter (during the period of the underwriting or for 30 days thereafter) or
dealer; (iii) acting as agent for the private placement of securities in
accordance
with the requirements of the Securities Act of 1933 and the rules of the SEC, if
the company engaged in the activity does not purchase or repurchase for its own
account the securities being placed, or hold in inventory unsold portions of
issues
of these securities; (iv) acting as a futures commission merchant for
unaffiliated
persons in the execution, clearance, or execution and clearance of any futures
contract and option on a futures contract traded on an exchange in the United
States or abroad under certain conditions; and (v) providing to customers, as
agent, transactional services with respect to swaps and similar transactions.
8. INVESTMENT TRANSACTIONS AS PRINCIPAL: (i) Underwriting and dealing in
obligations of the United States, general obligations of states and their
political
subdivisions, and other obligations that state member banks of the Federal
Reserve
System may be authorized to underwrite and deal in under 12 U.S.C. 24 and 335,
including banker's acceptances and certificates of deposit, under the same
limitations as would be applicable if the activity were performed by the bank
holding company's subsidiary member banks or its subsidiary nonmember banks
as if
they were member banks; (ii) engaging as principal in: (a) foreign exchange;
(b)
forward contracts, options, futures, options on futures, swaps and similar
contracts, whether traded on exchanges or not, based on any rate, price,
financial
asset including gold, silver, platinum, palladium, copper or any other metal
approved by the Board, nonfinancial asset, or group of assets, other than a
bank-
ineligible security under certain conditions; (c) forward contracts, options,
futures, options on futures, swaps and similar contracts, whether traded on
exchanges or not, based on an index of a rate, a price, or the value of any
financial asset, nonfinancial asset or group of assets, if the contract requires
such settlement; and (iii) buying, selling and storing bars, rounds, bullion and
coins of gold, silver, platinum, palladium, copper and any other metal approved
by
the Federal Reserve Board, for the company's own account and the account of
others,
and providing incidental services such as arranging for storage, safe custody,
assaying and shipment.
9. MANAGEMENT CONSULTING AND COUNSELING ACTIVITIES: (i) Providing management
consulting advice under certain conditions; (ii) providing consulting services
to
employee benefit, compensation and insurance plans, including designing plans,
assisting in the implementation of plans, providing administrative services to
plans and developing employee communication programs for plans; and (iii)
providing
career counseling services to: (a) financial organizations and individuals
currently employed by, or recently displaced from, a financial organization; (b)
individuals who are seeking employment at a financial organization; and (c)
individuals who are currently employed in or who seek positions in the finance,
accounting and audit departments of any company.
10. SUPPORT SERVICES: (i) Providing courier services for: (a) checks, commercial
papers, documents and written instruments excluding currency or bearer-type
negotiable instruments that are exchanged among banks and financial
institutions;
and (b) audit and accounting media of a banking or financial nature and other
business records and documents used in processing such media; and (ii) printing
and
selling checks and related documents, including corporate image checks, cash
tickets, voucher checks, deposit slips, savings withdrawal packages and other
forms that require MICR-encoding.
11. INSURANCE AGENCY AND UNDERWRITING: (i) Acting as principal, agent or broker
for
insurance including home mortgage redemption insurance that is: (a) directly
related to an extension of credit by the bank holding company or any of its
subsidiaries; and (b) limited to ensuring the repayment of the outstanding
balance
due on the extension of credit in the event of the death, disability or
involuntary
unemployment of the debtor; (ii) acting as agent or broker for insurance
directly
related to an extension of credit by a finance company that is a subsidiary of a
bank holding company under certain conditions; (iii) engaging in any insurance
agency activity in a place where the bank holding company or a subsidiary of the
bank holding company has a lending office and that: (a) has a population not
exceeding 5,000 as shown in the preceding decennial census; or (b) has
inadequate
insurance agency facilities, as determined by the Federal Reserve Board, after
notice and opportunity for hearing; (iv) under certain restrictions, engaging in
any specific insurance-agency activity if the bank holding company, or
subsidiary
conducting the specific activity, conducted such activity on May 1, 1982, or
received the Federal Reserve Board approval to conduct such activity on or
before
May 1, 1982; (v) supervising on behalf of insurance underwriters the activities
of
retail insurance agents who sell: (a) fidelity insurance and property and
casualty
insurance on the real and personal property used in the operations of the bank
holding company or its subsidiaries; and (b) group insurance that protects the
employees of the bank holding company or its subsidiaries; (vi) engaging in any
insurance-agency activity if the bank holding company has total consolidated
assets
of $50.0 million or less; and (vii) engaging in any insurance-agency activity
performed directly or indirectly at any location in the United States by a bank
holding company that was engaged in insurance-agency activities prior to
January 1, 1971, as a consequence of approval by the Federal Reserve Board prior
to January 1, 1971.
12. COMMUNITY DEVELOPMENT ACTIVITIES: (i) Making equity and debt investments in
corporations or projects primarily designed to promote community welfare, such
as
the economic rehabilitation and development of low-income areas by providing
housing, services or jobs for residents; (ii) providing advisory and related
services for programs primarily designed to promote community welfare.
13. MONEY ORDERS, SAVINGS BONDS AND TRAVELERS' CHECKS: The issuance and sale at
retail of money orders and similar consumer-type payment instruments; the sale
of U.S. savings bonds and the issuance and sale of travelers' checks.
14. DATA PROCESSING: Providing data processing and data transmission services,
facilities (including data processing and data transmission hardware, software,
documentation or operating personnel), data bases, advice and access to such
services, facilities or data bases by any technological means under certain
conditions.
PENNSYLVANIA BANKING LAW
Under the Pennsylvania Banking Code of 1965, as amended, the Company is
permitted
to control an unlimited number of banks. However, the Company would be
required,
under the Bank Holding Company Act, to obtain the prior approval of the Federal
Reserve Board, before it could acquire all or substantially all of the assets of
any bank, or acquire ownership or control of any voting shares of any bank other
than Community Bank, if, after such acquisition, it would own or control more
than 5.0 percent of the voting shares of such bank.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, amended
various federal banking laws to provide for nationwide interstate banking,
interstate bank mergers and interstate branching. The interstate banking
provisions allow for the acquisition by a bank holding company of a bank located
in another state.
Interstate bank mergers and branch purchase and assumption transactions were
allowed effective June 1, 1997, however states may "opt-out" of the merger,
purchase and assumption provisions by enacting a law, which specifically
prohibits
such interstate transactions. States could, in the alternative, enact
legislation
to allow interstate merger, purchase and assumption transactions prior to
June 1, 1997. States could also enact legislation to allow for de novo
interstate
branching of out-of-state banks. In July of 1995, Pennsylvania adopted "opt-in"
legislation, which allows such transactions.
LEGISLATION AND REGULATORY CHANGES
From time to time, legislation is enacted that has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting
the competitive balance between banks and other financial institutions.
Proposals
to change the laws and regulations governing the operations and taxation of
banks,
bank holding companies and other financial institutions are frequently made in
Congress and before various bank regulatory agencies. No prediction can be made
as to the likelihood of any major changes or the impact such changes might have
on
the Company and Community Bank. Certain changes of potential significance to
the
Company that have been enacted or promulgated, as the case may be, by Congress
or various regulatory agencies, respectively, are discussed below.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e., FIRREA, was
enacted into law in order to restructure the regulation of the thrift industry,
to address the financial condition of the Federal Savings and Loan Insurance
Corporation and to enhance the supervisory and enforcement powers of the federal
bank and thrift regulatory agencies. The Federal Reserve Board, as the primary
federal regulator of Community Bank, is responsible for the supervision of
Community Bank. The Federal Reserve Board and FDIC have far greater flexibility
to impose supervisory agreements on an institution that fails to comply with its
regulatory requirements, particularly with respect to capital requirements.
Possible enforcement actions include the imposition of a capital plan,
termination
of deposit insurance and removal or temporary suspension of an officer, director
or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels, with amounts
increasing with the severity of the violation. The first tier provides for
civil
penalties of up to $5.0 thousand per day for any violation of law or regulation.
A civil penalty of up to $25.0 thousand per day may be assessed if more than a
minimal loss or a pattern of misconduct is involved. Finally, a civil penalty
of
up to $1.0 million per day may be assessed for knowingly or recklessly causing a
substantial loss to an institution or taking action that results in a
substantial
pecuniary gain or other benefit. Criminal penalties are increased to
$1.0 million
per violation, up to $5.0 million for continuing violations or for the actual
amount of gain or loss. These monetary penalties may be combined with prison
sentences of up to five years.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
GENERAL
The FDICIA reformed a variety of bank regulatory laws. Certain of these
provisions are discussed below.
EXAMINATIONS AND AUDITS
Annual full-scope, on-site examinations are required for all FDIC-insured
institutions with assets of $500.0 million or more. For bank holding companies
with $500.0 million or more in assets, the independent accountants of such
companies shall attest to the accuracy of management's report. Such accountants
shall also monitor management's compliance with governing laws and regulations.
Such companies are also required to select an independent audit committee,
composed
of outside directors who are independent of management, to review with
management
and the independent accountants the reports that must be submitted to the
appropriate bank regulatory agencies. If the independent accountants resign or
are
dismissed, written notification must be given to the FDIC and to the appropriate
federal and state bank regulatory agencies.
PROMPT CORRECTIVE ACTION
In order to reduce losses to the deposit insurance funds, the FDICIA established
a format to more closely monitor FDIC-insured institutions and to enable prompt
corrective action by the appropriate federal supervisory agency if an
institution
begins to experience any difficulty. The FDICIA established five capital
categories. They are: (i) well capitalized; (ii) adequately capitalized;
(iii) undercapitalized; (iv) significantly undercapitalized; and (v) critically
undercapitalized. The overall goal of these new capital measures is to impose
more
scrutiny and operational restrictions on depository institutions as they descend
the capital categories from well capitalized to critically undercapitalized.
The FDIC, the Office of the Comptroller of the Currency, the Federal Reserve
Board
and the Office of Thrift Supervision have jointly issued regulations relating to
these capital categories and prompt corrective action. These capital measures
for prompt corrective action are defined as follows:
A well capitalized institution would be one that has a 10.0 percent or greater
total risk-based capital ratio, a 6.0 percent or greater Tier I risk-based
capital
ratio, a 5.0 percent or greater Tier I Leverage ratio and is not subject to any
written order or final directive by its regulator to meet and maintain a
specific capital level.
An adequately capitalized institution would be one that meets the required
minimum
capital levels, but does not meet the definition of a well capitalized
institution.
The existing capital rules generally require banks to maintain a Tier I Leverage
ratio of at least 4.0 percent and an 8.0 percent or greater total risk-based
capital ratio. Because the risk-based standards require at least half of total
risk-based capital to be in the form of Tier I capital, this means that an
institution would need to maintain at least a 4.0 percent Tier I risk-based
capital
ratio. Thus, an institution would need to meet each of the required minimum
capital levels in order to be deemed adequately capitalized.
An undercapitalized institution fails to meet one or more of the required
minimum
capital levels for an adequately capitalized institution. An undercapitalized
institution must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal
regulator. A number of other discretionary restrictions may also be imposed on
a
case-by-case basis, and more stringent restrictions that otherwise would apply
to
significantly undercapitalized institutions may be imposed on an
undercapitalized
institution that fails to file or implement an acceptable capital restoration
plan.
A significantly undercapitalized institution would have a total risk-based
capital
ratio of less than 6.0 percent, a Tier I risk-based capital ratio of less
than 3.0
percent or a Tier I Leverage ratio of less than 3.0 percent. Institutions in
this
category would be subject to all the restrictions that apply to undercapitalized
institutions. Certain other mandatory prohibitions would also apply, such as
restrictions against the payment of bonuses or raises to senior executive
officers
without the prior approval of the institution's primary federal regulator. A
number of other restrictions may also be imposed.
A critically undercapitalized institution would be one with a tangible equity
(Tier I risk-based capital) ratio of 2.0 percent or less. In addition to the
same
restrictions and prohibitions that apply to undercapitalized and significantly
undercapitalized institutions, the FDIC's rule implementing this provision of
the
FDICIA also addresses certain other provisions for which the FDIC has been
accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes critically undercapitalized is
prohibited from taking the following actions without the prior written approval
of
its primary federal regulator: engaging in any material transactions other than
in the usual course of business, extending credit for highly leveraged
transactions, amending its charter or bylaws, making any material changes in
accounting methods, engaging in certain transactions with affiliates, paying
excessive compensation or bonuses and paying interest on liabilities exceeding
the
prevailing rates in the institution's market area. In addition, a critically
undercapitalized institution is prohibited from paying interest or principal
on its
subordinated debt and is subject to being placed in conservatorship or
receivership, if its tangible equity capital level is not increased within
certain mandated timeframes.
At any time, an institution's primary federal regulator may reclassify it into a
lower capital category. All institutions are prohibited from declaring any
dividends, making any other capital distribution or paying a management fee, if
it would result in downward movement into any of the three undercapitalized
categories. The FDICIA provides an exception to this requirement for stock
redemptions that do not lower an institution's capital and would improve its
financial condition, if the appropriate federal regulator has consulted with the
FDIC and approved the redemption.
The regulation requires institutions to notify the FDIC following any material
event that would cause such institution to be placed in a lower category.
Additionally, the FDIC monitors capital levels through call reports and
examination reports.
FDIC INSURANCE ASSESSMENTS
The FDIC has implemented a risk-related premium schedule for all insured
depository
institutions that results in the assessment of premiums based on capital and
supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semi-annual basis,
assigns
each institution to one of three capital groups, well capitalized, adequately
capitalized or undercapitalized, and further assigns such institution to one of
three subgroups within a capital group corresponding to the FDIC's judgment of
the
institution's strength based on supervisory evaluations, including examination
reports, statistical analysis and other information relevant to gauging the risk
posed by the institution. Only institutions with a total capital to
risk-adjusted
assets ratio of 10.0 percent or greater, a Tier 1 capital to risk-adjusted
assets
ratio of 6.0 percent or greater and a Tier 1 Leverage ratio of 5.0 percent or
greater, are assigned to the well capitalized group.
Over the last two years, FDIC insurance assessments have seen several changes
for
both BIF and Savings Association Insurance Fund ("SAIF") institutions. The most
recent change occurred on September 30, 1996, when the President signed into law
a bill designed to remedy the disparity between BIF and SAIF deposit premiums.
The first part of the bill called for the SAIF to be capitalized by a one-time
assessment on all SAIF insured deposits held as of March 31, 1995. This
assessment, which was 65.7 cents per $100 in deposits, raised approximately $4.7
billion to bring the SAIF up to its required 1.25 reserve ratio. This special
assessment, paid on November 30, 1996, had no effect on Community Bank. The
second
part of the bill remedied the future anticipated shortfall with respect to the
payment of Finance Corporation ("FICO") interest. For 1997 through 1999, the
banking industry will help pay the FICO interest payments at an assessment rate
that is one-fifth the rate paid by thrifts. The FICO assessment on BIF-insured
deposits is 1.29 cents per $100 in deposits and for SAIF-insured deposits it is
6.44 cents per $100 in deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro-rata by banks and thrifts based on deposits. At
December 31, 1997, the FICO interest assessment paid by Community Bank was
approximately $40.0 thousand. Community Bank has not been required to pay any
FDIC
insurance assessments since the fourth quarter of 1996, because the BIF has met
its
statutorily- required ratios and Community Bank is categorized as well
capitalized.
REAL ESTATE LENDING STANDARDS
Pursuant to the FDICIA, the Federal Reserve Board and other federal banking
agencies adopted real estate lending guidelines that would set loan-to-value
("LTV") ratios for different types of real estate loans. An LTV ratio is
generally
defined as the total loan amount divided by the appraised value of the property
at
the time the loan is originated or the purchase price, whichever is lower.
If the
institution does not hold a first lien position, the total loan amount would be
combined with the amount of all senior liens when calculating the ratio. In
addition to establishing the LTV ratios, the guidelines require all real estate
loans to be based upon proper loan documentation and a recent appraisal of the
property.
BANK ENTERPRISE ACT OF 1991 ("ACT")
Within the overall FDICIA is the Act. The purpose of the Act is to encourage
banking institutions to establish "basic transaction services for consumers," or
so-called "lifeline depository accounts." The FDIC assessment rate is reduced
for
all lifeline depository accounts. The Act establishes ten factors that are the
minimum requirements to qualify as a lifeline depository account. Some of these
factors relate to minimum opening and balance amounts, minimum number of monthly
withdrawals, the absence of discriminatory practices against low-income
individuals
and minimum service charges and fees. Moreover, the Housing and Community
Development Act of 1972 requires that the FDIC's risk-based assessment system
include provisions regarding lifeline depository accounts. Assessment rates
applicable to lifeline depository accounts are to be established by FDIC rule.
TRUTH IN SAVINGS ACT ("TSA")
FDICIA also contains the TSA. The Federal Reserve Board has adopted Regulation
DD
under the TSA, the purpose of which is to require the clear and uniform
disclosure
of the rates of interest that are payable on deposit accounts by depository
institutions and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. In addition to disclosures to be
provided when a customer establishes a deposit account, the TSA requires the
depository institution to include, in a clear and conspicuous manner, the
following
information with each periodic statement: (i) the annual percentage yield;
(ii) the
amount of interest earned; (iii) the amount of any fees and charges imposed; and
(iv) the number of days in the reporting period. The TSA allows for civil
lawsuits
to be initiated by customers, if the depository institution violates any
provision or regulation under the TSA.
REGULATORY CAPITAL REQUIREMENTS
The following table presents the Company's consolidated capital ratios at
December 31, 1997:
<TABLE>
<CAPTION>
(In Thousands)
<C> <S>
Tier I capital................................................................ $ 30,610
Tier II capital............................................................... $ 2,456
Total capital................................................................. $ 33,066
Adjusted total average assets................................................. $357,685
Total risk-adjusted assets (1)................................................ $195,153
Tier I risk-based capital ratio(2)............................................ 15.69%
Required Tier I risk-based capital ratio...................................... 4.00%
Excess Tier I risk-based capital ratio........................................ 11.69%
Total risk-based capital ratio(3)............................................. 16.94%
Required total risk-based capital ratio....................................... 8.00%
Excess total risk-based capital ratio......................................... 8.94%
Tier I Leverage ratio(4)...................................................... 8.56%
Required Tier I Leverage ratio................................................ 4.00%
Excess Tier I Leverage ratio.................................................. 4.56%
<FN>
(1) Includes off-balance sheet items at credit-equivalent values less intangible assets.
(2) Tier I risk-based capital ratio is defined as the ratio of Tier I capital to total risk-
adjusted assets.
(3) Total risk-based capital ratio is defined as the ratio of Tier I and Tier II capital to total
risk-adjusted assets.
(4) Tier I Leverage ratio is defined as the ratio of Tier I capital to adjusted total average
assets.
</TABLE>
The Company's ability to maintain the required levels of capital is
substantially
dependent upon the success of its capital and business plans, the impact of
future
economic events on loan customers, the ability to manage its interest rate risk
and investment portfolio and control its growth and other operating expenses.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are, and will be, affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and
its agencies. The monetary policies of the Federal Reserve Board have had, and
will likely continue to have, an important impact on the operating results of
commercial banks through their power to implement national monetary policy in
order
to curb inflation or combat a recession, among other things. The Federal
Reserve
Board has a major effect upon the levels of bank loans, investments and deposits
through its open market operations in United States government securities and
through its regulations of, among other things, the discount rate on
borrowings of
member banks and the reserve requirements against member bank deposits. It is
not
possible to predict the nature and impact of future changes in monetary and
fiscal policies.
HISTORY AND BUSINESS - COMMUNITY BANK
Community Bank's legal headquarters is located at 521 Main Street, Forest City,
Pennsylvania 18421. As of December 31, 1997, Community Bank had approximately
total assets of $377.4 million, total deposits of $332.4 million and total
stockholders' equity of $32.7 million.
Community Bank is a community bank that seeks to provide personal attention and
professional financial assistance to its customers. Community Bank is a locally
managed and oriented financial institution established to serve the needs of
individuals and small- and medium-sized businesses. Community Bank's business
philosophy includes offering direct access to its President and other officers
and
providing friendly, informed and courteous service, local and timely decision
making, flexible and reasonable operating procedures and consistently-applied
credit policies.
Community Bank is a full-service commercial bank offering a range of commercial
and
retail banking services to its customers. These include personal and business
checking and savings accounts, certificates of deposit and mortgage, home equity
and commercial loans. In addition, Community Bank provides safe deposit boxes,
travelers' checks, wire transfers of funds and certain personal, corporate and
pension trust services. Community Bank is a member of the MAC system and
provides
customers with access to this automated teller machine network. Community Bank
also makes credit cards available to its customers. In addition, Community Bank
has a trust department that provides traditional fiduciary services to its
customers.
Community Bank solicits small- and medium-sized businesses located primarily
within
its market area that typically borrow less than $100.0 thousand. In the event
that
certain loan requests exceed Community Bank's lending limit to any one customer,
Community Bank seeks to arrange such loans on a participation basis with other
financial institutions.
MARKET AREA
Community Bank's primary market area comprises Lackawanna, Susquehanna, Wayne
and
Wyoming counties that are located in the Northeast corner of the Commonwealth of
Pennsylvania. The largest municipality in this market area is the City of
Scranton
with a population of approximately 82.0 thousand based upon 1990 census data.
None
of Community Bank's branches are within the City of Scranton. All of the
branches
are located outside of Scranton in rural or small-town settings. See Item 2
hereof for a description of the location of each branch office.
Community Bank competes with 18 commercial banks, three thrift institutions and
22 credit unions, many of which are substantially larger in terms of assets and
liabilities. In addition, Community Bank experiences competition for deposits
from
mutual funds and security brokers. Consumer, mortgage and insurance companies
compete for various types of loans. Principal methods of competing for banking
and
permitted nonbanking services include price, nature of product, quality of
service and convenience of location.
SUPERVISION AND REGULATION - COMMUNITY BANK
The operations of Community Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the Pennsylvania
Department of Banking ("Department"), the Federal Reserve Board and the FDIC.
The primary federal supervisory authority that regularly examines Community Bank
is the Federal Reserve Board. The Federal Reserve Board has the authority under
the Financial Institutions Supervisory Act to prevent a state member bank from
engaging in unsafe or unsound practices in conducting its business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may make, the reserves
against
deposits a bank must maintain, loans a bank makes and the collateral it takes,
the activities of a bank with respect to mergers and consolidations and the
establishment of branches. All banks in Pennsylvania are permitted to maintain
branch offices in any county of the state. Branches of state-chartered banks
may
be established only after approval by the Department. The Department is
required
to grant approval only if it finds that there is a need for banking services or
facilities such as are contemplated by the proposed branch. The Department may
disapprove the application if the bank does not have the capital and surplus
deemed necessary.
Multi-bank holding companies are permitted in Pennsylvania. See sections
entitled "Pennsylvania Banking Law" and "Interstate Banking and Branching."
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding
company or its subsidiaries, on investments in the stock or other securities of
the
bank holding company or its subsidiaries, and on taking such stock or securities
as collateral for loans. The Federal Reserve Act and Federal Reserve Board
regulations also place certain limitations and reporting requirements on
extensions
of credit by a bank to principal stockholders of its parent holding company,
among
others, and to related interests of such principal stockholders. In addition,
such
legislation and regulations may affect the terms upon which any person becoming
a principal stockholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulations of, and restrictions on,
the
business of Community Bank. It cannot be predicted whether any such legislation
will be adopted or how such legislation would affect the business of Community
Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, Community Bank's business is particularly
susceptible to the affects of federal legislation and regulations that may
increase the costs of doing business.
Under the Federal Deposit Insurance Act, the Federal Reserve Board possesses the
power to prohibit institutions regulated by it, such as Community Bank, from
engaging in any activity that would be an unsafe and unsound banking practice
and
in violation of the law. Moreover, the Financial Institutions and Interest Rate
Control Act of 1987 ("FIRA") generally expands the circumstances under which
officers or directors of a bank may be removed by the institution's federal
regulator, restricts lending by a bank to its executive officers, directors,
principal stockholders or related interests thereof, restricts management
personnel
of a bank from serving as directors or holding other management positions with
certain depository institutions whose assets exceed a specified amount or that
have
an office within a specified geographic area and restricts management personnel
from borrowing from another institution that has a correspondent relationship
with
their bank. Additionally, FIRA requires that no person may acquire control of a
bank unless the appropriate federal regulator has been given 60 days prior
written
notice and within that time has not disapproved the acquisition or extended the
period for disapproval.
Under the Bank Secrecy Act ("BSA"), Community Bank is required to report to the
Internal Revenue Service currency transactions of more than $10.0 thousand or
multiple transactions of which it is aware in any one day that aggregate in
excess
of $10.0 thousand. Civil and criminal penalties are provided under the BSA for
failure to file a required report, failure to supply information required by the
BSA or filing a false or fraudulent report.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA"), as amended, and the regulations
promulgated to implement the CRA, are designed to create a system for bank
regulatory agencies to evaluate a depository institution's record in meeting the
credit needs of its community. Until May of 1995, a depository institution was
evaluated for CRA compliance based upon twelve assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to establish new
performance-based standards for use in examining a depository institution's
compliance with the CRA. The revised CRA regulations establish new tests for
evaluating both small and large depository institutions' investments in the
community. A small bank is defined as a depository institution that has total
assets of less than $250.0 million and is independent or is an affiliate of a
holding company with less than $1.0 billion in assets. Pursuant to the revised
CRA regulations, a depository institution that qualifies as a small bank will be
examined under a streamlined procedure that emphasizes lending activities. The
streamlined examination procedures for a small bank became effective on
January 1, 1996.
A large depository institution is one that does not meet the small bank
definition
above. A large depository institution can be evaluated under one of two tests:
(i) a three-part test evaluating the institution's lending, service and
investment
performance; or (ii) a "strategic plan" designed by the institution with
community
involvement and approved by the appropriate federal bank regulator. A large
depository institution was required to choose one of these options prior to July
of 1997, but had the option to be examined under one of these two options prior
to that time. Effective January 1, 1996, a large depository institution that
opts to
be examined pursuant to a strategic plan may submit its strategic plan to the
bank
regulators for approval. In addition, the revised CRA regulations include
separate
rules regarding the manner in which "wholesale banks" and "limited purpose
banks"
will be evaluated for compliance. The new CRA regulations were phased in over a
two-year period, beginning July 1, 1995, with a final effective date of July 1,
1997.
For the purposes of the CRA regulations, Community Bank is a small bank, based
upon
financial information as of December 31, 1997, and is evaluated for CRA
compliance
using the streamlined procedures for a small bank. Community Bank received a
final
CRA compliance report from the Federal Reserve Bank of Philadelphia on
February 24, 1997. This report included notification that Community Bank
received an
"outstanding" CRA rating as of December 31, 1996. There are no conditions or
events since that notification that management believes have changed Community
Bank's rating.
CONCENTRATION
The Company and Community Bank are not dependent for deposits nor exposed by
loan
concentrations to a single customer or to a group of customers, the loss of any
one
or more of which would have a material adverse effect on the financial position
of the Company or Community Bank.
YEAR 2000 ("Y2K") COMPLIANCE: MANAGEMENT INFORMATION SYSTEMS
Management has initiated an enterprise-wide program to address the effects the
Y2K
date change will have on the Company and Community Bank. In summary, the Y2K
issue
is the 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 could result in a system failure or miscalculations
causing disruptions of operations, including, 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, was made to identify exposure to the Y2K issue.
The Company and Community Bank, dependent upon third party providers for their
data
processing software, strive to remain current in software technology. This
practice has greatly reduced exposure to the Y2K problem. A number of mission
critical software applications used by the Company and Community Bank are
currently
Y2K compliant. The major operating systems are currently either Y2K compliant
or
will be during 1998. Significant testing has been performed on all software and
hardware that is currently Y2K compliant to ensure compliance. Future testing
will
be performed during 1998 as other applications become compliant. Based on
current
assessments, the Company and Community Bank expect to spend approximately $100.0
thousand to become fully compliant. The Y2K problem is not expected to have a
material adverse affect on the Company's or Community Bank's products, services
or
competitive position. Moreover, compliance with the Y2K is not reasonably
likely
to affect the Company's or Community Bank's future financial results or cause
the
reported financial information not to be necessarily indicative of future
operating
results or financial position. The Company presently believes that with
modifications to existing software and conversions to new software, the Y2K
issue
can be mitigated. For additional information with respect to Y2K compliance,
refer
to Management's Discussion and Analysis in the Annual Report to Stockholders
filed at Exhibit 13 hereto and incorporated in its entirety by reference.
ITEM 2. PROPERTIES
The Company owns no property other than through Community Bank as follows:
Type of Approximate
Property Location Ownership Square Footage Use
________ ________ _________ ______________ ___
1 521 Main Street Owned 7,100 Banking services.
Forest City, PA
2 528 Main Street Leased 4,250 Administrative
Forest City, PA offices.
3 347 Main Street Owned 5,500 Banking services.
Simpson, PA
4 37 Dundaff Street Owned 4,300 Banking services.
Carbondale, PA
5 Lake Como Road Leased 900 Banking services.
Lakewood, PA
6 57 Main Street Owned 6,000 Banking services.
Nicholson, PA
7 Route 6 West Owned 3,500 Banking services.
Tunkhannock, PA
8 Route 106 Owned 1,300 Banking services.
Clifford, PA
9 61 Church Street Owned 3,500 Banking services.
Montrose, PA
10 Route 29 Leased 2,175 Banking services.
Eaton Township, PA
11 Route 307 Leased 1,250 Banking services.
Lake Winola, PA
12 Route 6 Leased 1,850 Banking services.
Eynon, PA
13 97 College Avenue Owned 1,850 Banking services.
Factoryville, PA
The administrative offices' property lease expires in 1998 and contains an
option
that allows for an unlimited number of additional terms of six months each. The
Lakewood property lease expires in 2001 and contains an option to renew the
lease
for an additional term of five years. The Route 29 Eaton Township and Lake
Winola
property leases expire in 2009. The Eynon property lease expires in 1999. For
information with respect to obligations for lease rentals, refer to Note 6 of
the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Stockholders filed at Exhibit 13 hereto and incorporated in its entirety by
reference.
It is management's opinion that the facilities currently utilized are suitable
and adequate for current and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The nature of the Company's and Community Bank's business generates a certain
amount of litigation involving matters arising in the ordinary course of
business.
However, in the opinion of management of the Company and Community Bank, there
are
no proceedings pending to which the Company and Community Bank are a party or to
which their property is subject, which if determined adversely, would be
material
in relation to the Company's and Community Bank's undivided profits or financial
position, nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Company and Community Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Company and Community Bank by government authorities or
others.
ENVIRONMENTAL ISSUES
There are several federal and state statutes that govern the obligations of
financial institutions with respect to environmental issues. Besides being
responsible for its own conduct under such statutes, a bank may also be held
liable
under certain circumstances for actions of borrowers or other third parties on
properties that collateralize loans held by the bank. Such potential liability
may
far exceed the original amount of the loan made by the bank. Currently,
Community
Bank is not a party to any pending legal proceedings under any environmental
statute nor is Community Bank aware of any circumstances that may give rise to
liability of Community Bank under any such statute.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company had 782 stockholders of record and 2,204,169 shares of common stock,
par value of $0.33 per share, the only authorized class of common stock
outstanding
as of February 3, 1998. The Company's common stock began trading on the NASDAQ
Stock Market ("NASDAQ") as CommBcp under the symbol "CCBP" on June 17, 1996.
Prior
to June 17, 1996, the Company's common stock was quoted on the Over-the-Counter
Electronic Bulletin Board Interdealer System. The high and low closing sale
prices
and dividends per share of the Company's common stock for the four quarters of
1997
and 1996 are summarized in the following table. Retroactive effect is given in
sale prices and dividend information for a three-for-one stock split effectuated
April 1, 1996.
<TABLE>
<CAPTION>
Dividends
High Low Declared
_______ _______ _________
<S> <C> <C> <C>
1997:
First quarter..................................... $28 $25 $.06
Second quarter.................................... 31 1/4 26 1/2 .06
Third quarter..................................... 31 3/4 28 1/4 .06
Fourth quarter.................................... $37 $29 1/2 $.12
1996:
First quarter..................................... $14 $14 $.05
Second quarter.................................... 23 3/4 14 .06
Third quarter..................................... 25 1/2 21 1/2 .06
Fourth quarter.................................... $27 1/2 $25 $.11
</TABLE>
The Company has paid cash dividends since 1983. It is the present intention of
the
Company's Board of Directors to continue the dividend payment policy, although
the
payment of future dividends must necessarily depend upon earnings, financial
position, appropriate restrictions under applicable law and other factors
relevant
at the time the Board of Directors considers any declaration of dividends. Cash
available for the payment of dividends must initially come from dividends paid
by
Community Bank to the Company. Therefore, the restrictions on Community Bank's
dividend payments are directly applicable to the Company. For information with
respect to dividend restrictions of the Company and Community Bank, refer to
Note
16 of the Notes to Consolidated Financial Statements in the Company's Annual
Report
to Stockholders filed at Exhibit 13 hereto and incorporated in its entirety by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto are filed at
Exhibit 13 hereto and are incorporated in their entirety by reference under this
Item 8.
The Company's supplementary data is filed at Exhibit 13 hereto and is
incorporated in its entirety by reference under this Item 8.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Each director of the Company is elected for a one-year term and until his
successor
is duly elected and qualified. Current directors were elected at the 1997
Annual
Meeting of Stockholders, which was held on September 12, 1997. The following
table
contains certain information with respect to the directors and executive
officers of the Company:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
FOR PAST FIVE YEARS
AGE AS OF AND POSITION HELD DIRECTOR OF
FEBRUARY 3, WITH THE COMPANY AND COMPANY/COMMUNITY
NAME 1998 COMMUNITY BANK BANK SINCE
____ ___________ ____________________ _________________
<S> <C> <C> <C>
David L. Baker 52 President and Chief 1988/1993
Executive Officer ("CEO")
of the Company and
Community Bank (as of
April 26, 1995); Senior
Vice President of
Community Bank (as of
January 20, 1993)
William F. Farber, Sr. 60 President, Farber's 1983/1970
Restaurants; Chairman of the
Boards of Directors of the
Company and Community Bank
Judd B. Fitze 45 Partner, Farr, Davis & Fitze 1995/1993
(attorney-at-law)
John P. Kameen 56 Publisher, Forest City News; 1983/1979
Secretary of the Company
Erwin T. Kost 54 President, Kost Tire & Muffler 1997/1993
William B. Lopatofsky 66 Retired 1983/1982
J. Robert McDonnell 62 Owner, McDonnell's Restaurant; 1983/1979
Vice President of the Company
Joseph P. Moore, Jr. 71 President, Elk Mountain Ski 1988/1992
Resort, Inc.; Retired President,
Moore Motors Inc. (automobile
dealership)
Theodore W. Porosky 50 Owner, Porosky Lumber Company 1997/1989
Eric Stephens 46 Auto Dealer, H.L. Stephens 1988/1993
and Son (automobile dealership)
</TABLE>
PRINCIPAL OFFICERS OF THE COMPANY
The following table sets forth selected information about the principal officers
of the Company, each of whom is elected by the Board of Directors and each of
whom holds office at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
COMPANY
HELD EMPLOYEE NUMBER OF SHARES AGE AS OF
NAME AND POSITION SINCE SINCE BENEFICIALLY OWNED FEBRUARY 3, 1998
_________________ _____ ________ __________________ ________________
<S> <C> <C> <C> <C>
David L. Baker 1995 1995(1) 11,314(3) 52
President and CEO
William F. Farber, Sr. 1983 (2) 188,820 60
Chairman of the Board
John P. Kameen 1996 (2) 20,302(4) 56
Secretary
J. Robert McDonnell 1983 (2) 33,551(5) 62
Vice President
Scott A. Seasock 1989 1989 3,128(6) 40
Senior Vice President and
Chief Financial Officer
("CFO")
Thomas E. Sheridan 1989 1985 6,260(7) 41
Senior Vice President and
Chief Operations Officer
("COO")
<FN>
(1) Prior to his appointment as President and CEO of the Company, Mr. Baker was employed by
Community Bank from 1993 to 1995 as a Senior Vice President.
(2) Messrs. Farber, Kameen and McDonnell are not employees of the Company.
(3) Includes 5,040 shares held individually; 4,800 shares held jointly with his spouse; 737
shares held under his IRA; and 737 shares held under his spouse's IRA.
(4) Includes 17,280 shares held jointly with his spouse; and 3,022 shares held jointly with other
individuals.
(5) Includes 16,272 shares held individually; 16,272 shares held individually by his spouse; and
1,007 shares held individually by his son.
(6) Includes 831 shares held jointly with his spouse; 1,531 shares held jointly with his spouse
and sons; 101 shares held as custodian for his sons under the Uniform Gift to Minors Act; and
665 shares held under his IRA.
(7) Includes 1,777 shares held jointly with his spouse; 4,080 shares held jointly with his
father; 211 shares held under his IRA; and 192 shares held under his spouse's IRA.
</TABLE>
PRINCIPAL OFFICERS OF COMMUNITY BANK
The following table sets forth selected information about the principal officers
of Community Bank, each of whom is elected by the Board of Directors of
Community
Bank and each of whom holds office at the discretion of Community Bank's Board
of Directors:
<TABLE>
<CAPTION>
COMMUNITY
BANK
HELD EMPLOYEE NUMBER OF SHARES AGE AS OF
NAME AND POSITION SINCE SINCE BENEFICIALLY OWNED FEBRUARY 3, 1998
_________________ _____ _________ __________________ ________________
<S> <C> <C> <C> <C>
David L. Baker 1995 1993 11,314(1) 52
President and CEO
Thomas M. Chesnick 1989 1952 28,200(2) 63
Vice President, Cashier and
Assistant Secretary
Scott A. Seasock 1993 1993 3,128(3) 40
Senior Vice President and
CFO
Thomas E. Sheridan 1989 1985 6,260(4) 41
Senior Vice President and
COO
<FN>
(1) See footnote (3) under the above caption entitled "Principal Officers of the Company."
(2) Includes 17,820 shares held jointly with his spouse; and 10,380 shares held jointly with
various relatives.
(3) See footnote (6) under the above caption entitled "Principal Officers of the Company."
(4) See footnote (7) under the above caption entitled "Principal Officers of the Company."
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires the Company's officers
and
directors, and persons who own more than 10.0 percent of the registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and persons who own more than 10.0
percent of the Company's stock are required by the SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written
representations from certain reporting persons that no Form 5 was required for
any
of those persons, the Company believes that during the period January 1, 1997,
through December 31, 1997, its officers and directors were in compliance with
all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for services in
all
capacities to the Company and Community Bank for the fiscal years ended December
31, 1997, 1996 and 1995, to David L. Baker, President and CEO of the Company and
Community Bank. No other officer's total annual salary and bonus exceeded
$100.0 thousand during the fiscal years reported.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
Other
Name and Annual Restricted All Other
Principal Compensa- Stock Options LTIP Compensa-
Position Year Salary($) Bonus($) tion($) Award(s) /SARs Payouts tion($)
____________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David L. Baker
President and
CEO (1) 1997 111,401 18,700 3,346(2) -0- -0- -0- -0-
1996 101,029 10,000 3,012(2) -0- -0- -0- 27,958(3)
1995 84,666 6,000 1,632(2) -0- -0- -0- -0-
<FN>
(1) Mr. Baker was named President and CEO of the Company and Community Bank effective April
26, 1995. Prior to such time, Mr. Baker was a Senior Vice President of Community Bank.
(2) Represents the contribution Community Bank made on behalf of Mr. Baker pursuant to the
profit sharing plan. Aggregate perquisites and other personal benefits were less than
10.0 percent of the salary and bonus reported, and therefore, need not be presented.
(3) Represents the payout from the discontinuance of the Company's deferred compensation
plan for certain senior management employees.
</TABLE>
PENSION PLAN
Community Bank has a profit sharing plan ("Plan"), which covers all employees
who
have completed 1.0 thousand hours of service, attained 21 years of age and have
been employed by Community Bank for at least one year. The entry date of an
employee into the Plan is January 1 of the year following the satisfaction of
the
eligibility requirements. Normal retirement age is 65. The normal retirement
benefit is the accumulated account balance of annual contributions, investment
income and forfeitures. The annual contribution is determined by the Board of
Directors each year. Contributions are allocated to each participant based on a
pro-rata share of compensation covered under the Plan. Investment income is
allocated to each participant based on a pro-rata share of the account balances
accumulated at the beginning of the year. Forfeitures are allocated to each
participant based on a pro-rata share of compensation covered under the Plan.
If a participant separates from service prior to retirement, the participant
will be
entitled to a portion of the profit sharing account based on years of service
according to the following schedule:
Years of Service Vested Interest
________________ _______________
Less than 1 0%
1 10
2 20
3 30
4 40
5 60
6 80
7 or more 100%
A participant is always 100.0 percent vested in pension plan transferred
balances.
During 1997, $67,890 was allocated among the participants' accounts for the
Plan.
The amount contributed by Community Bank in 1997 to the Plan for Mr. Baker, the
President and CEO of the Company and Community Bank, was $3,346. Mr. Baker had
eleven years of credited service under the Plan.
COMPENSATION OF DIRECTORS
During 1997, Mr. Baker, an officer of the Company and Community Bank, sat on the
Company's and Community Bank's Board of Directors and various committees of
Community Bank. Mr. Baker received no fees for his services on such committees
or for his services on the Company's or Community Bank's Board of Directors.
All members of the Company's Board of Directors, including Mr. Farber, the
Chairman
of the Company, received a fee of $500 per month for 1997. Aggregate fees paid
by
the Company in 1997 totaled $48,000. Except for Mr. Farber, members of
Community
Bank's Board of Directors received a fee of $1,000 per month in 1997. Mr.
Farber,
as Chairman of Community Bank, received a fee of $3,000 per month for January
through November of 1997. Effective December 1, 1997, Mr. Farber's fee was
increased to $3,500 per month. In addition, all members of Community Bank's
Board
of Directors, including Mr. Farber, received a year-end bonus of $1,500.
Aggregate directors' fees paid by Community Bank in 1997 were $201,500.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Board of Directors of the Company is responsible for the governance of the
Company and its subsidiary, Community Bank. In fulfilling its fiduciary duties,
the Board of Directors acts in the best interests of the Company's stockholders,
customers and the communities served by the Company and Community Bank. To
accomplish the strategic goals and objectives of the Company, the Board of
Directors engages competent persons who undertake to accomplish these objectives
with integrity and in a cost-effective manner. The compensation of these
individuals is part of the Board of Directors' fulfillment of its duties to
accomplish the Company's strategic mission. Community Bank provides
compensation to the employees of the Company and Community Bank.
The fundamental philosophy of the Company's and Community Bank's compensation
program is to offer competitive compensation opportunities for all employees
based
on each individual's contribution and personal performance. The compensation
program is administered by the Executive Compensation Committee ("Committee")
comprised of two outside directors and three members of the Company's Board of
Directors listed in the section "Principal Officers," thereto. The objective of
the Committee is to establish a fair compensation policy to govern executive
officers' base salaries and incentive plans to attract and motivate competent,
dedicated and ambitious managers whose efforts will enhance the products and
services of the Company, the results of which will be improved profitability,
increased dividends to our stockholders and subsequent appreciation in the
market value of our stock.
The compensation of the Company's and Community Bank's top executives is
reviewed
and approved annually by the Board of Directors. The top executives whose
compensation is determined by the Committee include the CEO and all other
executive
management. As guidance for review in determining base salaries, the Committee
uses information composed from a Pennsylvania bank peer group. This bank peer
group is different than the peer group utilized for the performance chart.
Pennsylvania peer group banks have been utilized because of common industry
issues and competition for the same executive talent group.
CEO COMPENSATION
The Board of Directors has determined that the President and CEO's 1997
compensation of $130,101 was appropriate in light of the Company's 1997
performance
accomplishments. There is no direct correlation, however, between the President
and CEO's compensation and the Company's performance, nor is there any weight
given
by the Committee to any specific individual criteria. Such 1997 compensation
was
based on the Committee's subjective determination after review of all
information that it deemed relevant.
EXECUTIVE OFFICERS
Compensation for the Company's and Community Bank's executive officers is
determined by the Committee based on its subjective analysis of the individual's
contribution to the Company's strategic goals and objectives. In determining
whether strategic goals have been achieved, the Board of Directors considers the
Company's performance as measured by, among numerous other factors, the
following:
(i) earnings; (ii) revenues; (iii) return on assets; (iv) return on equity; (v)
market share; (vi) total assets; and (vii) nonperforming loans. Although the
performance and increases in compensation are measured in light of these
factors,
there is no direct correlation between any specific criterion and the employees
compensation, nor is there any specific weight provided to any such criteria in
the
Committee's analysis. The determination by the Committee is subjective after
review of all information, including the above, it deems relevant.
Total compensation opportunities available to the employees of the Company and
Community Bank are influenced by general labor market conditions, the specific
responsibilities of the individual and the individual's contributions to the
Company's success. Individuals are reviewed annually on a calendar year basis.
The Company strives to offer compensation that is competitive with that offered
by
employers of comparable size in the banking industry. Through these
compensation
policies, the Company strives to meet its strategic goals and objectives to its
constituents and provide compensation that is fair and meaningful to its
employees.
Submitted by the Executive Compensation Committee
William F. Farber, Sr.
Judd B. Fitze
John P. Kameen
J. Robert McDonnell
Joseph P. Moore, Jr.
STOCK PERFORMANCE GRAPH AND TABLE
Set forth below is a line graph comparing the cumulative total stockholder
return
on the Company's common stock, based on the market price change and assuming
reinvestment of dividends, with the cumulative total return of the NASDAQ Stock
Market (US Companies) Index and the Mid-Atlantic Bank Stocks Index (Delaware,
Maryland, New Jersey, New York, Pennsylvania and Washington D.C. Companies)
during
the five-year period ended December 31, 1997. The stockholder return shown on
the
graph and table below is not necessarily indicative of future performance. As
previously mentioned, the Company's common stock began trading on NASDAQ under
the symbol "CCBP" on June 17, 1996.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
_____ _____ _____ _____ _____ _____
<S> <C> <C> <C> <C> <C> <C>
- --------- Comm Bancorp, Inc............................. 100.0 128.9 174.7 186.3 353.8 489.8
Total Returns Index for
NASDAQ Stock Market
(US Companies)................................ 100.0 114.8 112.2 158.7 195.2 239.5
Total Returns Index for
Mid-Atlantic Bank Stocks...................... 100.0 116.3 113.0 180.9 259.7 369.0
<FN>
NOTES:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indices are reweighed daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/31/92.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL OWNERS
The following table sets forth information, as of February 3, 1998, related to
each
person of record who owns or who is known by the Board of Directors to be the
beneficial owner of more than 5.0 percent of the outstanding common stock.
