UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
521 MAIN STREET, FOREST CITY, PA 18421
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 785-3181
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,078,260 AT JULY 31, 1999.
Page 1 of 51
COMM BANCORP, INC.
FORM 10-Q
JUNE 30, 1999
INDEX
CONTENTS PAGE NO.
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PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements.
Consolidated Statements of Income and Comprehensive Income -
for the Six Months Ended June 30, 1999 and 1998............ 3
Consolidated Balance Sheets - June 30, 1999, and December
31, 1998................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1999..................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998............................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
Item 3: Quantitative and Qualitative Disclosures About Market
Risk.................................................. *
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings...................................... 47
Item 2: Changes in Securities and Use of Proceeds.............. 47
Item 3: Defaults Upon Senior Securities........................ 47
Item 4: Submission of Matters to a Vote of Security Holders.... 47
Item 5: Other Information...................................... 48
Item 6: Exhibits and Reports on Form 8-K....................... 48
SIGNATURES..................................................... 49
* Not Applicable
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................ $ 5,082 $5,110 $10,082 $10,204
Tax-exempt......................................................... 97 101 190 199
Interest and dividends on investment securities available-for-sale:
Taxable............................................................ 1,133 782 2,142 1,620
Tax-exempt......................................................... 489 514 993 1,031
Dividends.......................................................... 30 45 60 74
Interest on federal funds sold....................................... 50 202 98 284
------- ------ ------- -------
Total interest income............................................ 6,881 6,754 13,565 13,412
------- ------ ------- -------
INTEREST EXPENSE:
Interest on deposits................................................. 3,423 3,461 6,800 6,883
Interest on short-term borrowings.................................... 15 16 7
Interest on long-term debt........................................... 1 1 2 2
------- ------ ------- -------
Total interest expense........................................... 3,439 3,462 6,818 6,892
------- ------ ------- -------
Net interest income.............................................. 3,442 3,292 6,747 6,520
Provision for loan losses............................................ 30 105 60 210
------- ------ ------- -------
Net interest income after provision for loan losses.............. 3,412 3,187 6,687 6,310
------- ------ ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions................................ 370 376 750 729
Net gains on sale of loans........................................... 4 36
------- ------ ------- -------
Total noninterest income......................................... 374 376 786 729
------- ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................... 1,194 1,109 2,358 2,203
Net occupancy and equipment expense.................................. 302 305 650 657
Other expenses....................................................... 870 792 1,586 1,476
------- ------ ------- -------
Total noninterest expense........................................ 2,366 2,206 4,594 4,336
------- ------ ------- -------
Income before income taxes........................................... 1,420 1,357 2,879 2,703
Provision for income tax expense..................................... 310 277 629 553
------- ------ ------- -------
Net income....................................................... 1,110 1,080 2,250 2,150
------- ------ ------- -------
OTHER COMPREHENSIVE INCOME:
Unrealized gains (losses) on investment securities available-for-sale (1,476) 314 (1,903) 629
Income tax expense (benefit) related to other comprehensive income... (501) 107 (647) 214
------- ------ ------- -------
Other comprehensive income (loss), net of income taxes........... (975) 207 (1,256) 415
------- ------ ------- -------
Comprehensive income............................................. $ 135 $1,287 $ 994 $ 2,565
======= ====== ======= =======
PER SHARE DATA:
Net income........................................................... $ 0.51 $ 0.49 $ 1.03 $ 0.98
Cash dividends declared.............................................. $ 0.13 $ 0.07 $ 0.26 $ 0.14
Average common shares outstanding.................................... 2,161,775 2,205,112 2,185,075 2,204,643
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 7,885 $ 11,464
Federal funds sold.................................................................. 7,700
Investment securities available-for-sale............................................ 121,390 109,626
Loans held for sale, net............................................................ 497 503
Loans, net of unearned income....................................................... 254,724 248,140
Less: allowance for loan losses................................................... 4,069 4,050
-------- --------
Net loans........................................................................... 250,655 244,090
Premises and equipment, net......................................................... 8,968 7,016
Accrued interest receivable......................................................... 2,298 2,297
Other assets........................................................................ 5,675 5,555
-------- --------
Total assets.................................................................... $397,368 $388,251
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 35,619 $ 36,024
Interest-bearing.................................................................. 318,462 308,229
-------- --------
Total deposits.................................................................. 354,081 344,253
Short-term borrowings............................................................... 3,355
Long-term debt...................................................................... 40 41
Accrued interest payable............................................................ 1,759 1,740
Other liabilities................................................................... 1,612 2,483
-------- --------
Total liabilities............................................................... 360,847 348,517
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STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
June 30, 1999, 2,084,260 shares; December 31, 1998, 2,207,022 shares............... 688 729
Capital surplus..................................................................... 6,250 6,537
Retained earnings................................................................... 29,445 31,074
Net unrealized gain on available-for-sale securities................................ 138 1,394
-------- --------
Total stockholders' equity...................................................... 36,521 39,734
-------- --------
Total liabilities and stockholders' equity...................................... $397,368 $388,251
======== ========
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
COMMON CAPITAL RETAINED GAIN ON STOCKHOLDERS'
STOCK SURPLUS EARNINGS SECURITIES EQUITY