Included are the name, address, number of shares beneficially owned by such
person and the percentage of the outstanding common stock so owned.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES BENEFICIALLY COMMON STOCK
NAME AND ADDRESS OWNED(1) BENEFICIALLY OWNED
________________ ___________________ ______________________
<S> <C> <C>
Joseph P. Moore, Jr. 219,772(2) 9.97%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 188,820 8.57%
Crystal Lake Road
R.R. 1, Box 1281
Carbondale, PA 18407
Estate of Robert T. Seamans, Deceased 126,974 5.76%
P.O. Box 462
Factoryville, PA 18419
Gerald B. Franceski 123,470(3) 5.60%
Lewis Lake, P.O. Box 88
Union Dale, PA 18470
<FN>
(1) The shares "beneficially owned" by an individual are determined in accordance with the
definitions of "beneficial ownership" set forth in the General Rules and Regulations of the
SEC. Included may be shares owned by or for the individual's spouse and minor children and
any other relative who has the same home, as well as shares to which the individual has or
shares voting or investment power or has the right to acquire beneficial ownership within 60
days after February 3, 1998. Beneficial ownership may be disclaimed as to certain of the
shares.
(2) Includes 30,518 shares held individually; 6,358 shares held in the Moore Motors, Inc. Profit
Sharing Plan, an automobile dealership of which he was President; and 182,896 shares held by
Moore & Company, which are held in trust for his various relatives.
(3) Includes 77,650 shares held jointly with his spouse; 26,680 shares held jointly in various
combinations with relatives; and 19,140 shares held individually by his spouse.
</TABLE>
BENEFICIAL OWNERSHIP BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth as of February 3, 1998, the amount and percentage
of the common stock beneficially owned by each director and all officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL AMOUNT AND NATURE OF PERCENT
OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1)(2)(3) OF CLASS(4)
____________________ _____________________________ ___________
<S> <C> <C>
David L. Baker 11,314(5) ----
William F. Farber, Sr. 188,820 8.57%
Judd B. Fitze 11,786(6) ----
John P. Kameen 20,302(7) ----
Erwin T. Kost 8,917(8) ----
William B. Lopatofsky 25,410(9) 1.15%
J. Robert McDonnell 33,551(10) 1.52%
Joseph P. Moore, Jr. 219,772(11) 9.97%
Theodore W. Porosky 3,586(9) ----
Scott A. Seasock 3,128(12) ----
Thomas E. Sheridan 6,260(13) ----
Eric Stephens 7,000(14) ----
All Executive Officers and Directors
of the Company as a Group
(10 Directors, 6 Officers,
12 Persons in Total) 539,846 24.49%
<FN>
(1) Does not include any common stock held in fiduciary accounts under the control of the Trust
Department of Community Bank.
(2) See footnote (1) under the above caption entitled "Principal Owners."
(3) Information furnished by the Executive Officers, Directors and the Company.
(4) Less than 1.0 percent unless otherwise indicated.
(5) See footnote (3) under the above caption entitled "Principal Officers of the Company."
(6) Includes 9,067 shares held jointly with his spouse; and 2,719 shares held under his IRA.
(7) See footnote (4) under the above caption entitled "Principal Officers of the Company."
(8) Includes 4,464 shares held individually; and 4,453 shares held jointly with his spouse.
(9) Held jointly with his spouse.
(10)See footnote (5) under the above caption entitled "Principal Officers of the Company."
(11)See footnote (2) under the above caption entitled "Principal Owners."
(12)See footnote (6) under the above caption entitled "Principal Officers of the Company."
(13)See footnote (7) under the above caption entitled "Principal Officers of the Company."
(14)Includes 5,380 shares held individually; 900 shares held individually by his spouse; and 720
shares held individually by his children.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described in the paragraph below, there have been no material
transactions between the Company and Community Bank, nor any material
transactions
proposed, with any director or executive officer of the Company and/or Community
Bank or any associate of the foregoing persons. The Company and Community Bank
have had financial transactions in the ordinary course of business with
directors
and officers of the Company and Community Bank. The Company and Community Bank
intend to continue to have banking and financial transactions in the ordinary
course of business with directors and officers of the Company and Community Bank
and their associates on substantially the same terms, including interest rates
and
collateral, as those prevailing from time to time for comparable transactions
with
other persons. Total loans outstanding from Community Bank as of December 31,
1997, to the Company's and Community Bank's executive officers and directors as
a
group, members of their immediate families and companies in which they had an
ownership interest of 10.0 percent or more was $3,618,087, or approximately 10.0
percent of the total equity capital of the Company. Loans to such persons were
made in the ordinary course of business and were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Community Bank leased its Carbondale branch from William F. Farber, Sr., the
Chairman of the Boards of Directors of the Company and Community Bank. The
lease,
which commenced in October 1988, was scheduled to expire in 1998 and contained
an
option that allowed Community Bank to purchase the property at fair market value
or renew the lease for two additional terms of five years each. At the end of
the
first quarter of 1997, Community Bank purchased such property for the sum of
$600.0
thousand. Community Bank received a certified appraisal prior to this
transaction
from a qualified commercial realtor stating that the fair market value of such
property exceeded $600.0 thousand. Community Bank paid Mr. Farber lease
payments of $6,020 per month totaling $18,060 for the first three months of
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The Company's consolidated financial statements and notes thereto as
well
as the applicable reports of the independent certified public accountants are
filed
at Exhibit 13 hereto and are incorporated in their entirety by reference under
this Item 14(a)1.
2. All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. The exhibits required by Item 601 of Regulation S-K are included under Item
14(c) hereto.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the quarter ended
December 31, 1997.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
__________________________ ______________________
2 None.
3 Articles of Incorporation, amended
as of September 18, 1997.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended
December 31, 1997.
16 None.
18 None.
21 List of Subsidiaries of the Company.
22 None.
23 None.
24 None.
27 None.
28 None.
99 None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
COMM BANCORP, INC.
(REGISTRANT)
BY:/s/ David L. Baker March 10, 1998
__________________
David L. Baker, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Capacity Date
/s/ David L. Baker March 10, 1998
________________________________
David L. Baker, President and
Chief Executive Officer/Director
(Principal Executive Officer)
/s/ John B. Errico March 10, 1998
________________________________
John B. Errico, Comptroller
/s/ William F. Farber, Sr. March 10, 1998
________________________________
William F. Farber, Sr.,
Chairman of the Board/Director
/s/ Judd B. Fitze March 10, 1998
________________________________
Judd B. Fitze, Director
/s/ Stephanie A. Ganz March 10, 1998
________________________________
Stephanie A. Ganz, VP of Finance
(Principal Accounting Officer)
/s/ John P. Kameen March 10, 1998
_________________________________
John P. Kameen, Secretary/Director
/s/ Erwin T. Kost March 10, 1998
_________________________________
Erwin T. Kost, Director
/s/ William B. Lopatofsky March 10, 1998
_________________________________
William B. Lopatofsky, Director
/s/ J. Robert McDonnell March 10, 1998
_________________________________
J. Robert McDonnell,
Vice President/Director
/s/ Joseph P. Moore, Jr. March 10, 1998
_________________________________
Joseph P. Moore, Jr., Director
/s/ Theodore W. Porosky March 10, 1998
_________________________________
Theodore W. Porosky, Director
/s/ Scott A. Seasock March 10, 1998
__________________________________
Scott A. Seasock, Chief Financial
Officer (Principal Financial Officer)
/s/ Eric Stephens March 10, 1998
__________________________________
Eric Stephens, Director
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
___________ ___________ ____
3 Articles of Incorporation, amended
as of September 18, 1997 43
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended
December 31, 1997 49
21 List of Subsidiaries of the Company 230
EXHIBIT 3
ARTICLES OF INCORPORATION, AMENDED AS OF SEPTEMBER 18, 1997
COMM BANCORP, INC.
AMENDED ARTICLES OF INCORPORATION
AS OF SEPTEMBER 18, 1997
1. Corporation's Name
The name of the corporation is Comm Bancorp, Inc.
2. Corporation's Address
The address of this corporation's current registered office in this
Commonwealth and the
county of venue is 521 Main Street, Forest City, Pennsylvania 18421,
Susquehanna County.
3. Incorporation
This corporation is incorporated under the provisions of the Business
Corporation Law of 1933, as amended.
4. Number of Shares
The aggregate number of shares which the corporation shall have
authority to issue is twelve
million (12,000,000) shares of Common Stock of the par value of
thirty-three cents ($.33) per share (the "Common Stock").
5. Incorporator's Names and Addresses
The name and address of each incorporator and the number and class of
shares subscribed to
by each incorporator is: Gerald B. Franceski, 519 Lackawanna Street,
Forest City,
Pennsylvania 18421, 1 share Common Stock; William F. Farber, Sr.,
Box 492, R.D.#1,
Carbondale, Pennsylvania 18407, 1 share Common Stock; and Michael
Sterchak, D.D.S., 413 Main
Street, Forest City, Pennsylvania 18421, 1 share Common Stock.
6. Existence Term
The term of existence of this corporation is perpetual.
7. Articles Effective Date
These articles of incorporation are to be effective on the date of
filing with the Department
of State of the Commonwealth of Pennsylvania.
8. Cumulative Voting Rights
Cumulative voting rights shall not exist with respect to the election
of directors.
9. Opposition of Tender (or other offer)
A. The Board of Directors may, if it deems it advisable, oppose a
tender, or other offer for
the corporation's securities, whether the offer is in cash or in
securities of a
corporation or otherwise. When considering whether to oppose an
offer, the Board of
Directors may, but it is not legally obligated to, consider any
pertinent issues; by way
of illustration, but not of limitation, the Board of Directors
may, but shall not be
legally obligated to, consider any and all of the following:
(1) Whether the offer price is acceptable based on the historical
and present operating
results or financial condition of the corporation.
(2) Whether a more favorable price could be obtained for the
corporation's securities
in the future.
(3) The impact which an acquisition of the corporation would
have on its employees,
depositors and customers of the corporation and its
subsidiaries in the community
which they serve.
(4) The reputation and business practices of the offeror and its
management and
affiliates as they would affect the employees, depositors and
customers of the
corporation and its subsidiaries and the future value of the
corporation's stock.
(5) The value of the securities, if any, which the offeror is
offering in exchange for
the corporation's securities, based on an analysis of the
worth of the corporation
as compared to the corporation or other entity whose
securities are being offered.
(6) Any antitrust or other legal and regulatory issues that are
raised by the offer.
B. If the Board of Directors determines that an offer should be
rejected, it may take any
lawful action to accomplish its purpose including, but not
limited to, any and all of the
following: advising shareholders not to accept the offer;
litigation against the offeror;
filing complaints with all governmental and regulatory
authorities; acquiring the
authorized but unissued securities or treasury stock or granting
options with respect
thereto; acquiring a company to create an antitrust or other
regulatory problem for the
offeror; and obtaining a more favorable offer from another
individual or entity.
10. Classification of Directors
Directors will all be placed into one classification. Each
director shall serve until his
or her successor shall have been elected and shall qualify, even
though his or her term
of office as herein provided has otherwise expired, except in the
event of his or her
earlier resignation, removal or disqualification. As adopted at
the present time an
individual shall be able to serve as director until the completion
of the year in which
he or she has attained the age of seventy-two (72), except for
those directors previously
covered by the 80-year old policy.
11. Filling of Vacancies in Board of Directors Caused by Increase in
Number of Directors
Any directorship to be filled by reason of an increase in the
number of directors may be
filled by the Board of Directors. The Board of Directors shall
specify the class in which
a director so elected shall serve. Any director elected by the
Board of Directors shall
hold office only until the next annual meeting of the shareholders
and until his successor
shall have been elected and qualified; notwithstanding that the
term of office of the
other directors in the class of which he is a member does not
expire at the time of such
meeting. His successor shall be elected by the shareholders to a
term of office which
shall expire at the same time as the term of office of the other
directors in the class to which he is elected.
12. Number of Directors
The Board of Directors shall consist of not less than five (5) nor
more than twenty-five
(25) shareholders, the exact number to be fixed and determined
from time to time by
resolution of a majority of the shareholders at any annual or
special meeting thereof.
13. Preemptive Rights
No holder of shares of any class or of any series of any class
shall have any preemptive
right to subscribe for, purchase or receive any shares of the
corporation, whether now or
hereafter authorized, or any obligations or other securities
convertible into or carrying
options to purchase any such shares of the corporation, or any
options or rights to
purchase any such shares or securities, issued or sold by the
corporation for cash or any
other form of consideration, and any such shares, securities or
rights may be issued or
disposed of by the Board of Directors to such persons and on such
terms as the Board in
its discretion shall deem advisable.
14. Indebtedness
The corporation shall have authority to borrow money and the Board
of Directors, without
the approval of the shareholders and acting within their sole
discretion, shall have the
authority to issue debt instruments of the corporation upon such
terms and conditions and
with such limitation as the Board of Directors deems advisable.
The authority of the
Board of Directors shall include, but not be limited to, the power
to issue convertible debentures.
15. Indemnification
Every person who is or was a director, officer, employee, or agent
of the corporation, or
of any corporation which he served as such at the request of the
corporation, shall be
indemnified by the corporation to the fullest extent permitted by
law against all expenses
and liabilities reasonably incurred by or imposed upon him, in
connection with any
proceeding to which he may be made, or threatened to be made, a
party, or in which he may
become involved by reason of his being or having been a director,
officer, employee or
agent of the corporation, or of such other corporation, whether or
not he is a director,
officer, employee or agent of the corporation or such other
corporation at the time the
expenses or liabilities are incurred.
16. Shareholder Action
No merger, consolidation, liquidation or dissolution of the
Corporation nor any action
that would result in the sale or other disposition of all or
substantially all of the
assets of the Corporation (the foregoing transactions referred to
collectively as a
"Fundamental Transaction") shall be valid unless approved by the
affirmative vote of the
holders of at least seventy-five percent (75%) of the outstanding
shares of Common Stock;
provided, however, that if the Corporation shall be the surviving
or continuing entity to
a Fundamental Transaction, then, in such case, the Fundamental
Transaction shall be valid
by the approval of the affirmative vote of the holders of a
majority of the outstanding
shares of the Common Stock. This Article 16 may not be amended
unless first approved by
the affirmative vote of the holders of at least seventy-five
percent (75%) of the outstanding shares of Common Stock.
EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
Comm Bancorp, Inc.
CONTENTS
INTRODUCTION
51 Consolidated Financial Highlights
52 President's Message to Stockholders
55 New Developments
58 Consolidated Selected Financial Data
MANAGEMENT'S DISCUSSION AND ANALYSIS
59 Forward-Looking Discussion
60 Operating Environment
71 Review of Financial Position
129 Review of Financial Performance
CONSOLIDATED FINANCIAL STATEMENTS
148 Independent Auditors' Report
149 Consolidated Statements of Income
150 Consolidated Balance Sheets
151 Consolidated Statements of Changes in
Stockholders' Equity
152 Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
153 Summary of significant accounting policies
167 Cash and cash equivalents
167 Investment securities
172 Loans, nonperforming assets and allowance for
loan losses
176 Commitments, concentrations and contingent
liabilities
178 Premises and equipment, net
179 Other assets
180 Deposits
181 Short-term borrowings
182 Long-term debt
183 Fair value of financial instruments
183 Litigation recovery
183 Employee benefit plans
184 Income taxes
186 Parent Company financial statements
187 Regulatory matters
192 Summary of quarterly financial information
(unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS
1996 VERSUS 1995
193 Operating Environment
196 Review of Financial Position
216 Review of Financial Performance
DIRECTORS AND OFFICERS
222 Board of Directors and Corporate Officers
223 Advisory Boards
224 Officers
225 Locations
226 Glossary of Terms
229 Stockholder Information
COMM BANCORP, INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C>
FINANCIAL POSITION:
Assets................................................... $381,811 $354,812 $350,948
Investment securities.................................... 105,666 101,994 108,706
Net loans................................................ 246,429 231,859 209,932
Deposits................................................. 332,381 320,456 317,099
Stockholders' equity..................................... $ 36,102 $ 31,256 $ 27,895
FINANCIAL PERFORMANCE:
Interest income.......................................... $ 26,142 $ 25,059 $ 26,467
Interest expense......................................... 14,068 13,550 14,994
Net interest income...................................... 12,074 11,509 11,473
Net income............................................... 4,400 4,200 200
Dividends declared....................................... $ 659 $ 623 $ 462
FINANCIAL RATIOS:
Return on average total assets........................... 1.22% 1.21% 0.06%
Return on average stockholders' equity................... 13.40 14.57 0.77
Tier I capital ratio..................................... 15.69 15.42 14.23
Total capital ratio...................................... 16.94 16.68 15.49
Leverage ratio........................................... 8.56 8.30 6.95
Allowance for loan losses to loans, net.................. 1.52% 1.67% 1.83%
PER SHARE DATA:
Net income............................................... $ 2.00 $ 1.91 $ 0.09
Cash dividends declared.................................. 0.30 0.28 0.21
Stockholders' equity..................................... $ 16.39 $ 14.21 $ 12.68
</TABLE>
Comm Bancorp, Inc. is a bank holding company
incorporated under the laws of Pennsylvania.
Headquartered in Forest City, Pennsylvania, Comm
Bancorp, Inc. serves four counties through twelve
community banking offices. Each office interdependent
with the community offers a comprehensive array of
financial products and services to individuals,
businesses, not-for-profit organizations and government
entities.
Comm Bancorp, Inc. is an equal opportunity employer.
All employees and applicants for employment are treated
without regard to age, race, color, sex, religion,
national origin, disability or veteran status.
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS
Your Company experienced a year of continued growth and excellent earnings
in 1997. We acquired two offices from First Union National Bank, one
located in Eynon, Pennsylvania and the other in Factoryville, Pennsylvania.
This extended our market into areas that conform with our long-term
expansion plans. We expect to continue our expansion in 1998. We
accomplished a great deal in 1997, but have much more to achieve in 1998.
We are proud to report earnings of $4.4 million or $2.00 per share, an
increase of $200 thousand above 1996. Interest earned and fees paid on
loans, coupled with a settlement from a prior relationship with a
securities broker, were major contributors to our improved performance.
Loan volumes increased from $235.8 million in 1996 to $250.2 million in
1997. We also increased your dividend from $0.28 per share in 1996 to
$0.30 per share in 1997. For 1997, the Company's market value per share
began the year at $26.25 and closed the year at $36.00.
The acquisition of the Eynon and Factoryville branches aided the Company's
overall growth. All indications are that we have been favorably received
in both market areas. We provided a smooth transition by keeping both
branches staffed with personnel familiar to the customer base. It appears
that both branches are excellent additions to our banking network.
As you may know, we have purchased land in the Clarks Summit area for
construction of a community office facility and centralized administrative
center. This project will centralize several divisions within the Company,
promoting improved efficiency and effectiveness.
In order to keep pace and remain competitive in the ever-changing financial
markets, our Trust and Financial Services Division has implemented some
investment-related products in addition to the existing trust, estate
planning and retirement plan services. For many years we have used mutual
fund products and investments in our Trust customers' portfolios. As a new
service, we are now making available these same mutual fund programs on a
"no-load" basis to all of our new and existing customers. In conjunction
with a prominent insurance company with an AM Best rating of A/A+
(Excellent), we now offer fixed-rate annuity products. This program allows
you to earn a very attractive rate of interest on a tax-deferred basis to
supplement existing investment/retirement portfolios. For customers who
want to choose their own stock investments, we offer a full-service
Discount Brokerage Program. Our program provides substantial
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)
savings by reducing commissions normally charged for these transactions.
In January of 1998, we upgraded our Trust software for improved reporting
and recordkeeping as well as bringing the Trust Department into Year 2000
compliance.
The Year 2000 issue was a very hot topic in 1997. The regulators have been
especially interested in how companies plan to make banking operations Year
2000 compliant. Your Company has made great strides in bringing your bank
into the next millennium.
In early 1997, we asked our employees to evaluate every aspect of their
jobs to determine possible Year 2000 complications. This included
everything from rubber stamps, documents, computer software and customer
documents to vault lock and security systems. We feel that most of the
major issues have at least been identified if not already addressed. It is
our intention to take our findings and help our customers to identify
possible Year 2000 problems by conducting a series of Year 2000 awareness
seminars. It is our goal to alleviate any potential problems for your
Company and to provide our customers with as much information as possible
regarding the Year 2000 prior to the end of 1999.
In May of 1997, we brought our processing system into Year 2000 compliance
by installing a new processor. Other benefits of the processor include:
(i) faster processing of daily items; (ii) increased disk space for optical
storage; and (iii) faster retrieval time of stored items. The larger
system can also expand as the Company grows. Future system software
upgrades should bring our complete operations system to Year 2000
compliance. This is important as our operations system is a very mission
critical area. In June of 1997, we offered our customers the option to
receive their deposit statements on a CD-ROM disk with retrieval software
for convenience and easy reconciliation. Branch improvements included a
third drive-thru lane and new ATM machine in our Carbondale office and an
ATM machine for our Lake Winola office. Until the ATM was installed at the
Lake Winola office, the closest machine was in Tunkhannock, which is over
ten miles away.
Our employees completed an extensive Customer Service Sales and Excellence
Program in 1997. Our employees were taught techniques to identify
customers' needs and to meet them through our products and services.
Managers went through a School of Sales Management. They were taught
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)
various approaches to motivate their staff to maximize the service quality
that we worked hard to create at the Company.
We continued to strengthen and solidify our commitment to the communities
we serve in 1997. Charitable donations throughout our area exceeded $50
thousand. Recipients included, among others, Special Olympics, the United
Way, local school districts and fire companies and anti-drug programs. I
would be remiss if I did not mention the countless hours of volunteer
efforts by many Company employees and staff with such organizations as
Lions, Kiwanis, Rotary and Junior Achievement as well as many others.
To continue enthusiasm for our, "Save for America Program," highlighted in
our 1996 Annual Report, in June of 1997 we promoted a "Millionaire for a
Day" program. This included depositing $1.0 million in a selected
student's account. The lucky student was treated to a limousine ride home
from school after enjoying an ice cream social with his classmates. The
student was allowed to keep the interest that accrued in the account during
the day. An important lesson on saving for the future was reinforced for
all participants.
In January of 1998, we initiated our World Wide Web Page. The site not
only gives our customers and potential customers rate information and
branch locations, but also explains deposit and loan procedures. As a
stockholder you can view limited financial data and get quotes on the
Company's stock. The address of the website is WWW.COMBK.COM. We also
envision a Wide Area Network ("WAN") in the near future. The WAN will
improve branch communication and provide a backbone for voice over data,
items imaging transmission, E-mail and future document imaging for loan and
customer service documentation. The Clarks Summit project is essential for
this WAN.
On behalf of the Board of Directors and the employees of the Company, I
would like to thank your for your support and trust. We will endeavor to
continue to enhance your investment while serving the needs of our
customers. In closing, I would like to encourage the stockholders to
thoroughly review this Annual Report. As always, if you have any questions
please do not hesitate to contact us.
Sincerely,
/s/ David L. Baker
______________________________________
David L. Baker
President and Chief Executive Officer
COMM BANCORP, INC.
NEW DEVELOPMENTS
CORPORATE IDENTITY:
Community is a simple concept. It is where we work, where we live and
where we call home. As a conscientious community organization, the Company
is a helper, a leader and a dutiful entity. Although we perform many
roles, the Company is about knowing you can depend on us, about being a
part of our family. Large or small, business or individual, each member of
the Company family is as unique as they are important. Because we know the
Company has assimilated into your daily life, we recognize how important we
are to one another. As we reflect on the successes of 1997 and move into
1998, we do so with an understanding that our shared successes rely on the
maintenance of this relationship and our ability to blend the "human
element" within our daily operations, an important characteristic in this
increasingly technological age.
It is because of this message, and the ever-increasing competitiveness of
the market, that we have defined a need for an easily-identifiable,
familiar and friendly corporate identity. Because we, the Company family,
are a part of your everyday life, we are proud to introduce our new logo to
you, the new face of the Company, "Shining Through Your Life."
BREAKING NEW GROUND
As the achievements of 1997 reinforced the Company's position as a
financially-sound enterprise, officers of the Company initiated plans to
solidify our strategy to deliver earnings improvement to our stockholders
by strengthening our commitment to geographic diversity. Just as 1997 will
be known for our unity with you, our stockholders, our customers and our
employees, 1998 will be known for "breaking new ground."
Plans are underway to build a new 24,000 square foot administrative center
in Clarks Summit, Pennsylvania. This administrative center will enable the
organization to compete with other technologically-forward entities while
further extending the Company's reach into the communities we serve. With
the development of more competitive relationships in new customer markets,
the Company looks forward to uniting with the people of these communities
to expand our customer base while serving you as your hometown, community
bank.
COMM BANCORP, INC.
NEW DEVELOPMENTS (CONTINUED)
UNITY 1997
Working together. Sharing dreams. Touching lives. This is the essence of
the Company. Simply stated, we believe in helping people.
Every day, we work hand-in-hand with individuals and businesses to shape
futures and share successes. With a history of commitment to community, we
experience first-hand the value of this enterprise. By offering consumer,
commercial, trust and annuity products, the Company is dedicated to helping
those people we know as friends and neighbors, providing the resources to
achieve, the knowledge to prosper, the security for the future and the
commitment to community service so necessary for our continued growth. It
is this relationship with the community, this unity, that allows us to gain
financial strength, ultimately rewarding the stockholder through increased
investment performance, all while achieving stability, strength and
economic well-being for those we serve.
Welcome to your Company. We are there for you.
COMMUNITY AND THE CONSUMER SEGMENT
Because the Company is a part of everyday life, we are deeply committed to
the people of the communities we serve. Since 1934, we have been helping
our customers meet the demands of life by delivering a complete line of
quality loan and deposit products. Of the diverse line of the Company's
product offerings, mortgage and home equity loan volumes experienced strong
growth, up 6.1 percent over 1996, and have allowed us to further penetrate
local markets, emerging as a leader in this consumer segment. The ability
to locally control processing, underwriting and servicing, empowers our
customer service representatives with the ability to continue to promote
strong income improvement in the coming years.
COMMUNITY AND THE COMMERCIAL SEGMENT
The Company delivers a variety of commercial products to help businesses
prosper in today's competitive marketplace. By developing long-term
relationships with our clients, who are in varying cycles of financial
accumulation, the Company has an opportunity for enhanced cross-selling
ratios as commercial customers grow with us. Most of our commercial
customers enjoy two or more types of products. From loans for
COMM BANCORP, INC.
NEW DEVELOPMENTS (CONTINUED)
technological improvements to expansion or working capital, the Company
provides flexible terms and rates on these products while generating
competitive fee income from commercial checking and savings accounts.
TRUST, ANNUITY, MUTUAL FUNDS AND YOU
The best relationships are built on trust. Because of this, the Company
has been actively serving our communities by offering personal and
corporate trust, estate and retirement planning services since 1988.
Thousands of customers depend upon the flexible administration of
investments, disposition of property, securities, cash and real estate our
Trust Division provides. Through an agency agreement with our Trust
customers and third-party underwriting for annuities, mutual funds and
discount brokerage products, we help customers plan for a brighter future.
In 1997 alone, the Trust and Financial Services Division grew over 30.0
percent, reinforcing the Company's position as a full-service bank. By
providing this type of financial planning and management service, the
Company strengthens customer relationships. With the ability to help our
customers realize peace of mind now, and providing their families with
security for the future, the Company realizes the increased potential for
profitability we offer to our stockholders. We look to aggressively market
this division in 1998 to achieve this goal.
COMM BANCORP, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income......................................... $ 26,142 $ 25,059 $ 26,467 $ 24,991 $ 24,094
Interest expense........................................ 14,068 13,550 14,994 12,942 12,000
-------- -------- -------- -------- --------
Net interest income................................... 12,074 11,509 11,473 12,049 12,094
Provision for loan losses............................... 360 300 435 800 1,080
-------- -------- -------- -------- --------
Net interest income after provision for loan losses... 11,714 11,209 11,038 11,249 11,014
Noninterest income...................................... 1,776 1,387 (3,196) 1,005 2,571
Noninterest expense..................................... 7,956 7,383 8,194 7,949 7,852
-------- -------- -------- -------- --------
Income before income taxes............................ 5,534 5,213 (352) 4,305 5,733
Provision for income taxes.............................. 1,134 1,013 (552) 980 1,583
-------- -------- -------- -------- --------
Net income............................................ $ 4,400 $ 4,200 $ 200 $ 3,325 $ 4,150
======== ======== ======== ======== ========
CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities................................... $105,666 $101,994 $108,706 $152,566 $145,400
Net loans............................................... 246,429 231,859 209,932 190,909 173,313
Other assets............................................ 29,719 20,959 32,310 18,988 20,294
-------- -------- -------- -------- --------
Total assets.......................................... $381,811 $354,812 $350,948 $362,463 $339,007
======== ======== ======== ======== ========
Deposits................................................ $332,381 $320,456 $317,099 $316,169 $297,235
Short-term borrowings................................... 9,575 15,956 9,141
Long-term debt.......................................... 44 46 3,048 5,050 5,800
Other liabilities....................................... 3,709 3,054 2,906 2,599 2,324
Stockholders' equity.................................... 36,102 31,256 27,895 22,689 24,507
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity............ $381,811 $354,812 $350,948 $362,463 $339,007
======== ======== ======== ======== ========
PER SHARE DATA:
Net income.............................................. $ 2.00 $ 1.91 $ 0.09 $ 1.51 $ 1.89
Cash dividends declared................................. 0.30 0.28 0.21 0.21 0.20
Stockholders' equity.................................... $ 16.39 $ 14.21 $ 12.68 $ 10.31 $ 11.14
Cash dividends declared as a percentage of net income... 14.97% 14.83% 231.00% 13.68% 10.70%
Average common shares outstanding....................... 2,200,960 2,200,080 2,200,080 2,200,071 2,199,894
SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets.............. 1.22% 1.21% 0.06% 0.95% 1.30%
Net income as a percentage of stockholders' equity...... 13.40 14.57 0.77 14.26 17.91
Stockholders' equity as a percentage of total assets.... 9.14 8.30 7.25 6.65 7.26
Tier I capital as a percentage of adjusted total assets. 8.56 8.30 6.95 7.13 6.84
Net interest income as a percentage of earning assets... 3.87 3.79 3.48 3.68 4.09
Loans, net as a percentage of deposits.................. 75.02% 69.83% 62.81% 61.01% 60.84%
SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-adjusted assets.. 15.69% 15.42% 14.23% 13.82% 13.52%
Total capital as a percentage of risk-adjusted assets... 16.94 16.68 15.49 15.68 15.49
Allowance for loan losses as a percentage of loans, net. 1.52% 1.67% 1.83% 1.84% 1.80%
Full-time equivalent employees.......................... 161 149 147 153 137
Locations............................................... 12 10 10 10 10
</TABLE>
Note: Per share information reflects the retroactive effects of a three-for-one
stock split effective April of 1996 and a four-for-one stock split effective
February of 1994. Average balances were calculated using average daily
balances. Average balances for loans include nonaccrual loans. Tax-equivalent
adjustments were calculated using the prevailing statutory rate of 34.0
percent.
Management's Discussion and Analysis appearing on the following pages
should be read in conjunction with the Consolidated Financial Statements
beginning on page 148 and Management's Discussion and Analysis 1996 versus
1995 beginning on page 193.
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-K 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 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.
OPERATING ENVIRONMENT:
The United States economy turned in an exceptional performance for 1997.
The gross domestic product, the value of goods and services produced in the
United States, grew 3.9 percent for the year, the largest annual gain since
1994. The national unemployment level, 4.7 percent at year-end, was the
lowest it has been in 25 years. The unemployment rate at the end of the
previous year was 5.3 percent. This marks the sixth consecutive annual
decline in unemployment rates. Tighter labor conditions came with a price
to businesses, as compensation rose 3.3 percent, the largest change in four
years. The average hourly wage earned by workers equaled $12.43 by year-
end 1997, a 43 cents increase over 1996. Despite the tightening in labor
markets and higher wages paid to employees, the nation's Consumer Price
Index fell to 1.9 percent in 1997, contradicting the increase normally
expected under these conditions. The nation's Producer Price Index ("PPI")
was also held in check despite the empowered economy. Wholesale prices
actually contracted for the year as the PPI fell by 1.2 percent.
Strengthened productivity growth, flat prices influenced by Asian economic
turmoil and reduced commodity market pressures helped to keep inflation and
prices subdued in 1997.
The balance of strong economic conditions and uncertainties surrounding the
Asian crisis led the Federal Reserve Open Market Committee ("FOMC") to take
limited monetary policy action throughout 1997. In March of 1997, the FOMC
made a controversial decision to raise its target rate for federal funds to
5.50 percent, the first increase in two years. The FOMC's decision was
based on its inflationary concerns over the significant economic growth
experienced during the final quarter of 1996 and the first quarter of 1997.
The economy grew 4.3 percent during the fourth quarter of 1996 followed by
a 4.9 percent increase during the first quarter of 1997. As fears over
potential inflation subsided, the FOMC made no further moves in interest
rates for the remainder of the year.
Long- and intermediate-term interest rates tumbled nationally in 1997 while
short-term rates remained relatively unchanged. The average rate on a 30-
year mortgage at the end of 1997 was 7.03 percent, down from 7.64 percent
one year earlier. Average rates on 15-year, fixed-rate mortgages fell to
6.61 percent by year-end 1997 compared to 7.16 percent for the same period
of 1996. With interest rates falling, disposable incomes rising and
consumer confidence soaring, home and business spending heightened in 1997.
For the year, mortgage loans in the United States increased 8.5 percent
over 1996, while commercial loans experienced a 9.5 percent rise over the
previous year. Not all lending areas had a positive change in 1997.
Consumer loans lagged behind, declining 2.3 percent as compared to 1996.
The outlook for 1998 remains positive, although conditions are expected to
moderate. Currently, the only perceived detriment to expansion comes from
the Asian economic crisis. If restraint from the Asian turmoil is not
sufficient to confine inflationary tendencies that might otherwise result
from the strength in domestic spending and labor markets, the FOMC may
intervene in order to control inflation. The economy is expected to grow
by 2.7 percent with inflation forecasted at 2.3 percent. These factors
should result in a continued low unemployment rate, expected to be 4.8
percent for 1998. These strong economic conditions should benefit
individuals, but higher labor costs may hinder businesses. Financial
institutions should see continued strong loan demand, but may see a slight
deterioration in asset quality. Competition for deposits will intensify,
as consumers seeking higher returns place excess personal income into stock
or mutual fund markets. However, should a downturn in these markets occur,
financial institutions may see an influx of deposits as consumers seek
safety when investing their money.
Northeastern Pennsylvania's economic performance for 1997 lagged behind
that of the nation based on lower wage gains and higher unemployment. The
average hourly earnings of a United States manufacturing worker increased
43 cents, or 3.6 percent, during 1997. For the Company's four-county
market area, the increase was 24 cents, or 2.0 percent, for a manufacturing
worker. Unemployment figures in the Company's market area were also less
favorable than those experienced for the nation and the Commonwealth of
Pennsylvania.
National, Pennsylvania and market area unemployment rates at December 31,
1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
National................................................................. 4.7% 5.3%
Pennsylvania............................................................. 4.8 4.9
Lackawanna county........................................................ 5.4 5.4
Susquehanna county....................................................... 6.3 6.6
Wayne county............................................................. 8.1 8.4
Wyoming county........................................................... 8.2% 7.9%
</TABLE>
Additionally, the civilian labor force, defined as the total number of
individuals employed and those actively seeking employment, increased by
1.6 percent for the nation and 1.2 percent for the Commonwealth during
1997. Such gains are a significant factor in increasing economic output
due to the limitations in resources based on the low unemployment
statistics. In contrast to the labor force gains for the nation and the
Commonwealth, Northeastern Pennsylvania reported its second consecutive
year of labor force decline, a 3.5 percent drop in civilian workers as
compared to 1996.
Increased business costs, sluggish productivity and an aging infrastructure
can all hinder a region's economic growth. However, a quality workforce
and location near major market areas, such as Philadelphia and New York,
can significantly influence businesses considering locating in the
Company's market area. As the Lackawanna Valley Industrial Highway
Project, begun in 1994, progresses toward completion, the infrastructure
for many of the counties served by the Company continues to improve. By
making the area more accessible, economic development and business activity
can flourish.
Legislative action was also taken by Pennsylvania Governor Tom Ridge in his
efforts to make Pennsylvania "business friendly." Tax cuts for businesses,
workers' compensation reform and utility deregulations were areas of reform
in Pennsylvania for 1997. The most notable tax reforms included: (i) the
repeal of the computer services sales and use tax; (ii) an increase in the
exemption from the capital stock and franchise tax to $125 from $100; (iii)
research and development tax credits capped at $15.0 million per year to
aid high technology employers; (iv) allowing more small businesses to
qualify as Subchapter S corporations; and (v) several state sales tax
codifications and adjustments to certain manufacturers. Due to reform laws
signed in 1993 and 1996, workers' compensation costs have fallen an average
of 25.0 percent in Pennsylvania. During the Fall of 1997, Pennsylvania
instituted deregulation in the electric industry. Under this reform,
customers from residential, commercial and industrial classes can choose
from competing suppliers of electricity. The initial phase-in of this
program involved approximately 270 thousand customers with complete phase-
in for all customers scheduled by 1999. As a result of the new projects
and revised legislation, management expects the local economy to approach
a growth rate similar to that of the nation.
As did most industries for 1997, the banking industry experienced another
highly successful year. A good indicator of this success is the
performance of the nation's top 50 commercial banks. For 1997, this group
posted earnings of $40.5 billion, an 11.9 percent increase compared to
1996. Growth of 12.8 percent in noninterest income to $81.2 billion for
1997 was the main reason for the positive earnings change. The increase in
noninterest income was primarily attributed to investment securities gains
and revenue items taken by money-center banks to partially offset weak
trading results. Net interest income for these commercial banks improved
a modest 3.0 percent, from $107.1 billion in 1996 to $110.3 billion in
1997. The sluggish growth was attributable to compression in net interest
margins. For 1997, the composite net interest margin for these banks
compressed 22 basis points.
Regional and community banks also exhibited a strong year in 1997. For the
year, median earnings per share ("EPS") for regional and community banks
grew 13.5 percent. While not as impressive as the 15.0 percent growth for
1996, the gain is still solid in light of the downward trend in net
interest margins. These banks experienced a 20 basis point decline in net
interest margins from 4.7 percent in 1996 to 4.5 percent in 1997. This
downward trend is primarily attributed to competition for loan and deposit
products coupled with a flattening yield curve. During 1997, banks
generated strong loan growth, increased fee income and improved operating
efficiencies to offset the negative effects of the narrowing margins. Fee
revenues of regional and community banks have increased to 18.0 percent
compared to 14.0 percent in 1994. This trend is due to increased deposit
and automated teller machine charges, trust and mortgage origination fees.
Additionally, these banks have improved cost containment and controls
regarding noninterest expenses. In 1994, noninterest expenses equaled 70.0
percent of regional and community bank revenues. By 1997, this ratio fell
to 60.0 percent. Net interest margins are expected to continue flattening
in 1998. Regional and community banks will need to maintain loan growth,
increase fee income and continue improving operating efficiencies in order
to keep EPS levels high in 1998.
National, regional and community banks also experienced an improvement in
asset quality during 1997. The nation's top 50 banks had nonperforming
assets of $16.2 billion at year-end 1997, marking a 9.7 percent decline
compared to 1996. For regional and community banks, the improvement is
best evidenced by the decline in the median nonperforming assets to total
assets ratio from 0.72 percent in 1996 to 0.49 percent in 1997. The
improved asset quality positions of the national, regional and community
banks are attributed to better management and controls implemented in
approving credit extensions. Asset quality conditions may deteriorate in
1998, if the Asian economic problems begin to adversely affect domestic
economic conditions. However, should consumer credit conditions improve
and the Asian crisis be held in check, asset quality conditions for 1998
may continue to improve.
Mergers, acquisitions and branch dispositions may have provided the most
significant influence on the financial services sector in 1997. Mergers
and acquisitions of financial institutions occurred at a record pace. The
number of mergers and acquisitions announced in 1997 exceeded those of 1996
while deal prices remained high. For the year, aggregate announced deal
values for banks amounted to $259.9 billion, the largest dollar volume in
history. The number of deals for Northeast commercial banks mirrored 1996
but the volume of these deals increased significantly. The aggregate
number of mergers and acquisitions for Mid-Atlantic commercial banks was 25
for 1997 and 1996, however the aggregate dollar volume of these
transactions amounted to $64.4 billion in 1997 compared to $12.8 billion in
1996. Deal prices across the nation remained high based on the elevated
market valuation of acquirors and the scarcity of certain-sized targets.
The national average price to book value for bank mergers was 2.2 times or
22.2 times annual earnings for 1997. These ratios exceeded the 1.9 times
book value and the 18.9 times annual earnings for the 1996 deals. For the
year, the Mid-Atlantic region had the highest deal price earnings multiple
at 23.3 times with the New England region having the lowest at 13.6 times.
While large commercial bank mergers were occurring at record levels,
community bank mergers reached a six-year low in 1997. There were 256
mergers of banks with assets under $500.0 million, a reduction from the 325
recorded in 1996. Despite the slowdown, the average deal price earnings
multiple increased to 18.8 times annual earnings compared to 16.5 times
annual earnings for 1996.
Branch sale activity was highly competitive in 1997. The median premium to
deposits for bank branch sales reached a record high of 8.0 percent.
Despite the price increase, branch sale volumes remained relatively flat
for 1997, with the $20.0 billion in deposits sold falling slightly below
the $23.0 billion average over the past three years.
The revisions to the Riegle-Neal Interstate Banking and Efficiency Act of
1994 went into effect on July 1, 1997. Under this revised act, interstate
bank mergers have become a more feasible alternative for franchise
expansion.
In addition, newly proposed changes to merger and acquisition regulations
could positively influence the level of such activities for 1998.
Regulatory authorities recently proposed a rule to streamline the current
regulations regarding filing applications for mergers, branch acquisitions
and branch openings and relocations. The proposal makes expedited
processing procedures available for various application types. The bank
merger procedures allow merger applications to be approved by the latest
of: (i) 45 days after a completed application is received; (ii) ten days
after the last newspaper notice is published; (iii) five days after the
Attorney General's competitive comments are received; or (iv) in the case
of an interstate merger, five days after the applicant's home state
approves the merger. Eligibility for expedited processing requires an
institution to meet all of the following criteria: (i) have a CAMELS
rating of one or two; (ii) have a Community Reinvestment Act rating no less
than "satisfactory"; (iii) have a compliance rating of one or two; (iv) be
well capitalized; and (v) not be subject to any corrective or supervisory
order or agreement. Other sections of the proposal eliminate certain
application procedures and streamline the process for publishing newspaper
notices of upcoming applications.
On January 21, 1998, the Office of the Comptroller of the Currency ("OCC"),
Board of Governors of the Federal Reserve System ("Federal Reserve Board"),
Federal Deposit Insurance Corporation ("FDIC") and Office of Thrift
Supervision ("OTS") issued a joint release to propose a uniform "Bank
Merger Act Application" form for institutions to use for mergers,
consolidations and combinations. The Federal depository institution
regulatory agencies ("Agencies") noted that depository institutions would
no longer have to submit different forms to each agency and include a
significant amount of detailed information that regulators can access by
other means, such as call reports. The Agencies stated that they believe
the proposed form would aid in simplifying the application process,
particularly for mergers that require approval by different agencies.
Conversely, there are two items that may adversely affect future merger
activity. The Financial Accounting Standards Board ("FASB") is weighing a
proposal that would force companies to write-off goodwill from acquisitions
at a greater rate. Currently, goodwill can be written-off over a 40-year
period thus minimizing the effects on income. Under the proposal,
companies would take a bigger hit to earnings much sooner. Acquiring
companies would be required to break goodwill into its component assets.
Once the goodwill has been broken down, the companies would then need to
assign a timeframe of useful life to each of the assets. Finally, the
acquiring company would need to calculate an average useful life for the
goodwill and must write it off within that timeframe. Besides goodwill,
the FASB is looking to make the rules for the pooling method of accounting
for business combinations more stringent. The pooling method allows a
simple combination of assets between companies. In choosing this method,
no goodwill is created. Accordingly, future earnings are not affected by
amortization expense.
The other obstacle in the way of mergers and acquisitions is related to the
Year 2000 ("Y2K") issue. The Federal Reserve Board has issued a
supervisory letter in which it threatens to block mergers of banks that may
encounter significant Y2K computer problems. The letter states that Y2K
readiness of the post-merger company is very important in the Federal
Reserve Board's assessment of financial and managerial factors in merger
transactions. In serious Y2K unpreparedness, the Federal Reserve Board
would halt a merger. For less serious cases, the merger would get
conditional approval, pending successful Y2K compliance efforts. For
further discussion of the Y2K issue, reference is made to the section
entitled, "Review of Financial Performance," in this Management's
Discussion and Analysis.
With companies seeking enhanced earnings and the positive influence of
reductions in regulatory burdens, merger and acquisition activities for
1998 are expected to mirror the increased velocity experienced in 1997.
Although the goodwill accounting changes and Y2K issues may cause a slight
deterrent, merger and acquisition activity for 1998 should not be severely
affected.
Increased pressure from nonbank competitors for traditional product lines
has caused financial institutions to seek additional revenues from
nonbanking activities. The Federal Reserve Board made such activities
accessible through its February 28, 1997, comprehensive amendments to
Regulation Y, "Bank Holding Companies and Change in Bank Control." These
amendments improve the competitiveness of bank holding companies by
eliminating unnecessary regulatory burden and operating restrictions, and
by streamlining the application/notice process. The final rule lifts
restrictions in several areas, allowing bank holding companies certain
freedoms to promote competition with securities firms, technological
companies, consulting firms, data processing units and foreign banking
operations.
During the past two years, regulators have placed increased oversight on
financial institutions' risk management practices. Their latest effort
went into effect January 1, 1997, as the Federal Financial Institutions
Examinations Council ("FFIEC") revised its Uniform Financial Institutions
Rating System ("UFIRS") to address changes in the financial services
industry and supervisory policies and procedures since the system's
inception in 1979. The UFIRS, commonly referred to as the CAMEL rating
system, is an internal rating system used by federal and state supervisory
agencies to evaluate the soundness of financial institutions on a uniform
basis. Under the previous CAMEL rating system, there were five components
considered when assessing an institution's soundness: (i) capital adequacy;
(ii) asset quality; (iii) management and administration; (iv) earnings; and
(v) liquidity. The revised system, now known as CAMELS, added an "S"
component to address market-risk sensitivity. The new component stresses
better management in foreign exchange exposure, trading risk and IRR. The
Company's exposure to interest rate fluctuation is the only component that
will be of significance to its compliance. Examiners will look for
reliable tools that measure an institution's earnings and economic value
changes with respect to interest rate changes. The new system also
reformats and clarifies component rating descriptions and definitions, as
well as the composite ratings definition, while placing additional emphasis
on all rating components, particularly management and administration.
CAMELS ratings range from one to five with one being the strongest and five
being the weakest. A financial institution's CAMELS rating has a direct
effect on its deposit insurance rates and allowable activities.
In addition to the significant regulatory changes, there was an important
attempt at changing the laws restricting banking activities. During 1997,
the House Banking and Commerce Committees took steps towards modernizing
laws to limit activities in the financial services industry. These
Committees introduced two competing versions of H.R. 10, "The Financial
Services Competitiveness Act of 1997." H.R. 10 arose out of the widespread
view that events in the marketplace made the current structure of United
States financial institutions obsolete. In recent years, technological
advancements and market innovations have combined to replace traditional
banking services with those offered by noninsured financial institutions.
Federal bank regulators have recently allowed banks to enter into certain
areas of insurance and securities, resulting in several court battles to
define permissible lines of activities among financial industry groups.
Briefly, H.R. 10 as introduced by the Committees would: (i) permit
unlimited affiliations among banking, securities and insurance firms; (ii)
allow financial holding companies to derive up to 15.0 percent of their
revenues from nonfinancial businesses, and commercial businesses to derive
up to 15.0 percent of their revenues from banks, without coming under full-
fledged bank holding company regulation; (iii) authorize the chartering of
wholesale financial institutions, which could not receive initial deposits
of $100 or less; (iv) merge the OTS with the OCC, and merge the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF");
(v) increase banks' powers to offer additional financially-related
products, particularly in the technology and communications fields; and
(vi) reform the Federal Home Loan Bank system to facilitate community bank
lending for small businesses, economic development and agriculture in rural
and inner-city areas.
The House adjourned its 1997 session without giving final approval to
either version of H.R. 10. It does appear, however, that some type of
financial modernization reform will occur in the near term as Congressional
leadership has earmarked this project for 1998.
In other significant legislative action, the Senate introduced, S.1405
entitled, "The Financial Regulatory Relief and Economic Efficiency Act," on
November 7, 1997. This bill would significantly reduce regulations on
banks and thrifts by repealing or amending more than 50 existing laws.
This bill would, among other things: (i) permit Federal Reserve banks to
pay a member bank's interest on reserves deposited to meet the bank's
reserve requirements; (ii) allow the Federal Reserve Board to set lending
limits on member banks' extensions of loans collateralized by stocks and
bonds; (iii) permit financial institutions to pay interest and/or dividends
on demand deposits and offer NOW accounts to commercial customers; (iv)
specify criteria for acquisition applications; (v) reduce disclosure
requirements on open-end consumer credit plans; and (vi) simplify and
standardize regulatory reporting.
The future holds a great deal of change for the financial services sector.
Factors such as increased credit and asset quality risk, new business lines
and products and technology are all major components of this change.
Competition to generate loans and earnings in the banking industry
continually intensifies. Financial institutions will react to this
intensity by pursuing higher-yielding commercial loans. As competition
grows, underwriting standards will ease, which could lead to asset quality
deterioration. Banks will most likely react to this competition through
increased volumes of subprime lending, loans to borrowers having incomplete
or tarnished credit ratings. Subprime lending has become popular,
partially due to an increasing general demand for consumer credit.
Currently, bank involvement in subprime lending varies but usually
includes: (i) lending directly to subprime borrowers; (ii) purchasing
subprime dealer paper or loans acquired through brokers; (iii) lending
directly to financing companies involved in subprime lending; (iv)
participating in loan syndications by providing credit to such financing
companies; and (v) acquiring asset-backed securities issued by those
financing companies.
A rise in outstanding credit and growing consumer debt, could lead to
increased delinquencies and personal bankruptcies. These activities would
be a by-product of deteriorating balance sheets for some business borrowers
and greater financial troubles among consumers caused by spending patterns.
In turn, some banks may experience a decline in the asset quality of their
mortgage portfolios.
As aforementioned, regulators and other government entities have introduced
legislation that has, and will continue to allow banks to, enter new
business lines and offer new products. For example, on August 5, 1997, the
Taxpayer Relief Act of 1997 was passed into law. Under this act, two new
Individual Retirement Account ("IRA") products became available to
consumers effective January 1, 1998. For further discussion on these two
products, refer to the section entitled, "Deposits," in this Management's
Discussion and Analysis.
Technological advances will also benefit the financial services sector.
Internet and telephone banking will continue to bring financial services
into the convenience of a customer's home, allowing the customer to check
account balances, transfer money between accounts, pay bills, determine
what checks have cleared and download financial data, all in the privacy of
their own living rooms. Many banks currently use a proprietary dial-up
service for customer access due to security reasons. As on-line banking
becomes more prevalent, however, banks will move toward Internet-based
systems as they are more cost-efficient and easier to access for customers.
Internet banking will challenge banks in the future. Because changing
financial institutions will not be as costly to customers, banks must offer
value-added services to customers at comparable prices or they may lose
customers. Also, the Internet will make it easier for customers to compare
bank-offered products. This is of concern to banks as competing on the
basis of price will become exceedingly difficult. Finally, the Internet
reduces the value of the branch network thus eliminating a bank's
competitive edge related to an abundance of locations. Internet banking
will force banks to find ways to lower their operating costs. With retail
delivery infrastructure, including salaries and employee benefits expense,
accounting for the largest single item of noninterest expense for most
retail banks, and branch costs providing a significant amount of this
total, attention should focus on reducing the branch infrastructure over
the next several years.
REVIEW OF FINANCIAL POSITION:
In 1997, the Company focused its efforts on better serving its existing
customers and on expanding its customer base. On July 25, 1997, the
Company's wholly-owned subsidiary, Community Bank and Trust Company
("Community Bank") entered a definitive agreement to acquire two branches
of First Union National Bank ("First Union"). The branches, located in
Eynon, Lackawanna County, Pennsylvania, and Factoryville, Wyoming County,
Pennsylvania, became fully-functional Community Bank offices on
November 14, 1997. The Company also continued its strategy to build the
role of loans in its earning-assets mix while promoting safety and
soundness in its investment portfolio. As a result of its efforts, the
Company experienced moderate growth in 1997.
The Company's total assets grew $27.0 million or 7.6 percent, from $354.8
million at December 31, 1996, to $381.8 million at December 31, 1997.
Total asset growth of the peer group of 35 banks located in Northeastern
Pennsylvania averaged 9.4 percent in 1997. For the year, the Company's
total assets averaged $359.4 million as compared to $347.3 million in 1996,
a $12.1 million increase. The primary source of this increase was the
growth in the Company's loan portfolio. The composition of the balance
sheet changed during the year as evidenced by a shift in the ratios of
average investments and federal funds sold to average earning assets and
average loans to average earning assets. For 1997, the ratio of average
investments and federal funds sold to average earning assets declined to
30.1 percent from 34.6 percent in 1996. A counteractive effect took place
in the average loans to average earning assets ratio, which was 69.9
percent in 1997, an increase over the 65.4 percent recorded for 1996.
Although not to the extent of the loan portfolio, investments rose from
$102.0 million at December 31, 1996, to $105.7 million at December 31,
1997. The Company increased its portfolio in 1997 by purchasing short-term
U.S. Treasury securities, U.S. Government agencies and intermediate-term
obligations of states and municipalities. The short-term investments were
acquired to fund future loan demand and the tax-exempt municipal securities
were acquired to reduce the Company's tax burden. The tax-equivalent yield
on the investment portfolio increased to 6.7 percent for 1997 compared to
6.4 percent for 1996.
Loans, net of unearned income, increased $14.4 million or 6.1 percent
during 1997. The Company had aggregate loans of $7.0 million to certain
large Pennsylvania-based commercial banks at December 31, 1997. In
addition, the Company sold $3.4 million in student loans to a servicing
agent during the second quarter of the year. Adjusting for the commercial
bank credit extension and student loan sales, the loan portfolio growth was
$10.8 million or 4.6 percent. Customers took advantage of the favorable
mortgage rate environment as one-to-four family residential mortgages and
nonfarm, nonresidential real estate loans comprised the main portion of the
increase. Loan growth of the peer group averaged 10.8 percent for 1997.
For the year, the tax-equivalent yield on the Company's loan portfolio
declined slightly to 8.5 percent compared to 8.6 percent for 1996.
The placement of one large commercial loan on nonaccrual status, coupled
with a lagging effect in the local economy, led to some deterioration in
the Company's asset quality in 1997 as compared to 1996. This is
represented by increases in the ratios of nonperforming loans as a
percentage of loans, net of unearned income, and nonperforming assets as a
percentage of loans, net of unearned income. The Company's nonperforming
loans as a percentage of loans, net of unearned income, ratio was 2.25
percent at December 31, 1997, compared to 1.44 percent at December 31,
1996. Additionally, the ratio of nonperforming assets to loans, net of
unearned income, equaled 2.41 percent at December 31, 1997, compared to
1.62 percent one year earlier. The Company's allowance for loan losses as
a percentage of loans, net of unearned income, declined from 1.67 percent
at December 31, 1996, to 1.52 percent at December 31, 1997. The Company's
net charge-off position, coupled with the greater loan demand, were the
primary reasons for the decline.
Total deposits increased $11.9 million, or 3.7 percent, from $320.5 million
at December 31, 1996, to $332.4 million at December 31, 1997. Deposit
growth for the peer group averaged 8.5 percent for 1997. The major cause
of the deposit inflow was attributable to the addition of the Eynon and
Factoryville branches. The Company's cost of funds rose slightly to 4.8
percent for 1997 compared to 4.7 percent for 1996. In contrast, the peer
group experienced a slight decline in its cost of funds from 4.7 percent in
1996 to 4.6 percent in 1997.
The Company experienced improved interest sensitivity and liquidity
positions from year-end 1996 to year-end 1997. Interest sensitivity, as
measured by the ratio of cumulative one-year, rate-sensitive assets ("RSA")
to rate-sensitive liabilities ("RSL"), rose from 0.73 at December 31, 1996,
to 0.86 at December 31, 1997. Both ratios were within the acceptable
guidelines of 0.7 and 1.3 set forth in the Company's Asset/Liability
Management Policy. The positive change in the Company's liquidity position
is best illustrated by its net noncore funding dependence and net short-
term noncore funding dependence ratios. At December 31, 1997, the net
noncore funding dependence ratio equaled negative 7.5 percent. The same
ratio equaled 2.6 percent at December 31, 1996. The Company's net short-
term noncore funding dependence ratio totaled negative 10.2 percent at
December 31, 1997, while the same ratio totaled 0.4 percent one year
earlier. These ratios also well outperformed those of the peer group for
1997, which recorded a net noncore funding dependence ratio of 10.8 percent
and a net short-term noncore funding dependence ratio of 23.0 percent.
Stockholders' equity improved from $31.3 million at December 31, 1996, to
$36.1 million at December 31, 1997, a $4.8 million increase. This increase
primarily came from strong earnings of $4.4 million and a $1.0 million
positive change in the net unrealized holding gain partially offset by
dividends declared for the year of $659. The key regulatory ratio, defined
as Tier I capital as a percentage of total average assets less intangibles,
increased to 8.6 percent at year-end 1997 from 8.3 percent at year-end
1996. At December 31, 1997, the Company exceeded all relevant regulatory
capital measurements and was considered well capitalized.
In addition to improving the Company's financial position and performance,
management completed several other significant undertakings in 1997. These
events included: (i) the establishment of a fixed-rate annuity product
sales program; (ii) the initiation of a Dividend Reinvestment Program
("DRP"); (iii) the introduction of incentive programs for managers and
customer service employees; (iv) the planning of a new community office
facility and administrative center; and (v) the purchase of the previously-
mentioned branch offices.
During 1997, a major hurdle in the reformation of the Glass-Steagall Act of
1933 was removed as banks were given the opportunity to engage in insurance
and annuity activities. On June 25, 1997, Pennsylvania Governor Tom Ridge
signed into law HB 1055, a bill authorizing Pennsylvania state banks to
sell insurance for the first time. Unlike national banks that must base
their insurance operations in towns of under five thousand people,
Pennsylvania state banks can base their sales operations anywhere in the
Commonwealth. There are certain consumer protections in the law. For
example, insurance sales must be made in an area physically separate from
lending and deposit-taking areas. Small banks may receive exemption from
this requirement at the discretion of the insurance commissioner. The bill
also contains anti-tying provisions that prohibit conditioning a loan
approval on purchasing insurance from the bank.
Banks are given the following options to establish insurance sales: (i)
purchase the expertise embodied in an existing insurance company or agency;
(ii) develop insurance activities de novo through an operating subsidiary;
or (iii) participate in joint ventures or partnerships with insurance
companies or agents. Management analyzed the option to offer general life
and property insurance during 1997, however the Company has no near-term
plans to enter into this market.
During the final quarter of 1997, the Company began offering its customers
fixed-rate annuity products. Annuities are contracts between the purchaser
and an insurance company or authorized annuity sales facility. The
purchaser pays premiums and has rights under the contract. These products
have characteristics similar to IRA accounts. Taxes from income on
annuities are deferred until the customer begins to draw funds from the
account. The main difference is that customers are limited, for tax
purposes, to a $2 annual contribution on an IRA account, while annuity
products have no limitations on contributions. In order for the Company to
sell fixed-rate annuity products, its branch managers were required to pass
a state-administered test for life insurance. The Company has no near-term
plans to expand such offerings to variable-rate annuity products.
During the second quarter of 1997, the Company implemented a DRP. The DRP
offers stockholders the opportunity to automatically reinvest their
dividends in shares of common stock. The main features of the DRP include
the following: (i) shares will be purchased from original issuances; (ii)
no optional cash payments; (iii) eligibility for all registered and street
name stockholders; (iv) no minimum or maximum number of shares
participation restrictions; and (v) availability of full or partial
dividend reinvestment. The Company introduced an additional feature for
investor services in the third quarter of 1997 by offering dividend direct
deposit. Stockholders not participating in the DRP have the option of
directly depositing their cash dividends into their bank accounts. At
December 31, 1997, there were 2,325 shares issued under the DRP.
Management continued its commitment to improving customer service through
the development of an incentive program for branch managers. The Manager
Incentive Program, approved by the Company's Board of Directors in the
fourth quarter of 1997, rewards managers for improving the profitability of
their respective branches while focusing their efforts on meeting the needs
of existing customers and in assisting the development of new customers.
Management expects to expand this incentive program to include all of the
Company's employees by mid-year 1998. The estimated costs of operating the
plan are $75 for 1998. In addition, the Company completed an eight-month
comprehensive customer service program during the fourth quarter of 1997.
The objectives of this program were to improve business relations between
the Company's employees and its customers as well as to develop a sales
program to promote the Company's products and services.
During the fourth quarter of 1997, the Company conducted a feasibility
analysis of a new community office facility and administrative center in
Clarks Summit, Lackawanna County, Pennsylvania. On January 2, 1998, the
Company acquired land for this project, scheduled to be completed in the
first quarter of 1999. In addition to a 2,400 square foot community
banking office, the 24,000 square foot facility will house eight
administrative divisions comprised of 90 employees. Once completed, many
of the Company's divisions will be centralized, thus adding efficiency and
effectiveness to overall operations.
As aforementioned, the Company completed the purchase of the Eynon and
Factoryville branches during the fourth quarter of 1997. These purchases
have expanded the Company's market area and, due to a favorable response,
have paved the way for future expansion in these areas. At December 31,
1997, deposit volumes in the Eynon and Factoryville branches approximated
$21.7 million.
INVESTMENT PORTFOLIO:
Low inflation, moderate economic growth and the Asian economic crisis all
influenced the bond market in 1997. Bond prices rose in 1997 due to
declining investors' expectations of future inflation and increased demand
for fixed-income securities. The greater demand resulted from uncertainty
in world markets and strength of the United States dollar. Such demand
intensified by reductions in the supply of bonds. The United States budget
deficit evaporation and the earning surplus have reduced the need for new
government bond sales.
Long-term investment yields declined 72 basis points while short-term
investment yields declined, to a lesser extent, by 22 basis points during
1997. The 30-year U.S. Treasury bond opened the year with a 6.65 percent
yield. This yield fell to 6.41 percent by the end of the third quarter and
ended 1997 yielding 5.93 percent. Meanwhile, yields on the two-year U.S.
Treasury note also declined, beginning 1997 with a 5.88 percent yield and
ending the year yielding 5.66 percent. Yields on tax-exempt bonds also
experienced a decline in 1997, but not to the same degree as the taxable
bonds. Representative of such change was the decline in the yield on 20-
year, bank-qualified, tax-exempt municipal securities from 5.50 percent at
the start of the year to 5.05 percent at the end of 1997. Such changes
also helped to flatten the yield curve. At the beginning of 1997, the
yield curve spread of the 30-year U.S. Treasury bond over the two-year U.S.
Treasury note was 77 basis points. By the end of 1997, this advantage had
been trimmed to 27 basis points. Such flattening provides a certain degree
of protection against the future threat of the FOMC raising short-term
interest rates.
The Company's investment portfolio had an effective duration of 1.8 years
and primarily consisted of government securities, obligations of states and
municipalities and mortgage backed securities. The decrease in the
investment portfolio's effective duration from 2.0 years in 1996 reduced
the Company's exposure to future market value depreciation from rising
interest rates. The Company experienced an improvement in its bond
portfolio's total return in 1997. Total return is defined as the
cumulative dollar return from an investment in a given period. Total
return for bank investment portfolios is the sum of all interest income,
reinvestment income on all proceeds from repayments and capital gains and
losses, whether realized or unrealized. For the year, the Company's total
return amounted to 7.9 percent. In comparison, the Lehman Brothers'
aggregate-bond index, a benchmark used by most investment managers, scored
a 9.4 percent total return for 1997. For 1996, the Company's total return
at 4.9 percent exceeded the Lehman Brothers' Index at 3.6 percent.
Bond market forecasts for 1998 appear to be favorable. If weakness in
various Asian economies has a significant effect on exports, United States
economic growth will struggle, reducing the likelihood of increased
inflation for the near term. The continuation of turmoil in world markets
would also curtail the FOMC's likelihood to raise interest rates for fear
of crippling Asian currencies and their underlying economies.
Regulators have increased their emphasis on reviewing the quality of risk-
management practices within financial institutions. Accordingly,
management monitors and limits various risk elements inherent in the
Company's investment portfolio, particularly: (i) market or IRR; (ii)
credit risk; (iii) liquidity risk; (iv) reinvestment risk; and (v) "timing"
or call risk.
The Company's Investment Policy specifies approved investments and sets
limits to risk exposure on both individual securities and the overall
portfolio. Management evaluates and limits its risk exposure by using:
(i) quantitative techniques; (ii) subjective analysis; (iii) regulatory
guidance; and (iv) its investment policy.
Market or IRR relates to the inverse relationship between bond prices and
market yields. Such risk is defined as the risk that increases in general
market rates will result in market value losses. Market risk represents
the greatest risk to bond investors. Management quantifies and limits such
exposure through "stress test" modeling and by limiting the duration of
individual securities and the portfolio as a whole. Stress test modeling
measures the change in value of an investment given an immediate and
parallel shift in the yield curve or "shock." Stress tests conducted on
the portfolio at December 31, 1997, indicate a decline in the investment
portfolio's value of approximately 5.7 percent given a rising rate shock of
300 basis points. Management deems this to be an acceptable level of risk
considering the Company's capital position and overall financial well-
being.
Market conditions for 1997 aided the value of the Company's investment
portfolio. A strong economy and falling interest rates bolstered the net
unrealized holding gain on investment securities to $1,600, net of deferred
income taxes of $825, at December 31, 1997, from $564, net of deferred
income taxes of $291, at December 31, 1996. The unrealized holding gain
equaled 2.35 percent of amortized cost at December 31, 1997, an improvement
from the 0.85 percent reported at December 31, 1996.
According to the stress test model, the majority of such market risk
resides in the Company's state and municipal securities portfolio. This
market risk results from the longer effective duration of approximately 3.4
years in the state and municipal securities portfolio as compared to
approximately 0.7 years in the remainder of the portfolio at year-end 1997.
Duration measures the percentage change in price per 100 basis point change
in yield levels, assuming an immediate and parallel shift in the yield
curve. The tax-exempt feature of such investments serves to reduce their
effective duration and susceptibility to fair value depreciation relative
to taxable securities. The weighted-average life of the state and
municipal securities portfolio was 10.1 years at December 31, 1997.
Due to the state and municipal securities portfolio's susceptibility to
changes in interest rates, management uses a "trigger" strategy for such
investments. The portfolio is monitored for significant value
deteriorations resulting from increases in general market rates with
appropriate action taken upon the occurrence of some predefined threshold
level of deterioration.
Credit risk, the probability that an issuer cannot meet principal and
interest payments on a timely basis, was mitigated through the portfolio's
composition. U.S. Treasury securities and U.S. Government agencies,
including mortgage backed securities, accounted for 59.4 percent of
aggregate investments at December 31, 1997. The majority of the remaining
portion of the portfolio primarily consists of insured general obligations
of states and municipalities that received a rating of "Baa" or higher from
Moody's or "BBB" or higher from Standard and Poor's rating services.
Management considers repayment sources, municipal bond insurance, credit
quality and changes in credit ratings when dealing in the municipal bond
sector.
Liquidity risk refers to the ease in converting a security to cash at or
near its true value. The spread between the bid price and the ask price
quoted by a dealer serves as a proxy for such risk. Management considers
its liquidity risk exposure limited because of its high concentration of
U.S. Treasury and related securities, which normally offer the greatest
liquidity relative to other investments. Management pays particular
attention to the bid/ask spread on its holdings of mortgage backed
securities as such securities are often not as liquid as U.S. Treasury
securities.
Reinvestment risk concerns reinvested cash flows or the "interest on
interest" component of investment returns. As market rates fall, the
coupon payments of a bond will be reinvested at lower rates thus reducing
total returns. Given the overall structure of the Company's balance sheet,
where liabilities tend to reprice quicker than assets, reinvestment risk,
or a decline in interest rates, is generally not as great a concern as
market risk. Based on the interest sensitivity of the Company's overall
balance sheet, management feels that the reinvestment risk inherent in the
investment portfolio will not adversely affect the Company's financial
performance.
Many bonds contain a provision that grants the issuer an option to call all
or part of the issue before the maturity date. Other securities, such as
mortgage backed bonds, may prepay earlier or extend longer than expected.
Such options allow the issuer the flexibility to refinance, if market rates
fall substantially below the investment's coupon rate. Call, prepayment
and extension risks are essentially all timing risk. Timing risk refers to
the uncertainty of the timing of cash flows for a given investment or
portfolio of investments. Timing risk exists in the Company's holdings of
U.S. Government agencies, obligations of states and municipalities and
mortgage backed securities. Call provisions present three disadvantages
from the Company's perspective: (i) the cash flow pattern of the investment
is uncertain; (ii) the issuer may call the bond when rates fall, thus
increasing the Company's exposure to reinvestment risk; and (iii) the
capital appreciation of the bond will be truncated since a callable bond's
price will not rise much above the price at which the issuer can call the
bond.
The Company limits its cash flow timing risk through policy limitations on
holdings with such risk. Moreover, the Company utilizes modeling
techniques to monitor its timing risk exposure. One such model uses median
dealer prepayment assumptions on mortgage backed securities to project
future principal and interest cash flow streams under multiple interest
rate scenarios. The model measures both prepayment and extension risk.
Based on interest rate projections of plus or minus 300 basis points at
December 31, 1997, the Company expects to receive a minimum of $7.7 million
or a maximum of $14.6 million in mortgage-related security principal
repayments throughout the coming year.
Other sources of risk include: (i) regulatory and legal; (ii) yield curve;
(iii) inflation; (iv) event; (v) sector; and (vi) volatility. Most of
these risks are substantially mitigated through the previously-discussed
techniques. For example, management feels that its interest rate modeling
techniques largely reduce inflation risk. Other risks, such as regulatory
and legal risk, are considered by management in a more subjective manner
and are addressed in Investment Committee or Asset/Liability Management
Committee ("ALCO") meetings. Additionally, the Company's Investment Policy
promotes safety and soundness in the investment portfolio by establishing
strict limitations on the quality, quantity and maximum maturity of each
type of security. Moreover, various operational procedures enhance
controls and assure adherence to the Investment Policy.
The Company does not own any securities that are not actively traded in a
liquid market. Additionally, the Company does not own any investments that
have highly volatile market values relative to small changes in interest
rates that would have a material affect on operating results or liquidity.
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires
investments to be classified and accounted for as either held-to-maturity,
available-for-sale or trading account securities based on management's
intent at the time of acquisition. Management is required to reassess the
appropriateness of such classifications at each reporting date.
For the years ended December 31, 1997 and 1996, the Company classified all
investment securities as available-for-sale. By classifying the portfolio
in this manner, management can use such securities to implement
asset/liability strategies in response to changes in interest rates,
prepayment risk, liquidity requirements or other circumstances identified
by management. The peer group also continued its trend toward the
available-for-sale classification as it classified 90.7 percent of their
investments as available-for-sale at December 31, 1997, compared to 90.3
percent at December 31, 1996. Management does not anticipate reclassifying
any of its investments in the near term.
The appropriateness of the Company's accounting classifications for
investment securities became more significant as a result of the Auditing
Standards Board issuance of Statement on Auditing Standards ("SAS") No. 81,
"Auditing Investments." SAS No. 81 was effective for audits of financial
statements on or after December 15, 1997, and required external auditors to
ascertain whether a company has adopted accounting policies that conform
with generally accepted accounting principles ("GAAP"). Furthermore, the
auditors were required to evaluate whether management appropriately
classified investment securities in accordance with its stated intent. The
auditors had to examine evidence such as written and approved records of
investment strategies and investment activities, instructions to portfolio
managers and minutes of meetings of the Board of Directors and the
Investment Committee.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio over the past five years are
summarized as follows:
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities........ $ 12,042 7.89% $ 13,027 8.96%
U.S. Government agencies........ 36,993 24.25 29,306 20.16
State and municipals............ 20,616 13.51 20,000 13.75
Mortgage backed securities...... 38,015 24.92 28,042 19.29
Equity securities............... 1,305 0.90
-------- ------ -------- ------
Total held-to-maturity........ 107,666 70.57 91,680 63.06
-------- ------ -------- ------
Available-for-sale:
U.S. Treasury securities........ $ 28,583 27.05% $ 35,619 34.92% $ 43,751 40.25% 3,366 2.21 2,995 2.06
U.S. Government agencies........ 10,388 9.83 18,606 18.24 26,213 24.11 7,283 4.77 5,959 4.10
State and municipals............ 39,887 37.75 38,295 37.55 30,512 28.07
Mortgage backed securities...... 23,746 22.47 7,058 6.92 6,154 5.66 29,444 19.30 41,854 28.78
Equity securities............... 3,062 2.90 2,416 2.37 2,076 1.91 4,807 3.15 2,912 2.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total available-for-sale...... 105,666 100.00 101,994 100.00 108,706 100.00 44,900 29.43 53,720 36.94
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total....................... $105,666 100.00% $101,994 100.00% $108,706 100.00% $152,566 100.00% $145,400 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The Company continued its de-emphasis on the investment portfolio in 1997.
Average investments declined as a percentage of average assets from 31.7
percent in 1996, to 27.5 percent in 1997. In comparison, the peer group
held 31.9 percent in 1997 and 33.6 percent in 1996 of its average assets in
investment securities.
The Company did not sell securities in 1997. Proceeds from securities
sales in 1996 amounted to $1.5 million. The 1996 investment sales
consisted of four variable-rate, collateralized mortgage obligations
("CMOs"). The Investment Committee made the decision to sell these
securities based on its reassessment of the structure, composition and
characteristics of these investments. The committee concluded that such
investments were not appropriate based on the Company's future investment
goals. The Company recognized net losses of $58 in 1996 related to such
sales.
Repayments from investment securities totaled $31.2 million in 1997 and
$24.9 million in 1996. A "liquidity ladder," established with the proceeds
from the investment portfolio reconstitution in 1995, fueled the increase
in repayments for 1997. Management has constructed a short-term laddered
U.S. Government securities portfolio that assists the Company in meeting
its liquidity needs by structuring principal maturities at regular
intervals. During 1997, the Company purchased: (i) $9.0 million in short-
term U.S. Treasury securities; (ii) $4.3 million in intermediate-term state
and municipal obligations; (iii) $19.8 million in short-term CMOs and
pooled mortgage backed securities; and (iv) $298 in equity securities,
primarily common stock of the Federal Home Loan Bank of Pittsburgh ("FHLB-
Pgh").
In accordance with the Company's amended Investment Policy as approved
August 30, 1995, management is only allowed to purchase and hold those CMO
classes designated as Accretion Directed or Planned Amortization Class II.
Such classes possess the highest quality with respect to their structure
and composition, which effectively reduces their exposure to various risk
elements. Accretion Directed CMOs are designated to be completely
insensitive to changes in mortgage payment rates. Planned Amortization
Class II CMOs have the highest cash flow priority and the most protection
from call and extension risk of all other CMO classes. Management has
established internal pre-acquisition standards for CMOs that exceed the
FFIEC average life and interest sensitivity tests. At a minimum, prior to
the acquisition of any CMO, management will evaluate the following: (i)
credit risk; (ii) market or IRR; (iii) timing risk; (iv) liquidity risk;
and (v) total return as compared to the comparable U.S. Treasury security.
With the exception of credit risk, the CMOs acquired met or exceeded the
risk and return criteria of the U.S. Treasury security. The Company's
holdings of CMOs consist entirely of those of U.S. government-sponsored
agencies. Although not backed by the full faith and credit of the U.S.
Government, it is the general knowledge that the government would
ultimately cover any default of a sponsored agency. Accordingly
management, from time to time, acquires CMOs as alternatives to U.S.
Treasury securities for funding future loan demand and in meeting pledging
requirements of local municipalities.
Investment purchases amounted to $20.2 million in 1996. Invested proceeds
were placed in short-term U.S. Treasury securities and U.S. Government
agencies and intermediate-term obligations of states and municipalities, in
conformity with a "barbell" investment strategy. The Company continues to
utilize this investment strategy as short-term investments provide
liquidity, assuring necessary funding for future loan demand, whereas
purchases of tax-exempt municipal obligations lower the Company's effective
tax rate. The Company expects investment maturities of $37.1 million in
1998 and $22.9 million in 1999. Management expects to use the barbell
investment strategy through redirecting excess funds not utilized in
lending to investments in short-term U.S. Government securities and
intermediate-term state and municipal obligations.
Contrary to the significant decline in the yields on U.S. Treasuries during
1997, the tax-equivalent yield on the Company's investment portfolio rose
from 6.4 percent in 1996 to 6.7 percent in 1997. U.S. Treasury securities
and obligations of states and municipalities comprised 64.8 percent of the
investment portfolio at December 31, 1997, versus 72.5 percent at December
31, 1996. As previously stated, the credit risk inherent in the investment
portfolio is limited. Except for U.S. Treasury securities and U.S.
Government agencies, there were no securities of any individual issuer that
exceeded 10.0 percent of the Company's stockholders' equity at December 31,
1997 and 1996. Except for $1,862 of tax-exempt obligations of local
municipalities, all of the investment securities in the Company's portfolio
are considered "investment grade," receiving a rating of "Baa" or higher
from Moody's or "BBB" or higher from Standard and Poor's rating services at
December 31, 1997. At December 31, 1997, investment securities with an
amortized cost of $25,971 were pledged to secure deposits, to qualify for
fiduciary powers and for other purposes required or permitted by law. At
December 31, 1996, the amortized cost of pledged securities equaled
$35,099. The fair value of such securities equaled $25,979 at December 31,
1997, and $34,968 at December 31, 1996.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at
December 31, 1997, 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, CMOs and equity securities.
Mortgage backed securities and CMOs have been presented based upon
estimated cash flows, assuming no change in the current interest rate
environment. Equity securities with no stated contractual maturities are
included in the after ten years maturity distribution. Expected maturities
may differ from contracted maturities because borrowers have the right to
call or prepay obligations with or without call or prepayment penalties.
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
DECEMBER 31, 1997 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities.... $20,506 5.63% $ 8,028 6.00% $ 28,534 5.73%
U.S. Government agencies.... 9,800 4.63 648 4.61 10,448 4.63
State and municipals........ 725 5.92 6,048 6.80 $6,133 8.96% $25,423 8.22% 38,329 8.07
Mortgage backed securities.. 6,041 6.34 16,998 6.45 709 6.48 23,748 6.42
Equity securities........... 2,182 6.04 2,182 6.04
------- ------- ------ ------- --------
Total..................... $37,072 5.49% $31,722 6.37% $6,842 8.71% $27,605 8.05% $103,241 6.66%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $20,524 $ 8,059 $ 28,583
U.S. Government agencies.... 9,757 631 10,388
State and municipals........ 725 6,107 $6,507 $26,548 39,887
Mortgage backed securities.. 6,038 16,996 712 23,746
Equity securities........... 3,062 3,062
------- ------- ------ ------- --------
Total..................... $37,044 $31,793 $7,219 $29,610 $105,666
======= ======= ====== ======= ========
</TABLE>
At December 31, 1997 and 1996, the Company's investment portfolio contained
no high-risk CMOs as defined in the Federal Reserve Board's Supervisory
Policy Statement on Securities Activities. In accordance with the
Statement, structured mortgage backed securities that at the time of
purchase, or at a subsequent testing date, meet any of the average life or
interest sensitivity tests are considered high-risk CMOs. A security is
classified as a high-risk mortgage security if it meets any of the
following tests: (i) the mortgage product has an expected weighted-average
life of greater than ten years; (ii) the expected weighted-average life of
the product extends by more than four years or shortens by more than six
years, assuming interest rate shocks of plus or minus 300 basis points; or
(iii) the estimated change in price of the product is more than 17.0
percent given similar rate shocks. The test applies to the Company's CMOs
and excludes non-CMO products, such as pooled mortgage backed securities.
Moreover, none of the Company's CMOs met the criteria for high-risk,
nonequity CMOs as defined in Issue 2 of FASB's Emerging Issues Task Force
("EITF") Issue No. 89-4, "Accounting for a Purchased Investment in a
Collateralized Mortgage Obligation Instrument or in a Mortgage Backed
Interest-Only Certificate." EITF Issue No. 89-4 defines high-risk,
nonequity CMOs as those that have the potential for loss of a significant
portion of their original investments due to changes in: (i) interest
rates; (ii) prepayment rate of the assets of the CMO structure; or (iii)
earnings from temporary reinvestment of cash collected by the CMO structure
but not yet distributed to the holders of its obligations.
The Company held $19.1 million of CMOs at December 31, 1997, none of which
failed any of the high-risk tests. Moreover, it is unlikely that any of
these securities will fail any of the high-risk tests at some future date.
For example, the longest weighted-average life of any CMO product held by
the Company was 4.3 years at December 31, 1997. The largest extension in
the weighted-average life given a 300 basis point increase in rates is 0.5
years. Conversely, the most significant shortening of the weighted-average
life given a 300 basis point decrease is 3.3 years. Finally, the most
volatile CMO held by the Company exhibited a percentage price change of no
more than 9.8 percent in the stress test.
The Company sold the majority of its holdings of structured notes during
1995. At December 31, 1997, the carrying value of the remaining structured
notes was $2.0 million. In 1995, a consensus opinion from external
investment management consultants and review by regulatory agencies
prompted management to hold certain structured notes having maturities of
less than three years. Specifically, such securities included a dual-index
floater and a delevered floater, each having a carrying value of
approximately $1.0 million at December 31, 1997. Both securities are
scheduled to mature in 1998. For information with respect to accounting
considerations and treatment of such instruments, refer to Note 3 of the
Notes to Consolidated Financial Statements.
In June of 1996, the FASB issued a proposed Statement, "Accounting for
Derivatives and Similar Financial Instruments and for Hedging Activities."
The proposed Statement would significantly alter the recognition and
measurement of futures, forwards, options, swaps and other similar
financial contracts. Additionally, the proposed Statement would provide
consistent and comprehensive standards for hedge accounting. At a public
meeting on December 17, 1997, the FASB elected to extend the effective date
of this proposal to fiscal years beginning after June 15, 1999. The
Company had no dealings in derivative financial instruments or derivative
commodity instruments for the three years ended December 31, 1997.
Moreover, the Company's Investment Policy prohibits management from
engaging in derivative activities in the future.
LOAN PORTFOLIO:
Aside from major money center financial institutions that invest more of
their loan portfolios in commercial activities, loans to finance one-to-
four family residential properties account for the predominant portion of
bank lending activities. The housing market and economic conditions
affecting it are especially significant to the Company's current and future
financial viability as residential mortgage lending accounts for
approximately two-thirds of its aggregate lending activities.
The Federal Reserve Board's August of 1997, "Senior Loan Officer Opinion
Survey on Bank Lending Practices," indicated an increased demand for
business credit, but a decreased demand for consumer loans. Many banks
have responded to these trends by easing terms for commercial and
industrial loans while, at the same time, tightening the terms for consumer
loans. In many cases, banks explained their decisions to ease business
credit as being driven by competition, with overall improvements in the
condition of the borrowers often being a secondary factor.
Approximately 40.0 percent of banks narrowed the spread between their cost
of funds and their loan rates to large businesses, with about 25.0 percent
doing the same for small business loans. Other signs of easing credit
standards were lower costs for credit lines and less strict collateral
requirements. Approximately 15.0 percent of banks noted an increase in
demand for commercial and industrial loans to large- and mid-size
businesses, with 20.0 percent noting such an increase for small businesses.
Standards for household lending have tightened since the final quarter of
1995, although the percentage from the August survey is smaller than in
recent surveys. This may mean that banks believe they have adjusted their
standards to match the deterioration in the quality of these loans over the
past two years. Of the banks surveyed, 25.0 percent say they have
tightened credit card standards. Most banks reported steady mortgage loan
standards with 20.0 percent indicating an increased mortgage demand.
A strong national economy, tumbling interest rates and unseasonably mild
temperatures led to record-breaking statistics for residential lending in
1997. New home sales reached 800 thousand for the year, a 5.5 percent
increase over 1996. Sales for the Northeast region experienced a 6.8
percent rise, second only to the 7.4 percent growth in the Southern region.
Sales of previously-owned homes enjoyed their second consecutive record-
breaking year reaching 4.2 million, marking a 3.1 percent increase over the
1996 record. The Northeast region also experienced the second-highest
increase in this category with a 3.4 percent increase over 1996. Housing
starts for 1997 approximated 1996 levels with 1.5 million new homes and
apartment units begun. Of these new starts, 1.1 million were for new
single-family dwellings, a 5.2 percent decline from the 1996 figure. For
the Northeast, housing starts increased 3.5 percent compared to 1996. The
national median selling price on new homes rose to $145.5, a slight
increase compared to 1996. For existing homes, the median selling price
for 1997 reached $124.1, a 5.2 percent increase from the $118.0 recorded
for 1996. In the Northeast, the median selling price for an existing home
rose to $145.1, a 3.0 percent increase compared to 1996.
Interest rates on 30-year mortgages began 1997 at 7.6 percent and peaked in
April at 8.2 percent. During the remainder of 1997, the 30-year mortgage
interest rate tumbled to a year-end low of just under 7.0 percent. This
level was the nation's lowest since it hit 6.9 percent in October of 1993.
These lower rates also led to a record number of loan refinancings in 1997.
As the year closed, refinancings accounted for nearly 60.0 percent of all
mortgage applications, which was approximately three times the usual
percentage. Low mortgage rates, reduced unemployment rates and high
consumer confidence point toward continued strength in housing
expenditures. A great demand for housing provides an integral part of a
strong national economy as it creates jobs related to the construction of
new dwellings, the manufacturing of building materials and the sales of
products used to equip and furnish homes.
Housing was not the only sector that benefitted from the nation's strong
economic position. United States business lending also experienced an
upswing in 1997. With the declining rate environment, companies began to
borrow at a furious pace to "lock-in" some of the lowest corporate interest
rates ever offered. At December 31, 1997, the nation's banks recorded
$853.2 billion in commercial loans. This marked a $74.1 billion or 9.5
percent increase over the December 31, 1996, amount.
With respect to the Company's commercial loan practices, it was ranked
second in 1997 by the U.S. Small Business Administration's Office of
Advocacy among Pennsylvania banks with assets between $100.0 million and
$500.0 million for its "small business friendly" lending activities. This
marks the second consecutive year that the Company was awarded this honor.
Five criteria are used in ranking banks. They include: (i) the ratio of
small business loans of less than $250 to assets; (ii) the ratio of small
business loans to total business loans; (iii) the ratio of small business
loans to total deposits; (iv) the total dollar amount of business loans;
and (v) the total number of business loans outstanding.
While mortgage and commercial lending flourished in 1997, consumer lending
performed sluggishly. Overall, consumer lending for the nation's banks
ended the year at $513.7 billion. At December 31, 1996, this figure
equaled $525.8 billion. The 2.3 percent decline is partially attributable
to the lag in changes on consumer loan interest rates as compared to
general market rates. Over the past two years, credit card rates have
averaged just under 17.0 percent. Conversely, ten-year U.S. Treasury
security rates have fallen 1.5 percentage points while 30-year mortgage
loan rates have fallen 1.4 percentage points since June of 1996.
The composition of the Company's loan portfolio at year-end for the past
five years is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ----------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others.. $ 38,996 15.58% $ 36,416 15.44% $ 45,554 21.30% $ 31,829 16.37% $ 24,158 13.69%
Real estate:
Construction.................... 2,096 0.84 3,657 1.55 992 0.46 2,729 1.40 5,079 2.88
Mortgage........................ 180,123 71.98 165,868 70.34 144,649 67.65 134,453 69.13 122,666 69.50
Consumer, net..................... 29,012 11.60 29,862 12.67 22,640 10.59 25,474 13.10 24,579 13.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, net of unearned income... 250,227 100.00% 235,803 100.00% 213,835 100.00% 194,485 100.00% 176,482 100.00%
====== ====== ====== ====== ======
Less: allowance for loan losses... 3,798 3,944 3,903 3,576 3,169
-------- -------- -------- -------- --------
Net loans..................... $246,429 $231,859 $209,932 $190,909 $173,313
======== ======== ======== ======== ========
</TABLE>
Loans, net of unearned income, amounted to $250.2 million at December 31,
1997, a $14.4 million or 6.1 percent increase over the $235.8 million at
December 31, 1996. The Company had aggregate commercial loans of $7.0
million to certain large Pennsylvania-based commercial banks at December
31, 1997. The Company had no such loans at year-end 1996. Adjusting for
short-term credit extensions to other financial institutions and the sale
of $3.4 million in student loans during the second quarter of 1997, the
increase would have approximated $10.8 million in 1997. After considering
all adjustments, the increase in aggregate loan demand can be primarily
attributed to two areas. For 1997, loans issued for one-to-four family
residential properties increased $8.9 million or 6.1 percent compared to
1996. Additionally, loans issued for nonfarm, nonresidential properties
rose $5.3 million or 17.8 percent over 1996. Partially offsetting these
increases was a decline in commercial loans, adjusted for the extensions to
large Pennsylvania-based commercial banks, of $4.4 million compared to
1996. Loans, net of unearned income, amounted to 68.7 percent of total
earning assets at December 31, 1997. The same ratio equaled 69.1 percent
at December 31, 1996. Despite the small decline, the ratio exceeds the
63.3 percent recorded at December 31, 1995. Management expects to maintain
this higher level in conjunction with its strategic objective of increasing
the loan portfolio's role in the Company's earning assets mix. During
1997, the peer group's average loans accounted for 64.0 percent of average
assets as compared to the Company's ratio of 67.3 percent. Management
expects loan demand to moderate in 1998. The Company's opening of two new
branches in the fourth quarter of 1997 and a continuation of the low
interest rate environment may fuel loan demand. However, real estate loan
demand may decline as saturation occurs in the market. Should interest
rates climb or local employment conditions deteriorate, the Company may
also experience a drop in loan demand for 1998.
The tax-equivalent yield on the loan portfolio declined slightly from 8.6
percent in 1996 to 8.5 percent in 1997. This level also lagged the 9.0
percent yield of the Company's peer group. The lower yield resulted from
the Company's 1997 pricing strategies in light of the falling interest rate
environment and intensified competition for loan customers. In contrast to
the national trends, the Company's volume of refinanced residential
mortgages dropped considerably from $23.1 million in 1996 to $10.9 million
in 1997. The large level of 1996 refinancings primarily came in the second
and third quarters as customers took advantage of the Company's "Loan Sale"
marketing efforts. Management expects loan yields to remain constant
throughout 1998 if general market rates do not decline further and
competition does not intensify.
Falling mortgage rates and credit extensions to financial institutions led
to a slight change in the composition of the loan portfolio during 1997.
The favorable mortgage lending conditions led to real estate loans
accounting for approximately 72.8 percent of total loans outstanding at
December 31, 1997, compared to 71.9 percent for the same period of 1996.
Real estate loans amounted to $182.2 million at December 31, 1997, an
increase of $12.7 million as compared to year-end 1996. Commercial loan
volumes increased by $2.6 million at December 31, 1997, as compared to
December 31, 1996. This increase is due to $7.0 million in outstanding
credit extensions to other Pennsylvania-based commercial banks at December
31, 1997. Had such extensions not been granted, the Company would have
experienced a $4.4 million decline in its commercial loan portfolio.
Consumer loan volumes declined in 1997, falling from $29.9 million at
December 31, 1996, to $29.0 million at December 31, 1997. Adjusting for
the Company's $3.4 million sale of student loans, consumer loans would have
experienced an increase of $2.5 million.
Based on the Company's asset/liability simulation model, management feels
confident that it can facilitate loan demand through payments and
prepayments on investments and loans and increases in core deposits.
Management expects to receive approximately $92.4 million from repayments
on loans and investment securities during 1998. In the event an unforeseen
increase in loan demand arises during 1998, management could facilitate
such demand by aggressively competing for deposits or utilizing various
credit products available through the FHLB-Pgh.
At December 31, 1997, the Company had no loan concentrations exceeding 10.0
percent of total loans, excluding locational concentrations, to individual
or multiple borrowers engaged in activities that would cause them to be
similarly affected by changes in economic or other conditions. The Company
limits its exposure to concentrations of credit risk by the nature of its
lending activities as approximately 62.4 percent of total loans outstanding
are secured by residential properties. The average mortgage outstanding on
a residential property was $37 at December 31, 1997. The Company maintains
a policy restricting the loan-to-value ratio at 80.0 percent. The loan
portfolio does not consist of any form of credit involving highly-leveraged
transactions, defined as financing transactions that involve the buyout,
acquisition or recapitalization of an existing business and include credits
extended to highly-leveraged industries.
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These instruments involve, to varying degrees, elements of
credit and IRR in excess of the amount recognized in the financial
statements. Management does not anticipate that losses, if any, that may
occur as a result of funding off-balance sheet commitments would have a
material adverse effect on the Company's results of operations or financial
position.
The Company's involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of home equity and credit
card lines and commercial letters of credit is represented by the
contractual amounts of those instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Commercial letters of credit are conditional commitments issued by
the Company to support customers in the purchase of commercial goods. Such
letters of credit are automatically renewable upon their anniversary date
unless cancelled prior to such date at the option of the Company.
The Company employs the same credit policies and requirements in making
off-balance sheet credit commitments as it does for on-balance sheet
instruments. Provision for losses, if any, is included in the Company's
allowance for loan losses. No provision was deemed necessary at December
31, 1997 and 1996. Such commitments are generally issued for one year or
less and often expire unused in whole or part by the customer. The Company
bases the amount of collateral obtained on management's credit evaluation
of the customer. Collateral held varies but may include property, plant
and equipment, primary residential properties, and to a lesser extent,
income-producing properties. The Company's exposure to such commitments
was $17.8 million at December 31, 1997, and $10.9 million at December 31,
1996.
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and liquidity
strains. Approximately 33.5 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 future IRR in the loan portfolio.