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<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998........................ $729 $6,537 $31,074 $ 1,394 $39,734
Net income........................................ 2,250 2,250
Dividends declared: $0.26 per share............... (559) (559)
Dividend reinvestment plan: 3,381 shares issued... 1 92 93
Repurchase and retirement: 126,143 shares......... (42) (379) (3,320) (3,741)
Net change in unrealized gain on securities....... (1,256) (1,256)
---- ------ ------- ------- -------
BALANCE, JUNE 30, 1999............................ $688 $6,250 $29,445 $ 138 $36,521
==== ====== ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1999 1998
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<C> <S> <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 2,250 $ 2,150
Adjustments:
Provision for loan losses.............................................................. 60 210
Depreciation, amortization and accretion............................................... 844 594
Amortization of loan fees.............................................................. (73) (100)
Deferred income tax (benefit).......................................................... (83) (26)
Losses (gains) on sales of other real estate........................................... (9) 9
Changes in:
Loans held for sale, net............................................................. 6
Interest receivable.................................................................. (1) 265
Other assets......................................................................... 362 (175)
Interest payable..................................................................... 19 67
Other liabilities.................................................................... (856) 197
-------- --------
Net cash provided by operating activities.......................................... 2,519 3,191
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of available-for-sale securities................................ 21,875 23,156
Purchases of available-for-sale investment securities.................................... (35,843) (18,461)
Proceeds from sale of other real estate.................................................. 128 99
Net decreases (increases) in lending activities.......................................... (6,667) 3,209
Purchases of premises and equipment...................................................... (2,251) (1,398)
-------- --------
Net cash provided by (used in) investing activities................................ (22,758) 6,605
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ 5,951 1,316
Time deposits.......................................................................... 3,877 4,681
Short-term borrowings.................................................................. 3,355 (9,575)
Payments on long-term debt............................................................... (1) (2)
Proceeds from issuance of common shares.................................................. 93 96
Repurchase and retirement of common shares............................................... (3,741)
Cash dividends paid...................................................................... (574) (419)
-------- --------
Net cash provided by (used in) financing activities................................ 8,960 (3,903)
-------- --------
Net increase in cash and cash equivalents.......................................... (11,279) 5,893
Cash and cash equivalents at beginning of year..................................... 19,164 17,265
-------- --------
Cash and cash equivalents at end of period......................................... $ 7,885 $ 23,158
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 6,799 $ 6,825
Income taxes........................................................................... 919 521
Noncash items:
Transfer of loans to other real estate................................................. 115 204
Change in net unrealized losses (gains) on available-for-sale securities............... 1,256 (415)
Cash dividends declared................................................................ $ 559 $ 309
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm
Bancorp, Inc. and subsidiary, Community Bank and Trust Company
(collectively, the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. In the opinion of management, all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods have been included. All significant
intercompany balances and transactions have been eliminated in the
consolidation. Prior-period amounts are reclassified when necessary to
conform with the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual
results could differ from those estimates. For additional information and
disclosures required under GAAP, reference is made to the Company's Annual
Report on Form 10-K for the period ended December 31, 1998.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
On June 30, 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133." On June 16, 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which established accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, collectively referred to as derivatives and for hedging
activities. SFAS No. 133 was effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999, with earlier application
encouraged. SFAS No. 137 amended SFAS No. 133 making the Statement
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The anticipated adoption of SFAS No. 133 on January 1, 2001, is
not expected to have a material effect on operating results or financial
position as the Company has no instruments that qualify as derivative or
hedges nor does it expect to be effected by the provisions for potential
reclassification of investment securities.
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-Q are forward-looking statements that
involve numerous risks and uncertainties. The following factors, among
others, may cause actual results to differ materially from projected
results:
Local, domestic and international economic and political conditions, and
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates,
tight money supply, real estate values, international conflicts and other
factors beyond the control of Comm Bancorp, Inc. and its subsidiary,
Community Bank and Trust Company (collectively, the "Company") may also
adversely affect its future results of operations. Management, consisting
of the Board of Directors and executive officers, expects that no
particular factor will affect the Company's results of operations.
Downward trends in areas such as real estate, construction and consumer
spending, may adversely impact the Company's ability to maintain or
increase profitability. Therefore, the Company cannot assure that it will
continue its current rates of income and growth.
The Company's earnings depend largely upon net interest income. The
relationship between the Company's cost of funds, deposits and borrowings,
and the yield on its interest-earning assets, loans and investments all
influence net interest income levels. This relationship, defined as the
net interest spread, fluctuates and is affected by regulatory, economic and
competitive factors that influence: (i) interest rates; (ii) the volume,
rate and mix of interest-earning assets and interest-bearing liabilities;
and (iii) the level of nonperforming assets. As part of its interest rate
risk ("IRR") management strategy, management monitors the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities to control its exposure to interest rate changes.