The maturity and repricing information of the loan portfolio by major
classification at December 31, 1997, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1997 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others........................... $22,812 $ 9,778 $ 6,406 $ 38,996
Real estate:
Construction............................................. 2,096 2,096
Mortgage................................................. 17,596 57,338 105,189 180,123
Consumer, net.............................................. 12,828 12,730 3,454 29,012
------- ------- -------- --------
Total.................................................. $55,332 $79,846 $115,049 $250,227
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates............................... $37,902 $67,730 $ 98,682 $204,314
Floating-or-adjustable interest rates...................... 45,913 45,913
------- ------- -------- --------
Total.................................................. $83,815 $67,730 $ 98,682 $250,227
======= ======= ======== ========
</TABLE>
The Company's fixed-rate loans increased $15.8 million at December 31,
1997, while adjustable-rate loans declined $1.4 million. Fixed-rate loans
comprised 81.7 percent of the loan portfolio at December 31, 1997, with
adjustable-rate loans making up the remaining 18.3 percent. At December
31, 1996, fixed-rate loans accounted for 79.9 percent of the loan portfolio
with adjustable-rate loans making up the remaining 20.1 percent. Under the
falling interest rate environment of 1997, customers chose fixed-rate
products as compared to adjustable-rate products in anticipation of a
potential rise in future rates.
Subsequent to year-end 1997, the Company began developing a program for
selling and underwriting certain loan products. During the first quarter
of 1998, the Company hired an experienced secondary market mortgage manager
to oversee the 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 by the second quarter of 1998.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," on January 1, 1997.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. SFAS No.
125 also provides implementation guidance for: (i) assessing isolation of
transferred assets and for accounting for transfers of partial interests;
(ii) servicing of financial assets; (iii) securitizations; (iv) transfers
of sales-type and direct financing lease receivables; (v) securities
lending transactions; (vi) repurchase agreements; (vii) dollar-roll
transactions; (viii) wash sales; (ix) loan syndications and participations;
(x) risk participations in banker's acceptances; (xi) factoring
arrangements; (xii) transfers of receivables with recourse; and (xiii)
extinguishment of liabilities. The accounting and reporting standards in
SFAS No. 125 are based on consistent application of a financial-components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an enterprise recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, except as amended in SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." Specifically, the provisions identified as being
deferred under SFAS No. 127 include secured borrowings, collateralizations
and transfers of financial assets that are part of repurchase agreements,
dollar-rolls, securities lending and similar transactions. In 1997, the
Company had no transfers of financial assets nor extinguishment of
liabilities that fell under the scope of SFAS No. 125. The adoption of
SFAS No. 127 in 1998 is not expected to have a material effect on operating
results or financial position.
ASSET QUALITY:
Personal bankruptcies in the United States continued to rise in 1997 and
bank charge-off levels remained near the recessionary levels of 1990 and
1991. Despite these occurrences, national asset quality experienced little
deterioration. In 1997, 1.4 million Americans filed for personal
bankruptcy, a 19.0 percent rise over 1996. This is an increase of more
than 300.0 percent since 1980. Historically, a healthy economy has often
led to increased levels of bankruptcy filings as consumers are encouraged
to spend more money and often take greater chances. Changes in bankruptcy
laws, irresponsible consumers and overzealous marketing by credit card
issuers have also received part of the blame for these advanced levels.
Creditors are particularly concerned with the credit practices of
"Generation X," people between 20 and 35 years old. The median debt of
this group rose 32.0 percent between 1992 and 1995. Of the debtors under
age 35, 8.8 percent are at least 60 days behind in their debt payments.
With the stigma of bankruptcy fading away, Generation X members often
choose bankruptcy as a way to relieve themselves of their debt burden.
With respect to residential mortgage lending, the Mortgage Bankers
Association of America reported that national residential mortgage
delinquencies rose to a seasonally-adjusted rate of 4.4 percent during the
fourth quarter of 1997. Although this marks the highest delinquency level
since the first three months of 1996, it is still in the low range as
compared to the level experienced during the 1990-1991 recession.
Moreover, national commercial credit delinquencies did not deteriorate
despite the economic difficulties experienced world-wide.
Bankruptcies in Northeastern Pennsylvania rose 42.2 percent for 1997, over
twice the increase experienced nationally. This level ranks the area
fourth among all regions in the United States. Mounting credit card debts,
job losses, uninsured medical expenses and family breakups were all cited
as causes for the rise. Bankruptcy filing increases were seen not only
among the younger generation but also among the elderly as many older
adults got into financial difficulty from supporting their adult children.
Unemployment rates in the Company's market area remain above the levels
reported for the United States and Pennsylvania. These inflated
unemployment figures have somewhat deteriorated asset quality levels. Such
deterioration is evidenced by a rise in the peer group's ratio of
nonaccrual loans as a percentage of gross loans. At December 31, 1997, the
peer group's ratio equaled 0.71 percent, a 17 basis point rise over the
0.54 percent recorded at December 31, 1996. Management is aware that if
local economic conditions continue to lag the nation's improvements, asset
quality may suffer. Therefore, management will continue to closely monitor
asset quality throughout 1998.
The Company manages credit risk by diversifying the loan portfolio and
applying policies and procedures designed to foster sound lending
practices. Such policies include certain standards that assist lenders in
making judgments related to the character, capacity, capital structure and
collateral of the borrower. Additionally, the lender must determine the
borrower's ability to repay the credit based on prevailing and expected
business conditions. Although supervised by a central loan committee, the
responsibility of credit administration lies with each community office,
including analyzing credit applications and making lending approvals within
specified limits, in order to minimize credit risk. The Board of Directors
establishes the lending authority of all credit officers and reviews this
authority at least annually. Credits beyond the scope of the branch
lending officer are forwarded to a centralized lending committee. Such
committee, comprised of senior lending management and board members,
attempts to assure the quality of the loan portfolio through careful
analysis of credit applications, adherence to credit policies and
examination of outstanding loans and delinquencies. These procedures aid
in the early detection and timely follow-up of problem loans. Credits in
excess of $500 are subject to approval by the Board of Directors.
Also, the Company minimizes credit risk by annually conducting an internal
loan review and contracting with an external loan review company to
independently perform this function. The independent loan review aids
management in identifying deteriorating financial conditions of borrowers,
allowing them to assist customers in remedying these situations. The
results of an independent loan review conducted by an external reviewer at
September 15, 1997, indicated no material difference from the assets
identified through the Company's loan review program.
In accordance with guidance set forth in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures,"
a loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Impairment is measured based on the present value of expected future cash
flows discounted at a loan's effective interest rate, the loan's observable
market price or the fair value of collateral if the loan is collateral-
dependent. When the measure of an impaired loan is less than the recorded
investment in the loan, the impairment is recognized by adjusting the
allowance for loan losses with a corresponding charge to the provision for
loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed assets.
Accruing loans past due 90 days or more and loans impaired under SFAS Nos.
114 and 118 comprise nonperforming loans. Impaired loans consist of
nonaccrual and restructured loans. A loan is classified as nonaccrual when
it is determined that the collection of all or a portion of interest or
principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless such loan is well secured and in the
process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against
income in the current period. Interest collections after a loan has been
placed on nonaccrual status are credited to income when received unless the
collectibility of principal is in doubt, causing all collections to be
applied as principal reductions. A nonaccrual loan is not returned to
performing status until the loan is current as to principal and interest
and has performed with the contractual terms for a minimum of six months.
Restructured loans are loans with original terms, interest rate, or both,
that have been modified as a result of a deterioration in the borrower's
financial condition. Interest income on restructured loans is recognized
when earned using the interest method. The Company had the same one
restructured loan during 1997 and 1996.
Foreclosed assets are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans
classified as in-substance foreclosures. The Company includes such
properties in other assets. A loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place.
Foreclosed assets are recorded at the lower of the related loan balance or
80.0 percent of its appraised fair value at the time of acquisition. Any
excess of the loan balance over the recorded value is charged to the
allowance for loan losses. Subsequent declines in the recorded value of
the property prior to its disposal and costs to maintain the assets are
included in other expenses. In addition, any gain or loss realized upon
disposal is included in other income or expense. The historical average
holding period for such properties is less than twelve months.
Information concerning nonperforming assets for the last five years is
summarized as follows. The table includes credits classified for
regulatory purposes and all material credits that cause management to have
serious doubts as to the borrowers' ability to comply with present loan
repayment terms.
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
DECEMBER 31 1997 1996 1995 1994 1993
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and others................................. $ 197 $ 251 $ 167 $ 45 $ 137
Real estate:
Construction...................................................
Mortgage....................................................... 2,063 1,018 1,164 1,352 1,497
Consumer, net.................................................... 12 40
------ ------ ------ ------ ------
Total nonaccrual loans....................................... 2,272 1,269 1,331 1,397 1,674
------ ------ ------ ------ ------
Restructured loans............................................... 189 225 262 236 275
------ ------ ------ ------ ------
Total impaired loans......................................... 2,461 1,494 1,593 1,633 1,949
------ ------ ------ ------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others................................. 321 359 181 33 62
Real estate:
Construction...................................................
Mortgage....................................................... 2,536 1,247 1,633 1,194 1,130
Consumer, net.................................................... 312 291 336 197 374
------ ------ ------ ------ ------
Total accruing loans past due 90 days or more................ 3,169 1,897 2,150 1,424 1,566
------ ------ ------ ------ ------
Total nonperforming loans.................................... 5,630 3,391 3,743 3,057 3,515
------ ------ ------ ------ ------
Foreclosed assets................................................ 405 420 441 226 248
------ ------ ------ ------ ------
Total nonperforming assets................................... $6,035 $3,811 $4,184 $3,283 $3,763
====== ====== ====== ====== ======
Ratios:
Impaired loans as a percentage of loans, net..................... 0.98% 0.63% 0.74% 0.84% 1.10%
Nonperforming loans as a percentage of loans, net................ 2.25 1.44 1.75 1.57 1.99
Nonperforming assets as a percentage of loans, net............... 2.41% 1.62% 1.96% 1.69% 2.13%
</TABLE>
Nonperforming assets, consisting of nonperforming loans and foreclosed
assets, totaled $6.0 million at December 31, 1997, compared to $3.8 million
at December 31, 1996. The Company's foreclosed assets had a net decrease
of $15 during 1997. Eight loans totaling $336 were transferred to
foreclosed assets and were offset by the sale of five properties totaling
$400, including net gains on such dispositions of $49. In 1996, a property
originally purchased by the Company to be utilized as a site for a new
branch office was included in other real estate. During 1995, management
reevaluated its intent for such property and transferred it to other real
estate at $220, which equaled 80.0 percent of its appraised value, with the
difference being recorded in other losses. In the first quarter of 1997,
such property was sold with a gain of $50 being recognized. The carrying
values of all properties included in other real estate were no more than
80.0 percent of their collateral values at December 31, 1997.
Nonperforming loans, consisting of accruing loans past due 90 days or more
and impaired loans, increased $2.2 million during 1997 from $3.4 million to
$5.6 million. The rise in nonperforming loans was primarily due to a
$1,272 increase in accruing loans past due 90 days or more and a $967
increase in impaired loans. The $967 change in impaired loans included
gross loans placed into this category of $1,544 and gross loans removed as
a result of charge-offs of $113, transfers to other real estate of $233,
and principal repayments of $231. Approximately 60.0 percent of the $1,544
of gross loans placed into impaired status during 1997 was attributable to
one commercial customer. Management expects this loan to be returned to
accrual status shortly, as it is current with respect to principal and
interest and has been performing with its contractual terms. Accruing
loans past due 90 days or more increased from $1,897 at December 31, 1996,
to $3,169 at December 31, 1997. The major portion of the increase came
from a $1,289 increase in real estate loans past due 90 or more days. As
a percentage of the loans past due 90 days or more, loans secured by real
estate comprised approximately 80.0 percent. The Company's historical
recovery rate on real estate loans is extremely high. However, as a
preventative measure, management continuously monitors and improves its
internal procedures regarding delinquent credits. Such procedures focus on
early detection and timely follow-up of past due loans in order to identify
potential problem loans and attempt to correct them before they
deteriorate. The Company experienced some deterioration in its asset
quality ratios in 1997. The impaired loans as a percentage of loans, net
of unearned income, ratio was 0.98 percent at December 31, 1997, compared
to 0.63 percent at December 31, 1996. For the Company's peer group, this
ratio was 0.71 percent. Additionally, the nonperforming assets to loans,
net of unearned income, ratio equaled 2.41 percent at December 31, 1997,
compared to 1.62 percent one year earlier. This ratio was also less
favorable as compared to the peer group's 1.22 percent recorded at December
31, 1997.
At December 31, 1997 and 1996, the Company had a recorded investment in
impaired loans of $2,461 and $1,494, respectively. The recorded investment
in impaired loans averaged $2,368 in 1997 and $1,528 in 1996. At December
31, 1997, the amount of recorded investment in impaired loans for which
there was a related allowance for loan losses and the amount of the
allowance was $2,272 and $541, respectively, and $1,269 and $650,
respectively, for the year ended December 31, 1996. The amount of recorded
investment for which there was no related allowance for loan losses was
$189 and $225 at December 31, 1997 and 1996, respectively. During 1997,
activity in the allowance for loan losses account related to impaired loans
included a provision charged to operations of $4 and losses charged to the
allowance of $113. There were no recoveries of impaired loans previously
charged-off in 1997. The activity in 1996 in the allowance for loan losses
account related to impaired loans included a provision charged to
operations of $3, losses charged to the allowance of $92 and recoveries of
impaired loans previously charged-off of $125. Interest income related to
impaired loans would have been $90, $113, and $66 in 1997, 1996 and 1995,
respectively, had such loans been current and the terms of the loans not
been modified. Interest recognized on impaired loans amounted to $84 in
1997, $30 in 1996 and $92 in 1995. Included in these amounts was interest
recognized on a cash basis of $84, $30 and $87, respectively. Cash
received on impaired loans applied as a reduction of principal totaled
$587, $398 and $595 in 1997, 1996 and 1995, respectively. There were no
commitments to extend additional funds to customers with impaired loans at
December 31, 1997 and 1996.
Classified assets are those cited by bank examiners, or by the bank's
internal rating system, as having an undesirable degree of risk.
Regulators separate classified assets into three major categories based on
degree of risk: (i) substandard; (ii) doubtful; and (iii) loss.
Accordingly, as part of their routine annual examination process,
regulators classified assets of the Company at June 30, 1997. The result
of such review indicated an improvement in the ratio of classified assets
as a percentage of Tier I capital from the 1996 examination.
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 SFAS No. 114, the allowance for loan losses
related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral
for certain collateral-dependent loans. Management uses historical loss
experience as a starting point for the evaluating 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.
Such 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. Such agencies may require the Company
to recognize additions to the allowance, beyond normal monthly provisions,
based on their judgments concerning information available to them at the
time of their examination. No such charge was deemed necessary upon
conclusion of the 1997 examination, as regulators considered the Company's
allowance for loan losses account adequate based on risk characteristics
and size of the loan portfolio. Upon its review of the 1997 regulatory
report, management was not aware of any significant recommendation with
respect to the loan portfolio that would materially affect future liquidity
or capital resources.
Management utilizes the federal banking regulatory agencies' Interagency
Policy Statement on the Allowance for Loan and Lease Losses in assessing
the adequacy of its allowance for loan losses account. The policy
statement provides guidance on the nature and purpose of the allowance,
related responsibilities of management and examiners, loan review systems
and international transfer risk matters. The 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 December 31, 1997, 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
1997 1996 1995 1994 1993
_____________ ______________ ______________ ______________ ______________
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A AS A
% OF % OF % OF % OF % OF
DECEMBER 31 AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
___________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others. $1,322 15.58% $1,396 15.44% $1,358 21.30% $1,188 16.37% $ 944 13.69%
Real estate:
Construction................... 0.84 1.55 0.46 1.40 2.88
Mortgage....................... 1,277 71.98 1,326 70.34 1,333 67.65 1,251 69.13 1,135 69.50
Consumer, net.................... 1,199 11.60 1,222 12.67 1,212 10.59 1,137 13.10 1,090 13.93
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........................ $3,798 100.00% $3,944 100.00% $3,903 100.00% $3,576 100.00% $3,169 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and illustration of
charge-offs and recoveries by major loan category for the past five years
is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31 1997 1996 1995 1994 1993
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period................. $3,944 $3,903 $3,576 $3,169 $2,497
Loans charged-off:
Commercial, financial and others................................. 271 523 136 243 177
Real estate:
Construction...................................................
Mortgage....................................................... 211 88 171 176 263
Consumer, net.................................................... 175 115 86 131 140
------ ------ ------ ------ ------
Total........................................................ 657 726 393 550 580
------ ------ ------ ------ ------
Loans recovered:
Commercial, financial and others................................. 15 284 80 7 42
Real estate:
Construction...................................................
Mortgage....................................................... 40 130 144 64 69
Consumer, net.................................................... 96 53 61 86 61
------ ----- ------ ------ ------
Total........................................................ 151 467 285 157 172
------ ----- ------ ------ ------
Net loans charged-off............................................ 506 259 108 393 408
------ ----- ------ ------ ------
Provision for loan losses........................................ 360 300 435 800 1,080
------ ------ ------ ------ ------
Allowance for loan losses at end of period....................... $3,798 $3,944 $3,903 $3,576 $3,169
====== ====== ====== ====== ======
Ratios:
Net loans charged-off as a percentage of average loans
outstanding..................................................... 0.21% 0.12% 0.05% 0.21% 0.23%
Allowance for loan losses as a percentage of period end loans.... 1.52% 1.67% 1.83% 1.84% 1.80%
</TABLE>
The allowance for loan losses, against which loans are charged-off, equaled
$3.8 million at December 31, 1997, and represented 1.52 percent of loans,
net of unearned income. At December 31, 1996, the allowance was $3.9
million and represented 1.67 percent of loans, net of unearned income. The
Company's strong loan demand led to the reduced ratio. However, such ratio
continued to exceed both the peer group and regulatory guidelines. At
December 31, 1997, the peer group reported a 1.30 percent ratio, down
slightly from the 1.38 percent ratio recorded one year earlier.
As a percentage of nonperforming loans, the allowance account covered 67.5
percent at December 31, 1997. This coverage ratio at December 31, 1996,
calculated to 116.3 percent. Relative to all nonperforming assets, the
allowance covered 62.9 percent at December 31, 1997. At December 31, 1996,
the ratio equaled 103.5 percent. Management will continue to make
provisions to its allowance in 1998 based on the Company's increased loan
volume. Should a deterioration of asset quality occur, management would
make a corresponding increase to its monthly provision.
Past due loans not satisfied through repossession, foreclosure or related
actions, are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan
losses. Any subsequent recoveries are credited to the allowance account.
Net charge-offs were $506 or 0.21 percent of average loans outstanding in
1997 compared to $259 or 0.12 percent in 1996. The nation's top 50 banks
reported a net charge-offs to average loans ratio of 0.56 percent for 1997
and 0.63 percent for 1996, while the peer group reported net charge-offs as
a percentage of average loans outstanding of 0.19 percent for 1997 and 0.18
percent for 1996. Management is cautiously optimistic that net charge-off
levels will decline in 1998 if the local economy improves. However,
management will closely monitor net charge-off levels in 1998 should local
unemployment ratios remain above national levels.
DEPOSITS:
The solid economic conditions prevalent throughout the United States during
1997 led to greater consumer confidence levels and higher disposable income
rates, but did not foster growth in personal saving patterns. Consumer
confidence ended 1997 at 136.3, the highest level experienced since 1967.
Real disposable income increased 2.9 percent from 1996 levels, the best
performance in the last three years. Despite this increase, personal
savings rates, a measure of savings as a percentage of disposable after-tax
income, dropped to 3.8 percent, the lowest level witnessed since 1939. This
rate, however, does not reflect the billions of dollars invested in stocks
and mutual funds and represents only a residual after taxes and personal
expenditures. National unemployment continued its downward spiral, falling
from 5.3 percent at year-end 1996 to 4.7 percent by the end of 1997. With
the job market narrowing, hourly wages continued to move upward, rising 3.7
percent for 1997. This enhanced personal wealth led to a 5.4 percent
annual spending growth rate in 1997, the greatest increase since 1994. Any
funds left from the 1997 consumer "spending spree" did not, however, find
their way into bank deposit accounts. Consumers took advantage of the
higher-yielding mutual fund and stock markets as opposed to lower-yielding
bank deposits. On average, diversified United States stock funds returned
24.4 percent in 1997, making the cumulative return on such instruments 95.3
percent over the past three years. Also, despite a 554 point drop on
October 27, 1997, the Dow Jones rebounded and ended the year over the 7,900
mark. Consumers young and old put more money away for their retirement.
Overall, retirement savings rose 2.0 percent in 1997. Americans aged 52
through retirement boosted their savings by 42.3 percent while the
Generation X portion of the population bumped their retirement savings by
17.8 percent. "Baby boomers," people between the ages of 33 and 51, were
the only individuals with a decline in their retirement savings patterns as
they fell 10.6 percent for the year. Continued savings trends away from
traditional bank deposit accounts may push banks to offer higher interest
rates on deposit accounts so they can retain and acquire deposits used to
fund asset growth. Higher deposit rates may also lead to higher loan rates
for bank customers. However, should investors become cautious on investing
in mutual funds and stock markets, banks with their safer products and
stable returns, may experience an increase in deposit volumes.
The Company's deposit volumes may be favorably affected by two recent
changes in laws regulating IRA deposits. On January 1, 1997, the Job Act
went into effect. Under the Job Act, tax deductible IRA contributions,
subject to adjusted gross income limits, of up to $2 are permitted for each
spouse if the combined compensation of both spouses is at least equal to
the amount contributed. Prior to the implementation of the Job Act, the
maximum limit on combined contributions was $2.25.
Under the 1997 Taxpayer Relief Act, signed into law on August 5, 1997, two
new IRA products will be available to consumers beginning January 1, 1998.
The Roth IRA will be available for people meeting the following conditions:
(i) joint filers with an adjusted gross income under $150 with a phase-out
at $160; and (ii) individual filers with an adjusted gross income under $95
with phase-out between $95 and $110. Roth IRA contributions are
nondeductible. Earnings on the Roth IRA accumulate tax-free and qualified
distributions are fully nontaxable.
Roth IRA distributions are qualified if the account has existed for at
least five years and the following criteria are met: (i) the account holder
is at least 59.5 years old; (ii) the account holder is deceased or
disabled; or (iii) it is used to pay certain expenses in connection with a
first-time home purchase by the Roth IRA owner, his/her spouse or any
child, grandchild or ancestor of the owner or spouse. The lifetime
distribution in this case is limited to $10.
Individuals and couples with adjusted gross income of $100 or less can
convert all or part of deductible or nondeductible IRAs into Roth IRAs.
Rollovers to Roth IRAs may represent a shift of significant savings amounts
among institutions. Roth IRA accounts may also be advantageous due to
their penalty-free accessibility and the potential earnings above an
unmatched Section 401(k) contribution.
The other new product is the Education IRA. Under the new law, taxpayers
can contribute as much as 500 dollars per year for each child under 18
years of age to an Education IRA. This IRA is not deductible by the
contributor but does accumulate income tax-free. Phase-out on the
availability of these accounts will begin as joint contributors' income
exceeds $150, or $95 for a single contributor. Distributions must be made
by the beneficiary's 30th birthday. If the distributions are not made for
educational purposes, a 10.0 percent tax penalty will be imposed.
The Education IRA should be popular with consumers for the following
reasons: (i) the statutory language permits contributions with a
beneficiary that is not related to the contributor; (ii) grandparents and
relatives will want to establish these accounts to help grandchildren and
other relatives save for college; (iii) contributors can generally change
the beneficiary without tax consequence if the original designee and the
changed designee are in the same family.
The 1997 Taxpayer Relief Act will also raise the limitations for making a
deductible IRA contribution for taxpayers participating in an employer-
sponsored qualified plan. The phase-out range will be $50 to $60 for joint
returns and $30 to $40 for single returns in 1998. By 2007, the phase-out
range will be $80 to $100 for joint returns and $50 to $60 for single
returns. Management expects the Company's deposit levels to rise in 1998
as customers take advantage of the Job Act and the Taxpayer Relief Act.
Mutual funds and stock markets were not the only obstacles the Company
faced in deposit gathering for 1997. Local bank and thrift institutions
also competed aggressively for customer deposits. For example, the average
rate paid on a 30-month certificate of deposit for the Company's peer group
exceeded 5.4 percent for 1997. Comparatively, the average rate on 30-month
certificates paid by commercial banks in the United States was 5.3 percent
for the year.
On February 25, 1998, a U.S. Supreme Court decision pronounced that
federally-chartered credit unions could accept members from only one
company or group. This decision overturned National Credit Union
Administration ("NCUA") rules that permitted thousands of credit unions to
expand their membership over the past 15 years. Until 1982, the NCUA
required most credit unions to have a common bond linking all members. The
agency then changed its interpretation of a 1934 statute and allowed credit
unions to accept members from multiple groups. This allowed rapid
expansion for credit unions as 3,500 credit unions have admitted over 150.0
thousand unrelated employer groups since 1982.
The Supreme Court decision can potentially cost credit unions over ten
million members if bank groups force them to close their accounts. If this
occurs, bank deposit volumes may flourish.
The average amount of, and the rate paid on, the major classifications of
deposits for the past five years are summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
1997 1996 1995 1994 1993
_______________________________________________________________________________________
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
YEAR ENDED DECEMBER 31 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
_____________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....... $ 16,854 3.16% $ 18,144 2.92% $ 21,869 3.47% $ 23,955 3.31% $ 22,267 3.26%
NOW accounts................ 18,464 2.18 16,661 2.02 15,550 1.96 15,151 1.96 14,406 2.35
Savings accounts............ 65,081 2.92 67,144 3.00 71,911 3.25 83,142 3.13 73,400 3.34
Time deposits less than $100 165,487 5.70 157,271 5.67 155,183 5.75 139,641 4.94 131,572 5.26
Time deposits $100 or more.. 29,092 6.17 27,755 5.93 29,336 6.04 25,995 5.97 25,960 5.02
-------- -------- -------- -------- --------
Total interest-bearing.... 294,978 4.77% 286,975 4.69% 293,849 4.80% 287,884 4.22% 267,605 4.39%
Noninterest-bearing......... 27,448 26,329 24,090 21,849 19,657
-------- -------- -------- -------- --------
Total deposits............ $322,426 $313,304 $317,939 $309,733 $287,262
======== ======== ======== ======== ========
</TABLE>
Deposit volumes rose 3.7 percent from $320.5 million at December 31, 1996,
to $332.4 million at December 31, 1997. Such increase was primarily due to
the Company's acquisition of the Eynon and Factoryville branches from First
Union. Without considering deposits from these branches, the Company's
total deposits would have been $310.7 million at December 31, 1997. For
Northeastern Pennsylvania banks, deposits increased 8.5 percent from year-
end 1996 to year-end 1997. Total deposits averaged $322.4 million for 1997
compared to $313.3 million for 1996, an increase of 2.9 percent. For the
first quarter of 1997, the Company's total deposits declined $2.7 million
primarily due to a reduction in time deposits $100 or more held by school
districts. During the second quarter, the Company's deposits grew $5.8
million. The primary cause of the second quarter increase was an $8.2
million increase in time deposits less than $100 fueled by the Company's
offering of a special time deposit during the quarter. Also contributing,
to a lesser degree, was a $2.1 million rise in commercial checking
accounts. These increases were partially offset by a $7.2 million decline
in time deposits $100 or more due to the cyclical nature of local school
district deposits. The third quarter of 1997 closed with the Company's
deposits $3.2 million below the $323.6 million recorded at June 30, 1997.
The Company, in anticipation of the pending influx of deposits from the
Eynon and Factoryville branch acquisition, was less aggressive in deposit
pricing. Deposits, net of the acquired branch funds, declined $9.7 million
during the final quarter of 1997, as management chose to lower the
Company's cost of funds by not actively competing for higher-costing,
short-term time deposits of commercial enterprises.
The Company's deposit composition continued to change, as evidenced by a
decline in the average volume of transaction accounts as a percentage of
average total deposits. For the year ended December 31, 1997, this ratio
equaled 39.7 percent as compared to 40.9 percent for the same period of
1996. Customers repositioned available funds from lower-yielding
transaction accounts into higher-yielding time deposits in order to enhance
their yields. While time deposits less than $100 benefit the funding of
loan demand, they also make the Company more reliant on higher-costing
funding sources. The Company's weighted-average cost of time deposits for
1997 totaled 5.8 percent. This cost was 295 basis points above the
Company's weighted-average cost of money market, NOW and savings accounts.
For 1997, average time deposits accounted for 54.1 percent of the Company's
average assets. The Company's average core deposits to average total
deposits had little change in 1997, falling slightly from 91.1 percent in
1996, to 91.0 percent. For 1997, the Company's cost of funds rose slightly
to 4.8 percent from 4.7 percent in 1996. The Company's increase was
primarily due to rises in rates offered on money market accounts and time
deposits $100 or more in the latter part of the year. In contrast, the
peer group's cost fell slightly from 4.7 percent in 1996 to 4.6 percent in
1997. The cost of money market accounts for the first quarter of 1997 was
3.05 percent, while time deposits $100 or more cost 6.05 percent for the
same period. For the fourth quarter of 1997, money market accounts cost
the Company 3.23 percent and time deposits $100 or more cost 6.26 percent.
The Company continually analyzes its pricing strategies with respect to
prevailing market conditions. Changes in general market rates, loan demand
and liquidity position are all considered when making decisions regarding
deposit pricing for future periods. Although management expects increased
pressure on the Company's cost of funds from the intense competitive
environment, they may be able to counter these forces through offering
customers alternative investment products such as those included in the
aforementioned newly-implemented, fixed-rate annuity program.
By building its base of noninterest-bearing deposits, the Company can
achieve lower funds cost. In 1997, the Company's noninterest-bearing
deposits grew $4.3 million from $26.4 million at December 31, 1996, to
$30.7 million at December 31, 1997. Average volumes of noninterest-bearing
deposits also increased from $26.3 million in 1996 to $27.4 million in
1997. For 1997 and 1996, average noninterest-bearing deposits comprised
7.6 percent of total average assets. In comparison, the peer group's
average noninterest-bearing deposits comprised 8.9 percent of total average
assets for 1997 and 7.6 percent of total average assets for 1996.
Volatile deposits, time deposits in denominations $100 or more, declined
from $35.9 million at December 31, 1996, to $20.8 million at December 31,
1997. As aforementioned, this decline came as the Company chose not to
actively compete for time deposits $100 or more in an attempt to bring its
cost of funds to a more acceptable level. The Company was also less
reliant on this funding as compared to the peer group in 1997. Average
volatile deposits, as a percentage of average assets, was 8.1 percent in
1997 as compared to 10.8 percent for the peer group. The Company's average
cost of such funds rose 24 basis points during 1997.
<TABLE>
<CAPTION>
Maturities of time deposits $100 or more for the past five years are
summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS $100 OR MORE
DECEMBER 31 1997 1996 1995 1994 1993
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Within three months............................................. $ 3,195 $ 8,598 $ 6,466 $ 7,861 $ 5,817
After three months but within six months........................ 2,819 9,958 6,646 4,200 5,447
After six months but within twelve months....................... 6,334 11,262 8,590 10,740 5,957
After twelve months............................................. 8,484 6,047 7,982 7,410 7,060
------- ------- ------- ------- -------
Total......................................................... $20,832 $35,865 $29,684 $30,211 $24,281
======= ======= ======= ======= =======
</TABLE>
Short-term borrowings available to the Company consist of a line of credit
and fixed-rate advances with the FHLB-Pgh secured under terms of a blanket
collateral agreement by a pledge of FHLB-Pgh stock and certain other
qualifying collateral, such as investment and mortgage backed securities
and mortgage loans. The line is limited to the Company's maximum borrowing
capacity ("MBC") with the FHLB-Pgh, which is based on a percentage of
qualifying collateral assets. At December 31, 1997, the Company's MBC was
$137.4 million. Interest accrues daily on the line based on the rate of
FHLB-Pgh discount notes. This rate resets each day. The line is renewable
annually on its anniversary date and carries no associated commitment fees.
The FHLB-Pgh has the right to reduce or terminate the line at any time
without prior notice and the Company may repay this line at any time
without incurring prepayment penalties. Short-term, fixed-rate advances
are issued with maturities less than one year based on the FHLB-Pgh's
current cost of funds rate. Advances are limited to the Company's MBC and
are not prepayable. There are no commitment fees associated with the
advances, except for those for forward settlement that are based on FHLB-
Pgh hedging costs.
There were $9.6 million in short-term borrowings outstanding at December
31, 1997. At December 31, 1996, the Company had no short-term borrowings
outstanding. The average daily balance and weighted-average rate on
aggregate short-term borrowings was $138 at 5.8 percent in 1997 and $51 at
5.9 percent in 1996. The maximum amount of all short-term borrowings
outstanding at any month end was $9.6 million during 1997 and $2.8 million
during 1996. Short-term borrowings during 1997 and 1996 consisted entirely
of the FHLB-Pgh line of credit.
Long-term debt at December 31, 1997 and 1996, consisted entirely of a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program. This advance matures on September 2, 2009. The
scheduled principal payments on the note total $2 for each of the five
years 1998 through 2002. The prepayment fee applicable to the advance is
equal to the present value of the difference between cash flows generated
at the advance rate from the date of the prepayment until the original
maturity date, and the cash flows that would result from the interest rate
posted by the FHLB-Pgh on the date of prepayment for an advance of
comparable maturity. The note is secured under terms of a blanket
collateral agreement by a pledge of qualifying investment and mortgage
backed securities, certain mortgage loans and a lien on FHLB-Pgh stock.
The average daily balance on long-term debt for 1997 was $45 with a
weighted-average rate of 8.9 percent. For 1996, the average daily balance
on long-term debt was $2.1 million with a weighted-average rate of 4.4
percent. Included in the average daily balance and weighted-average rate
for 1996 was a $3.0 million, 4.3 percent fixed-rate advance that matured
September 9, 1996. The note was repaid in accordance with its contractual
terms.
The Company did not enter into repurchase agreements with others during
1997 and 1996. Repurchase agreements consist of transactions whereby an
institution sells securities and agrees to repurchase the identical, or
substantially the same securities, at a specified date for a specified
price.
MARKET RISK SENSITIVITY:
Market risk is the risk to a company's financial position resulting from
adverse changes in market rates or prices, such as interest rates, foreign
exchange rates or equity prices. The Company has no exposure to foreign
currency exchange risk nor does it have any specific exposure to commodity
price risk. The major area of market risk exposure to the Company is IRR.
The Company's exposure to IRR can be explained as the potential for change
in its reported earnings and/or the market value of its net worth.
Variations in interest rates affect the Company's earnings by changing its
net interest income and its level of other interest-sensitive income and
operating expenses. Interest rate changes also affect the underlying
economic value of the Company's assets, liabilities and off-balance sheet
items. These changes arise because the present value of future cash flows,
and often the cash flows themselves, change with the interest rates. The
effects of the changes in these present values reflect the change in the
Company's underlying economic value and provide a basis for the expected
change in future earnings related to the interest rate. IRR is inherent in
the role of banks as financial intermediaries, however a bank with a high
IRR level may experience lower earnings, impaired liquidity and capital
positions, and most likely, a greater risk of insolvency. Therefore, banks
must carefully evaluate IRR to promote safety and soundness in their
activities.
The responsibility for the Company's market risk sensitivity management has
been delegated to the ALCO. Specifically, ALCO utilizes several
computerized modeling techniques to monitor and attempt to control the
influence that market changes have on the Company's RSA and RSL.
The topic of market risk has recently become a major focal point of
regulatory emphasis. On May 23, 1996, the Federal Reserve Board issued
Supervisory Release ("SR") 96-13, "Joint Policy Statement on Interest Rate
Risk," to provide guidance on sound practices for managing IRR. While each
bank needs to develop its own IRR management program depending on its
structure, certain elements are fundamental components of sound IRR
management. These elements include appropriate board and management
oversight as well as a comprehensive risk management process that
effectively identifies, measures, monitors and controls risk. Should a
bank have material weaknesses in its risk management process or high
exposure relative to its capital, the agencies will take action to remedy
these shortcomings. The policy statement: (i) identifies the key elements
of sound IRR management; (ii) describes prudent principles and practices
for each of the elements; (iii) emphasizes the importance of adequate
oversight by a bank's board of directors and senior management; (iv)
emphasizes the importance of a comprehensive risk management process; and
(v) describes the critical factors affecting the agencies' evaluation of a
bank's IRR when making a determination of capital adequacy. The agencies
noted that they will continue to place significant emphasis on the level of
a bank's IRR exposure and the quality of its risk management process when
evaluating a bank's capital adequacy. They noted that the principals and
practices identified in the policy statement will provide the standards
upon which the agencies will evaluate the adequacy and effectiveness of a
bank's IRR management.
On January 23, 1997, Federal Reserve Board, FDIC and the OCC issued a joint
news release announcing that the Basle Committee, with the agreement of the
central bank governors of the Group of Ten countries, issued the paper
entitled, "Principles for the Management of Interest Rate Risk." This
paper describes principles for strong risk management and standards that
banking agencies should use to evaluate the adequacy and effectiveness of
a bank's IRR management process.
It was noted by the Federal banking agencies that the paper is consistent
with the "Joint Agency Policy Statement on Interest Rate Risk." Both
pieces of literature emphasize the importance of appropriate board of
director and senior management oversight of a comprehensive risk management
process that identifies, measures, monitors and controls a bank's IRR
exposure.
As aforementioned, the Company utilizes various computerized modeling
techniques for market risk management. For 1997, management implemented an
additional technique to assess the Company's market risk exposure based on
newly-introduced SEC guidance.
On January 28, 1997, the SEC issued, "Disclosures of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments
and Disclosure of Quantitative and Qualitative Information about Market
Risk Inherent in Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments." This final rule
requires quantitative and qualitative disclosures related to market risk
inherent in derivative financial instruments, certain derivative commodity
instruments and other financial instruments outside the financial
statements. Derivative financial instruments include: (i) futures; (ii)
forwards; (iii) swaps; (iv) options; and (v) other financial instruments
with similar characteristics.
Derivative commodity instruments include: (i) commodity futures; (ii)
commodity forwards; (iii) commodity swaps; (iv) commodity options; and (v)
other commodity instruments that are not derivative financial instruments,
but may be settled in cash or with another financial instrument by contract
or business custom.
Other financial instruments means all financial instruments as defined by
GAAP for which fair value disclosures are required in accordance with SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." Examples
of other financial instruments are: (i) investments; (ii) loans; (iii)
structured notes; (iv) mortgage backed securities; (v) indexed debt
instruments; (vi) interest-only and principal-only obligations; (vii)
deposits; and (viii) other debt obligations.
In making quantitative disclosures, companies' are given three alternatives
for each type of portfolio or market risk category for which disclosures
are required. These options are: (i) a tabular presentation of fair value
information and contract terms relevant to determine the future cash flows
of market risk sensitive instruments, categorized by expected maturity
dates; (ii) a sensitivity analysis that expresses the potential loss in
future earnings, fair values or cash flows of market risk sensitive
instruments from selected hypothetical changes in market rates and prices;
or (iii) value at risk disclosures that express the potential loss in
future earnings, fair values or cash flows of market risk sensitive
instruments from various market movements over a selected period of time
and with a selected likelihood of occurrence.
The Company utilizes the tabular presentation alternative in complying with
quantitative and qualitative disclosure rules. The following table
summarizes information with respect to maturities and fair values of other
financial instruments at December 31, 1997. For expected maturity
distributions, other financial assets and liabilities are presented based
on their carrying values, except for investment securities, which are based
on amortized costs. Investment securities and federal funds sold
distributions and their related weighted-average interest rates are based
on contractual maturities, with the exception of mortgage backed securities
and equity securities. Mortgage backed securities are presented based upon
estimated principal cash flows and related weighted-average interest rates,
assuming no change in the current interest rate environment. The amount
of, and weighted-average interest rate earned on, equity securities are
included in the "Thereafter" maturity category. Loans and their related
weighted-average interest rates are categorized based on payment due dates,
assuming no change in current interest rates. For noninterest-bearing
deposits and money market, NOW and savings accounts that have no
contractual maturity, principal cash flows and related weighted-average
interest rates are presented based on the Company's historical experience,
management's judgment and statistical analysis, as applicable, concerning
their most likely withdrawal behaviors. The table presents distributions
and related weighted-average interest rates for time deposits, short-term
borrowings and long-term debt based on contractual maturities assuming no
change in current interest rates. The weighted-average yield of tax-exempt
securities and loans has been computed on a tax-equivalent basis using the
statutory tax rate of 34.0 percent. For additional information on the
assumptions used to determine fair values, reference is made to Note 1,
"Summary of significant accounting policies," in the Company's Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARKET RISK DISCLOSURES
EXPECTED MATURITY DATE
_________________________________________________________________________
THERE FAIR
1998 1999 2000 2001 2002 AFTER TOTAL VALUE
__________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other financial assets:
Cash and due from banks........... $ 9,040 $ 9,040 $ 9,040
Average interest rate.............
Federal funds sold................ 8,225 8,225 8,225
Average interest rate............. 5.50% 5.50%
Investment securities:
U.S. Treasuries and agencies:
Fixed-rate...................... 24,506 $8,028 32,534 32,570
Average interest rate........... 5.55% 6.00% 5.66%
Adjustable-rate................. 5,800 $ 648 6,448 6,401
Average interest rate........... 4.27% 4.61% 4.30%
State and municipals.............. 725 1,750 1,449 $ 1,364 $ 1,485 $ 31,556 38,329 39,887
Average interest rate............. 5.92% 6.40% 6.76% 7.15% 7.14% 8.36% 8.07%
Mortgage backed securities........ 6,041 13,104 2,625 756 513 709 23,748 23,746
Average interest rate............. 6.34% 6.45% 6.45% 6.45% 6.45% 6.48% 6.42%
Equity securities................. 2,182 2,182 3,062
Average interest rate............. 6.04% 6.04%
-------- ------- ------ ------- ------- -------- -------- --------
Total........................... 37,072 22,882 4,722 2,120 1,998 34,447 103,241 105,666
Average interest rate........... 5.49% 6.29% 6.29% 6.90% 6.96% 8.17% 6.66%
Net loans:
Fixed-rate........................ 36,896 20,186 18,261 15,869 13,085 96,917 201,214 198,690
Average interest rate............. 7.76% 8.45% 8.15% 8.15% 7.91% 8.02% 8.03%
Adjustable-rate................... 17,596 2,679 2,742 2,404 3,408 16,386 45,215 45,215
Average interest rate............. 8.63% 9.18% 9.36% 9.30% 5.94% 9.34% 8.80%
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... 54,492 22,865 21,003 18,273 16,493 113,303 246,429 243,905
Average interest rate........... 8.04% 8.54% 8.31% 8.30% 7.50% 8.21% 8.17%
Accrued interest receivable....... 2,575 2,575 2,575
Average interest rate.............
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... $111,404 $45,747 $25,725 $20,393 $18,491 $147,750 $369,510 $369,411
======== ======= ======= ======= ======= ======== ======== ========
Other financial liabilities:
Noninterest-bearing deposits...... $ 6,448 $ 5,834 $ 5,220 $ 4,605 $ 3,991 $ 4,605 $ 30,703 $ 30,703
Average interest rate.............
Interest-bearing liabilities:
MMDA, NOW and savings............. 21,949 19,859 17,768 15,678 13,587 15,678 104,519 104,519
Average interest rate............. 2.73% 2.73% 2.73% 2.73% 2.73% 2.73% 2.73%
Time deposits..................... 93,656 62,826 23,814 7,527 6,415 2,921 197,159 197,868
Average interest rate............. 5.12% 6.05% 6.57% 5.87% 5.97% 3.92% 5.63%
Short-term borrowings............. 9,575 9,575 9,575
Average interest rate............. 5.75% 5.75%
Long-term debt.................... 2 2 2 2 2 34 44 44
Average interest rate............. 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... 125,182 82,687 41,584 23,207 20,004 18,633 311,297 312,006
Average interest rate........... 4.75% 5.25% 4.93% 3.75% 3.77% 2.93% 4.66%
Accrued interest payable.......... 1,714 1,714 1,714
Average interest rate.............
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... $133,344 $88,521 $46,804 $27,812 $23,995 $ 23,238 $343,714 $344,423
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
At December 31, 1997, the Company had investments of $37.1 million with a
weighted-average, tax-equivalent yield of 5.49 percent scheduled to mature
within one year. Correspondingly, net loans of $54.5 million with a
weighted-average, tax-equivalent yield of 8.04 percent were scheduled to
mature in the same timeframe. Overall, interest-earning assets scheduled
to mature within one year equaled $99.8 million with a weighted-average,
tax-equivalent yield of 6.88 percent. With respect to interest-bearing
liabilities, the Company had interest-bearing transaction accounts, defined
as money market, NOW and savings accounts, of $21.9 million with a
weighted-average yield of 2.73 percent scheduled to mature within one year.
The Company had time deposits of $93.7 million with a weighted-average
yield of 5.12 percent scheduled to mature in the same timeframe. Total
interest-bearing liabilities scheduled to mature within one year equaled
$125.2 million with a weighted-average rate of 4.75 percent.
Limitations of the market risk disclosure model include, among others, the:
(i) magnitude; (ii) timing; and (iii) frequency of interest rate changes of
other financial assets and liabilities. Historical withdrawal patterns
with respect to interest-bearing and noninterest-bearing transaction
accounts are not necessarily indicative of future performance as the volume
of cash flows may increase or decrease. Loan information is presented on
payment due dates, which may materially differ from actual results due to
prepayments caused by changes in: (i) interest rates; (ii) sociological
conditions; (iii) demographics; and (iv) economic climate. Maturity
distributions and fair values are based primarily on contractual maturities
or payment due dates and do not consider repricing frequencies for
adjustable-rate assets and liabilities. The table does not include
maturity distribution and fair value information on certain assets and
liabilities, which are not considered financial, and does not anticipate
future business activity. Actual results will more likely than not differ
from results presented in the table.
Additionally, the Company supplements the market risk disclosure model
through simulation analysis utilizing interest rate "shocks." The model
analyzes the effects instantaneous parallel shifts of plus or minus 100
basis points will have on the economic values of other financial
instruments. The results of the model at December 31, 1997, are summarized
as follows:
<TABLE>
<CAPTION>
FAIR VALUE
______________________________
DECEMBER 31, 1997 +100 BPS LEVEL -100 BPS
_______________________________________________________________________________________
<S> <C> <C> <C>
OTHER FINANCIAL ASSETS:
Cash and due from banks................................. $ 9,040 $ 9,040 $ 9,040
Federal funds sold...................................... 8,225 8,225 8,225
Investment securities................................... 103,724 105,666 107,049
Net loans............................................... 231,364 243,905 258,311
Accrued interest receivable............................. 2,575 2,575 2,575
-------- -------- --------
Total................................................. $354,928 $369,411 $385,200
======== ======== ========
OTHER FINANCIAL LIABILITIES:
Noninterest-bearing deposits............................ $ 30,703 $ 30,703 $ 30,703
Money market, NOW and savings accounts.................. 104,519 104,519 104,519
Time deposits........................................... 193,512 197,868 202,639
Short-term borrowings................................... 9,575 9,575 9,575
Long-term debt.......................................... 44 44 44
Accrued interest payable................................ 1,714 1,714 1,714
-------- -------- --------
Total................................................. $340,067 $344,423 $349,194
======== ======== ========
</TABLE>
The Company also uses models that consider repricing frequencies of RSA and
RSL in addition to maturity distributions. One such technique utilizes a
static gap report, which attempts to measure the Company's interest rate
exposure by calculating the net amount of RSA and RSL that reprice within
specific time intervals. A positive gap, indicated by 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
DECEMBER 31, 1997 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Investment securities............... $12,727 $ 24,317 $ 31,793 $ 36,829 $105,666
Loans, net of unearned income....... 62,820 20,995 67,730 98,682 250,227
Federal funds sold.................. 8,225 8,225
------- -------- -------- --------- --------
Total............................. $83,772 $ 45,312 $ 99,523 $ 135,511 $364,118
======= ======== ======== ========= ========
Rate-sensitive liabilities:
Money market accounts............... $ 18,056 $ 18,056
NOW accounts........................ 21,465 21,465
Savings accounts.................... $ 64,998 64,998
Time deposits less than $100........ $32,118 56,207 87,989 $ 13 176,327
Time deposits $100 or more.......... 3,195 9,153 8,484 20,832
Short-term borrowings............... 9,575 9,575
Long-term debt...................... 1 1 8 34 44
------- -------- -------- --------- --------
Total............................. $44,889 $104,882 $161,479 $ 47 $311,297
======= ======== ======== ========= ========
Rate-sensitivity gap:
Period............................ $38,883 $(59,570) $(61,956) $ 135,464
Cumulative........................ $38,883 $(20,687) $(82,643) $ 52,821 $ 52,821
RSA/RSL ratio:
Period............................ 1.87 0.43 0.62 2,883.21
Cumulative........................ 1.87 0.86 0.73 1.17 1.17
</TABLE>
At December 31, 1997, the Company had a cumulative one-year, RSA/RSL ratio
of 0.86. This ratio has improved from the 0.73 at December 31, 1996. The
improvement over 1996 levels was partially attributable to the Company's
strategy of investing in shorter-term investments. At December 31, 1997,
35.1 percent of the Company's investment portfolio was scheduled to mature
or reprice within one year. The same ratio equaled 30.2 percent at
December 31, 1996. The improvement was also aided by an increase in loans
maturing or repricing within one year. At December 31, 1997, loans
maturing or repricing within one year totaled $83.8 million, up $2.3
million increase from one year earlier. Favorable borrowing conditions led
the Company to shift the excess funds not used for investment purchases
into shorter-term loans in order to satisfy demand. Time deposits $100 or
more also contributed to improvement in the cumulative one-year gap as they
declined $17.5 million to $12.3 million at December 31, 1997, from $29.8
million at December 31, 1996. The lower 1997 levels are a by-product of
management's decision not to aggressively compete for this type of deposit
as a result of its higher cost relative to other forms of deposits.
While the Company's cumulative one-year ratio improved, its three-month
ratio fell. The three-month ratio equaled 1.87 at December 31, 1997,
compared to 2.44 at December 31, 1996. This change occurred primarily due
to an increase in time deposits less than $100 maturing within three
months. At December 31, 1997, time deposits less than $100 maturing or
repricing in this timeframe totaled $32.1 million compared to $22.0 million
at December 31, 1996. This change occurred as customers chose liquidity
over return when investing in time deposits less than $100. 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 general
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 December 31, 1997, produced
similar results to those indicated by the one-year static gap position.
Should a parallel and instantaneous rise in interest rates of 100 basis
points occur, a decline in net interest income of 1.3 percent is expected.
Conversely, a 100 basis point decline in market rates would cause a 1.3
percent increase 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
fluctuations. 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.
Management annually develops a liquidity plan for the Company. The plan's
mission is to ensure the Company can generate cash at a reasonable cost in
order to satisfy commitments to borrowers as well as to meet the demands of
depositors and debtholders. The Company's liquidity plan assesses its
current liquidity position and includes determining appropriate standards
for the volume, mix, price and maturity of loans, investments and deposits.
In addition, management ascertains the appropriate level of short-term
assets required to fund normal day-to-day operations and to ensure the
Company's ability to meet off-balance sheet commitments and unanticipated
deposit withdrawals. The plan includes controls and monitoring procedures
for evaluating the Company's daily liquidity position. Finally, the plan
introduces strategies to assure future liquidity. Such strategies, which
the Company considers proprietary in nature, include the maintenance of a
minimum net federal funds sold cushion, a capital contingency strategy and
enhanced strategies on loan and deposit pricing. Based on the 1997
liquidity plan, the Company's ratio of core deposits to total assets is
expected to rise to approximately 83.0 percent for 1998 as compared to 81.6
percent based on actual 1997 average balances.
Compared to 1996, the Company's liquidity position has shown considerable
improvement. The best illustrations of this change are the Company's net
noncore funding dependence and net short-term noncore funding dependence
ratios. The net noncore funding dependence ratio is defined as the
difference between noncore funds, time deposits over $100 and brokered time
deposits under $100, and short-term investments to long-term assets. The
net short-term noncore funding dependence ratio is defined as the
difference between noncore funds maturing within one year, including
borrowed funds, less short-term investments to long-term assets. At
December 31, 1997, the net noncore funding dependence ratio equaled
negative 7.5 percent. The same ratio equaled 2.6 percent at December 31,
1996. The Company's net short-term noncore funding dependence ratio
totaled negative 10.2 percent at December 31, 1997, while the same ratio
totaled 0.4 percent one year earlier. These ratios also well outperformed
those of the peer group for 1997. The peer group recorded a net noncore
funding dependence ratio of 10.8 percent and a net short-term noncore
funding dependence ratio of 23.0 percent at December 31, 1997. Management
believes that by maintaining adequate volumes of short-term investments and
remaining competitive in medium-term certificate of deposit pricing, these
ratios will continue to improve. The maintenance of a high level of core
deposits is a major component in keeping a strong liquidity position. Core
deposits are important as they represent a stable and relatively low-
costing source of funds.
The consolidated statements of cash flows present the change in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents, consisting of cash on hand, cash items in the process
of collection, noninterest-bearing deposits with other banks, balances with
the Federal Reserve Bank of Philadelphia ("FRB") and FHLB-Pgh, and federal
funds sold, increased $6.2 million in 1997. Net cash provided by operating
activities was the primary reason for the net cash inflow for 1997. This
amount totaled $5.5 million and primarily resulted from the Company's $4.4
million in net income.
The Company's net cash used in investing activities totaled $1.1 million
for 1997. The primary components of the outflow from investing activities
were loan disbursements and investment purchases, partially offset by
inflows from investment and net branch acquisition proceeds. The Company's
net loan disbursements amounted to $17.9 million for 1997. The Company
also purchased $33.4 million in securities during 1997. Such purchases
were funded with the $31.2 million in securities repayments as well as net
proceeds of $16.3 million from the branch acquisition occurring in the
fourth quarter of 1997.
Net cash provided by financing activities equaled $1.9 million in 1997.
The rise was primarily attributable to an increase of $9.6 million in
overnight borrowings partially offset by a $7.1 million reduction in time
deposits.
CAPITAL ADEQUACY:
Stockholders' equity improved $4.8 million during 1997, or 15.5 percent
compared to 1996. The primary component of this increase was the Company's
generation of $4.4 million in net income, partially offset by $659 in
dividends declared for the year. The Company's capital position also
benefitted from a $1.0 million positive change in the net unrealized
holding adjustment. The Company reported a net unrealized holding gain of
$1.6 million at December 31, 1997, as compared to $564 at December 31,
1996. Management's continuing efforts towards improving the quality,
composition and structure of the investment portfolio have aided the
Company in minimizing the impact of market depreciation resulting from
rises in interest rates.
For the year-ended December 31, 1997, the Company declared dividends of
$659 or $0.30 per share as compared to $623 or $0.28 per share for the same
period of 1996. As a percentage of net income, cash dividends declared in
1997 equaled 15.0 percent. It is the present intention of the Company's
Board of Directors that dividends will be paid in the future. However,
factors such as operating results, financial and economic decisions,
capital needs, growth objectives, appropriate dividend restrictions related
to the Company and other relevant factors may impact these decisions.
Limitations on the Company's ability to pay dividends to its stockholders
arise from its ability to obtain funds from its subsidiary as specified by
federal and state regulations. Accordingly, Community Bank, without prior
approval of bank regulators, may declare dividends to the Company in 1998
totaling $7.5 million plus net profits earned by Community Bank for the
period from January 1, 1998, through the date of declaration, less
dividends previously paid in 1998.
On April 2, 1997, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") to register 300 thousand shares
of common stock to be used for the DRP. The plan went into effect
beginning with the second quarter dividend and offers stockholders the
opportunity to automatically reinvest their dividends in shares of the
Company's common stock. Stockholder participation in the plan approximated
25.4 percent of average outstanding shares for 1997.
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 resulted in regulatory
agencies adopting minimum capital adequacy requirements that include
mandatory and discretionary supervisory actions for noncompliance. At a
minimum, banks must maintain a Tier I capital to risk-adjusted assets ratio
of 4.0 percent and a total capital to risk-adjusted assets ratio of 8.0
percent. In addition, banks must maintain a Leverage ratio, defined as
Tier I capital to total average assets less intangibles, of 3.0 percent.
The minimum Leverage ratio of 3.0 percent applies only to those
institutions with a composite rating of one under the Uniform Interagency
Bank Rating System, that are not anticipating or experiencing significant
growth and have well-diversified risk. An additional 100 to 200 basis
points are required for all but these most highly-rated institutions. The
Company's minimum ratio of Tier I capital to adjusted total average assets
was 4.0 percent at December 31, 1997 and 1996. If an institution is deemed
to be undercapitalized by such standards, banking law prescribes an
increasing amount of regulatory intervention, including the required
institution of a capital restoration plan and restrictions on the growth of
assets, branches or lines of business. Further restrictions are applied to
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, banks not subject to a supervisory directive will
exclude unrealized holding gains and losses, net of income taxes, on
available-for-sale debt securities when calculating Tier I capital.
However, net unrealized holding losses on available-for-sale marketable
equity securities will continue to be deducted from Tier I capital. Such
regulatory accounting rule does not affect reporting for financial
statement purposes. Accordingly, for financial accounting presentations,
banks will continue to report available-for-sale debt and equity securities
at fair value, with unrealized holding gains and losses, net of income
taxes, excluded from earnings and reported in a separate component of
stockholders' equity.
On October 27, 1997, the Federal Reserve Board, FDIC, OCC and OTS, proposed
to amend their respective risk-based capital standards for banks, bank
holding companies and thrifts regarding the treatment of unrealized holding
gains on equity securities. Currently the gains are reported as a part of
equity capital for financial statement reporting, but are not a part of
regulatory capital under the agencies' guidelines. If the proposal is
adopted as a final rule, uniform interagency rules would be established
that would allow institutions to include up to 45.0 percent of unrealized
gains on certain available-for-sale equity securities in Tier II capital.
The 55.0 percent discount is applied to the unrealized gains to reflect
potential volatility in this form of unrealized capital, as well as tax
liability charges that would be incurred if the unrealized gain were
realized or otherwise taxed currently.
Furthermore, the agencies clarified that net unrealized holding gains and
losses on other types of assets, such as bank premises and available-for-
sale debt securities, are not included in supplementary capital, but may be
taken into account when assessing an institution's overall capital
adequacy. Should this proposal be put into effect, management does not
expect it to have a material impact on the Company's capital ratios.
The Company's capital ratios at December 31, 1997 and 1996, as well as the
required minimum ratios for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions as defined by
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
__________________________________________________________________
DECEMBER 31 1997 1996 1997 1996 1997 1996
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Basis for ratios:
Tier I capital to risk-adjusted assets... $ 30,610 $ 28,692 $ 7,806 $ 7,443 $11,709 $11,164
Total capital to risk-adjusted assets.... 33,066 31,038 15,612 14,886 19,515 18,607
Tier I capital to total average assets
less intangibles........................ 30,610 28,692 $14,307 $13,830 $17,884 $17,287
Risk-adjusted assets..................... 186,410 180,809
Risk-adjusted off-balance sheet items.... 8,743 5,261
Average assets for Leverage ratio........ $357,685 $345,738
Ratios:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 15.7% 15.4% 4.0% 4.0% 6.0% 6.0%
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items................. 16.9 16.7 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less intangibles......... 8.6% 8.3% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at
December 31, 1997 and 1996, and was considered well capitalized.
Regulatory agencies define institutions not under a written directive to
maintain certain capital levels as well capitalized if they exceed the
following: a Tier I risk-based ratio of at least 6.0 percent, a total risk-
based ratio of at least 10.0 percent, and a Leverage ratio, defined as Tier
I capital to total average assets less intangibles, of at least 5.0
percent. The Company improved its capital level in 1997 as evidenced by
its improved Leverage ratio. This ratio was 8.6 percent at December 31,
1997, compared to 8.3 percent at December 31, 1996.
The significance of maintaining a well capitalized regulatory
classification became increasingly important as a result of the
deregulation provisions in the BIF/SAIF legislation enacted September 30,
1996. The Federal Reserve Board's adoption of regulations under such
legislation made it easier for bank holding companies having such
classification to engage in certain nonbanking activities. Under the
rules, bank holding companies are: (i) allowed to begin offering
securities sales, trust services, leasing, loan servicing, management
consulting, data processing and futures commission merchant activities
without prior regulatory approval; (ii) no longer subject to application
requirements to acquire businesses that already offer the aforementioned
services; and (iii) able to enter an activity other than those services
listed above. The only requirement set forth in the rule is that the bank
holding company notify the regulators of its intent within a certain
timeframe.
As part of the Company's overall strategic plan, management developed a
capital plan during 1997. The plan addressed: (i) the current and
expected capital requirements of the Company, including the maintenance of
capital ratios well in excess of minimum regulatory guidelines; (ii) the
market value of the Company's securities and the resulting effect on the
Company's capital; (iii) any planned growth in the Company's assets; (iv)
the Company's anticipated level of net earnings, taking into account the
Company's projected asset/liability position and exposure to changes in
market interest rates; and (v) the source and timing of additional funds to
fulfill future capital requirements.
The submitted plan covered the period from July 1, 1997, to June 30, 1999,
and took into account the market value of the Company's securities and the
resulting effect on its capital position under four different interest rate
scenarios. Also included in the plan were contingency strategies that
could be followed in the event the Company's ratios fell below regulatory
guidelines. Such strategies, which the Company considers proprietary in
nature, include capital generation techniques.
The Federal Reserve Board issued a final rule revising risk-based capital
standards to implement section 305 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 regarding IRR. This ruling went into
effect on September 1, 1995. This allows regulatory agencies to consider
the potential negative effects that changes in interest rates may have on
the economic value of a company's capital when determining its economic
needs. This amendment created a standardized supervisory measurement
system model that measures the risk of banks not exempt from reporting
additional information on their IRR exposure. In addition, banks are
encouraged to report the results of their internal IRR systems.
The regulatory agencies consider both a rising and falling rate scenario
based on a 200 basis point parallel change in market interest rates for all
maturities when measuring a bank's IRR exposure level for adequacy. Such
scenarios may be modified based on current and historical interest rate
levels and volatilities as well as other relevant market and supervisory
considerations. For model purposes, banks need to report assets,
liabilities and off-balance sheet item maturities for various time
intervals. The appropriate time interval is determined by using guidelines
set forth by the regulatory agencies. Once the bank's assets, liabilities
and off-balance sheet items have been classified into the appropriate time
intervals, they are multiplied by IRR risk weights. The result is the
bank's IRR exposure. The risk weights are designed to approximate the
percentage change in the value of the reported position that would result
from a 200 basis point instantaneous and uniform movement in market
interest rates. Banks having fixed-rate residential mortgages exceeding
20.0 percent of total assets or adjustable-rate residential mortgage
holdings exceeding 10.0 percent of total assets must provide additional
disclosures to the agencies.
Upon review of the supervisory model and the bank's internal model,
examiners will determine the amount of capital needed to be held by the
bank should such bank have high levels of measured exposure or weak
management systems. This determination, as well as the examiners' overall
IRR conclusions, will be discussed with management at the end of the bank's
examination. During interim periods, the agencies will use the model to
monitor a bank's IRR exposure changes, making decisions as to supervisory
actions when warranted. Based on the results of the Company's internal IRR
system, it is management's opinion that the Company was adequately
capitalized at December 31, 1997.
Effective for financial statements issued for periods ending after December
15, 1997, the Company adopted SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement does not establish any new
disclosure standards, but rather codifies certain previously required
disclosures. Specifically, it requires information regarding the pertinent
rights and privileges of the various components of an entity's capital
structure such as: (i) dividend and liquidation preferences; (ii)
participation rights; (iii) call prices and dates; (iv) conversion prices
and dates; (v) unusual voting rights; and (vi) terms of contracts to issue
additional shares. Since the Statement contains no change in disclosure
requirements, the Company's adoption had no effect on financial statement
preparation.
REVIEW OF FINANCIAL PERFORMANCE:
As was the case in 1996, financial institutions throughout the nation
recorded an increase in profits. As previously mentioned, this is best
illustrated by the performance of the nation's top 50 banks. For 1997,
this composite group earned net income of $40.5 billion, an 11.9 percent
increase compared to 1996. Similarly, the Mid-Atlantic region, as
represented by a composite group of 48 banks, also recorded an increase in
net income of $3.9 billion, an 18.2 percent increase compared to 1996.
For its second consecutive year, the Company surpassed its highest net
income in its existence earning $4,400 or $2.00 per share in 1997. This
marks a $200 increase over the $4,200 or $1.91 per share earnings of 1996.
The increase was a result of improvements in net interest income and
noninterest income offset partially by a higher recorded level of
noninterest expense.
The Company's return on average total assets ratio was 1.22 percent for
1997, a slight increase over the 1.21 percent recorded one year earlier.
For the Company's peer group, the return on average total assets ratio
equaled 1.33 percent for 1997. The Company's return on average
stockholders' equity equaled 13.40 percent for 1997 as compared to 14.57
percent for 1996. This ratio, despite its decline from 1996, outperformed
the 13.01 percent recorded for the peer group in 1997. Tax-equivalent net
interest income increased $687 from $12,691 in 1996 to $13,378 in 1997.
Higher loan volumes, partially offset by lower investment volumes and
higher time deposit volumes, provided the main influences in improving net
interest income. For 1997, the Company's average loan volumes increased
$23.1 million or 10.5 percent over 1996. This positive change was
attributable to the favorable borrowing conditions prevalent throughout the
year. Management has also been successful in re-emphasizing loans in the
Company's earning assets mix. This is best illustrated by the decline in
the percentage of investments to total earning assets. Average investments
in 1997 equaled 28.6 percent of average earning assets. The same ratio was
32.9 percent for 1996. The positive effects of the higher loan volumes
were partially offset by the Company's increased time deposit volumes. For
the year, average time deposits equaled $194.6 million, a $9.6 million or
5.2 percent increase over 1996.
For the year-ended December 31, 1997, the Company's provision for loan
losses increased $60 to $360. The Company chose to increase its monthly
provision from $25 to $35, effective July 1, 1997. This decision came in
response to the Company's increased amount of credit extensions and adverse
change in nonperforming asset levels.
Noninterest income increased from $1,387 in 1996 to $1,776 in 1997, an
increase of $389 or 28.0 percent. The majority of such increase resulted
from a $250 litigation settlement paid by a securities broker to the
Company's wholly-owned subsidiary, Community Bank. The settlement was
awarded with respect to Community Bank's business relationship with this
broker prior to 1995. This nonrecurring addition had a $148.5 positive
impact on earnings after applicable income taxes and legal fees.
Noninterest income also was favorably influenced by a 5.6 percent increase
in service charges, fees and commissions.
Noninterest expense for the Company increased $573 to $7,956 for 1997
compared to $7,383 for 1996. The increase was primarily caused by higher
amounts of salaries and employee benefits expense and other expenses.
Salaries and employee benefits expense increased as a result of annual
merit raises, employee additions from the Eynon and Factoryville branch
acquisition and costs associated with implementing the customer service
training program. Higher levels of stationery and supplies costs resulting
from the centralization of the purchasing department and newly-acquired
branches were the major causes of the increase in other expenses.
Effective for financial statements issued for periods ending after December
15, 1997, the Company adopted SFAS No. 128, "Earnings per Share." The
object of SFAS No. 128 is to simplify the EPS calculation and to make the
United States standard for computation compatible with the EPS standards of
other countries and with those of the International Accounting Standards
Committee.
Under SFAS No. 128, two EPS calculations are required basic EPS, which is
computed by dividing net income by the 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
three-year period ended December 31, 1997, therefore the per share data
presented on the face of the consolidated statements of income relates to
basic per share amounts.
On June 30, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. Items falling
under the scope of SFAS No. 130 include foreign currency items and
unrealized gains and losses on available-for-sale debt and equity
securities. According to the Statement, all items that are 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.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The impact on the Company after adoption of this Statement in the
first reporting period of 1998 would be to require additional disclosures
in the Company's financial statements.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The impact, if any, of this Statement on the Company
after adoption in 1998 could be to require additional disclosures in the
Company's financial statements.
The most significant factor that can have a material effect on the
financial performance of all industries is the Y2K issue. The issue
regards how application software products and operating systems will handle
the Y2K dilemma. Many existing software products were designed only to
handle a two-digit date position, representing the year. As a result, the
possibility exists that 1999 will be the last year that the existing
systems can process accurately. For financial institutions, this can lead
to erroneous checking account transactions, interest calculations or
payment schedules. It can also cause problems with ATM systems or credit
and debit cards. The potential problems do not end at financial systems.
Any machine or device controlled by a computer is susceptible to the Y2K
problem. Estimates for fixing the Y2K problem are as high as $600.0
billion for companies throughout the world. Governments may also
experience major difficulties. A U.S. Office of Management and Budget
report issued on December 16, 1997, indicated that barely 25.0 percent of
federal systems are ready for Y2K. The United States federal government
estimates that it will spend a minimum of $3.9 billion to avert widespread
government computer crashes.
Banks are already feeling the effects of the Y2K problem. Banks that
started late or have yet to begin addressing the Y2K problem have been
stiffly penalized for their tardiness. The Federal Reserve Board ordered
a cease-and-desist order to three affiliated Georgia banks in November of
1997 due to their lack of preparedness regarding the Y2K issue. Other
banks with serious Y2K problems have put themselves up for sale or are
looking to merge with healthier banks. High code-fixing costs have
hindered product development, acquisition plans and other initiatives at
other banks. It is predicted that between 5.0 percent and 20.0 percent of
banks will fail as a direct result of the Y2K dilemma. Mid- and small-
size banks will be particularly vulnerable due mostly to problems in
finding programmers and lack of technical capabilities.
Regulatory and accounting authorities have found the Y2K issue so important
that they recently issued guidance on compliance. On October 8, 1997, the
staff of the SEC's Divisions of Corporation Finance and Investment
Management issued Staff Legal Bulletin No. 5, reminding public operating
companies, investment advisors and investment companies to consider their
disclosure obligations relating to the anticipated costs, problems and
uncertainties associated with the Y2K issue. The Bulletin was revised on
January 12, 1998. In addressing the Y2K issue, each company must consider
several factors in determining its potential costs and uncertainties.
These factors include an assessment of the company's software, hardware and
nature of its industry. Also, companies must coordinate with other
entities with which they electronically interact, both domestically and
internationally, such as suppliers, customers, creditors, borrowers and
financial service organizations. The SEC notes that a company that does
not successfully address its Y2K problem may face material adverse
consequences.
On November 12, 1997, the Federal Reserve Board issued SR 97-29, "Guidance
Regarding the Federal Reserve's Year 2000 Supervision Program and Possible
Supervisory Follow-up Actions." The Federal Reserve has intensified its
efforts in dealing with Y2K compliance issues. These efforts include: (i)
heightening awareness levels in the United States and international banking
markets regarding the importance of Y2K readiness; (ii) developing, in
conjunction with other federal banking agencies, an interagency statement
outlining the steps that domestic and foreign banks operating in the United
States should take to address the century date change and establishing
uniform, coordinated examination programs; (iii) examining banking
organizations supervised by the FRB to determine the level of awareness and
attention to Y2K compliance obligations; (iv) requiring the discussion of
Y2K-related issues at meetings between senior bank officials and FRB staff;
(v) appointing an official in the FRB's Division of Banking Supervision and
Regulation to address Y2K issues on a full-time basis; (vi) designating
senior staff at each Federal Reserve Bank to coordinate Y2K supervisory-
related matters and provide information to Congress, the media and the
public about Y2K issues related to the banking industry.
SR 97-29 updates the current status of the FRB's Y2K supervision program
and provides added guidance on steps to be taken by FRB examiners and
supervisors to address deficiencies in a bank's Y2K remediation program.
The FRB's Y2K supervision program was distributed to member banks and other
interested parties as guidance relating to: (i) examination of all banks
by mid-1998; (ii) examiner risk assessments, including the examination of
Y2K credit risk; (iii) possible supervisory follow-up actions; (iv)
international coordination; (v) treatment of Y2K issues in the context of
applications by organizations considering mergers and acquisitions or
seeking other regulatory approvals; (vi) consumer-related information
systems; (vii) multi-regional data processing servicers supervision
program; and (viii) vendor certification.
The FASB EITF Issue No. 96-14, "Accounting for Costs Associated with
Modifying Computer Software for the Year 2000," instructs auditors to
verify that clients are properly accounting for Y2K computer modifications.
EITF Issue No. 96-14 addresses accounting for the internal and external
costs specifically associated with the modification of internal-use
computer software for the Year 2000. Purchases of hardware or software
that replace existing software that is not Y2K compliant or impairment or
amortization issues relating to existing assets are not addressed in the
issue. The EITF concluded that internal and external costs specifically
associated with modifying internal-use software for the Year 2000 should be
charged to expense as incurred.
The Company has been working diligently to resolve the Y2K effects for
quite some time. An extensive internal assessment of all operational
systems has been performed to identify the Company's exposure to the Y2K
problem. All employees have evaluated the preparedness of their systems
regarding Y2K. In performing this functional appraisal, the Company
reviewed not only its computer systems but all date-sensitive materials.
These materials include items such as preprinted forms, mechanical calendar
stamps and other office equipment.
The Company depends on third-party providers for its data processing
software. All of the suppliers were contacted to determine their readiness
for the Y2K problem. Letters attesting to current vendor and release Y2K
compliance have been received from suppliers. Extensive testing has been
performed on all applications that are currently compliant to ensure
compliance. Those systems requiring upgrades can be maintenanced through
the Company's normal operations.
It has always been the Company's practice to remain current in software
technology. In doing so, the Company's exposure related to Y2K compliance
has been greatly limited. Many of the Company's mission-critical software
applications already recognize the four-digit year due to the timely
migration to new software releases. Major operating systems are either
currently Y2K compliant or are scheduled for upgrading by the end of 1998.
Planned introduction of a Wide Area Network by the first quarter of 1999
will provide a platform for the conversion of individual software packages
resident on employees' personal computers to a standardized network
software solution. Evaluation of the software to be selected for all
general computer use is currently underway. Once chosen and installed,
older, noncompliant software will be eliminated from Company use.
Internal functions are not the only ones that may effect the Company
regarding Y2K. Customers of the Company may also encounter Y2K problems
with their computers and other date-dependent equipment. Customers'
profitability and liquidity positions could be adversely affected if their
equipment fails to handle the century date change. This could lead to
delinquencies on loans, possible defaults and bankruptcy filings in extreme
cases. In order to mitigate this potential problem, loan customers are
required to remit their Y2K status and financial statements to the Company
by year-end 1998. During the second quarter of 1998, the Company will send
documents to its loan customers requesting this information. The Company's
stockholders, customers and staff will be continually updated regarding the
progress of Y2K compliance through periodic seminars and workshops to be
held during 1998.
Based on a current assessment of proposals received from third party
vendors, the Company estimates its cost of becoming Y2K compliant to
approximate $100.
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
1997 VS. 1996 1996 VS. 1995
_______________________ _________________________
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
_______________________ _________________________
TOTAL TOTAL
CHANGE RATE VOLUME CHANGE RATE VOLUME
_______ ____ ______ _______ _____ _______
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Taxable.............................................. $1,472 $(66) $1,538 $ 1,206 $ (19) $ 1,225
Tax-exempt........................................... 247 (7) 254 106 82 24
Investments:
Taxable.............................................. (616) 288 (904) (2,767) (35) (2,732)
Tax-exempt........................................... 111 (47) 158 1,187 (10) 1,197
Federal funds sold..................................... (9) 4 (13) (700) (2) (698)
------ ---- ------ ------- ----- -------
Total interest income.............................. 1,205 172 1,033 (968) 16 (984)
------ ---- ------ ------- ----- -------
Interest expense:
Money market accounts.................................. 4 43 (39) (229) (110) (119)
NOW accounts........................................... 66 28 38 32 9 23
Savings accounts....................................... (117) (54) (63) (320) (172) (148)
Time deposits less than $100........................... 500 46 454 2 (62) 64
Time deposits $100 or more............................. 149 70 79 (124) (31) (93)
Short-term borrowings.................................. 5 (1) 6 (674) (60) (614)
Long-term debt......................................... (89) 40 (129) (131) (20) (111)
------ ---- ------ ------- ----- -------
Total interest expense............................. 518 172 346 (1,444) (446) (998)
------ ---- ------ ------- ----- -------
Net interest income................................ $ 687 $ $ 687 $ 476 $ 462 $ 14
====== ==== ====== ======= ===== =======
</TABLE>
Tax-equivalent net interest income rose to $13,378 in 1997, an increase of
$687 or 5.4 percent, compared to 1996. This increase was due entirely to
the growth in the average volume of earning assets over the volume of
average interest-bearing liabilities comparing 1997 to 1996. Specifically,
the favorable volume variance resulted from an increase in the volumes of
loans partially offset by reductions in investment volumes and greater time
deposit volumes. For 1997, the Company's average loan volumes equaled
$241.9 million, a $23.1 million or 10.5 percent increase over 1996. This
$23.1 million increase accounted for a $1,792 positive influence on
interest income. The Company, moving towards localizing a larger portion
of its earning assets into loans, materially reduced its investment volumes
in 1997. For the year ended December 31, 1997, the Company's average
investment volumes declined $11.4 million or 10.3 percent to $98.8 million.
In executing this strategic decision, the Company experienced a negative
investment volume variance of $746, partially offsetting the favorable loan
volume variance. Also mitigating the positive influence of larger loan
volumes was an increase in interest expense related to the growth of time
deposits. For 1997, time deposits less than $100 averaged $165.5 million
while time deposits $100 or more averaged $29.1 million. In contrast, time
deposits less than $100 averaged $157.3 million and time deposits $100 or
more averaged $27.8 million in 1996. These volume changes accounted for a
$533 increase in interest expense for 1997 related to time deposit volumes.
Net interest income was not impacted by rate variances as the tax-
equivalent yield on earning assets rose correspondingly to the cost of
funds rate on interest-bearing liabilities. The tax-equivalent yield on
earning assets increased from 7.85 percent in 1996 to 7.93 percent in 1997.
On a tax-equivalent basis, interest income on earning assets increased $172
due to yield appreciation. The main reason for the increase was a change
in rates on taxable investments. The 17 basis point increase in the yield
on taxable investments resulted in a positive rate variance of $288. The
improvement in the yield on taxable investments was a result of the
reinvestment of cash flows from maturing adjustable-rate U.S. Government
agencies to higher-yielding investments. Management retained certain low-
yielding securities when it reconstituted the investment portfolio during
1995 due to their significant market value depreciation and short
contractual lives. Approximately 56.5 percent of such securities matured
in 1997, allowing management to reinvest the proceeds in higher-yielding
investments. The remaining 43.5 percent of these securities mature in 1998
with the exception of one adjustable-rate security due in January of 2000.
Partially offsetting this increase was a $73 negative rate variance on
loans. In 1997, the Company's taxable portion of the loan portfolio
yielded 8.55 percent. For the same period of 1996, the taxable loan yield
equaled 8.66 percent. Loan yields on the tax-exempt portion of the
portfolio also declined in 1997. For the year-ended December 31, 1997, the
Company's yield on the tax-exempt portion of the portfolio equaled 8.08
percent compared to 8.21 percent from a year earlier. These declines
resulted from general reductions in market rates and increased competition
during 1997. The increase in interest expense of $172, resulting from
interest rate changes on interest-bearing liabilities, was the same as the
rate variance on earning assets. Approximately two-thirds of the rate
variance on RSL was caused by increased fund costs on time deposits. For
1997, the average rate paid on time deposits less than $100 equaled 5.70
percent compared to 5.67 percent paid for 1996. The average rate paid on
time deposits $100 or more was also higher than 1996. For the year-ended
December 31, 1997, the average rate paid on time deposits $100 or more
equaled 6.17 percent, a 24 basis point increase over the 5.93 percent
recorded for 1996. For 1997, the Company's net interest margin improved to
3.87 percent compared to 3.79 percent for 1996. The more influential role
of the loan portfolio in the Company's earning assets mix helped to offset
its increased cost of funds caused by the highly competitive deposit-
gathering environment.
Management expects the sizeable gain in loan volumes and increased emphasis
on fund costs will have a positive effect on its net interest income.
However, should general market rates increase or the competition in
deposit-gathering intensify, increases in net interest income may be
hindered. Management is also aware that a deterioration in local
unemployment conditions resulting in higher levels of nonaccrual loans may
also dilute these positive net interest income influences.
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
1997 1996
___________________________ ___________________________
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
_______ ________ ________ _______ ________ ________
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $233,001 $19,916 8.55% $213,071 $18,444 8.66%
Tax-exempt.................................. 8,876 717 8.08 5,724 470 8.21
Investments:
Taxable..................................... 60,975 3,406 5.59 74,233 4,022 5.42
Tax-exempt.................................. 37,818 3,116 8.24 35,923 3,005 8.37
Federal funds sold............................ 5,265 291 5.53 5,508 300 5.45
-------- ------- -------- -------
Total earning assets...................... 345,935 27,446 7.93% 334,459 26,241 7.85%
Less: allowance for loan losses............... 3,919 4,014
Other assets.................................. 17,334 16,834
-------- --------
Total assets.............................. $359,350 $347,279
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 16,854 533 3.16% $ 18,144 529 2.92%
NOW accounts.................................. 18,464 403 2.18 16,661 337 2.02
Savings accounts.............................. 65,081 1,899 2.92 67,144 2,016 3.00
Time deposits less than $100.................. 165,487 9,425 5.70 157,271 8,925 5.67
Time deposits $100 or more.................... 29,092 1,796 6.17 27,755 1,647 5.93
Short-term borrowings......................... 138 8 5.80 51 3 5.88
Long-term debt................................ 45 4 8.89 2,122 93 4.38
-------- ------- -------- -------
Total interest-bearing liabilities........ 295,161 14,068 4.77% 289,148 13,550 4.69%
Noninterest-bearing deposits.................. 27,448 26,329
Other liabilities............................. 3,913 2,968
Stockholders' equity.......................... 32,828 28,834
-------- ------- -------- -------
Total liabilities and stockholders' equity $359,350 14,068 $347,279 13,550
======== ------- ======== -------
Net interest/income spread................ $13,378 3.16% $12,691 3.16%
Net interest margin....................... ======= 3.87% ======= 3.79%
Tax-equivalent adjustments:
Loans......................................... $ 244 $ 160
Investments................................... 1,060 1,022
------- -------
Total adjustments......................... $ 1,304 $ 1,182
======= =======
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 $1,166 in 1997 and $337 in 1996, and an average unrealized
holding loss of $1,272 in 1995 and $4,217 in 1994 included in other assets. Tax-equivalent adjustments were
calculated using the prevailing statutory tax rate of 34.0 percent.
</TABLE>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
___________________________ ___________________________
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..................................... $195,047 $17,238 8.84% $185,318 $15,761 8.50%
Tax-exempt.................................. 4,649 364 7.83 3,657 272 7.44
Investments:
Taxable..................................... 113,675 6,789 5.97 136,386 7,826 5.74
Tax-exempt.................................. 20,775 1,818 8.75 20,609 1,817 8.82
Federal funds sold............................ 17,070 1,000 5.86 384 26 6.77
-------- ------- -------- -------
Total earning assets...................... 351,216 27,209 7.75% 346,354 25,702 7.42%
Less: allowance for loan losses............... 3,816 3,540
Other assets.................................. 11,770 7,586
-------- --------
Total assets.............................. $359,170 $350,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 21,869 758 3.47% $ 23,955 792 3.31%
NOW accounts.................................. 15,550 305 1.96 15,151 297 1.96
Savings accounts.............................. 71,911 2,336 3.25 83,142 2,602 3.13
Time deposits less than $100.................. 155,183 8,923 5.75 139,641 6,905 4.94
Time deposits $100 or more.................... 29,336 1,771 6.04 25,995 1,553 5.97
Short-term borrowings......................... 9,935 677 6.82 11,186 545 4.87
Long-term debt................................ 4,715 224 4.75 5,050 248 4.91
-------- ------- -------- -------
Total interest-bearing liabilities........ 308,499 14,994 4.86% 304,120 12,942 4.26%
Noninterest-bearing deposits.................. 24,090 21,849
Other liabilities............................. 547 1,120
Stockholders' equity.......................... 26,034 23,311
-------- ------- -------- -------
Total liabilities and stockholders' equity $359,170 14,994 $350,400 12,942
======== ------- ======== -------
Net interest/income spread................ $12,215 2.89% $12,760 3.16%
======= =======
Net interest margin....................... 3.48% 3.68%
Tax-equivalent adjustments:
Loans......................................... $ 124 $ 93
Investments................................... 618 618
------- -------
Total adjustments......................... $ 742 $ 711
======= =======
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
1993
___________________________
INTEREST AVERAGE
AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE
_______ ________ ________
<S> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $172,416 $15,748 9.13%
Tax-exempt.................................. 2,343 226 9.65
Investments:
Taxable..................................... 113,380 6,962 6.14
Tax-exempt.................................. 16,841 1,588 9.43
Federal funds sold............................ 5,536 187 3.38
-------- -------
Total earning assets...................... 310,516 24,711 7.96%
Less: allowance for loan losses............... 2,886
Other assets.................................. 11,784
--------
Total assets.............................. $319,414
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 22,267 726 3.26%
NOW accounts.................................. 14,406 338 2.35
Savings accounts.............................. 73,400 2,450 3.34
Time deposits less than $100.................. 131,572 6,925 5.26
Time deposits $100 or more.................... 25,960 1,304 5.02
Short-term borrowings......................... 1,005 33 3.28
Long-term debt................................ 3,866 224 5.79
-------- -------
Total interest-bearing liabilities........ 272,476 12,000 4.40%
Noninterest-bearing deposits.................. 19,657
Other liabilities............................. 4,104
Stockholders' equity.......................... 23,177
-------- -------
Total liabilities and stockholders' equity $319,414 12,000
======== -------
Net interest/income spread................ $12,711 3.56%
=======
Net interest margin....................... 4.09%
Tax-equivalent adjustments:
Loans......................................... $ 77
Investments................................... 540
-------
Total adjustments......................... $ 617
=======
</TABLE>
PROVISION FOR LOAN LOSSES:
The provision for loan losses for the nation's top 50 banks increased 20.0
percent in 1997 to $12.6 billion. This increase came in response to a rise
in net charge-offs for the year of 10.8 percent to $12.3 billion. However,
as a percentage of average loans outstanding, net charge-offs fell to 0.56
percent in 1997 compared to 0.63 percent in 1996. The more cautious
approach allowed the provisions to outdistance charge-offs by $300.0
million for the year. Repercussions from the Asian market crisis and
increases in credit card charge-offs may lead to higher charge-off ratios
in 1998. A need to replenish loan loss reserves along with a continued
strong loan demand, may prompt the banking industry to take greater loan
loss provisions in 1998.
The Company makes provisions for loan losses based on evaluations of its
allowance for loan losses account. Factors such as previous loan
experience, overall loan portfolio characteristics, prevailing economic
conditions and other relevant factors are taken into consideration when
determining the provision. Based on its most current valuation, management
believes that the allowance is adequate to absorb any known and inherent
losses in the portfolio.
In line with the stance taken by the banking industry, the Company
increased its provision for loan losses by $60 to $360 in 1997 from the
$300 taken in 1996. Management believes that maintaining a standard
monthly charge to operations in the form of a provision is warranted,
despite maintaining an adequate allowance account, as nonperforming asset
levels have risen and loan demand has increased. If the strong loan demand
of 1997 continues or nonperforming asset levels deteriorate, management
will consider adjusting the monthly provision amount for 1998.
NONINTEREST INCOME:
The Company recorded noninterest income of $1,776, a $389 or 28.0 percent
increase over the $1,387 reported for 1996. As previously mentioned, the
primary cause of the increase was the settlement of a lawsuit against an
investment securities broker.
Service charges, fees and commissions increased $81 or 5.6 percent from
$1,445 for the year-ended December 31, 1996, to $1,526 for the same period
of 1997. The major contributing factor to this increase was an increase in
fees collected on insufficiently-funded customer accounts. The net
investment securities losses of $58 recorded for 1996 resulted from the
disposition of four adjustable-rate CMOs with a carrying value of $1,487.
The disposition resulted from an Investment Committee decision based on a
reassessment of the appropriateness of the securities related to their
structure, composition and characteristics in line with future investment
goals.
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.
Americans' wages and benefits rose in 1997 at the quickest pace in four
years. According to the Labor Department, the Employment Cost Index,
considered the best measure of changes in wages and benefit costs, rose 3.3
percent for 1997. For the final quarter of 1997, wages and benefits rose
1.0 percent, the largest increase since the final quarter of 1992. This
trend is expected to continue for 1998 as employers will need to raise
compensation to retain workers in the tightest job market in a generation.
For the year ended December 31, 1997, noninterest expense totaled $7,956,
a $573, or 7.8 percent increase, compared to 1996. The Company had a net
overhead expense to average assets ratio of 1.8 percent, slightly higher
than the 1.7 percent recorded in 1996. However, with respect to the peer
group ratio of 2.7 percent, the Company continues to demonstrate greater
efficiency. 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 efficiency ratio was less favorable compared to
1996 as it equaled 58.3 percent in 1997, compared to 56.4 percent in 1996.
The acquisition of the Eynon and Factoryville branches increased the
Company's noninterest expense levels thus causing a corresponding adverse
effect to the Company's efficiency ratio.
The majority of the Company's noninterest expense comes from salaries and
benefits. For the year-ended December 31, 1997, these expenses totaled
$4,098 and composed 51.5 percent of noninterest expense. This marked a
$290 or 7.6 percent increase compared to 1996. The cost associated with
personnel performance appraisals in the form of merit increases
approximated 50.0 percent of the $290 change. The remainder of this
increase is attributable to employee additions from the branch acquisition
and customer service employee training expenses.
In February of 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The Statement: (i)
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
pensions or other postretirement benefit plans; (ii) standardizes the
disclosure requirements for benefits of such plans to the extent
practicable; (iii) requires additional information on changes in the
benefit obligations and fair value of plan assets that will facilitate
financial analysis; (iv) eliminates certain disclosures that are no longer
useful as they were when Statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for Settlement and Curtailment of
Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
were issued.
SFAS No. 132 is effective for fiscal years beginning after December 31,
1997. Most of the changes in the disclosure provisions of SFAS No. 132
address defined benefit plans. The Company's adoption of this Statement on
January 1, 1998, will not significantly change the disclosure requirements
nor will it have any effect on operating results or financial position.
Net occupancy and equipment expense aggregated $1,199 for the year-ended
December 31, 1997, slightly lower than the amount recorded for the same
period last year. Lower maintenance and lease costs related to bank
facilities and equipment used in normal banking operations were the major
causes of the decline. On January 2, 1998, Community Bank acquired land in
Clarks Summit, Pennsylvania for $1.2 million to construct an administrative
center and branch facility. This project, having an estimated aggregate
cost of $4.0 million, should be completed during the first quarter of 1999.
The project will be funded through normal operations.
Other expenses totaled $2,659 in 1997, an increase of $297 or 12.6 percent
compared to the $2,362 recorded in 1996. This unfavorable variance stemmed
from a nonrecurring increase in stationery and supplies expense during the
second quarter. This nonrecurring charge was associated with the Company's
decision to centralize its purchasing department. Also contributing to the
higher stationery and supplies expense level were expenses related to the
Company's new imaging system and those related to the Eynon and
Factoryville branches. The overall increase in 1997 compared to 1996
related to stationery and supplies amounted to $149. To a lesser degree,
increased postage costs resulted in a higher level of noninterest expenses
for 1997. These costs were a result of numerous mailings to existing and
potential customers of the Eynon and Factoryville branches and an
enhancement in the distribution of Company information to stockholders.
On November 12, 1997, the FDIC issued a press release to announce that it
will retain existing insurance premiums for the first half of 1998. Risk-
related assessment rates for both the BIF and the 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 listed
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. The average 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. At June 30, 1997, the BIF reserve ratio was 1.35
percent; (ii) over 90.0 percent of all SAIF-member institutions are
estimated to pay no premiums. The average annual assessment rate is
estimated to be 0.32 cents per 100 dollars, which is expected to maintain
SAIF reserves over the 1.25 percent mandated ratio. At June 30, 1997, the
SAIF reserve ratio was 1.32 percent; (iii) there will be a separate levy
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 should the
two funds merge.
The FDIC is currently considering eliminating the $100 insurance on
deposits. FDIC insurance has existed since the Depression in the 1930s
when many U.S. banks failed. There are five proposals being considered for
overhauling the program. They are: (i) eliminating the $100 federal
guarantee of safety per person per bank; (ii) privatizing the program,
removing the federal government as the insurance provider and letting
private insurance companies or the individual banks handle the insurance;
(iii) reducing the guarantee to $50 per person per bank; (iv) reducing the
guarantee to $100 per person, regardless of bank; and (v) making no changes
to the existing system.
Large banks are in favor of changing the system as they are confident that
the government will not let them fail. Smaller banks would like the system
to remain the way it is for fear that a change would lead depositors away
from the small banks and into the larger ones. Those who do not move their
funds from smaller banks to larger ones may choose to invest in the stock
market if their deposits are no longer federally guaranteed as the return
on stocks is better than that on deposits. Reforms to the current system
may adversely impact the Company's deposits in the future. The cost
associated with FDIC insurance for the Company was $40 in 1997 and $48 in
1996.
Major components of noninterest expense for the past five years are
summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
_____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes........................................ $3,420 $3,251 $3,429 $3,022 $2,585
Employee benefits................................................. 678 557 599 760 746
------ ------ ------ ------ ------
Salaries and employee benefits expense.......................... 4,098 3,808 4,028 3,782 3,331
------ ------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense............................................. 579 602 684 784 680
Equipment expense................................................. 620 611 538 465 654
------ ------ ------ ------ ------
Net occupancy and equipment expense............................. 1,199 1,213 1,222 1,249 1,334
------ ------ ------ ------ ------
Other expenses:
Marketing expense................................................. 269 242 281 201 211
Other taxes....................................................... 255 218 200 191 127
Stationery and supplies........................................... 375 226 250 262 338
Contractual services.............................................. 864 871 879 727 597
Insurance including FDIC assessment............................... 74 84 480 717 807
Other............................................................. 822 721 854 820 1,107
------ ------ ------ ------ ------
Other expenses.................................................. 2,659 2,362 2,944 2,918 3,187
------ ------ ------ ------ ------
Total noninterest expense..................................... $7,956 $7,383 $8,194 $7,949 $7,852
====== ====== ====== ====== ======
</TABLE>
INCOME TAXES:
The Company reported tax expense of $1,134 in 1997 compared to $1,013 in
1996. The effective tax rate for 1997 was 20.5 percent, up from the 19.4
percent reported for 1996. The Company's higher effective tax rate for
1997 was due to the overall improvement in income levels for the year.
Despite the rise, this rate was significantly better than the 25.5 percent
effective tax rate reported by the peer group for 1997. Management expects
the Company's effective tax rate for 1998 to remain relatively stable with
the 1997 level through emphasizing income on tax-exempt investments and
loans and utilizing investment tax credits available through its investment
in a residential housing program for elderly and low- to moderate-income
families. The aggregate amount of tax credits available from such project
that will be recognized over ten years ending 2003 is $895.
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 quarterly reviews on the tax criteria related to the
recognition of deferred tax assets.
COMM BANCORP, INC.
INDEPENDENT AUDITORS' REPORT
Board of Directors
and Stockholders
Comm Bancorp, Inc.
Forest City, Pennsylvania
We have audited the accompanying consolidated balance sheets of Comm
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comm
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
February 9, 1998
/s/ Kronick Kalada Berdy & Co.
KRONICK KALADA BERDY & CO., P.C.
Kingston, Pennsylvania
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
____________________________________________________________________________________________________________
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................... $19,916 $18,444 $17,238
Tax-exempt................................................................ 473 310 240
Interest on investment securities held-to-maturity:
Taxable................................................................... 3,830
Tax-exempt................................................................ 895
Interest and dividends on investment securities available-for-sale:
Taxable................................................................... 3,274 3,914 2,839
Tax-exempt................................................................ 2,056 1,983 305
Dividends................................................................. 132 108 120
Interest on federal funds sold.............................................. 291 300 1,000
------- ------- -------
Total interest income................................................... 26,142 25,059 26,467
------- ------- -------
INTEREST EXPENSE:
Interest on deposits........................................................ 14,056 13,454 14,093
Interest on short-term borrowings........................................... 8 3 677
Interest on long-term debt.................................................. 4 93 224
------- ------- -------
Total interest expense.................................................. 14,068 13,550 14,994
------- ------- -------
Net interest income..................................................... 12,074 11,509 11,473
Provision for loan losses................................................... 360 300 435
------- ------- -------
Net interest income after provision for loan losses..................... 11,714 11,209 11,038
------- ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions....................................... 1,526 1,445 1,197
Litigation recovery......................................................... 250
Net investment securities losses............................................ (58) (4,393)
------- ------- -------
Total noninterest income (loss)......................................... 1,776 1,387 (3,196)
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense...................................... 4,098 3,808 4,028
Net occupancy and equipment expense......................................... 1,199 1,213 1,222
Other expenses.............................................................. 2,659 2,362 2,944
------- ------- -------
Total noninterest expense............................................... 7,956 7,383 8,194
------- ------- -------
Income (loss) before income taxes........................................... 5,534 5,213 (352)
Provision for income tax expense (benefit).................................. 1,134 1,013 (552)
------- ------- -------
Net income.............................................................. $ 4,400 $ 4,200 $ 200
======= ======= =======
PER SHARE DATA:
Net income.................................................................. $ 2.00 $ 1.91 $ 0.09
Cash dividends declared..................................................... $ 0.30 $ 0.28 $ 0.21
Average common shares outstanding........................................... 2,200,960 2,200,080 2,200,080
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 1997 1996
____________________________________________________________________________________________________________
<S> <C> <C>
ASSETS:
Cash and due from banks.............................................................. $ 9,040 $ 7,732
Federal funds sold................................................................... 8,225 3,300
Investment securities available-for-sale............................................. 105,666 101,994
Loans, net of unearned income........................................................ 250,227 235,803
Less: allowance for loan losses.................................................... 3,798 3,944
-------- --------
Net loans............................................................................ 246,429 231,859
Premises and equipment, net.......................................................... 3,772 3,092
Accrued interest receivable.......................................................... 2,575 2,671
Other assets......................................................................... 6,104 4,164
-------- --------
Total assets..................................................................... $381,811 $354,812
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing................................................................ $ 30,703 $ 26,424
Interest-bearing................................................................... 301,678 294,032
-------- --------
Total deposits................................................................... 332,381 320,456
Short-term borrowings................................................................ 9,575
Long-term debt....................................................................... 44 46
Accrued interest payable............................................................. 1,714 1,758
Other liabilities.................................................................... 1,995 1,296
-------- --------
Total liabilities................................................................ 345,709 323,556
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
1997, 2,202,405 shares; 1996, 2,200,080 shares...................................... 727 726
Capital surplus...................................................................... 6,385 6,317
Retained earnings.................................................................... 27,390 23,649
Net unrealized gain on available-for-sale securities................................. 1,600 564
-------- --------
Total stockholders' equity....................................................... 36,102 31,256
-------- --------
Total liabilities and stockholders' equity....................................... $381,811 $354,812
======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED GAIN (LOSS) ON STOCKHOLDERS'
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 STOCK SURPLUS EARNINGS SECURITIES EQUITY
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............................. $733 $6,310 $20,334 $(4,688) $22,689
Net income............................................. 200 200
Dividends declared: $0.21 per share.................... (462) (462)
Net unrealized gain on securities:
Securities transferred to available-for-sale........... 1,249 1,249
Other.................................................. 4,219 4,219
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1995............................. 733 6,310 20,072 780 27,895
Net income............................................. 4,200 4,200
Dividends declared: $0.28 per share.................... (623) (623)
Net unrealized loss on securities...................... (216) (216)
Three-for-one stock split.............................. (7) 7
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1996............................. 726 6,317 23,649 564 31,256
Net income............................................. 4,400 4,400
Dividends declared: $0.30 per share.................... (659) (659)
Dividend reinvestment plan: 2,325 shares issued........ 1 68 69
Net unrealized gain on securities...................... 1,036 1,036
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1997............................. $727 $6,385 $27,390 $ 1,600 $36,102
==== ====== ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1997 1996 1995
____________________________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 4,400 $ 4,200 $ 200
Adjustments:
Provision for loan losses..................................................... 360 300 435
Depreciation, amortization and accretion...................................... 947 1,037 528
Amortization of loan fees..................................................... (195) (215) (179)
Deferred income tax expense (benefit)......................................... 41 (66) (140)
Losses on sale of investment securities available-for-sale.................... 58 4,393
Gains on sale of loans........................................................ (34) (72)
Gains on sale of other real estate............................................ (49) (35) (36)
Changes in:
Accrued interest receivable................................................. 96 201 (236)
Other assets................................................................ (81) 61 (783)
Accrued interest payable.................................................... (146) (3) 205
Other liabilities........................................................... 170 203 95
------- ------- -------
Net cash provided by operating activities................................. 5,509 5,741 4,410
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale securities............................ 1,472 87,103
Proceeds from repayments of investment securities:
Held-to-maturity.............................................................. 3,078
Available-for-sale............................................................ 31,150 24,860 1,896
Purchases of investment securities:
Held-to-maturity.............................................................. (179)
Available-for-sale............................................................ (33,392) (20,237) (44,028)
Proceeds from sale of loans..................................................... 3,439 5,591
Proceeds from sale of other real estate......................................... 400 279 457
Net increases in lending activities............................................. (17,940) (22,235) (25,434)
Purchases of premises and equipment............................................. (1,057) (518) (204)
Proceeds from acquisition of branches, net...................................... 16,268
------- -------- --------
Net cash provided by (used in) investing activities....................... (1,132) (16,379) 28,280
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts................... (56) (1,842) (13,946)
Time deposits................................................................. (7,093) 5,199 14,877
Short-term borrowings......................................................... 9,575 (15,956)
Payments on long-term debt...................................................... (2) (3,002) (2,002)
Proceeds from the issuance of common shares..................................... 69
Cash dividends paid............................................................. (637) (675) (456)
------- -------- --------
Net cash provided by (used in) financing activities....................... 1,856 (320) (17,483)
------- -------- --------
Net increase (decrease) in cash and cash equivalents...................... 6,233 (10,958) 15,207
Cash and cash equivalents at beginning of year............................ 11,032 21,990 6,783
------- -------- --------
Cash and cash equivalents at end of year.................................. $17,265 $11,032 $ 21,990
======= ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest...................................................................... $14,112 $13,553 $ 14,789
Income taxes.................................................................. 1,022 1,315 114
Noncash items:
Transfers of:
Loans to other real estate.................................................. 336 223 636
Investments from held-to-maturity to available-for-sale..................... 105,799
Change in net unrealized losses (gains) on available-for-sale securities.... $(1,036) $ 216 $ (5,468)
Fair value of assets acquired and liabilities assumed:
Loans, premises and equipment............................................... $ 730
Core deposit intangible..................................................... 2,178
Cash received............................................................... 16,268
Accrued interest payable.................................................... (102)
-------
Deposit liabilities assumed................................................. $19,074
=======
See notes to consolidated financial statements.
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Comm Bancorp, Inc., a bank holding company incorporated under the laws of
Pennsylvania, provides a full range of banking services, including trust
services, through its wholly-owned subsidiary, Community Bank and Trust
Company ("Community Bank"). Community Bank services its individual and
commercial customers through twelve full-service branches located within
four counties of Pennsylvania. Susquehanna and Wyoming counties account
for the predominant portion of Comm Bancorp, Inc.'s business activities,
with Lackawanna and Wayne counties contributing to a lesser degree.
Community Bank faces competition primarily from other commercial banks,
thrift institutions and credit unions within the Northeastern
Pennsylvania market, many of which are substantially larger in terms of
assets and liabilities. In addition, Community Bank experiences
competition for deposits from mutual fund and security brokers.
Consumer, mortgage and insurance companies compete for various types of
loans. Principal methods of competing for banking and permitted
nonbanking services include price, nature of product, quality of service
and convenience of location.
The primary product of Community Bank is loans to finance one-to-four
family residential properties. Other products include loans to small-
and medium-sized businesses and individuals. Community Bank primarily
funds its loans by offering certificates of deposit to commercial
enterprises and individuals. Other product offerings include various
demand and savings accounts.
Comm Bancorp, Inc. and Community Bank (collectively, the "Company") are
subject to regulations of certain federal and state regulatory agencies
and undergo periodic examinations.
BASIS OF PRESENTATION:
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles ("GAAP"),
Regulation S-X, Item 302 of Regulation S-K and reporting practices applied
in the banking industry. All significant intercompany balances and
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
transactions have been eliminated in the consolidation. The Company also
presents herein condensed parent company only financial information
regarding Comm Bancorp, Inc. ("Parent Company").
Prior period amounts are reclassified when necessary to conform with the
current year's presentation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and
expenses during the reporting periods. Significant estimates that are
particularly susceptible to material change in the next year relate to the
allowance for loan losses, real estate acquired through foreclosure and
intangible assets. Actual results could differ from those estimates.
Management maintains the allowance for loan losses at a level it believes
adequate to absorb estimated potential credit losses. While historical
loss experience provides a reasonable starting point for assessing the
adequacy of the allowance account, management also considers a number of
relevant factors that may cause estimated credit losses associated with the
Company's current portfolio to differ from historical loss experience.
These factors include: (i) changes in lending policies and procedures; (ii)
economic conditions; (iii) nature and volume of the portfolio; (iv) loan
review system; (v) volumes of past due and impaired loans; (vi)
concentrations; (vii) borrowers' financial status; (viii) collateral value;
and (ix) other factors deemed relevant by management. This evaluation is
inherently subjective as it requires material estimates, including the
amounts and timing of future cash flows expected to be received on impaired
loans, that may be susceptible to significant change. The Company employs
the December 21, 1993, federal banking regulatory agencies' Interagency
Policy Statement on the Allowance for Loans and Lease Losses as the primary
analytical tool in assessing the adequacy of the allowance account.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Additionally, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses and
foreclosed real estate. Such agencies may require the Company to recognize
additions to the allowance based on information available to them at the
time of their examination. Management is unaware of any such requirements
based on the results of the Company's latest regulatory examination at
September 15, 1997.
The valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans is written-down to the lower of the related loan
balance or 80.0 percent of fair market value based upon estimates derived
through independent appraisals. However, realization of sales proceeds may
ultimately be higher or lower than those estimates.
Intangible assets include goodwill that resulted from the 1993 acquisition
of The First National Bank of Nicholson and a core deposit intangible that
resulted from the assumption of the deposit liabilities of two branches of
First Union National Bank ("First Union") in 1997. However, if the future
benefits are not derived, estimated amortization may increase and/or a
charge for impairment may be recognized.
INVESTMENT SECURITIES:
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires
investments to be classified and accounted for as either held-to-maturity,
available-for-sale or trading account securities based on management's
intent at the time of acquisition. Management is required to reassess the
appropriateness of such classifications at each reporting date. The
Company does not buy or hold securities principally for the purpose of
selling them in the near term in order to generate profits from market
appreciation. Accordingly, management did not classify any investments as
trading account securities during the three years ended December 31, 1997.
The Company classifies debt securities as held-to-maturity when management
has the positive intent and ability to hold such securities to maturity.
Held-to-maturity securities are stated at cost, adjusted for amortization
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
of premium and accretion of discount. The Company has not classified any
securities as held-to-maturity since the September 30, 1995, transfer of
all such securities to the available-for-sale classification.
Investment securities are designated as available-for-sale when they are to
be held for indefinite periods of time for the purpose of implementing
management's asset/liability strategies. The Company may also sell these
securities in response to changes in interest rates, prepayment risk,
liquidity requirements or other circumstances identified by management.
Available-for-sale securities are reported at fair value, with unrealized
gains and losses, net of income taxes, excluded from earnings and reported
in a separate component of stockholders' equity. All marketable equity
securities are accounted for at fair value. Restricted investment
securities of the Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh") and
Federal Reserve Bank of Philadelphia ("FRB") are carried at cost.
Estimated fair values for investment securities are based on quoted market
prices from a national electronic pricing service. All of the Company's
investments trade actively in a liquid market.
Management periodically evaluates each investment security to determine
whether a decline in fair value below the amortized cost basis is other
than temporary. If a decline is judged to be other than temporary, the
cost basis of the individual security is written-down to fair value with
the amount of the write-down included in earnings. Realized gains and
losses are computed using the specific identification method and are
included in noninterest income. Premiums are amortized and discounts are
accreted over the contractual lives of investment securities using the
interest method, except for mortgage backed securities, where amortization
and accretion are based on principal repayments.
Transfers of securities between categories are recorded at fair value at
the date of the transfer, with the accounting for unrealized gains or
losses determined by the category into which the security is transferred.
LOANS:
Loans are stated at principal amounts outstanding, net of unearned interest
and net unamortized loan fees. Interest income is accrued on the principal
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
amount outstanding. Unearned interest on installment loans is recognized
over the respective loan terms using the effective interest method. Loan
origination fees, net of certain direct loan origination costs, are
deferred and recognized over the contractual life of the related loan as an
adjustment of yield. Other credit related fees, such as commercial letters
of credit fees and fees on unused, available lines of credit are recorded
as service charges, fees and commissions in noninterest income when earned.
The Company does not sell, provide servicing for others for a fee or
securitize mortgage loans.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," on January 1, 1997.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. SFAS No.
125 also provides implementation guidance for: (i) assessing isolation of
transferred assets and for accounting for transfers of partial interests;
(ii) servicing of financial assets; (iii) securitizations; (iv) transfers
of sales-type and direct financing lease receivables; (v) securities
lending transactions; (vi) repurchase agreements; (vii) dollar-roll
transactions; (viii) wash sales; (ix) loan syndications and participations;
(x) risk participations in banker's acceptances; (xi) factoring
arrangements; (xii) transfers of receivables with recourse; and (xiii)
extinguishment of liabilities. The accounting and reporting standards in
SFAS No. 125 are based on consistent application of a financial-components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an enterprise recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, except as amended in SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." Specifically, the provisions identified as being
deferred under SFAS No. 127 include secured borrowings, collateralizations
and transfers of financial assets that are part of repurchase agreements,
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
dollar-rolls, securities lending and similar transactions. In 1997, the
Company had no transfers of financial assets nor extinguishment of
liabilities that fell under the scope of SFAS No. 125. The adoption of
SFAS No. 127 in 1998 is not expected to have a material effect on operating
results or financial position.
NONPERFORMING ASSETS:
In accordance with the guidance set forth in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures,"
a loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Impairment is measured based on the present value of expected future cash
flows discounted at a loan's effective interest rate, the loan's observable
market price or the fair value of the collateral if the loan is collateral-
dependent. When the measure of an impaired loan is less than the recorded
investment in the loan, the impairment is recognized by adjusting the
allowance for loan losses with a corresponding charge to the provision for
loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed assets.
Accruing loans past due 90 days or more and loans impaired under SFAS Nos.
114 and 118 comprise nonperforming loans. Impaired loans consist of
nonaccrual and restructured loans. A loan is classified as nonaccrual when
it is determined that the collection of all or a portion of interest or
principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless such loan is well secured and in the
process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against
income in the current period. Interest collections after a loan has been
placed on nonaccrual status are credited to income when received unless the
collectibility of principal is in doubt, causing all collections to be
applied as principal reductions. A nonaccrual loan is not returned to
performing status until the loan is current as to principal and interest
and has performed according to the contractual terms for a minimum of six
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
months. Restructured loans are loans with original terms, interest rate,
or both, that have been modified as a result of a deterioration in the
borrower's financial condition. Interest income on restructured loans is
recognized when earned, using the interest method. The Company had the
same one restructured loan during 1997 and 1996.
Foreclosed assets are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans
classified as in-substance foreclosures. The Company includes such
properties in other assets. A loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place.
Foreclosed assets are recorded at the lower of the related loan balance or
80.0 percent of its appraised fair value at the time of acquisition. Any
excess of the loan balance over the recorded value is charged to the
allowance for loan losses. Subsequent declines in the recorded value of
the property prior to its disposal and costs to maintain the assets are
included in other expenses. In addition, any gain or loss realized upon
disposal is included in other income or expense. The historical average
holding period for such properties is less than twelve months.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses account is established through charges to
earnings as a provision for loan losses. Loans, or portions of loans,
determined to be uncollectible are charged against the allowance account
and subsequent recoveries, if any, are credited to the account.
Nonaccrual, restructured and large delinquent commercial and real estate
loans are reviewed monthly to determine if carrying value reductions are
warranted. Consumer loans are considered losses when they are 120 days
past due, except those expected to be recovered through insurance or
collateral disposition proceeds. Under SFAS No. 114, the allowance for
loan losses related to impaired loans is based on discounted cash flows
using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral-dependent loans.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit, commitments under home equity and credit card arrangements and
commercial letters of credit. Such financial instruments are recorded in
the financial statements when they are exercised.
PREMISES AND EQUIPMENT, NET:
Land is stated at cost. Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation. The cost of routine
maintenance and repairs is expensed as incurred. The costs of major
replacements, renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated and any resulting gain or loss is reflected in
noninterest income or noninterest expense. Depreciation is computed using
the straight-line method based on the following useful lives:
Premises............................................................ 15-45 years
Equipment........................................................... 3-12 years
Leasehold improvements.............................................. 15 years
LONG-LIVED AND INTANGIBLE ASSETS:
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recovered. Goodwill, the excess cost over
the net assets acquired accounted for as a purchase, is included in other
assets and amortized on a straight-line basis over 15 years. The core
deposit intangible that resulted from the purchase of the Eynon and
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Factoryville branches is included in other assets and amortized on a
straight-line basis over eight years. As of December 31, 1997, there were
no events or changes in circumstances that would lead management to believe
that the carrying amounts of these assets may not be recoverable.
EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution plan covering all employees who have
completed 1,000 hours of service, attained 21 years of age and have been
employed by the Company for at least one year. Contributions to the plan
are determined by the Board of Directors and are based on a prescribed
percentage of the annual compensation of all participants. Pension costs
are accrued monthly to salaries and benefits expense with the plan being
funded annually.
In addition, the Company had a deferred compensation plan for certain
senior management employees that it discontinued during the third quarter
of 1996. Costs for the plan were accrued monthly in salaries and benefits
expense. The Company had no recognition of gain or loss from the
discontinuance of the plan.
In February of 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The Statement: (i) revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of pensions or other
postretirement benefit plans; (ii) standardizes the disclosure requirements
for benefits of such plans to the extent practicable; (iii) requires
additional information on changes in the benefit obligations and fair value
of plan assets that will facilitate financial analysis; (iv) eliminates
certain disclosures that are no longer useful as they were when Statements
No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlement and Curtailment of Defined Benefit Pension Plans
and for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," were issued.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SFAS No. 132 is effective for fiscal years beginning after December 31,
1997. Most of the changes in the disclosure provisions of SFAS No. 132
address defined benefit plans. The Company's adoption of this Statement on
January 1, 1998, will not significantly change the disclosure requirements
nor will it have any effect on operating results or financial position.
TRUST ASSETS:
Assets held in a fiduciary or agency capacity for customers are not
included in the accompanying consolidated balance sheets since they are not
the Company's assets. Trust income is recorded on a cash basis, which is
not materially different than if reported on an accrual basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of certain on- and off-
balance sheet financial instruments.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial.
Accordingly, such assets and liabilities are excluded from disclosure
requirements. For example, no benefit is recorded for the value of low-
cost funding subsequently discussed. In addition, Community Bank's trust
department contributes fee income annually. Trust assets and liabilities
are not considered financial instruments for this disclosure, and their
values have not been incorporated into the fair value estimates. Other
significant items that are not considered financial instruments include
deferred tax assets, premises and equipment, foreclosed assets and
intangibles. Accordingly, the net aggregate fair value amounts presented
do not represent the underlying value of the Company.
Approximately 97.4 percent and 98.0 percent of the Company's assets and
99.4 percent and 99.6 percent of its liabilities were considered financial
instruments as defined in SFAS No. 107 at December 31, 1997 and 1996,
respectively. In cases where quoted market prices are not available, fair
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets. In many cases, these values cannot be
realized in immediate settlement of the instrument.
The following methods and assumptions were used by the Company to construct
the summary table in Note 11 containing the fair value and related carrying
amounts of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying values of cash and cash equivalents
as reported on the balance sheet approximate fair value.
INVESTMENT SECURITIES: The fair value of investment securities is based on
quoted market prices. The carrying values of restricted equity securities
approximate fair value.
NET LOANS: For adjustable-rate loans that reprice frequently and with no
significant credit risk, fair values are based on carrying values. The
fair values of all other loans are estimated using discounted cash flow
analysis, using interest rates currently offered for loans with similar
terms to borrowers of similar credit risk. Fair values for impaired loans
are estimated using discounted cash flow analysis determined by the loan
review function or underlying collateral values, where applicable.
ACCRUED INTEREST RECEIVABLE: The carrying value of accrued interest
receivable as reported on the balance sheet approximates fair value.
DEPOSITS WITHOUT STATED MATURITIES: The fair value of demand deposits,
savings accounts and certain money market accounts, as required by SFAS No.
107, is the amount payable on demand at the reporting date. The fair value
estimates do not include the benefit that results from such low-cost
funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
DEPOSITS WITH STATED MATURITIES: The carrying value of adjustable-rate,
fixed-term time deposits approximates their fair value at the reporting
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
date. The present value of future cash flows for fixed-rate time deposits
is used to estimate fair value. The discount rates used are the current
rates offered for time deposits with similar maturities.
SHORT-TERM BORROWINGS: The carrying value of short-term borrowings at a
variable interest rate approximates fair value.
LONG-TERM DEBT: The fair value of the fixed-rate, long-term debt is
estimated based on rates currently available to the Company for debt with
similar terms.
ACCRUED INTEREST PAYABLE: The carrying value of accrued interest payable as
reported on the balance sheet approximates fair value.
COMMITMENTS: The majority of the Company's commitments to extend credit,
unused portions of home equity and credit card lines and letters of credit
carry current market interest rates if converted to loans. Because such
commitments are generally unassignable by either the Company or the
borrower, they only have value to the Company and the borrower. The
estimated fair value approximates the recorded deferred fee amounts and is
included in net loans.
COMPREHENSIVE INCOME:
On June 30, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. Items falling
under the scope of SFAS No. 130 include foreign currency items and
unrealized gains and losses on available-for-sale debt and equity
securities. According to the Statement, all items that are 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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The impact on the Company after adoption of this Statement in the
first reporting period of 1998 would be to require additional disclosures
in the Company's financial statements.
SEGMENT DISCLOSURE:
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This Statement establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The impact, if any, of this Statement on the Company
after adoption in 1998 could be to require additional disclosures in the
Company's financial statements.
STATEMENTS OF CASH FLOWS:
The statements of cash flows are presented using the indirect method. For
the purpose of cash flow, cash and cash equivalents include cash on hand,
cash items in the process of collection, noninterest-bearing deposits with
other banks, balances with the FRB and FHLB-Pgh and federal funds sold.
Federal funds sold are highly liquid investments sold for one-day periods.
ADVERTISING COSTS:
The Company expenses advertising costs as incurred. Advertising costs
totaled $217 in 1997, $206 in 1996 and $238 in 1995.
INCOME TAXES:
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using
the provisions of the enacted tax laws. Deferred tax assets and
liabilities are recognized for the estimated future tax effects of
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
temporary differences by applying enacted statutory tax rates to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The amount of deferred tax
assets is reduced, if necessary, to the amount that, based on available
evidence, will more likely than not be realized. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
The Parent Company and its subsidiary file a consolidated federal income
tax return. The subsidiary provides for income taxes on a separate return
basis, and remits amounts determined to be currently payable to the Parent
Company.
EARNINGS PER COMMON SHARE AND CAPITAL STRUCTURE:
Effective for financial statements issued for periods ending after December
15, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." The
object of SFAS No. 128 is to simplify the earnings per share ("EPS")
calculation and to make the United States standard for computation
compatible with the EPS standards of other countries and with those of the
International Accounting Standards Committee.
Under SFAS No. 128, two EPS calculations are required basic EPS, which is
computed by dividing net income by the weighted-average common shares
outstanding, and dilutived 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
three-year period ended December 31, 1997, therefore the per share data
presented on the face of the consolidated statements of income 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 does not establish any new disclosure standards but rather
codifies certain previously-required disclosures. Specifically, it
requires information regarding the pertinent rights and privileges of the
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
various components of an entity's capital structure such as: (i) dividend
and liquidation preferences; (ii) participation rights; (iii) call prices
and dates; (iv) conversion prices and dates; (v) unusual voting rights; and
(vi) terms of contracts to issue additional shares. Since this Statement
contains no change in disclosure requirements, the Company's adoption had
no effect on financial statement preparation.
The retroactive effect of a three-for-one stock split that occurred on
April 1, 1996, is presented in the financial statements. The split changed
the par value from $1.00 per share to $0.33 per share.
2. CASH AND CASH EQUIVALENTS:
The Federal Reserve Act, as amended by the Monetary Control Act of 1980,
imposes reserve requirements on all member depository institutions. The
Company's required reserve balances were $1,415 and $1,194 at December 31,
1997 and 1996, respectively, which were satisfied through the restriction
of vault cash. Such reserve requirements averaged $1,256 in 1997 and
$1,159 in 1996.
Community Bank maintains compensating balances with the FRB and various
other correspondent banks, most of which are not required, to offset
specific charges for check clearing and other services. Balances maintained
for this purpose were $4,337 and $3,502 at December 31, 1997 and 1996,
respectively. Compensating balances with correspondent banks averaged
$4,407 in 1997 and $4,909 in 1996.
3. INVESTMENT SECURITIES:
As previously mentioned, SFAS No. 115 requires an enterprise to classify
its investment securities into three categories: held-to-maturity,
available-for-sale and trading.
3. INVESTMENT SECURITIES (CONTINUED):
For years ended December 31, 1997 and 1996, the Company classified all
investment securities as available-for-sale. The amortized cost and fair
value of available-for-sale securities at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 28,534 $ 56 $ 7 $ 28,583
U.S. Government agencies.................... 10,448 60 10,388
State and municipals........................ 38,329 1,558 39,887
Mortgage backed securities.................. 23,748 51 53 23,746
Equity securities........................... 2,182 880 3,062
-------- ------ ---- --------
Total..................................... $103,241 $2,545 $120 $105,666
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 35,677 $ 44 $102 $ 35,619
U.S. Government agencies.................... 18,836 1 231 18,606
State and municipals........................ 37,692 696 93 38,295
Mortgage backed securities.................. 7,050 32 24 7,058
Equity securities........................... 1,884 532 2,416
-------- ------ ---- --------
Total..................................... $101,139 $1,305 $450 $101,994
======== ====== ==== ========
</TABLE>
There were no sales of available-for-sale securities during 1997. Proceeds
from the sales of available-for-sale securities amounted to $1,472 in 1996
and $87,103 in 1995. The Company realized gross gains from securities
sales of $8 in 1996 and $320 in 1995. Gross losses on securities sales of
$66 in 1996 and $4,713 in 1995 were realized. Income tax benefits amounted
to $20 related to net realized investment securities losses of $58 in 1996
and $1,494 related to net unrealized investment securities losses of $4,393
in 1995. The net unrealized holding gains, included as a separate
component of stockholders' equity, amounted to $1,600, net of income taxes
of $825, at December 31, 1997, and $564, net of income taxes of $291, at
December 31, 1996.
SFAS No. 115 requires an enterprise to reassess the appropriateness of its
accounting and reporting classifications of debt and equity securities at
each reporting date. Accordingly, management transferred its entire
held-to-maturity classification to available-for-sale at September 30,
1995. This transfer resulted from management's need to divest certain
securities purchased utilizing investment practices and actions followed
3. INVESTMENT SECURITIES (CONTINUED):
prior to 1995 that placed a significant exposure to interest rate risk on
the Company. Specifically, the prior investment practices and actions
included those that are referred to as unsuitable pursuant to the Board of
Governors of the Federal Reserve System's ("Federal Reserve Board's")
Supervisory Policy Statement on Securities Activities effective February
10, 1992, and revised April 15, 1994, and the Federal Reserve Board's
Supervisory Policy Statement on Structured Notes effective September 21,
1995. The securities transferred had an amortized cost of $105,799 and a
fair value of $103,906 at the date of the transfer. The Company recognized
unrealized holding losses of $1,249, net of applicable income taxes of
$644, in a separate component of stockholders' equity as a result of such
transfer. Management sold certain available-for-sale securities at a loss
after September 30, 1995, some of which were transferred from the held-to-
maturity portfolio. The resulting loss of $2,500 on the sale was
recognized in earnings in the third quarter of 1995, the period in which
the decision to sell was made. The portion of such loss attributable to
the securities transferred from the held-to-maturity portfolio was $1,825.
Prior to the aforementioned transfer, the Company did not sell or transfer
any securities from its held-to-maturity classification. The Company's
investment policy was amended in 1995 prohibiting such activities and the
investment in the types of financial instruments discussed in SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments."
The Company held collateralized mortgage obligations ("CMOs") during 1995
deemed to be high-risk as defined in the Federal Reserve Board's
Supervisory Policy Statement on Securities Activities. High-risk CMOs are
defined as any mortgage backed security that at the time of purchase, or at
a subsequent testing date, meets any of the average life or interest
sensitivity tests. The Company held no such securities during 1997 and
1996, as all securities determined to be high-risk CMOs and those that had
the potential to become high-risk were disposed of during the 1995
divestiture of certain securities. Proceeds from the sale of high-risk
CMOs amounted to $27,674 in 1995. Gross gains of $66 and gross losses of
$1,621 were realized on the sale of Federal Reserve Board defined high-risk
CMOs in 1995. There were no Federal Reserve Board defined high-risk CMOs
that met the criteria for high-risk, nonequity CMOs as defined in Issue 2
3. INVESTMENT SECURITIES (CONTINUED):
of FASB's Emerging Issues Task Force ("EITF") Issue No. 89-4, "Accounting
for a Purchased Investment in a Collateralized Mortgage Obligation
Instrument or in a Mortgage Backed Interest-Only Certificate." EITF Issue
No. 89-4 defines high-risk, nonequity CMOs as those that have the potential
for loss of a significant portion of their original investments due to
changes in interest rates, prepayment rate of the assets of the CMO
structure, or earnings from temporary reinvestment of cash collected by the
CMO structure but not yet distributed to the holders of its obligations.
Accordingly management, after considering whether such securities satisfied
any of the three subtests outlined above, did not discount these CMOs to
the present value of estimated future cash flows at a risk-free rate to
determine whether or not an other than temporary impairment existed.
Management applied the guidance to each type of CMO instrument, including
those with unusual or unique terms or features, in formulating its
conclusion that such securities did not meet the EITF Issue No. 89-4
definition of a high-risk, nonequity CMO.
At its November 14, 1996, meeting, the EITF reached a consensus on Issue
No. 96-12, "Recognition of Interest Income and Balance Sheet Classification
of Structured Notes," requiring investors to use the retrospective interest
method for recognizing income on structured notes that are classified as
available-for-sale or held-to-maturity securities and that meet one or more
of three specified conditions. These conditions relate to the risk of the
contractual principal amount or the original investment amount of the note,
the variability of the note's return on investment and the basis of the
note's contractual maturity. EITF No. 96-12 provides guidance for purposes
of determining the effective yield at which income will be recognized under
the retrospective interest method for qualifying structured notes.
Furthermore, the EITF requires an enterprise to determine whether a
structured note has experienced a decline in value below amortized cost
that is other than temporary requiring a write-down of amortized cost, with
the amount of the write-down included in earnings.
The Company sold the majority of its holdings of structured notes during
1995. The carrying value of structured notes totaled $2.0 million at
December 31, 1997, and $2.9 million at December 31, 1996. Specifically, at
December 31, 1997, these securities included a dual-index floater and a
3. INVESTMENT SECURITIES (CONTINUED):
delevered floater, each having a carrying value of approximately $1.0
million. The delevered floater is not within the scope of EITF Issue No.
96-12 as its coupon rate moves in the same direction as market-based
interest rates. However, the coupon rate on the dual-index floater is
determined by the spread between two different indices that will not
necessarily move in the general direction of a specific interest rate or
index causing such instrument to be within the scope of EITF Issue No. 96-
12. Management considered the guidance in accounting for the interest
income of such security and determined it was not significantly different
than the method used.
Investment securities with an amortized cost of $25,971 at December 31,
1997, and $35,099 at December 31, 1996, were pledged to secure deposits, to
qualify for fiduciary powers and for other purposes required or permitted
by law. The fair value of such securities was $25,979 at December 31,
1997, and $34,968 at December 31, 1996.
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at
December 31, 1997, 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, CMOs and equity securities.
Mortgage backed securities and CMOs have been presented based upon
estimated cash flows, assuming no change in the current interest rate
environment. Equity securities with no stated contractual maturities are
included in the after ten years maturity distribution. Expected maturities
may differ from contracted maturities because borrowers have the right to
call or prepay obligations with or without call or prepayment penalties.
3. INVESTMENT SECURITIES (CONTINUED):
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
______________________________________________________________________________
DECEMBER 31, 1997 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities.... $20,506 5.63% $ 8,028 6.00% $ 28,534 5.73%
U.S. Government agencies.... 9,800 4.63 648 4.61 10,448 4.63
State and municipals........ 725 5.92 6,048 6.80 $6,133 8.96% $25,423 8.22% 38,329 8.07
Mortgage backed securities.. 6,041 6.34 16,998 6.45 709 6.48 23,748 6.42
Equity securities........... 2,182 6.04 2,182 6.04
------- ------- ------ ------- --------
Total..................... $37,072 5.49% $31,722 6.37% $6,842 8.71% $27,605 8.05% $103,241 6.66%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $20,524 $ 8,059 $ 28,583
U.S. Government agencies.... 9,757 631 10,388
State and municipals........ 725 6,107 $6,507 $26,548 39,887
Mortgage backed securities.. 6,038 16,996 712 23,746
Equity securities........... 3,062 3,062
------- ------- ------ ------- --------
Total..................... $37,044 $31,793 $7,219 $29,610 $105,666
======= ======= ====== ======= ========
</TABLE>
Except for U.S. Treasury securities and U.S. Government agencies, there
were no securities of any individual issuer that exceeded 10.0 percent of
the Company's stockholders' equity at December 31, 1997 and 1996. Except
for $1,862 of tax-exempt obligations of local municipalities, all of the
investment securities in the Company's portfolio are considered "investment
grade," receiving a rating of "Baa" or higher from Moody's or "BBB" or
higher from Standard and Poor's rating services at December 31, 1997.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES:
The major classifications of loans outstanding, net of unearned interest of
$2,180 and $2,318 and loan fees of $827 and $925 at December 31, 1997 and
1996, respectively, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Commercial, financial and others................................. $ 38,996 $ 36,416
Real estate:
Construction................................................... 2,096 3,657
Mortgage....................................................... 180,123 165,868
Consumer, net.................................................... 29,012 29,862
-------- --------
Total........................................................ $250,227 $235,803
======== ========
</TABLE>
Fixed-rate loans totaled $204,314 at December 31, 1997, while loans with
adjustable interest rates totaled $45,913. At December 31, 1996, fixed-
rate loans totaled $188,468 and adjustable-rate loans totaled $47,335.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The maturity distribution of the loan portfolio by major classification at
December 31, 1997, is summarized as follows:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1997 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $22,812 $ 9,778 $ 6,406 $ 38,996
Real estate:
Construction....................... 2,096 2,096
Mortgage........................... 17,596 57,338 105,189 180,123
Consumer, net........................ 12,828 12,730 3,454 29,012
------- ------- -------- --------
Total............................ $55,332 $79,846 $115,049 $250,227
======= ======= ======== ========
</TABLE>
Loans outstanding to directors, executive officers, principal stockholders,
or to their affiliates totaled $3,618 at December 31, 1997, and $5,013 at
December 31, 1996. Advances, repayments and reductions due to director
retirements for such loans during 1997 totaled $1,829, $2,648 and $576,
respectively. These loans are made during the ordinary course of business
at the Company's normal credit terms. There were no related party loans
that were classified as nonaccrual, past due, restructured or considered a
potential problem at December 31, 1997 and 1996.
At December 31, 1997, substantially all of the Company's loans consisted of
loans that are at least partially secured by real estate in Lackawanna,
Susquehanna, Wayne and Wyoming counties of Northeastern Pennsylvania.
Therefore, the Company's primary concentration of credit risk is related to
the real estate market in the Northeastern Pennsylvania area. Changes in
the general economy, local economy or in the real estate market could
affect the ultimate collectibility of this portion of the Company's loan
portfolio. Management does not believe there are any other significant
concentrations of credit risk that could affect the loan portfolio.
During 1997, the Company sold student loans with a carrying value of $3,405
to its servicing agent. The Company recognized a gain of $34 on the sale.
The Company did not sell loans in 1996 and had no loans for sale at
December 31, 1997 and 1996.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The analysis of changes affecting the allowance for loan losses account for
the three-years ended December 31, 1997, 1996 and 1995, is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C>
Balance, January 1............................................. $3,944 $3,903 $3,576
Provision for loan losses...................................... 360 300 435
Loans charged-off.............................................. (657) (726) (393)
Loans recovered................................................ 151 467 285
------ ------ ------
Balance, December 31........................................... $3,798 $3,944 $3,903
====== ====== ======
</TABLE>
Information concerning nonperforming assets at December 31, 1997 and 1996,
is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others.................................... $ 197 $ 251
Real estate:
Construction......................................................
Mortgage.......................................................... 2,063 1,018
Consumer, net....................................................... 12
------ ------
Total nonaccrual loans.......................................... 2,272 1,269
------ ------
Restructured loans.................................................. 189 225
------ ------
Total impaired loans............................................ 2,461 1,494
------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others.................................... 321 359
Real estate:
Construction......................................................
Mortgage.......................................................... 2,536 1,247
Consumer, net....................................................... 312 291
------ ------
Total accruing loans past due 90 days or more................... 3,169 1,897
------ ------
Total nonperforming loans....................................... 5,630 3,391
------ ------
Foreclosed assets................................................... 405 420
------ ------
Total nonperforming assets...................................... $6,035 $3,811
====== ======
</TABLE>
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Information relating to the Company's recorded investment in impaired loans
at December 31, 1997 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Impaired loans:
With a related allowance............................................ $2,272 $1,269
With no related allowance........................................... 189 225
------ ------
Total............................................................. $2,461 $1,494
====== ======
</TABLE>
The analysis of changes affecting the allowance for loan losses related to
impaired loans at December 31, 1997, 1996 and 1995, is summarized as
follows:
<TABLE>
<CAPTIOM>
1997 1996 1995
_______________________________________________________________________________________
<S> <C> <C> <C>
Balance, January 1................................................ $650 $614 $488
Provision for loan losses......................................... 4 3 4
Loans charged-off................................................. 113 92 69
Loans recovered................................................... 125 191
---- ---- ----
Balance, December 31.............................................. $541 $650 $614
==== ==== ====
</TABLE>
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loans 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-years ended December 31, 1997, is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996 1995
_______________________________________________________________________________________
<S> <C> <C> <C>
Gross interest due under terms.................................. $ 174 $ 143 $ 158
Interest income recognized...................................... 84 30 92
------ ------ ------
Interest income not recognized.................................. $ 90 $ 113 $ 66
====== ====== ======
Interest income recognized (cash-basis)......................... $ 84 $ 30 $ 87
Average recorded investment in impaired loans................... $2,368 $1,528 $1,621
</TABLE>
Cash received on impaired loans applied as a reduction of principal totaled
$587 in 1997, $398 in 1996 and $595 in 1995. There were no commitments to
extend additional funds to customers with impaired loans at December 31,
1997 and 1996.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES:
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements. Management does not anticipate that losses, if any,
that may occur as a result of funding off-balance sheet commitments would
have a material adverse effect on the Company's results of operations or
financial position.
The contractual amounts of off-balance sheet commitments at December 31,
1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Commitments to extend credit.......................................... $15,881 $ 8,919
Unused portions of home equity and credit card lines.................. 1,366 1,349
Commercial letters of credit.......................................... 596 635
------- -------
Total............................................................... $17,843 $10,903
======= =======
</TABLE>
The Company's involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of home equity and credit
card lines and commercial letters of credit is represented by the
contractual amounts of those instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Commercial letters of credit are conditional commitments issued by
the Company to support customers in the purchase of commercial goods. Such
letters of credit are automatically renewable upon their anniversary date
unless cancelled prior to such date at the option of the Company.
The Company employs the same credit policies and requirements in making
off-balance sheet credit commitments as it does for on-balance sheet
instruments. Provision for losses, if any, is included in the Company's
allowance for loan losses. No provision was deemed necessary at December
31, 1997 and 1996. Such commitments are generally issued for one year or
less and often expire unused in whole or in part by the customer.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
The Company provides deposit and loan products and other financial services
to consumer and corporate customers in its four-county market area of
Lackawanna, Susquehanna, Wayne and Wyoming. There are no significant
concentrations of credit risk from any individual counterparty or groups of
counterparties, except for locational concentrations. The concentrations
of the credit portfolio by loan type are set forth in Note 4. The Company
requires collateral on all real estate exposure and most other loans,
including off-balance sheet commitments upon extension of credit, and
maintains loan-to-value ratios of no greater than 80.0 percent, except in
the case of loans secured by deposits or U.S. Government securities. The
amount of collateral obtained is based on management's credit evaluation of
the customer. Collateral varies but may include property, plant and
equipment, primary residential properties, and to a lesser extent, income-
producing properties. Although the credit portfolio is diversified, the
Company and its borrowers are dependent on the continued viability of the
Northeastern Pennsylvania economy. The loan portfolio does not include any
form of credit involving highly-leveraged transactions, defined as
financing transactions that involve the buyout, acquisition or
recapitalization of an existing business, including credit extended to
highly-leveraged industries.
Securities and short-term investment activities are conducted with a
diverse group of government entities, corporations and depository
institutions. The Company evaluates the counterparty's creditworthiness
and need for collateral on a case-by-case basis. At December 31, 1997 and
1996, there were no significant concentrations of credit risk from any one
issuer with the exception of U.S. Treasury securities and U.S. Government
agencies.
Neither the Company or any of its property is subject to any material legal
proceedings. Management, after consultation with legal counsel, does not
anticipate that the ultimate liability, if any, arising out of pending and
threatened lawsuits will have a material effect on the Company's results of
operations or financial position.
6. PREMISES AND EQUIPMENT, NET:
Premises, furniture and equipment at December 31, 1997 and 1996, is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Land.................................................................... $ 288 $ 187
Premises................................................................ 5,156 4,715
Leasehold improvements.................................................. 262 243
Furniture and equipment................................................. 3,846 3,156
------ ------
Total premises and equipment.......................................... 9,552 8,301
Less: accumulated depreciation.......................................... 5,780 5,209
------ ------
Premises and equipment, net........................................... $3,772 $3,092
====== ======
</TABLE>
Amounts charged to noninterest expense for depreciation amounted to $571 in
1997, $496 in 1996 and $428 in 1995. Occupancy expense has been reduced by
rental income from premises leased to others in the amount of $64 in 1997,
$61 in 1996 and $59 in 1995.
Certain facilities and equipment are leased under operating lease
agreements expiring at various dates until the year 2009. Two leases
contain escalation clauses that provide for cost of living adjustments, and
several contain renewal options. The realty leases require the Company to
pay real estate taxes, insurances and repair costs. Rental expense on
operating leases amounted to $164 in 1997, $281 in 1996 and $304 in 1995.
Future minimum required annual rentals under noncancellable leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998.............................................................................. $126
1999.............................................................................. 77
2000.............................................................................. 70
2001.............................................................................. 66
2002.............................................................................. 54
2003 and thereafter............................................................... 358
----
Total........................................................................... $751
====
</TABLE>
On January 2, 1998, Community Bank acquired land in Clarks Summit,
Pennsylvania for $1.22 million to construct an administrative center and
branch facility. This project, having an estimated aggregate cost of $4.0
million, should be completed during the first quarter of 1999. The project
will be funded through normal operations.
7. OTHER ASSETS:
The major components of other assets at December 31, 1997 and 1996, are as
follows:
<TABLE>
<CAPTIOM>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Goodwill................................................................ $1,222 $1,440
Core deposit intangible................................................. 2,160
Deferred income taxes................................................... 476 1,051
Foreclosed assets....................................................... 405 420
Other................................................................... 1,841 1,253
------ ------
Total................................................................. $6,104 $4,164
====== ======
</TABLE>
On November 14, 1997, the Company acquired certain assets and assumed the
deposit liabilities of the Eynon and Factoryville branches of First Union
in a transaction accounted for by the purchase method. The Company assumed
the deposit liabilities in exchange for the receipt of a lesser amount of
cash, other assets and loans. The transaction was recorded based on the
fair values of the assets acquired and liabilities assumed. The difference
between the liabilities assumed and the assets acquired resulted in the
acquisition of a core deposit intangible.
The Company assumed liabilities of $19.2 million and acquired land,
building, equipment and certain loans having an aggregate value of $730 and
cash of $16.3 million. The amount by which the acquisition cost exceeded
the value of assets received totaled $2.2 million and is included in other
assets as a core deposit intangible.
Amortization expense on goodwill amounted to $218 per year for 1997, 1996
and 1995. Amortization expense of the core deposit intangible amounted to
$18 in 1997.
8. DEPOSITS:
The major components of interest-bearing and noninterest-bearing deposits
at December 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Interest-bearing deposits:
Money market accounts............................................ $ 18,056 $ 16,168
NOW accounts..................................................... 21,465 17,915
Savings accounts................................................. 64,998 66,037
Time deposits less than $100..................................... 176,327 158,047
Time deposits $100 or more....................................... 20,832 35,865
-------- --------
Total interest-bearing deposits................................ 301,678 294,032
Noninterest-bearing deposits....................................... 30,703 26,424
-------- --------
Total deposits................................................. $332,381 $320,456
======== ========
</TABLE>
The Company accepts deposits of its directors, executive officers,
principal stockholders or their affiliates on the same terms and at the
prevailing interest rates offered at the time of deposit for comparable
transactions with unrelated parties. The amount of related party deposits
totaled $1,969 at December 31, 1997, and $1,522 at December 31, 1996.
The maturity distribution of time deposits $100 or more at December 31,
1997 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
_______________________________________________________________________________________
<S> <C> <C>
Within three months................................................... $ 3,195 $ 8,598
After three months but within six months.............................. 2,819 9,958
After six months but within twelve months............................. 6,334 11,262
After twelve months................................................... 8,484 6,047
------- -------
Total............................................................... $20,832 $35,865
======= =======
</TABLE>
Interest expense on time deposits $100 or more amounted to $1,796 in 1997,
$1,647 in 1996 and $1,771 in 1995.
8. DEPOSITS (CONTINUED):
The aggregate amounts of maturities for all time deposits at December 31,
1997, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.......................................................................... $ 93,656
1999.......................................................................... 62,826
2000.......................................................................... 23,814
2001.......................................................................... 7,527
2002.......................................................................... 6,415
2003 and thereafter........................................................... 2,921
--------
Total....................................................................... $197,159
========
</TABLE>
The aggregate amount of deposits reclassified as loans was $89 at December
31, 1997, and $212 at December 31, 1996. Management evaluates transaction
accounts that are overdrawn for collectibility as part of its evaluation
for credit losses. At December 31, 1997 and 1996, no allowance was deemed
necessary for such accounts. During 1997 and 1996, the Company had no
deposits that were received on terms other than those available in the
normal course of business.
9. SHORT-TERM BORROWINGS:
Short-term borrowings available to the Company consist of a line of credit
and fixed-rate advances with the FHLB-Pgh secured under terms of a blanket
collateral agreement by a pledge of FHLB-Pgh stock and certain other
qualifying collateral, such as investment and mortgage backed securities
and mortgage loans. The line is limited to the Company's maximum borrowing
capacity ("MBC") with the FHLB-Pgh, which is based on a percentage of
qualifying collateral assets. At December 31, 1997, the Company's MBC was
$137.4 million. Interest accrues daily on the line based on the rate of
FHLB-Pgh discount notes. This rate resets each day. The line is renewable
annually on its anniversary date and carries no associated commitment fees.
The FHLB-Pgh has the right to reduce or terminate the line at any time
without prior notice and the Company may repay such line at any time
without incurring prepayment penalties. Short-term, fixed-rate advances
are issued with maturities less than one year based on the FHLB-Pgh's
current cost of funds rate. Advances are limited to the Company's MBC and
are not prepayable. There are no commitment fees associated with the
9. SHORT-TERM BORROWINGS (CONTINUED):
advances, except for those for forward settlement that are based on FHLB-
Pgh hedging costs.
There was $9,575 of short-term borrowings outstanding at December 31, 1997,
under the line of credit agreement. At December 31, 1996, the Company had
no short-term borrowings outstanding. The average daily balance and
weighted-average rate on aggregate short-term borrowings was $138 at 5.8
percent in 1997 and $51 at 5.9 percent in 1996. The maximum amount of all
short-term borrowings outstanding at any month-end was $9,575 during 1997
and $2,750 during 1996. Short-term borrowings during 1997 and 1996
consisted entirely of the FHLB-Pgh line of credit.
The Company has not entered into repurchase agreements with others during
1997 and 1996. Repurchase agreements consist of transactions whereby an
institution sells securities and agrees to repurchase the identical, or
substantially the same securities, at a specified date for a specified
price.
10. LONG-TERM DEBT:
Long-term debt at December 31, 1997 and 1996, consisted entirely of a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program. This advance matures on September 2, 2009. The
scheduled principal payments on such note total $2 for each of the five
years 1998 through 2002. The prepayment fee applicable to the advance is
equal to the present value of the difference between cash flows generated
at the advance rate from the date of the prepayment until the original
maturity date, and the cash flows that would result from the interest rate
posted by the FHLB-Pgh on the date of prepayment for an advance of
comparable maturity. The note is secured under terms of a blanket
collateral agreement by a pledge of qualifying investment and mortgage
backed securities, certain mortgage loans and a lien on FHLB-Pgh stock. The
average daily balance on long-term debt for 1997 was $45 with a weighted-
average rate of 8.9 percent. For 1996, the average daily balance on long-
term debt was $2,122 with a weighted-average rate of 4.4 percent. Included
in the average daily balance and weighted-average rate for 1996 was a
$3,000, 4.3 percent fixed-rate advance that matured September 9, 1996. The
note was repaid in accordance with its contractual terms.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments at December
31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
___________________ ___________________
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................... $ 17,265 $ 17,265 $ 11,032 $ 11,032
Investment securities........................ 105,666 105,666 101,994 101,994
Net loans.................................... 246,429 243,905 231,859 230,579
Accrued interest receivable.................. 2,575 2,575 2,671 2,671
-------- -------- -------- --------
Total...................................... $371,935 $369,411 $347,556 $346,276
======== ======== ======== ========
Financial liabilities:
Deposits without stated maturities........... $135,222 $135,222 $126,544 $126,544
Deposits with stated maturities.............. 197,159 197,868 193,912 194,412
Short-term borrowings........................ 9,575 9,575
Long-term debt............................... 44 44 46 46
Accrued interest payable..................... 1,714 1,714 1,758 1,758
-------- -------- -------- --------
Total...................................... $343,714 $344,423 $322,260 $322,760
======== ======== ======== ========
</TABLE>
12. LITIGATION RECOVERY:
During the second quarter of 1997, Community Bank reached a settlement with
an investment securities broker. The $250 settlement was awarded with
respect to Community Bank's business relationship with this broker prior to
1995. This one-time addition to noninterest income had a $148.5 positive
impact on earnings after applicable income taxes and legal fees.
13. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution plan covering all employees who meet
the age and service requirements. Salaries and employee benefits expense
included $68 in 1997, $67 in 1996 and $50 in 1995 for the plan.
As previously mentioned in Note 1 of these financial statements, the
Company discontinued its deferred compensation plan for certain senior
management employees in 1996. Expenses for this plan amounted to $16 in
1996 and $29 in 1995. Funding for the plan was provided by life insurance
contracts.
14. INCOME TAXES:
For the years ended December 31, 1997, 1996 and 1995, the current and
deferred amounts of the provision for income tax expense (benefit) are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C>
Current....................................................... $1,093 $1,079 $(412)
Deferred...................................................... 41 (66) (140)
------ ------ -----
Total....................................................... $1,134 $1,013 $(552)
====== ====== =====
</TABLE>
A reconciliation between the effective income tax expense (benefit) and the
amount of income taxes (benefit) that would have been provided at the
federal statutory rate of 34.0 percent for the years ended December 31,
1997, 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C>
Federal income tax at statutory rate.......................... $1,882 $1,773 $(120)
Differences resulting from:
Tax-exempt interest, net.................................... (733) (668) (416)
Goodwill.................................................... 74 74 74
Residential housing program tax credit...................... (80) (160)
Other....................................................... (9) (6) (90)
------ ------ -----
Total..................................................... $1,134 $1,013 $(552)
====== ====== =====
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, sources of change in
deferred income taxes and the related tax effects are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C>
Allowance for loan losses....................................... $ 49 $ (14) $ (111)
Loans, net of unearned income................................... 33 (43) 18
Accrued interest receivable..................................... (17) (26) (15)
Premises and equipment, net..................................... (26) (28) (37)
Core deposit intangible......................................... 2
Other, net...................................................... 45 5
---- ---- ------
Change in deferred income taxes affecting the statements of
income....................................................... 41 (66) (140)
Deferred income taxes on investment securities recognized in
stockholders' equity........................................... 534 (110) 2,816
---- ----- ------
Total change in deferred income taxes....................... $575 $(176) $2,676
==== ==== ======
</TABLE>
14. INCOME TAXES (CONTINUED):
The temporary differences that give rise to the significant portions of
deferred tax assets and liabilities at December 31, 1997 and 1996, are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
______________________________________________________________________________________
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses........................................... $1,125 $1,174
Loans, net of unearned income....................................... 281 315
Accrued interest receivable......................................... 177 160
------ ------
Total............................................................. 1,583 1,649
------ ------
Deferred tax liabilities:
Investment securities............................................... 824 291
Premises and equipment, net......................................... 281 307
Core deposit intangible............................................. 2
------ ------
Total............................................................. 1,107 598
------ ------
Net deferred tax assets........................................... $ 476 $1,051
====== ======
</TABLE>
The Company has determined that it is not required to establish a valuation
reserve for the deferred tax assets since it is more likely than not that
the net deferred tax assets could be principally realized through carryback
to taxable income in prior years and by future reversals of existing
taxable temporary differences, or to a lesser extent, through future
taxable income. The Company reviews the tax criteria related to the
recognition of deferred tax assets on a quarterly basis. Banks in
Pennsylvania are not subject to state or local income taxes, however they
pay a tax on capital. Such tax is included in other expenses.
15. PARENT COMPANY FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1997 1996 1995
________________________________________________________________________________________
<S> <C> <C> <C>
Income:
Dividends from subsidiary...................................... $ 602 $ 753 $ 821
Management fees from subsidiary................................ 249 176 180
Other income................................................... 81 69 51
------ ------ ------
Total income................................................. 932 998 1,052
------ ------ ------
Expense:
Occupancy and equipment expenses............................... 91 96 93
Other expenses................................................. 509 469 561
------ ------ ------
Total expenses............................................... 600 565 654
------ ------ ------
Income before income taxes and undistributed income of
subsidiary.................................................... 332 433 398
Income tax benefits............................................ (106) (200) (127)
------ ------ ------
Income before undistributed income of subsidiary............... 438 633 525
Equity in undistributed income of subsidiary................... 3,962 3,567 (325)
------ ------ ------
Net income................................................... $4,400 $4,200 $ 200
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31 1997 1996
________________________________________________________________________________________
<S> <C> <C>
Assets:
Cash................................................................... $ 445 $ 253
Investment in bank subsidiary.......................................... 33,941 29,391
Investment securities available-for-sale............................... 1,483 1,113
Other assets........................................................... 1,265 1,449
------- -------
Total assets......................................................... $37,134 $32,206
======= =======
Liabilities:
Dividends payable...................................................... $ 264 $ 242
Other liabilities...................................................... 768 708
------- -------
Total liabilities.................................................... 1,032 950
Stockholders' equity................................................... 36,102 31,256
------- -------
Total liabilities and stockholders' equity........................... $37,134 $32,206
======= =======
</TABLE>
15. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED):
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1997 1996 1995
_______________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 4,400 $ 4,200 $ 200
Adjustments:
Equity in undistributed income of subsidiary............... (3,962) (3,567)
Distributions in excess of earnings of subsidiary.......... 325
Depreciation and amortization.............................. 294 294 294
Gains on sale of investment securities..................... (8)
Changes in:
Other assets............................................. 108 (158) (294)
Other liabilities........................................ (58) 208 ( 53)
------- ------ -------
Net cash provided by operating activities.............. 782 969 472
------- ------ -------
Cash flows from investing activities:
Proceeds from sales of investment securities................. 25
Purchases of investment securities........................... (22) (73) (17)
------- ------ -------
Net cash used in investing activities.................. (22) (48) (17)
------- ------ -------
Cash flows from financing activities:
Issuance of common stock..................................... 69
Cash dividends paid.......................................... (637) (675) (455)
------- ------ -------
Net cash used in financing activities.................. (568) (675) (455)
------- ------ -------
Net increase in cash................................... 192 246
Cash at beginning of year.............................. 253 7 7
------- ------- -------
Cash at end of year.................................... $ 445 $ 253 $ 7
======= ======= =======
Supplemental disclosure:
Noncash item:
Change in net unrealized losses (gains) on available-for-
sale securities........................................... $(1,036) $ 216 $(5,468)
======= ======= =======
</TABLE>
16. REGULATORY MATTERS:
Under the Pennsylvania Business Corporation Law of 1988, as amended, the
Company may not pay a dividend if, after giving effect thereto, either the
Company could not pay its debts as they become due in the usual course of
business, or the Company's total assets would be less than its total
liabilities. The determination of total assets and liabilities may be
based upon: financial statements prepared on the basis of GAAP; financial
16. REGULATORY MATTERS (CONTINUED):
statements that are prepared on the basis of other accounting practices and
principles that are reasonable under the circumstances; or a fair valuation
or other method that is reasonable under the circumstances.
In addition, the Company is subject to dividend restrictions under the
Pennsylvania Banking Code of 1965, as amended, which allows cash dividends
to be declared and paid out of accumulated net earnings. More stringent
dividend restrictions apply under Federal Reserve Regulation H, which
restricts calendar year dividend payments of member banks to the total of
its net profits for that year combined with its retained net profits of the
preceding two calendar years, less any required transfer to surplus, unless
a bank has received prior approval from the Federal Reserve Board.
Accordingly, Community Bank, without prior approval from the Federal
Reserve Board, may declare dividends to the Parent Company in 1998 totaling
$7,529 plus net profits earned for the period from January 1, 1998, through
the date of declaration, less any dividends previously paid in 1998.
The Company has paid cash dividends since its formation as a bank holding
company in 1983. It is the present intention of the Company's Board of
Directors to continue this dividend payment policy, however, further
dividends must necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the time the
Company's Board of Directors considers payment of dividends.
The amount of funds available for transfer from Community Bank to the
Parent Company in the form of loans and other extensions of credit is also
limited. Under the provisions of Section 23A of the Federal Reserve Act,
transfers to any one affiliate are limited to 10.0 percent of capital and
surplus. At December 31, 1997, the maximum amount available for transfer
from Community Bank to the Parent Company in the form of loans amounted to
$11,535. At December 31, 1997 and 1996, there were no loans outstanding,
nor were any advances made during 1997 and 1996.
The Company must maintain certain capital to total risk-weighted asset
ratios as defined by Section 38 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). In the event an
institution is deemed to be undercapitalized by such standards, FDICIA
16. REGULATORY MATTERS (CONTINUED):
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 the significantly or critically undercapitalized institutions
including restrictions on interest payable on accounts, dismissal of
management and appointment of a receiver. For well capitalized
institutions, FDICIA provides authority for regulatory intervention where
the institution is deemed to be engaging in unsafe and unsound practices or
receives a less than satisfactory examination report rating. The Company
received a final regulatory examination report from the Commonwealth of
Pennsylvania Department of Banking on December 5, 1997. This report
included notification that the Company was considered well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company must maintain minimum Tier I,
total and Tier I Leverage ratios as set forth in the table. The Tier I
Leverage ratio is defined as Tier I capital to total average assets less
intangible assets. There are no conditions or events since that
notification that management believes have changed the Company's category.
The Company's capital ratios at December 31, 1997 and 1996, as well as the
required minimum ratios for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions as defined by
FDICIA, are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
_________________________________________________________
DECEMBER 31, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets............ $ 30,610 15.7% $ 7,806 4.0% $11,709 6.0%
Total capital to risk-adjusted assets............. 33,066 16.9 15,612 8.0 19,515 10.0
Tier I capital to total average assets
less intangible assets........................... $ 30,610 8.6% $14,307 4.0% $17,884 5.0%
Risk-adjusted assets.............................. $186,410
Risk-adjusted off-balance sheet items............. 8,743
Average assets for Leverage ratio................. $357,685
</TABLE>
16. REGULATORY MATTERS (CONTINUED):
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
_________________________________________________________
DECEMBER 31, 1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets............ $ 28,692 15.4% $ 7,443 4.0% $11,164 6.0%
Total capital to risk-adjusted assets............. 31,038 16.7 14,886 8.0 18,607 10.0
Tier I capital to total average assets
less intangible assets........................... $ 28,692 8.3% $13,830 4.0% $17,287 5.0%
Risk-adjusted assets.............................. $180,809
Risk-adjusted off-balance sheet items............. 5,261
Average assets for Leverage ratio................. $345,738
</TABLE>
On April 2, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to register 300,000 shares of common
stock in establishing a Dividend Reinvestment Plan ("DRP"). The purpose of
the DRP is to provide stockholders with a simple and convenient method to
invest cash dividends in the Company's common stock without payment of any
brokerage commissions while also furnishing the Company with additional
funds for general corporate purposes. Main features of the DRP include the
following: (i) shares will be purchased from original issuances; (ii) no
optional cash payments; (iii) eligibility for all registered and street
name stockholders; (iv) no minimum or maximum number of shares
participation restrictions; and (v) availability of full or partial
dividend reinvestment. At December 31, 1997, there were 2,325 shares
issued under the DRP.
Prior to February 16, 1996, the Company was subject to a written
supervisory agreement in the form of a Memorandum of Understanding ("MOU")
with the FRB. Such agreement included various operating restrictions on
capital, among others. Specifically, under the terms of the MOU, the
Company was required to: (i) obtain the prior written approval of the FRB
to declare or pay any dividends; (ii) obtain the prior written approval of
the FRB before the Company incurs any debt other than normal operating
expenses; (iii) obtain the prior written approval of the FRB before the
Company redeems its own stock; (iv) submit to the FRB a written plan to
maintain capital ratios well in excess of minimum regulatory guidelines;
(v) submit to the FRB a written plan to ensure appropriate authority over
and oversight of the Company's investment practices; (vi) prohibit the
16. REGULATORY MATTERS (CONTINUED):
Company from additional purchases of high-risk securities and structured
notes as well as securities not in compliance with the Federal Reserve
Board's Supervisory Policy Statement on Securities Activities; (vii) retain
an independent consultant to review the Company's securities activities and
investments in the context of the Company's overall interest rate risk and
liquidity position and provide a written report to the FRB thereon; (viii)
submit to the FRB revised investment policies and procedures to correct
deficiencies cited in the FRB's examinations with respect to prior
investment practices involving the investment portfolio; (ix) submit to the
FRB a written liquidity plan to provide for an adequate level of assets to
fund operations and meet customer needs; (x) submit quarterly progress
reports to the FRB to assure compliance with the MOU; and (xi) submit the
written plans, policies and procedures to the FRB for review and approval.
The Company took significant steps to comply with the MOU in 1995. These
steps included the divestiture of criticized investment securities,
development of formalized plans, policies and procedures and reorganization
of management oversight. The costs associated with the MOU included in
noninterest expense approximated $500 in 1995. The agreement was
terminated on the previously-mentioned date as a result of the significant
improvement in the Company's overall financial condition and substantial
compliance with the agreement.
17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1997 1996
__________________________________________________________________________
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................ $4,795 $4,946 $5,005 $5,170 $4,625 $4,637 $4,564 $4,618
Tax-exempt......................... 109 132 123 109 50 57 102 101
Interest and dividends on investment
securities available-for-sale:
Taxable............................ 807 783 820 864 1,026 1,037 983 868
Tax-exempt......................... 525 513 507 511 485 488 501 509
Dividends.......................... 31 33 32 36 25 28 26 29
Interest on federal funds sold....... 35 113 101 42 126 76 55 43
------ ------ ------ ------ ------ ------ ------ ------
Total interest income............ 6,302 6,520 6,588 6,732 6,337 6,323 6,231 6,168
------ ------ ------ ------ ------ ------ ------ ------
INTEREST EXPENSE:
Interest on deposits................. 3,433 3,518 3,536 3,569 3,399 3,327 3,322 3,406
Interest on short-term borrowings.... 1 7 1 2
Interest on long-term debt........... 1 1 2 33 33 26 1
------ ------ ------ ------ ------ ------ ------ ------
Total interest expense........... 3,435 3,519 3,536 3,578 3,432 3,360 3,349 3,409
------ ------ ------ ------ ------ ------ ------ ------
Net interest income.............. 2,867 3,001 3,052 3,154 2,905 2,963 2,882 2,759
Provision for loan losses............ 75 75 105 105 75 75 75 75
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses....... 2,792 2,926 2,947 3,049 2,830 2,888 2,807 2,684
------ ------ ------ ------ ------ ------ ------ ------
NONINTEREST INCOME:
Service charges, fees and
commissions......................... 413 349 358 406 336 372 389 348
Litigation recovery.................. 250
Net investment securities losses..... (27) (31)
------ ------ ------ ------ ------ ------ ------ ------
Total noninterest income ........ 413 599 358 406 336 345 358 348
------ ------ ------ ------ ------ ------ ------ ------
NONINTEREST EXPENSE:
Salaries and employee benefits
expense............................. 987 1,035 998 1,078 962 981 826 1,039
Net occupancy and equipment expense.. 300 300 288 311 327 314 285 287
Other expenses....................... 596 716 660 687 598 663 579 522
------ ------ ------ ------ ------ ------ ------ ------
Total noninterest expense........ 1,883 2,051 1,946 2,076 1,887 1,958 1,690 1,848
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes........... 1,322 1,474 1,359 1,379 1,279 1,275 1,475 1,184
Provision for income tax expense..... 264 312 279 279 278 274 326 135
------ ------ ------ ------ ------ ------ ------ ------
Net income ...................... $1,058 $1,162 $1,080 $1,100 $1,001 $1,001 $1,149 $1,049
====== ====== ====== ====== ====== ====== ====== ======
PER SHARE DATA:
Net income........................... $ 0.48 $ 0.53 $ 0.49 $ 0.50 $ 0.45 $ 0.46 $ 0.52 $ 0.48
Cash dividends declared.............. $ 0.06 $ 0.06 $ 0.06 $ 0.12 $ 0.05 $ 0.06 $ 0.06 $ 0.11
</TABLE>
OPERATING ENVIRONMENT:
The United States economy turned in a remarkably favorable performance in
1996, the best among all advanced industrial countries in the world.
Although the growth in gross domestic product, the value of goods and
services produced in the United States, was modest at 2.5 percent as
compared to gains registered in some earlier years of the postwar period,
it was accompanied by low unemployment, inflation and interest rates. The
national unemployment rate continued its five-year decline to 5.3 percent
in 1996, the lowest rate since 1973. This rate was 5.6 percent in 1995.
Employee wages and benefits rose a moderate 2.9 percent during 1996. As a
result, the consumer and producer price indices, measurements of
inflation, rose 3.3 percent and 2.8 percent, respectively, during 1996.
Such moderate increases led the Federal Reserve Open Market Committee
("FOMC") to take no monetary policy action throughout most of 1996. The
FOMC's interest rate adjustment on January 31, 1996, reduced the federal
funds target rate, the overnight loan rate between banks, to 5.25 percent
from 5.50 percent, and the discount rate for loans to financial
institutions to 5.00 percent from 5.25 percent. This action was taken to
ensure the resumption of moderate economic growth after the marked
economic slowdown and business inventory buildup during the fourth quarter
of 1995.
Intermediate- and long-term interest rates grew moderately in 1996,
despite the stability in near-term rates, as economic growth had become
more vigorous than anticipated. The adverse effects of such increases
were more than offset by the combination of relative price stability and
the easing of lending terms at banks. The combination of these positive
influences with a level of consumer confidence not surpassed in seven
years, resulted in higher levels of disposable income and led to
improvements in consumer and business spending. Such economic conditions
were especially meaningful to the national financial sector as they
increased loan and deposit volumes. Throughout the United States,
aggregate consumer loans increased 20.6 percent and commercial loans
increased 4.4 percent, while savings increased 5.4 percent. In addition,
there was a significant increase in residential mortgage lending in
response to record levels of existing home sales and housing starts.
The output of the economy in Northeastern Pennsylvania was slower than the
level experienced nationally based on smaller income gains and higher
unemployment. The average hourly earnings for a United States
manufacturing worker increased 43 cents or 3.7 percent during 1996 as
compared to 8 cents or 0.7 percent for a worker in Comm Bancorp, Inc. and
its subsidiary, Community Bank and Trust Company's (collectively, the
"Company's") four-county market area. In addition, the market area served
by the Company reported higher unemployment figures than the nation and
the Commonwealth of Pennsylvania. The United States unemployment rate was
5.3 percent and the Pennsylvania unemployment rate was 4.9 percent for
December of 1996. Lackawanna, Susquehanna, Wayne and Wyoming counties
reported unemployment rates for the comparable period of 5.4 percent, 6.6
percent, 8.4 percent and 7.9 percent, respectively. Moreover, the
civilian labor force, defined as the total number of individuals employed
and those actively seeking employment, increased by 2.0 percent for the
nation and 3.1 percent for the Commonwealth during 1996. Contrary to
these gains, Northeastern Pennsylvania reported a decline of 5.8 percent
in the number of civilian workers.
The strong performance of the economy in 1996 was paramount to the banking
industry enjoying yet another stellar year. Representative of this
success was the nation's top 50 commercial banks posting profits of $36.2
billion for 1996, a 12.8 percent increase over the 1995 level. These
results are especially impressive given the fact that they followed
another significant increase of 9.0 percent in 1995. Regional community
banks experienced similar success as median earnings per share increased
15.0 percent in 1996. Strong revenue growth and improved operating
efficiencies were the primary reasons for the banking industry's success
during 1996. Increased levels of interest and noninterest income
contributed to the growth in revenue. Specifically, interest income
increases were attributed to the strength in loan demand and banks
capturing new customers from the fallout of consolidations occurring in
the market. Many financial institutions increased their loan portfolio
yields through the securitization of consumer and mortgage portfolios and
redirection of the proceeds to commercial loans that typically yield much
higher rates than retail loans. Another major influence contributing to
the 1996 record revenue levels was the rise in service charges. On April
1, 1996, national electronic payment networks that link Automated Teller
Machines ("ATMs") began allowing banks and other ATM operators to charge
access fees to individuals using machines not owned by their bank. This
change played a significant role in the banking industry recording a 13.8
percent increase in noninterest income. In addition to the revenue
improvements, financial institutions increased net income through
operating efficiencies. Many banks have increased their investments in
cost-effective delivery systems and made technological changes to improve
back-office operations. Supermarket branches, telephone banking, personal
computer banking and ATMs are among many of the recent enhancements made
for delivering products and services to customers. The aggregate
investment of the banking industry for upgrading existing systems amounted
to $19.0 billion during 1996. In addition, some financial institutions
are outsourcing more services or forming joint ventures to share
technology and processing costs.
Asset quality for national and regional commercial banks did not
demonstrate a significant deterioration during 1996. The only noticeable
asset quality deterioration was either borrower-specific or a result of
uncontrolled growth and did not represent weakness in overall loan
portfolios. Although many banks invested heavily in commercial loans,
most were secured wholly or partially by real estate.
During 1996, the merger and acquisition activities of financial
institutions were subdued as compared to the previous year. The number of
mergers and acquisitions announced in 1996 was less than in the prior two
years, but average deal values continued to rise. For Mid-Atlantic
commercial banks, the aggregate number and amount of mergers and
acquisitions fell from 29, accounting for $36.5 billion in 1995, to 25,
accounting for $12.8 billion in 1996. The value of such deals increased
from 15.8 times annual earnings or 2.0 times book value in 1995 to 18.9
times annual earnings or 1.9 times book value in 1996.
Another significant occurrence in banking during 1996 was the long-awaited
beginning of consolidation within the financial services industry. The
first significant event was the announcement that the independent
insurance lobby dropped its long-standing opposition to allowing banks to
affiliate with insurance companies, thus removing one of the biggest
hurdles to reformation of the Glass-Steagall Act of 1933.
During 1996, the major emphasis of regulatory change for the banking
industry centered around risk as regulatory agencies issued a number of
documents addressing the subject. On May 24, 1996, the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") issued Supervisory
Release ("SR") 96-14, "Risk-Focused Safety and Soundness Examinations and
Inspections," to summarize and place in context changes made in the
examination process and to suggest areas where further changes may occur.
According to SR 96-14, the following risk types are to be evaluated at
examinations and inspections: (i) credit risk arising from the potential
that a borrower or counterparty will fail to perform on an obligation;
(ii) market risk to a financial institution's condition resulting from
adverse changes in interest rates, foreign exchange rates or equity
prices; (iii) funding liquidity risk where an institution is unable to
meet obligations due to an inability to liquidate assets or obtain
adequate funding; (iv) market liquidity risk where an institution cannot
easily offset exposures without significantly lowering market prices due
to inadequate market depth or market disruptions; (v) operational risk
resulting from inadequate information systems, internal control breaches,
fraud or unforeseen catastrophes that may result in unexpected losses;
(vi) legal risk from potential unenforceable contracts, lawsuits or
adverse judgments that may negatively affect operations; and (vii)
reputational risk from negative publicity related to an institution's
business practices, true or not, that can lead to a reduced customer base,
costly litigation or revenue reductions.
REVIEW OF FINANCIAL POSITION:
During 1996, management's efforts focused on implementing its strategic
plan to transform the Company into a "traditional community bank." This
type of bank ensures safety to depositors while providing a reasonable
rate of return to stockholders by limiting the risk exposure of its
assets. Prior to the development of this plan, the Company emphasized a
significantly higher degree of involvement with investment activities. In
implementing this plan, management focused on the reallocation of its
resources from the reconstitution of the Company's investment portfolio
into funding loan demand. The 1995 investment portfolio reconstitution
included the transfer and sale of certain securities possessing an
inordinate amount of risk. Another key area of concentration was lowering
the Company's cost of funds. As a result of these efforts, the Company
did not experience significant growth during 1996.
The Company's total assets grew $3.9 million or 1.1 percent from $350.9
million at December 31, 1995, to $354.8 million at December 31, 1996.
Total asset growth of the peer group of 35 banks located in Northeastern
Pennsylvania averaged 9.8 percent in 1996. The Company's total assets
averaged $359.2 million in 1995 as compared to $347.3 million in 1996, an
$11.9 million decrease. This reduction was primarily attributable to the
retirement of borrowed funds with proceeds from the sale of certain
criticized investment securities during the second and third quarters of
1995. The composition of the Company's balance sheet changed dramatically
as evidenced by a shift in the ratios of average investments and federal
funds sold to average earning assets and average loans to average earning
assets. In 1995, the ratio of average investments and federal funds sold
to average earning assets was 43.1 percent and the ratio of average loans
to average earning assets was 56.9 percent. In 1996, the ratio of average
investments and federal funds sold to average earning assets decreased to
34.6 percent while the ratio of average loans to average earning assets
increased to 65.4 percent.
Investment securities declined from $108.7 million at December 31, 1995,
to $102.0 million at December 31, 1996. This reduction resulted from the
Company utilizing the proceeds from repayments on investments to fund loan
demand not fulfilled through gains in core deposits. Funds expended on
securities during 1996 were invested in either short-term U.S. Treasury or
U.S. Government agency securities or intermediate-term obligations of
states and municipalities. The short-term investments were acquired to
fund future loan demand and the tax-exempt municipal securities were
acquired to reduce the Company's tax burden.
Total loans, net of unearned income, increased $22.0 million or 10.3
percent during 1996. The Company had aggregate loans of $19.0 million to
certain large Pennsylvania-based commercial banks at December 31, 1995.
The repayments from these temporary loans were reinvested into longer-term
commitments with local commercial and retail customers. Adjusting for the
temporary credit extensions, the loan portfolio growth was significant at
$41.0 million or 21.0 percent during 1996. This growth, the greatest in
the Company's history, was primarily attributable to the introduction of
the "Loan Sale" marketing program. This program included aggressive
product pricing and increased advertising expenditures. Aggregate loans
of $83.3 million having a weighted-average yield of 8.0 percent were
originated during 1996. The yield on these new loans was lower than the
yield on existing loans as a result of aggressive product pricing.
Accordingly, the effect of such volume improvements did not have as
significant an effect on the Company's results of operations as it would
have had if the rates on such loans been consistent with existing loans.
The average loan growth for the peer group approximated 11.0 percent
during 1996.
Despite the marked increase in loan volume, the Company's asset quality
improved compared to year-end 1995. This improvement is evidenced by the
decline in the ratio of nonperforming loans as a percentage of loans, net
of unearned income, from 1.75 percent in 1995 to 1.44 percent in 1996.
The ratio of nonperforming assets as a percentage of loans, net of
unearned income, also decreased from 1.96 percent in 1995 to 1.62 percent
in 1996. The Company's allowance for loan losses as a percentage of
loans, net of unearned income, declined from 1.83 percent at December 31,
1995, to 1.67 percent at December 31, 1996. This reduction was attributed
to the increased loan volume.
Total deposits increased $3.4 million from $317.1 million at December 31,
1995, to $320.5 million at December 31, 1996. The slight increase of 1.1
percent resulted from the Company's improved liquidity position and less
aggressive pricing behavior due to its higher cost of funds compared to
the peer group. Management successfully reduced the Company's cost of
funds from 4.86 percent in 1995 to 4.69 percent in 1996 despite a rise in
general market rates. The peer group reported deposit growth of 7.9
percent in 1996 and an increase in their cost of funds from 4.58 percent
in 1995 to 4.69 percent in 1996.
The Company experienced a slight decline in its interest sensitivity and
liquidity positions from year-end 1995 to year-end 1996. Interest
sensitivity, as measured by the ratio of cumulative one-year, rate-
sensitive assets ("RSA") to rate-sensitive liabilities ("RSL"), declined
from 0.93 at December 31, 1995, to 0.73 at December 31, 1996. Both ratios
fell within the acceptable guidelines set forth in the Company's
Asset/Liability Management Policy. In addition, the Company reported a
decline in its liquidity position as evidenced by a reduction in the ratio
of temporary investments to volatile liabilities. The ratio was 118.9
percent at December 31, 1995, and 54.0 percent at December 31, 1996. The
changes in the interest sensitivity and liquidity positions was primarily
due to management's reallocation of resources from short-term investments
to loans.
Stockholders' equity improved from $27.9 million at December 31, 1995, to
$31.3 million at December 31, 1996, a $3.4 million increase. This
increase primarily came from strong earnings of $4.2 million, partially
offset by dividends of $623 and a reduction in the net unrealized holding
gain of $216. The key regulatory ratio, defined as Tier I capital as a
percentage of total average assets less intangibles, increased from 7.0
percent at December 31, 1995, to 8.3 percent at December 31, 1996. The
Company exceeded all relevant regulatory capital measurements at December
31, 1996, and was considered well capitalized.
Management accomplished a number of significant nonfinancial goals during
1996. Such undertakings included the effectuation of a three-for-one
stock split, approval of the Company's common stock listing on the NASDAQ
Stock Market ("NASDAQ") and implementation of a document-imaging system.
The three-for-one stock split, declared during the first quarter of 1996,
was effective April 1, 1996. On June 17, 1996, the Company began listing
on NASDAQ as CommBcp under the symbol "CCBP." The actions taken in 1996
with respect to the Company's common stock had a favorable effect on
stockholders' total return. Share price appreciation plus reinvested
dividends, commonly referred to as total return, was 89.9 percent for 1996
as compared to 6.7 percent for 1995.
During the third quarter of 1996, management reinforced its commitment to
progress by making the Company the first financial institution in its
market area to introduce a document-imaging system. This technology has
not only enhanced the effectiveness and efficiency in serving customers
but reduced operating costs thus improving profitability.
INVESTMENT PORTFOLIO:
The Company's investment portfolio performed well considering the
moderately rising interest rate environment of 1996. The year began with
bullish bond market sentiment, yet the intermediate-range U.S. Treasury
yield curve ended 1996 up approximately 80 basis points. The long bond
ended the year up nearly 70 basis points to yield 6.65 percent, while the
short end of the curve also rose, but to a lesser degree.
The bond market ended a volatile year with mediocre performance as
evidenced by the Lehman Brothers' Aggregate Bond Index, which posted a
3.60 percent total return, down from a solid 18.47 percent performance in
1995. Due to its short duration and a rising interest rate environment,
the Company's bond portfolio outpaced the general market in 1996 by
generating a total return of 4.90 percent.
The rising yield curve scenario of 1996 was neither constant nor gradual.
Bond yields actually fell for two months then rose swiftly through the
summer, only to be deflated by a Fall market rally and ended the year up
slightly. As previously mentioned, the FOMC cut the overnight discount
rate from 5.25 percent to 5.00 percent on January 31, 1996, and held the
rate at that level throughout the year. However, market volatility ensued
as Wall Street and nervous investors attempted to gauge the FOMC's next
move.
As previously mentioned, regulators have recently placed increased
emphasis on the quality of risk management practices within financial
institutions. Accordingly, management monitors and limits various risk
elements inherent in the Company's investment portfolio, particularly
market or interest rate risk ("IRR"), credit risk, liquidity risk,
reinvestment risk and "timing" or call risk.
Market risk had a slightly adverse effect on the Company's investment
portfolio during 1996. As a result of the surprisingly strong economic
expansion and the ensuing increase in interest rates, the net unrealized
holding gain on investment securities declined from $780, net of deferred
income taxes of $401, to $564, net of deferred income taxes of $291, from
December 31, 1995, to December 31, 1996. The unrealized holding gain was
0.85 percent of amortized cost at December 31, 1996, which exceeded the
average gain of 0.51 percent reported by the peer group.
The excess of fair value over amortized cost for the Company's state and
municipal securities portfolio declined $292, slightly less than 1.0
percent of its value, during 1996. This market risk resulted from the
longer effective duration of approximately 4.0 years in the state and
municipal securities portfolio as compared to approximately 0.8 years in
the remainder of the portfolio at year-end 1996. Duration measures the
percentage change in price per 100 basis point change in yield levels,
assuming an immediate and parallel shift in the yield curve. The tax-
exempt feature of such investments serves to reduce their effective
duration and susceptibility to fair value depreciation relative to taxable
securities. The weighted-average life of the state and municipal
securities portfolio was 8.1 years at December 31, 1996.
Credit risk, the probability that an issuer cannot meet principal and
interest payments on a timely basis, was mitigated through the portfolio's
composition. U.S. Treasury securities and U.S. Government agencies,
including mortgage backed securities, accounted for 60.1 percent of
aggregate investments at December 31, 1996. The majority of the remaining
portion of the portfolio consisted primarily of insured general
obligations of states and municipalities that received a rating of "AAA"
from Moody's or Standard and Poor's rating services.
Liquidity risk refers to the ease in converting a security to cash at or
near its true value. The spread between the bid price and the ask price
quoted by a dealer serves as a proxy for such risk. The Company's
liquidity risk exposure was low based on the high concentration of U.S.
Treasury and related securities, which normally offer the greatest
liquidity relative to other investment vehicles.
Reinvestment risk concerns reinvested cash flows or the "interest on
interest" component of investment returns. Based on the overall structure
of the Company's balance sheet, where liabilities tend to reprice quicker
than assets, reinvestment risk inherent in the investment portfolio did
not adversely affect the Company's financial performance.
Timing risk refers to the uncertainty of the timing of cash flows for a
given investment or portfolio of investments. The Company limited its
cash flow timing risk through policy limitations and modeling techniques.
The investment portfolio was less prominent with respect to the Company's
financial position in 1996. Average investments declined from 37.4
percent of average assets in 1995, to 31.7 percent in 1996. Such
reduction was in response to management transforming the Company's balance
sheet to a more traditional community bank structure, favoring loans over
investments. In comparison, the peer group held 33.6 percent of its
average assets in investment securities.
Proceeds from the sale of securities amounted to $1.5 million in 1996 and
$87.1 million in 1995. The Company recognized net losses of $58 in 1996
and $4,393 in 1995 related to such sales. Repayments from investment
securities totaled $25.2 million in 1996 and $4.9 million in 1995.
Investment purchases amounted to $20.2 million in 1996 and $44.2 million
in 1995.
The tax-equivalent yield on the investment portfolio in 1996 was
relatively unchanged from the 6.4 percent level of 1995. U.S. Treasury
securities and state and municipal bonds comprised 72.5 percent of the
investment portfolio at December 31, 1996, versus 68.3 percent at December
31, 1995. Except for U.S. Treasury securities and U.S. Government
agencies, there were no securities of any individual issuer that exceeded
10.0 percent of the Company's stockholders' equity at December 31, 1996 or
1995. Except for $2,416 of tax-exempt obligations of local
municipalities, all of the investment securities in the Company's
portfolio were considered "investment grade," receiving a rating of "Baa"
or higher from Moody's or "BBB" or higher from Standard and Poor's rating
services at December 31, 1996. Investment securities with an amortized
cost of $35,099 at December 31, 1996, and $33,997 at December 31, 1995,
were pledged to secure deposits, to qualify for fiduciary powers and for
other purposes required or permitted by law. The fair value of such
securities was $34,968 at December 31, 1996, and $34,050 at December 31,
1995.
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires
investments to be classified and accounted for as either held-to-maturity,
available-for-sale, or trading securities based on management's intent at
the time of acquisition.
SFAS No. 115 requires an enterprise to reassess the appropriateness of its
accounting and reporting classifications of debt and equity securities at
each reporting date. Accordingly, management transferred its entire held-
to-maturity classification to available-for-sale at September 30, 1995.
This transfer resulted from management's need to divest certain securities
purchased utilizing investment practices and actions followed prior to
1995 that placed a significant exposure to IRR on the Company.
Specifically, the prior investment practices and actions included those
that are referred to as unsuitable pursuant to the Federal Reserve Board's
Supervisory Policy Statement on Securities Activities effective February
10, 1992, and revised April 15, 1994, and the Federal Reserve Board's
Supervisory Policy Statement on Structured Notes effective September 21,
1995. The securities transferred had an amortized cost of $105.8 million
and a fair value of $103.9 million at the date of the transfer. The
Company recognized unrealized holding losses of $1,249, net of applicable
income taxes of $644, in a separate component of stockholders' equity as a
result of the transfer. Management sold certain available-for-sale
securities at a loss after September 30, 1995, some of which were
transferred from the held-to-maturity portfolio. The resulting loss of
$2.5 million on the sale was recognized in earnings in the third quarter
of 1995, the period in which the decision to sell was made. The portion
of the loss attributable to the securities transferred from the held-to-
maturity portfolio was $1.8 million. Prior to this transfer, the Company
did not sell or transfer any securities from its held-to-maturity
classification.
As a result of successfully implementing the reconstitution plan during
1995, the Company's investment portfolio contained no high-risk
collateralized mortgage obligations ("CMOs"), as defined in the Federal
Reserve Board's Supervisory Policy Statement on Securities Activities and
Issue 2 of the Financial Accounting Standards Board's ("FASB's") Emerging
Issues Task Force Issue No. 89-4, "Accounting for a Purchased Investment
in a Collateralized Mortgage Obligation Instrument or in a Mortgage Backed
Interest-Only Certificate," at December 31, 1996 or 1995. The Company
held $4.4 million of CMOs at December 31, 1996, none of which failed any
of the high-risk tests.
The Company sold the majority of its holdings of structured notes during
1995. The carrying value of structured notes totaled $2.9 million at
December 31, 1996 and 1995. These securities included a dual-index
floater, a delevered floater and a multi-step bond each having a carrying
value of approximately $1.0 million.
The Company had no dealings in derivative financial instruments in 1996
and 1995.
LOAN PORTFOLIO:
For 1996, national residential investment spending rose 4.0 percent,
reversing a decline from the previous year. This growth was aided by
favorable weather conditions, affordable interest rates and improved
national economic growth. Housing provided a key source of the nation's
economic strength in 1996. For the year, new homes sold totaled 758
thousand, the largest number since 1978, with the Northeast region of the
country experiencing the greatest increase at 36.4 percent. Sales of
previously-owned homes also rose sharply to over 4.1 million, breaking an
18-year record. In addition, housing starts for 1996 moved in a favorable
direction rising 8.9 percent for the year nationally and 11.2 percent in
the Northeast. New home and apartment starts increased from 1.35 million
units in 1995 to 1.47 million units in 1996. Of these new starts, 1.16
million were for new single-family dwellings, marking a 7.8 percent
increase over the 1995 figure. The median selling prices on new and
existing homes rose from $133.9 and $112.9, respectively, in 1995 to
$145.0 and $118.0, respectively, in 1996.
Interest rates on 30-year mortgages also showed a steady increase
throughout 1996 as they went from 7.0 percent in January to 7.6 percent in
December. Despite these increases, housing purchases remained very
affordable due to the improving economic conditions prevalent throughout
1996.
Economic conditions in the Company's market area were also favorable for
mortgage lending during 1996. In the Company's four-county market area,
average annual property taxes amounted to approximately one-half of the
average experienced nationally. Additionally, Northeastern Pennsylvania
was rated as the second most affordable area in the Commonwealth to live,
with its metropolitan area also ranked second among areas of similar
population across the nation. Finally, according to a nationwide price
comparison survey, the Company's market area was ranked 19th in the United
States in terms of affordable housing.
Business lending in the United States also enjoyed the benefits of a
strong economy in 1996. Encouraged by the prospects of sustained economic
expansion and low inflation, banks displayed a large appetite for business
obligations and appeared willing to ease compensation requirements for the
risk entailed. This easing of standards led to a 4.5 percent increase in
commercial and industrial loans outstanding, as they rose from $536.0
trillion at year-end 1995 to $560.0 trillion at year-end 1996.
With respect to commercial loan practices, the Company was ranked second
by the U.S. Small Business Administration's Office of Advocacy among
Pennsylvania banks with assets between $100.0 million and $500.0 million
for its "small business friendly" lending activities.
Contrary to the easing of standards for business lending, national
conditions for consumer lending tightened. This tightening came in
response to banks reacting to the rising volume of credit card
delinquencies and charge-offs experienced throughout the year. Despite
such action by financial institutions, outstanding consumer loans rose to
$1.23 trillion at year-end 1996 from $1.02 trillion for the same period of
1995. The increase resulted from consumers using lower-costing home
equity loans in place of higher-costing installment products.
Loans, net of unearned income, were $235.8 million at December 31, 1996,
an increase of $22.0 million, or 10.3 percent, over the volume reported at
December 31, 1995. The increase, adjusted for short-term credit
extensions to other financial institutions, would have approximated $41.0
million in 1996. The Company had aggregate commercial loans of $19.0
million to certain large Pennsylvania-based commercial banks at December
31, 1995. The Company had no such loans at year-end 1996. The increase
in aggregate loan demand, after considering such adjustment, can be
primarily explained by a rise in the volume of loans to finance one-to-
four family residential properties of $27.6 million and those to finance
commercial and industrial enterprises of $9.2 million. Loans, net of
unearned income, as a percentage of total earning assets were 69.1 percent
at December 31, 1996, and 63.3 percent at December 31, 1995. Such a
material increase resulted from a combination of favorable borrowing
conditions for consumers and management placing stronger emphasis on
fulfilling its strategic goal. During 1996, the peer group's average
loans accounted for 64.0 percent of average assets as compared to the
Company's ratio of 63.0 percent.
The Company's volume of loans with predetermined interest rates increased
$16.0 million and represented 79.9 percent of the portfolio, while those
bearing adjustable-interest rates rose $6.0 million and represented 20.1
percent of the portfolio at December 31, 1996. Customers, in protecting
against a rise in interest rates, opted for fixed-rate products as opposed
to variable-rate products. The tax-equivalent yield on the loan portfolio
declined from 8.8 percent in 1995 to 8.6 percent in 1996. The decrease
primarily occurred during the second and third quarters of 1996 when
management's aggressive product pricing through its "Loan Sale" marketing
efforts reduced rates to their lowest point during the year. This
reduction initiated increased loan demand and led existing customers to
refinance. Rates increased for the final quarter of 1996 as the Company
became less aggressive in its product pricing, which led to loan yields
that approached 1995 levels. The Company's volume of refinanced
residential mortgages increased significantly from $9.5 million in 1995 to
$23.1 million in 1996 as customers with existing loans took advantage of
the Company's favorable interest rate offerings.
The composition of the loan portfolio changed during 1996 primarily due to
the favorable conditions for mortgage lending and the removal of short-
term credit extensions made to commercial banks. Commercial loans
declined $9.1 million during 1996 and represented 15.4 percent of loans,
net of unearned income. Excluding the effects of the $19.0 million in
repayments received from commercial bank loans, this segment of the loan
portfolio would have experienced an increase of $9.9 million. The Company
experienced a $7.3 million rise in consumer loans from $22.6 million at
December 31, 1995, to $29.9 million at December 31, 1996. The Company
reported a 32.3 percent increase in consumer credit, outdistancing the
20.6 percent increase witnessed by commercial banks throughout the nation.
The favorable mortgage lending conditions for 1996 resulted in loans to
finance real estate taking a more prominent position in the Company's loan
mix at approximately 71.9 percent of total loans outstanding from
approximately 68.1 percent a year earlier.
At December 31, 1996, the Company had no concentrations of loans exceeding
10.0 percent of total loans, excluding locational concentrations, to
individual or multiple borrowers engaged in similar activities that would
cause them to be similarly affected by changes in economic or other
conditions. The Company limited its exposure to concentrations of credit
risk by the nature of its lending activities, as approximately 61.9
percent of total loans outstanding were secured by residential properties.
The average mortgage outstanding on a residential property was $36.2 at
December 31, 1996.
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These instruments are used by
customers to meet their financing needs. These financial instruments
include commitments to extend credit, unused portions of home equity and
credit card lines and commercial letters of credit. The Company's
exposure to such commitments was $10.9 million at December 31, 1996, and
$9.6 million at December 31, 1995. No provision for loan losses was
deemed necessary at December 31, 1996 or 1995, for these commitments.
Management continually examines the maturity distribution and interest
rate sensitivity of the loan portfolio in an attempt to limit IRR and
liquidity strains. At December 31, 1996, management determined that
approximately 34.6 percent of the lending portfolio was scheduled to
reprice within 12 months. The 34.6 percent fell below the 41.1 percent at
December 31, 1995, but was an improvement over the 33.9 percent recorded
at September 30, 1996. In terms of volume, variable-rate loans increased
$5.9 million, or 14.3 percent, from $41.4 million at December 31, 1995, to
$47.3 million at December 31, 1996. The Company did not sell, provide
servicing for others for a fee or securitize mortgage loans.
ASSET QUALITY:
Bankruptcies, delinquencies and bank charge-offs increased during 1996,
however, overall asset quality did not experience a significant
deterioration. Banks and credit card companies wrote-off bad debt at
record paces despite consumer confidence reaching its highest level in
seven years. National charge-off levels rose to near those experienced
during the last recession in 1990 and 1991. Such levels caught banks off
guard as some deterioration in the consumer loan portfolio was expected
but not to the extent that it occurred. The unexpectedly high levels were
attributable to an increase in personal bankruptcies of 30.0 percent in
1996. In Pennsylvania, personal bankruptcies rose 62.0 percent above the
1995 level, ranking second only to Florida in percent increase. This
increase stemmed in part from bankruptcy code changes that went into
effect at the beginning of the year.
Credit card delinquencies also experienced a sharp rise as credit card
issuers were overzealous and indiscriminatory in pursuing customers during
the first half of 1996. Such practices played a major role in credit card
late payments during the first quarter of 1996 reaching their highest
levels since 1981 and reaching a historical high of 3.7 percent. Banks
responded to deteriorating consumer loan portfolios by tightening lending
standards and terms on consumer loans, particularly credit card loans,
during the second half of the year.
As previously mentioned, unemployment rates in the Company's market area
remained well above the levels reported for the United States and the
Commonwealth of Pennsylvania. Despite its inflated unemployment levels,
asset quality improved in the Company's market area. This improvement was
evidenced by declines in the peer group's ratios of nonaccrual loans as a
percentage of gross loans and nonperforming loans as a percentage of gross
loans. At December 31, 1996, the peer group's ratios were 0.54 percent
and 1.34 percent, respectively, compared to 1.37 percent and 1.71 percent,
respectively, at December 31, 1995.
Nonperforming assets, consisting of nonperforming loans and foreclosed
assets, totaled $3.8 million at December 31, 1996, compared to $4.2
million at December 31, 1995. The Company experienced a net decrease of
$21 in foreclosed assets during 1996, as transfers of six loans totaling
$223 were offset by the sale of six properties totaling $279, including
net gains on the dispositions of $35. Also included in other real estate
was a property originally purchased by the Company to be utilized as a
site for a new branch office. During 1995, management reevaluated its
intent for the property and transferred it to other real estate at $220,
which was 80.0 percent of its appraised value, with the difference being
recorded in other losses. Subsequent to year-end 1996, this property was
sold with a gain of $50 being recognized. The carrying values of all
properties included in other real estate were less than 80.0 percent of
their collateral values at December 31, 1996.
Nonperforming loans, consisting of accruing loans past due 90 days or more
and impaired loans, declined $352 during 1996 from $3,743 to $3,391. The
reduction in nonperforming loans was due to the $253 decline in accruing
loans past due 90 days or more with a $99 reduction in impaired loans.
The $99 change in impaired loans included gross loans placed into this
category of $428 and gross loans removed as a result of charge-offs of
$33, transfers to other real estate of $123 and principal repayments of
$371. Accruing loans past due 90 days or more declined from $2,150 at
December 31, 1995, to $1,897 at December 31, 1996. Of the loans past due
90 days or more, approximately 65.7 percent of these credits were secured
by real estate. The Company experienced improvement in all its asset
quality ratios in 1996. The ratio of impaired loans as a percentage of
loans, net of unearned income, was 0.63 percent and the ratio of
nonperforming assets as a percentage of loans, net of unearned income, was
1.62 percent, at December 31, 1996. The comparable ratios were 0.74
percent and 1.96 percent, respectively, at December 31, 1995. Such
ratios, however, remained less favorable than the peer group's ratios of
0.54 percent and 1.34 percent, respectively, at December 31, 1996.
The average recorded investment in impaired loans was $1,528 in 1996 and
$1,621 in 1995. At December 31, 1996, the recorded investment in impaired
loans was $1,494 and was $1,593 at December 31, 1995. Included in these
amounts were $1,269 for which there was a related allowance for loan
losses of $650 at December 31, 1996, and $1,331 for which there was a
related allowance for loan losses of $614 at December 31, 1995. The
recorded investment for which there was no related allowance for loan
losses was $225 at December 31, 1996, and $262 at December 31, 1995. In
1996, activity in the allowance for loan losses account related to
impaired loans included a provision charged to operations of $3, losses
charged to the allowance of $92 and recoveries of amounts charged-off of
$125. The activity during 1995 in the allowance for loan losses account
related to impaired loans included a provision charged to operations of
$4, losses charged to the allowance of $69 and recoveries of amounts
charged-off of $191. Interest income related to impaired loans would have
been $113 in 1996 and $66 in 1995 had these loans been current and the
terms of the loans not been modified. Interest income that would have
been recognized on the restructured loan included in these amounts was $12
in 1996 and $9 in 1995. Interest recognized on impaired loans amounted to
$30 in 1996 and $92 in 1995. Included in these amounts was interest
recognized on a cash basis of $30 in 1996 and $87 in 1995. The
restructured loan accounted for $7 in 1996 and $5 in 1995 of interest
recognized on impaired loans. Cash received on impaired loans applied as
a reduction of principal totaled $398 in 1996 and $595 in 1995. There
were no commitments to extend additional funds to customers with impaired
loans at December 31, 1996 and 1995.
Classified assets are those assets cited by bank examiners, or by the
bank's internal rating system, as being at risk to a greater degree than
is considered desirable. The Company experienced a 31.7 percent
improvement in the ratio of classified assets as a percentage of Tier I
capital comparing the results of the regulatory examinations at October
31, 1995, and September 30, 1996.
The allowance for loan losses, against which loans are charged-off, was
$3.9 million at December 31, 1996, representing 1.67 percent of loans, net
of unearned income. The allowance was also $3.9 million in 1995 but
represented 1.83 percent of loans, net of unearned income. The reduction
in the Company's ratio was primarily a function of its strong loan demand.
However, this ratio continued to exceed both the peer group and regulatory
guidelines. The peer group reported ratios of 1.38 percent at December
31, 1996, and 1.43 percent at December 31, 1995. As a percentage of
nonperforming loans, the allowance account covered 116.3 percent at year-
end 1996 and 104.3 percent at year-end 1995. Relative to all
nonperforming assets, the allowance covered 103.5 percent at December 31,
1996, and 93.3 percent at December 31, 1995.
The Company was considered adequately reserved at December 31, 1996 and
1995, based on the results of its regulatory calculations in accordance
with the federal banking regulatory agencies' Interagency Policy Statement
on the Allowance for Loan and Lease Losses. Moreover, regulatory agencies
did not require the Company to make additions to its allowance account
based on the results of their 1996 and 1995 examinations.
Net charge-offs were $259 or 0.12 percent of average loans outstanding in
1996 compared to $108 or 0.05 percent in 1995. The nation's top 50 banks
reported net charge-offs to average loan ratios of 0.63 percent in 1996
and 0.53 percent in 1995, while the peer group reported net charge-offs as
a percentage of average loans outstanding of 0.18 percent in 1996 and 0.20
percent in 1995.
DEPOSITS:
During 1996, the nation witnessed the continuance of strengthened personal
savings patterns. Personal savings rates, a measure of savings as a
percentage of disposable after-tax income, rose to 5.4 percent in 1996
compared to 4.4 percent in 1995. The national unemployment rate fell to
5.3 percent by year-end 1996 from 5.6 percent for the same period of 1995,
while hourly wages increased 3.8 percent, marking the greatest increase
since 1990. For the year, personal income rose 5.8 percent above 1995
levels. This newfound consumer wealth led to a 4.6 percent annual
spending growth rate in 1996, however, the rate has fallen steadily since
1993. The excess funds did not, however, filter into bank deposit
accounts. The "baby boomer" generation became acutely aware of a need to
save for the long term as they approached retirement age. This was
evidenced by the growing volumes of 401(k) plans and mutual funds in 1996.
Consumers also looked toward the stock market in 1996 as the Dow Jones
approached 7,000. Mutual funds that invest in stocks received more money
in 1996 than ever before, reaping $221.9 billion as compared to $128.0
billion in 1995. By year-end 1996, mutual funds of all types recorded
$3.5 trillion in assets. This did not mean that baby boomers were saving
more money, but rather were shifting funds from certificates of deposit
and personal savings accounts as yields on traditional bank deposits paled
in comparison to those of equity investments.
Besides the intense competition from mutual funds, the Company also
received strong competition for deposits from local bank and thrift
institutions. For example, the average rate paid on a 30-month
certificate of deposit for the Company's peer group exceeded 5.3 percent
for 1996. Comparatively, the average rate on 30-month certificates paid
by commercial banks in the United States was 5.1 percent.
The Company's deposit volumes rose a modest 1.1 percent from $317.1
million at December 31, 1995, to $320.5 million at December 31, 1996, as
competition for deposit products intensified. Total deposits averaged
$313.3 million in 1996 as compared to $317.9 million in 1995, a decrease
of 1.4 percent. The average deposit growth experienced by Northeastern
Pennsylvania banks was 7.9 percent for the comparable period. The Company
experienced a decline in deposits during the first quarter of 1996, as
modified pricing strategies in light of improved liquidity conditions
coupled with cyclical trends due to customers foregoing savings to pay for
holiday spending, led to a $9.1 million downturn in volumes. The majority
of the Company's deposit growth occurred during the second and fourth
quarters of 1996 as deposits grew at annualized rates of 9.8 percent and
7.2 percent, respectively. Most of the second quarter growth was
attributable to increases in commercial money market accounts of $4.7
million and interest checking accounts of $2.1 million. The growth in the
fourth quarter was primarily attributable to an increase in time deposits
$100 or more, most of which came from area school districts.
The deposit composition changed, as evidenced by a decline in the average
volume of transaction accounts as a percentage of average total deposits
from 42.0 percent in 1995 to 40.9 percent in 1996. This change was a
function of depositors sacrificing accessibility by transferring funds
from lower-yielding transaction accounts to higher-yielding time deposits.
Average time deposits accounted for 53.3 percent of average assets during
1996 as compared to 43.3 percent for the peer group. The Company
experienced an upward shift in its average core deposits to average total
deposits from 90.8 percent in 1995 to 91.1 percent in 1996. The Company's
cost of funds declined from 4.9 percent in 1995 to 4.7 percent in 1996, as
compared to an increase in the peer group's cost from 4.6 percent in 1995
to 4.7 percent in 1996. The primary reason for the decline was the
average rate on retail certificates of deposit decreasing from 5.8 percent
during the first quarter of 1996 to 5.7 percent during the fourth quarter.
An integral component of the Company achieving lower funds cost was
building its base of noninterest-bearing deposits. In 1996, the Company's
noninterest-bearing deposits grew $1.0 million from $25.4 million at
December 31, 1995, to $26.4 million at December 31, 1996. Average volumes
of noninterest-bearing deposits also increased from $24.1 million in 1995
to $26.3 million in 1996, and comprised 7.6 percent of total average
assets, compared to 6.7 percent for 1995.
Volatile deposits, time deposits in denominations of $100 or more,
increased from $29.7 million at December 31, 1995, to $35.9 million at
December 31, 1996. As previously mentioned, this increase was due to
local school districts transferring funds from transaction accounts into
time deposits. Despite this increase, the Company was less reliant on
such funding as compared to the peer group. Average volatile deposits, as
a percentage of average assets, was 8.0 percent in 1996 as compared to 9.1
percent for the peer group. The average cost of these funds fell 11 basis
points during 1996. This decline resulted from management being less
aggressive in competing for this type of deposit product due to the
stabilized liquidity position of the Company.
The Company's improved liquidity position effectively eliminated its
reliance on borrowings to fund assets. At December 31, 1996, aggregate
borrowings were $46, as compared to $3,048 for the same period of 1995.
The Company reduced its long-term debt in 1996 as it repaid a $3,000, 4.3
percent fixed-rate advance from the Federal Home Loan Bank of Pittsburgh
("FHLB-Pgh") upon its maturity. The remaining $46 represents a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program that is subject to a prepayment fee in the event the
advance is repaid prior to maturity. The Company's total borrowings
averaged $2.2 million with a weighted-average rate of 4.4 percent in 1996,
as compared to $14.7 million at 6.2 percent in 1995.
At December 31, 1996 and 1995, the Company had no short-term borrowings
outstanding. The average daily balance and weighted-average rate on
aggregate short-term borrowings was $51 at 5.9 percent in 1996 and $9.9
million at 6.8 percent in 1995. The maximum amount of all short-term
borrowings outstanding at any month-end was $2.8 million during 1996 and
$28.0 million during 1995. Short-term borrowings during 1996 consisted
entirely of the FHLB-Pgh line of credit. During 1995, the FHLB-Pgh line
of credit included in total short-term borrowings had an average daily
balance of $3.6 million and weighted-average rate of 6.2 percent. The
maximum amount of this line outstanding at any month-end was $17.6 million
during 1995. The Company did not enter into repurchase agreements with
others during 1996 or 1995.
MARKET RISK SENSITIVITY:
At December 31, 1996, the Company had a cumulative one-year, RSA/RSL ratio
of 0.73. This fell below the 0.93 ratio at December 31, 1995, but based
upon the guidelines set forth in the Company's Asset/Liability Management
Policy, this ratio fell within the 0.7 and 1.3 deemed acceptable by
management. The decline was attributable to the Company's reinvestment of
maturing, short-term credit extensions to other financial institutions
into residential mortgages. Additionally, the Company received $25.2
million in securities repayments during 1996. Of these repayments, $3.0
million was used to retire long-term borrowings that matured September 9,
1996. The remaining funds were used to purchase $2.9 million in mortgage
backed securities, $8.6 million in intermediate-term state and municipal
securities, $8.6 million in U.S. Treasury securities and $100 in equity
securities. Excess funds not utilized for security purchases were used to
fund loan demand. Time deposits $100 or more also contributed to the
decline in the cumulative one-year gap as they increased $8.1 million to
$29.8 million at December 31, 1996, from $21.7 million at December 31,
1995. This increase resulted from customers choosing liquidity over
return when investing in time deposits $100 or more. The Company also
experienced a sharp decline in its three-month ratio, which fell from 3.09
at December 31, 1995, to 2.44 at December 31, 1996. This decline can be
explained by the same reasons given for the reduction in the cumulative
one-year ratio. The Company was liability rate-sensitive for the
cumulative one-year period based on the results of the December 31, 1996,
static gap report.
In addition to the static gap analysis, management utilizes a simulation
model in its asset/liability strategy. This model creates pro forma net
interest income scenarios under various interest rate shocks. Model
results from December 31, 1996, indicated similar results to those
produced by the static gap model. A decline in net interest income of 3.9
percent was expected had there been a parallel and instantaneous rise in
interest rates of 100 basis points. Conversely, a similar decline in
interest rates would have resulted in a 3.9 percent increase in net
interest income.
LIQUIDITY:
Although the Company's liquidity position remained adequate in meeting the
present and future financial obligations and commitments, it became less
favorable compared to 1995. A primary example of this unfavorable change
was the decline in the ratio of temporary investments to volatile
liabilities from 118.9 percent at December 31, 1995, to 54.0 percent at
December 31, 1996. Another example is the regression in the ratio of
volatile liabilities less temporary investments to total assets less
temporary investments to 4.9 percent at December 31, 1996, from negative
1.8 percent at December 31, 1995. These ratios also fell below the 91.8
percent and 0.8 percent, respectively, recorded by the peer group at year-
end 1996. The maintenance of a high level of core deposits is a major
component in keeping a strong liquidity position. Core deposits are
important as they represent a stable and relatively low-cost source of
funds. At December 31, 1996, core deposits funded 80.2 percent of the
Company's total assets.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents, consisting of cash on hand, cash items in the
process of collection, noninterest-bearing deposits with other banks,
balances with the Federal Reserve Bank of Philadelphia and FHLB-Pgh and
federal funds sold, decreased $11.0 million in 1996. Net cash provided by
operating activities totaled $5.7 million and primarily resulted from the
Company's $4.2 million in net income.
The Company's net cash used in investing activities of $16.4 million was
the major reason for the net decrease in cash and cash equivalents. The
primary components of the outflow from investing activities were loan
disbursements and investment purchases, partially offset by inflows from
repayments on short-term loans to other banking institutions and
investments. For 1996, the Company's net loan disbursements amounted to
$22.2 million. Aggregate loan demand of $41.2 million was partially
funded by $19.0 million in net repayments on short-term credit extensions
to financial institutions. The Company also purchased $20.2 million in
securities during 1996. The purchases were funded with the $24.9 million
received in repayments on securities, with the excess of the proceeds
being used to retire $3.0 million in long-term borrowings, as well as to
fund loan demand.
Net cash used in financing activities totaled $320 in 1996. The decline
primarily resulted from the Company's repayment on September 9, 1996, of a
$3.0 million fixed-rate advance from the FHLB-Pgh. Partially offsetting
this decrease was a $3.4 million increase in deposits.
CAPITAL ADEQUACY:
Stockholders' equity improved $3.4 million during 1996 principally due to
the Company's $4.2 million in net income, partially offset by $623 in
dividends and a change in the net unrealized holding adjustment of $216.
The Company reported a net unrealized holding gain of $564 at December 31,
1996, as compared to $780 at December 31, 1995. This change in the fair
market value of the Company's investment portfolio was significantly less
severe than that of its peers. The Company's exposure to interest rate
risk has been better protected through improvements in the quality,
composition and structure of the investment portfolio.
For the year-ended December 31, 1996, the Company declared dividends of
$623 or $0.28 per share as compared to $462 or $0.21 per share for the
same period of 1995. As a percentage of net income, cash dividends
declared in 1996 equaled 14.8 percent.
Other significant events in 1996 that affected the Company's capital
included the effectuation of a three-for-one stock split and the listing
of the Company's common stock on a national stock market. The April 1,
1996, stock split fulfilled the minimum share listing requirement for
NASDAQ. The liquidity of the Company's common stock improved as a result
of its trading on the NASDAQ under the symbol "CCBP" on June 17, 1996.
The Company exceeded all relevant regulatory capital measurements at
December 31, 1996, and was considered well capitalized. The Company's
Leverage ratio was 8.3 percent at December 31, 1996, compared to 7.0
percent at December 31, 1995. At December 31, 1996, the Company had a
Tier I risk-based ratio of 15.4 percent and a total risk-based ratio of
16.7 percent. The Tier I risk-based ratio was 14.2 percent and the total
risk-based ratio was 15.5 percent at December 31, 1995.
REVIEW OF FINANCIAL PERFORMANCE:
The Company earned $4,200 or $1.91 per share in 1996. The Company's
return on assets was 1.21 percent and return on equity was 14.57 percent.
For the Company's peer group, return on assets was 1.31 percent and return
on equity was 12.96 percent. The Company's record earnings for 1996 were
primarily attributable to higher net interest income and noninterest
income combined with improved noninterest expense levels. Net interest
income on a tax-equivalent basis increased $476 from $12,215 in 1995 to
$12,691 in 1996. This increase was primarily due to an increase in loan
volumes and the Company's controlling of funds cost. Since the second
quarter of 1995 when the Company instituted its plan to become a more
traditional banking institution, it was successful in improving the
Company's financial position as loans comprised 69.1 percent of earning
assets at December 31, 1996, as compared to 57.4 percent at June 30, 1995.
The Company also successfully reduced its cost of funds from 4.86 percent
in 1995 to 4.69 percent in 1996. Improvements in liquidity allowed the
Company to be more stringent in controlling funds cost. The Company's
cost of funds increased from 4.71 percent during the first quarter of 1995
to 4.88 percent during the fourth quarter. In 1996 these costs decreased
from 4.74 percent in the first quarter to 4.69 percent in the fourth
quarter. This was no small achievement as general market rates on U.S.
Treasury securities increased during 1996. Yields on one-year U.S.
Treasury instruments averaged 5.12 percent in the first quarter of 1996
and rose to 5.48 percent in the fourth quarter. Likewise, five-year U.S.
Treasury instruments averaged 5.58 percent in the first quarter and rose
to 6.10 percent in the fourth quarter.
For the year-ended December 31, 1996, the Company's provision for loan
losses declined $135 to $300. This decline resulted from the Company's
decision to reduce its provision from $70 per month to $25 per month at
the beginning of the second quarter of 1995. This decision was in
response to the Company reaching a loan loss reserve level believed by
management to be adequate to absorb future charge-offs.
The Company also had a dramatic rise in noninterest income in 1996 as
compared to 1995. The majority of the increase was attributable to a
reduction in securities losses from $4,393 for the year-ended December 31,
1995, to $58 for the same period of 1996. The loss in 1995 came primarily
during the second and third quarters as a result of management's decision
to reconstitute the investment portfolio.
Noninterest expense for the Company showed a marked improvement over 1995
levels. These expenses declined $811 from $8,194 for the year-ended
December 31, 1995, to $7,383 for the same period of 1996. The Company
took better control of other expenses in 1996 and benefitted from its
improved financial position by earning lower Federal Deposit Insurance
Corporation ("FDIC") insurance rates and reducing legal and administrative
costs associated with the Memorandum of Understanding that was removed on
February 16, 1996.
NET INTEREST INCOME:
The Company's net interest income on a tax-equivalent basis rose to
$12,691 in 1996, an increase of $476 or 3.9 percent, compared to 1995.
This increase was due almost entirely to the Company's improved net
interest margin. The Company's 1996 net interest margin was 3.79 percent.
This marked a 31 basis point increase over the 3.48 percent margin
recorded in 1995. The combination of an improved yield on earning assets
and a lower cost associated with interest-bearing deposits accounted for
the improvement. The Company experienced an increase of 10 basis points
in its yield on earning assets as this rate was 7.85 percent for the year-
ended December 31, 1996, as compared to 7.75 percent for the year-ended
December 31, 1995. Additionally, the Company's cost of funds declined 17
basis points to 4.69 percent for the year-ended December 31, 1996, from
4.86 percent for the same period of 1995. These changes accounted for the
$462 positive rate variance recorded for 1996. Such favorable results
were by-products of implementing transitional asset/liability strategies.
The Company also reaped the rewards of its improved liquidity position in
1996 as it was not pressured into aggressively competing for funds nor was
it reliant on high-cost borrowings to fund loan demand.
Reductions in the volumes of interest-bearing liabilities in excess of
average earning assets resulted in a positive influence of $14 on net
interest income. Total average earning assets decreased $16.8 million to
$334.5 million in 1996, while average interest-bearing liabilities
decreased $19.4 million to $289.1 million. The Company experienced an
18.1 percent decrease in its volume of average investments from $134.5
million in 1995 to $110.2 million in 1996. This reduction was a direct
result of management changing its earning asset preference. This decrease
was responsible for $1,535 of the reduction in interest income as a result
of volume changes. Partially offsetting this decline was a 9.6 percent
increase in average loan volumes to $218.8 million in 1996 from $199.7
million in 1995. This accounted for a $1,249 positive influence on income
due to volume changes. The other major contributor to the unfavorable
volume variance in interest income was the reduced average volume of
federal funds sold in 1996. This decline accounted for a $698 reduction
in interest income. Average federal funds sold decreased $11.6 million
during 1996 as management used proceeds from the sales of securities to
fund the increased loan demand and to retire a long-term note held with
the FHLB-Pgh. The favorable volume variance of $998 in interest expense
offset the unfavorable volume variance of $984 in interest income. Lower
average volumes of short-term borrowings were the primary contributor to
the variance. Average short-term borrowing volumes fell from $9.9 million
in 1995 to $51 in 1996 as the Company, through its success in
reconstituting the investment portfolio, eliminated its need for
borrowings to fund asset growth.
PROVISION FOR LOAN LOSSES:
Provision for loan losses for the nation's top 50 banks increased 34.6
percent in 1996 to $10.5 billion. This increase came in response to a
rise in net charge-offs for the year of 29.1 percent to $11.1 billion,
which pushed net charge-offs as a percentage of average loans outstanding
for these institutions to 0.63 percent in 1996 from 0.54 percent in 1995.
Bankruptcies, delinquencies and charge-offs, primarily from revolving
consumer credit, increased in 1996. Even after taking higher provisions,
net charge-offs still outdistanced the provision for the year by $600.0
million, resulting in a 1.0 percent reduction in the allowance for loan
losses account. Contrary to the stance taken by the banking industry, the
Company reduced its provision for loan losses by $135 to $300 in 1996 from
the $435 taken in 1995.
NONINTEREST INCOME:
The Company reported noninterest income of $1,387 for the year-ended
December 31, 1996, as compared to a loss of $3,196 for the same period of
1995. The $4,583 turnaround primarily resulted from reporting net losses
on investment securities of $58 in 1996 compared to net losses of $4,393
in 1995. These losses in 1995 were the result of completing the
reconstitution of the investment portfolio during the second and third
quarters. The net investment securities losses of $58 for 1996 resulted
from the disposition of four variable-rate CMOs with a carrying value of
$1,487. These dispositions resulted from a decision by the Investment
Committee based on a reassessment of their appropriateness with respect to
structure, composition and characteristics in line with investment goals.
Service charges, fees and commissions increased $248 or 20.7 percent from
$1,197 for the year-ended December 31, 1995, to $1,445 for the same period
of 1996. The primary reason for the increase stemmed from management's
decision, effective April 1, 1996, to adjust general service charges on
deposit accounts.
NONINTEREST EXPENSE:
Noninterest expense totaled $7,383 in 1996, a decrease of $811, or 9.9
percent, compared to 1995. The Company had a net overhead expense to
average assets ratio of 1.7 percent, an improvement over the 1.9 percent
recorded in 1995. In relation to the peer group ratio of 2.7 percent, the
Company continued to demonstrate a greater efficiency level. In addition,
the Company's operating efficiency ratio showed an improvement from 64.1
percent at December 31, 1995, to 56.4 percent at December 31, 1996.
Reduced levels of noninterest expense coupled with the increase in net
interest income and service charges, fees and commissions were responsible
for the positive change in such ratio.
The Company's salaries and benefits expense composed 51.6 percent of
noninterest expense and totaled $3,808 in 1996, a $220 or a 5.5 percent
decrease compared to 1995. The majority of this decrease was attributable
to the Company's Board of Directors exercising its termination option of
the former President and Chief Executive Officer's written employment
agreement during the second quarter of 1995. The cost of exercising the
agreement approximated $207. The Company had a defined compensation plan
for certain senior management employees that it discontinued during the
third quarter of 1996. Costs for the plan were recognized monthly in
salaries and benefits expense on an accrual basis. The Company had no
recognition of gain or loss from the discontinuance of the plan.
Net occupancy and equipment expense aggregated $1,213 for the year-ended
December 31, 1996, similar to the amount recorded for 1995.
Other expenses totaled $2,362 in 1996, a decrease of $582 or 19.8 percent
compared to the $2,944 recorded in 1995. This decline was due in large
part to a reduction in FDIC premiums paid by the Company in 1996. Under
the new structure approved by the FDIC Board of Directors on November 14,
1995, and put into effect on January 1, 1996, the Company was assessed the
$2 minimum annual FDIC insurance payment for 1996 based on its current
risk characteristic. As a product of maintaining this rating, the
Company's FDIC insurance expense decreased $369, from $417 in 1995 to $48
in 1996.
INCOME TAXES:
The Company reported tax expense of $1,013 in 1996, compared to a tax
benefit of $552 in 1995. The effective tax rate for 1996 at 19.4 percent
was the lowest rate recorded for any year with taxable income. The rate
was significantly better than the effective tax rate of the peer group at
25.0 percent during the comparable period. Management increased emphasis
on acquiring tax-exempt loans and investments and utilized investment tax
credits to effectuate the favorable tax rate. The tax benefit reported in
1995 was 156.8 percent of the loss before tax and above the marginal tax
rate due to the effect of tax-exempt income. The Company was able to
utilize the tax benefit because of taxable income in previous years and
expectations of the future realization of the benefit. The Company's
investment in a limited partnership interest in a residential housing
program designed for the elderly and for low- to moderate-income families
provided it with tax credits of $160 in 1996.
The Company determined that it was not required to establish a valuation
reserve for the deferred tax assets since it is more likely than not that
the net deferred tax assets could be principally realized through
carryback to taxable income in prior years and by future reversals of
existing taxable temporary differences or, to a lesser extent, through
future taxable income.
COMM BANCORP, INC.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
COMM BANCORP, INC.
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
JOHN P. KAMEEN
SECRETARY
Publisher, Forest City News
ERWIN T. KOST
President, Kost Tire & Muffler
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE W. POROSKY
Owner, Porosky Lumber Company
ERIC STEPHENS
Auto Dealer, H.L. Stephens and Son
CORPORATE OFFICERS
COMM BANCORP, INC.
DAVID L. BAKER
President and
Chief Executive Officer
THOMAS M. CHESNICK
Assistant Secretary
WILLIAM F. FARBER, SR.
Chairman of the Board
JOHN P. KAMEEN
Secretary
J. ROBERT McDONNELL
Vice President
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer
BOARD OF DIRECTORS
COMMUNITY BANK AND TRUST COMPANY
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
President, Farber's Restaurants
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
MICHAEL T. GOSKOWSKI
SECRETARY
Owner, Kartri Sales Mfg.
ALLAN A. HORNBECK
President, Allan Hornbeck Chevrolet
JOHN P. KAMEEN
Publisher, Forest City News
WILLIAM A. KERL
Owner, Carbondale Concrete, Kerl Oil
and Kerl Trucking
ERWIN T. KOST
President, Kost Tire & Muffler
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE W. POROSKY
Owner, Porosky Lumber Company
ERIC STEPHENS
Auto Dealer, H.L. Stephens and Son
COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)
ADVISORY BOARDS
COMMUNITY BANK AND TRUST COMPANY
CARBONDALE BRANCH
JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home
JOHN J. CERRA
Attorney, Walsh and Cerra
ROBERT W. FARBER
R.W.F. Computer Consulting Co.
HENRY E. DEECKE
Henry E. Deecke Real Estate
CLIFFORD BRANCH
WILLIAM F. FARBER, JR.
Manager, Farber's Restaurants
THOMAS J. LOPATOFSKY, JR.
Lenox Propane
JOSEPH T. McGRAW
Attorney, McGraw and McGraw
ERIC STEPHENS
Auto Dealer, H.L. Stephens and Son
EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK BRANCHES
ROD AZAR
Azar Insurance Agency
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
DOUG GAY
Gay's True Value
THOMAS KUKUCHKA
Sheldon-Kukuchka Funeral Home
GLEN LAYAOU
Eaton Hills Development Corp.
Layaou Construction Co.
HOWARD TRAUGER
Trauger's, Inc.
FOREST CITY BRANCH
THOMAS BAILEYS
President, Fire Risk Management
and NMEB, Inc.
RICHARD CURTIS
Owner, Rich's Auto Service and
CUBE Auto Supply
JOSEPH LUCCHESI, D.D.S.
Dentist
SCOTT MISKOVSKY
Pharmacist, Red Cross Pharmacy
LINDA RICHARDS
Sparkware Associates, Inc.
STEVEN TOURJE
NEP Telephone Company
MONTROSE BRANCH
EDGAR B. BAKER
Consultant
DUANE JERAULD
Montrose Beverage
TOM KERR
Tom Kerr Chevrolet
ROBERT LEE
Lee's Furniture Store
DONNA WILLIAMS
Livestock Dealer/Farmer
NICHOLSON BRANCH
RICHARD LOCHEN
Lochen's Market
MARK NOVITCH
Director, Fleet Maintenance TRL
DAVID SCHMIDT, JR.
Schmidt's Valley Farm Market
SIMPSON BRANCH
FRANCIS LAPERA
Lapera Oil Company
SUSAN MANCUSO,
Mancuso and Mancuso
GERALD SALKO, D.D.S.
Dentist
COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)
OFFICERS
COMMUNITY BANK AND TRUST COMPANY
CAROL AMES
Lake Winola Branch Manager
DEBORAH AYERS
Tunkhannock Branch Manager
DAVID L. BAKER
President and
Chief Executive Officer
WILLIAM R. BOYLE
Vice President
Branch Administrator
MARK E. CATERSON
Vice President
Senior Trust Officer
THOMAS M. CHESNICK
Vice President, Cashier
Forest City Branch Manager
JOHN B. ERRICO
Comptroller
STEPHANIE A. GANZ, CPA
Vice President of Finance
FRAN HEDRICK
Factoryville Branch Manager
RANDOLPH LaCROIX
Clifford Branch Manager
PAMELA S. MAGNOTTI
Compliance Officer
MARY ANN MUSHO
Assistant Cashier
Human Resource Officer
IRENE Y. O'MALLEY
Senior Loan Administrator
ROBERT O'MALLEY
Eynon Branch Manager
JANICE NESKY
Nicholson Branch Manager
CAROL NOVAJOSKY
Eaton Township Branch Manager
M. EVELYN PANTZAR
Vice President
Internal Auditor
CHERYL ROBINSON
Lakewood Branch Manager
CHERYL RUPP
Simpson Branch Manager
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS W. SHEPPARD
Vice President
Senior Loan Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer
RONALD K. SMITH
Vice President
Montrose Branch Manager
TAMI L. SNYDER
Vice President
Information Services
STEVEN URSICH
Carbondale Branch Manager
COMMUNITY BANK AND TRUST COMPANY
LOCATIONS
CARBONDALE BRANCH*
37 Dundaff Street
Carbondale, PA 18407
717-282-7500
CLIFFORD BRANCH*
Route 106
Clifford, PA 18413
717-222-3168
EATON TOWNSHIP BRANCH*
Cross County Complex
Route 29
Eaton Township, PA 18657
717-836-1008
EYNON BRANCH*
Eynon Plaza
Route 6
Eynon, PA 18403
717-876-4881
FACTORYVILLE BRANCH*
97 College Avenue
Factoryville, PA 18419
717-945-5137
FOREST CITY BRANCH*
521 Main Street
Forest City, PA 18421
717-785-3181
LAKEWOOD BRANCH
Lake Como Road
Lakewood, PA 18439
717-798-2900
LAKE WINOLA BRANCH*
Winola Plaza
Lake Winola, PA 18625
717-378-3195
MONTROSE BRANCH*
61 Church Street
Montrose, PA 18801
717-278-3824
NICHOLSON BRANCH*
57 Main Street
Nicholson, PA 18446
717-942-6135
SIMPSON BRANCH*
347 Main Street
Simpson, PA 18407
717-282-4821
TUNKHANNOCK BRANCH*
Route 6 West
Tunkhannock, PA 18657
717-836-5555
TRUST SERVICES
61 Church Street
Montrose, PA 18801
800-217-3501
*MAC Locations
COMM BANCORP, INC.
GLOSSARY OF TERMS
BASIS POINT - Unit of measure equal to one hundredth of one percent.
BOOK VALUE PER COMMON SHARE - Value of one share of common stock calculated
by dividing stockholders' equity by the total number of common shares
outstanding.
COMMON SHARES OUTSTANDING - The total number of common shares issued less any
shares held in the treasury.
CORE DEPOSITS - Total deposits excluding time deposits of $100,000 or more.
CORE DEPOSIT INTANGIBLE - The value given to long-term deposit relationships
resulting from the assumption of liabilities in a branch and/or bank
acquisition.
EARNING ASSETS - Assets that generate interest income and/or yield-related
fee income, such as loans, securities and short-term investments.
EARNINGS PER SHARE - Net income divided by the average number of common
shares outstanding.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid for the
use of funds, including interest checking, savings, time deposit accounts and
borrowed funds.
INTEREST SENSITIVITY - A measurement of the effect on net interest income due
to changes in interest rates.
LIQUIDITY - A corporation's ability to meet cash requirements. Deposits,
borrowings, capital and/or asset conversions are all items used for the
raising of cash.
MORTGAGE BACKED SECURITIES - Securities collateralized by pools of
residential mortgages having cash flows serviced by repayment activity on the
underlying mortgages.
NET CHARGE-OFFS - The amount of loans charged against the allowance for loan
loss account less any recoveries on loans previously charged-off.
NET INTEREST INCOME - Income earned on earning assets less interest expense
paid on interest-bearing liabilities.
NET INTEREST MARGIN - Net interest income on a fully tax-equivalent basis
divided by total average earning assets.
COMM BANCORP, INC.
GLOSSARY OF TERMS (CONTINUED)
NET INTEREST SPREAD - Difference between the average tax-equivalent rate
received on earning assets and the average rate paid on interest-bearing
liabilities.
NONACCRUAL LOANS - Loans that have had interest accruals interrupted due to
the financial difficulties of the borrower.
NONPERFORMING ASSETS - Assets consisting of nonperforming loans and
foreclosed assets. Nonperforming loans are defined as accruing loans past
due 90 days or more, loans on which interest is currently not being accrued
or loans on which the rate or term has been altered due to the deteriorated
financial condition of the borrower.
OVERHEAD RATIO - Used as a measurement of the relationship between operating
expenses and revenues. It is total noninterest expenses divided by the total
of tax-equivalent net interest income and noninterest income.
PAST DUE LOANS - Loans that are still accruing interest but are past due 90
days or more with respect to the collection of principal or interest.
PROVISION FOR LOAN LOSSES - A charge against income made to estimate the
expense related to management's estimated losses with respect to the loan
portfolio.
RATE-SENSITIVE ASSETS/LIABILITIES - Interest-bearing assets and liabilities
adjustable within a specified period due to maturity or contractual
agreements. These agreements typically relate stated interest rates to the
prime rate.
RESERVE FOR LOAN LOSSES - A valuation allowance charged against the loan
portfolio representing the amount considered by management to be adequate to
cover estimated losses.
RETURN ON AVERAGE TOTAL ASSETS - Net income divided by the average total
assets for the period.
RETURN ON AVERAGE TOTAL EQUITY - Net income divided by the average total
stockholders' equity for the period.
RISK-ADJUSTED ASSETS - Assets and credit-equivalent amounts of off-balance
sheet items that have been adjusted according to regulatory guidelines into
their assigned risk weights.
COMM BANCORP, INC.
GLOSSARY OF TERMS (CONTINUED)
RISK-BASED CAPITAL RATIOS - Guidelines set forth by regulatory agencies as
to the measurement of capital and how total assets and certain off-balance
sheet items are to be risk-adjusted to reflect levels of credit risk.
SENSITIVITY GAP - The difference between rate-sensitive assets and rate-
sensitive liabilities for a designated period. Assets exceeding liabilities
reflect a positive or net asset position. Liabilities exceeding assets
reflect a negative or a net liability position.
STOCKHOLDERS' EQUITY - Total investment by holders of common stock plus
retained earnings and net unrealized gains or losses on available-for-sale
securities.
STOCKHOLDERS' EQUITY PER COMMON SHARE - The value of a common share of stock
calculated by dividing total common stockholders' equity by the total number
of outstanding common shares at the end of the period.
TAX-EQUIVALENT BASIS - An adjustment made for tax-exempt instruments equal
to the amount of taxes that would have been paid had these instruments been
taxable at the statutory rate of 34.0 percent.
TIER I CAPITAL - Stockholders' equity less goodwill and any other intangible
items.
TOTAL RISK-BASED CAPITAL - The sum of Tier I capital and the allowance for
loan losses (restricted by certain regulatory limitations).
COMM BANCORP, INC.
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS:
521 Main Street
Forest City, PA 18421
LEGAL COUNSEL:
Saul, Ewing, Remick & Saul LLP
Penn National Insurance Tower
North Second Street, 7th Floor
Harrisburg, PA 17101
INDEPENDENT AUDITORS:
Kronick Kalada Berdy & Co., P.C.
190 Lathrop Street
Kingston, PA 18704
TRANSFER AGENT:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
MARKET MAKERS:
Robert W. Baird & Co., Inc.
777 E. Wisconsin Avenue
Milwaukee, WI 53202-5391
414-765-3500
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17604-4548
717-560-3015
Howe Barnes Investments, Inc.
135 S. LaSalle Street
Chicago, IL 60603-4358
312-655-2958
M.H. Meyerson & Co., Inc.
525 Washington Blvd.
Jersey City, NJ 07303-0260
201-495-9500
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
201-325-3000
SEC REPORTS AND ADDITIONAL INFORMATION:
Copies of Comm Bancorp Inc.'s Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q
filed with the Securities and Exchange
Commission or additional financial information
concerning Comm Bancorp, Inc. may be obtained
without charge by writing to Scott A. Seasock,
Chief Financial Officer, at corporate
headquarters.
COMMUNITY REINVESTMENT:
Copies of Community Bank and Trust Company's
community reinvestment statement may be
obtained without charge by writing to Pamela
Magnotti, Compliance Officer, at corporate
headquarters.
COMMON STOCK MARKET INFORMATION:
Shares of Comm Bancorp, Inc. common stock began
listing on the NASDAQ Stock Market ("NASDAQ")
as CommBcp under the symbol "CCBP" on June 17,
1996. Prior to June 17, 1996, the Company's
common stock was quoted on the Over-the-Counter
Electronic Bulletin Board Interdealer System.
As of March 1, 1998, five firms were listed on
the NASDAQ system as market makers for the
Company's common stock.
The high and low closing sale prices and
dividends per share of the Company's common
stock for the four quarters of 1997 and 1996
are summarized as follows. Retroactive effect
is given in sale price and dividend information
for a three-for-one stock split effectuated
April 1, 1996.
CASH DIVIDENDS
1997: HIGH LOW DECLARED
First Quarter... $28 $25 $.06
Second Quarter.. 31 1/4 26 1/2 .06
Third Quarter... 31 3/4 28 1/4 .06
Fourth Quarter.. $37 $29 1/2 $.12
1996:
First Quarter... $14 $14 $.05
Second Quarter.. 23 3/4 14 .06
Third Quarter... 25 1/2 21 1/2 .06
Fourth Quarter.. $27 1/2 $25 $.11
DIVIDEND REINVESTMENT:
Comm Bancorp, Inc. offers a Dividend
Reinvestment Plan whereby stockholders can
increase their investment in additional shares
of common stock without incurring fees or
commissions. A prospectus and enrollment form
may be obtained by contacting American Stock
Transfer & Trust Company, Dividend Reinvestment
Department, 40 Wall Street, 46th Floor, New
York, NY 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT:
Comm Bancorp, Inc. stockholders not
participating in the Dividend Reinvestment Plan
may opt to have their dividends deposited
directly into their bank account by contacting
American Stock Transfer and Trust Company at
1-800-936-5449.
WORLD WIDE WEB INFORMATION:
The Company's Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q are filed
electronically through the Electronic Data
Gathering, Analysis and Retrieval System
("EDGAR"), which performs automated collection,
validation, indexing, acceptance and forwarding
of submissions to the Securities and Exchange
Commission and is accessible by the public on
the Internet at HTTP//WWW.SEC.GOV/EDGARHP.HTM.
Additional financial and nonfinancial
information can be accessed electronically
using the Company's web site at
HTTP://WWW.COMBK.COM.
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Community Bank and Trust Company, incorporated under the laws of the
Commonwealth of Pennsylvania as a state-chartered commercial banking institution
and trust company.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS AND CONSOLODATED BALANCE SHEETS FOUND ON
PAGES 149 AND 150 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,040
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,666
<INVESTMENTS-CARRYING> 0
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<LOANS> 250,227
<ALLOWANCE> 3,798
<TOTAL-ASSETS> 381,811
<DEPOSITS> 332,381
<SHORT-TERM> 9,575
<LIABILITIES-OTHER> 3,709
<LONG-TERM> 44
0
0
<COMMON> 727
<OTHER-SE> 35,375
<TOTAL-LIABILITIES-AND-EQUITY> 381,811
<INTEREST-LOAN> 20,389
<INTEREST-INVEST> 5,462
<INTEREST-OTHER> 291
<INTEREST-TOTAL> 26,142
<INTEREST-DEPOSIT> 14,056
<INTEREST-EXPENSE> 14,068
<INTEREST-INCOME-NET> 12,074
<LOAN-LOSSES> 360
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<INCOME-PRETAX> 5,534
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<EXTRAORDINARY> 0
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<NET-INCOME> 4,400
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 7.93
<LOANS-NON> 2,272
<LOANS-PAST> 3,169
<LOANS-TROUBLED> 189
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,944
<CHARGE-OFFS> 657
<RECOVERIES> 151
<ALLOWANCE-CLOSE> 3,798
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