In originating loans, some credit losses are likely to occur. This risk of
loss varies with, among other things: (i) general economic conditions;
(ii) loan type; (iii) creditworthiness and debt servicing capacity of the
borrower over the term of the loan; and (iv) in the case of a
collateralized loan, the value and marketability of the collateral securing
the loan. Management maintains an allowance for loan losses based on,
among other things: (i) historical loan loss experience; (ii) known
inherent risks in the loan portfolio; (iii) adverse situations that may
affect a borrower's ability to repay; (iv) the estimated value of any
underlying collateral; and (v) an evaluation of current economic
conditions. Management 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 area that it serves. Although
the Company expects economic conditions in its market area to remain
favorable, assurance cannot be given that these conditions will continue.
Adverse changes to economic conditions in the Company's geographic market
area would likely impair its loan collections and may have a materially
adverse effect on the consolidated results of operations and financial
position.
The banking industry is highly competitive, with rapid changes in product
delivery systems and in consolidation of service providers. The Company
competes with many larger institutions in terms of asset size. These
competitors also have substantially greater technical, marketing and
financial resources. The larger size of these companies affords them the
opportunity to offer products and services not offered by the Company. The
Company is constantly striving to meet the convenience and needs of its
customers and to enlarge its customer base. The Company cannot assure that
these efforts will be successful in maintaining and expanding its customer
base.
OPERATING ENVIRONMENT
At the close of the second quarter of 1999, the Federal Open Market
Committee ("FOMC") raised the federal funds rate 25 basis points from 4.75
percent to 5.00 percent. This marked the first time the FOMC raised
interest rates in two years and pushed borrowing costs higher for consumers
and businesses as banks responded by an immediate 25 basis point increase
in their prime lending rate. The continued high economic growth, income
and spending rates, along with a tight labor market, prompted the FOMC to
raise interest rates to slow growth and keep inflation pressures in check.
The economy continued to grow in the second quarter of 1999. However, in
anticipation of the rise in interest rates, the economy experienced a
slight slowdown in growth for the second quarter as compared to the
previous quarter. The nation's gross domestic product, the value of all
goods and services produced in the United States, rose at a slower-than-
expected annual rate of 2.3 percent in the second quarter compared to the
4.3 percent annual rate posted for the first quarter. Consumer purchases,
which account for two-thirds of the nation's economic activity, was chiefly
responsible for the slowdown. This is evidenced by consumer spending which
grew at 4.0 percent for the second quarter, down from 6.7 percent for the
first three months of 1999. This marked the slowest spending increase
since the fourth quarter of 1997. Even though economic growth appeared to
moderate, the FOMC is leaning towards raising rates again in the third and
possibly the fourth quarters of 1999 in order to curb inflationary
pressures. This tendency arises from the continued low unemployment rate
of 4.3 percent for the second quarter coupled with a 1.1 percent jump in
employment costs, the fastest pace in eight years.
The banking industry overall posted solid results for the second quarter of
1999. Net interest margin stability appeared to be the leading factor
causing the positive results. The flat yield curve, characteristic of
1998, caused intense pressure on net interest margins. During the first
half of 1999 the yield curve began to steepen. The spread between the one-
year Treasury and the 30-year Treasury was 54 basis points at the close of
1998, compared to 80 basis points at March 31, 1999, and 94 basis points at
June 30, 1999. The steepening of the yield curve led to a slowing in
mortgage refinancing activity and higher reinvestment rates. Furthermore,
the recent 25 basis point interest rate increase was able to be converted
into higher loan yields without causing a parallel shift in fund costs.
Banks also experienced strong loan growth during the second quarter. This
strong growth coupled with stable net interest margins led to improved
efficiency ratios.
With respect to the Company's performance in the second quarter, net income
for the three months ended June 30, 1999, was $1,110 or $0.51 per share as
compared to $1,080 or $0.49 per share for the same period last year. The
Company's return on average assets equaled 1.13 percent for the three
months ended June 30, 1999, and 1.16 percent for the same period last year.
Return on average equity for the three months ended June 30, 1999 and 1998,
equaled 11.18 percent and 11.47 percent, respectively. Higher levels of net
interest income partially offset by greater noninterest expenses caused the
improved earnings. The Company's other comprehensive income, entirely
related to net unrealized gains and losses on investment securities, was
$135 for the three months ended June 30, 1999, compared to $1,287 for the
same period of 1998.
REVIEW OF FINANCIAL POSITION:
Total assets at June 30, 1999, amounted to $397.4 million, a $9.1 million
increase over the $388.3 million recorded at December 31, 1998. Higher
investment volumes and greater loan demand were the primary factors
contributing to the increase in total assets. Investments grew $11.8
million to $121.4 at June 30, 1999, from $109.6 million at December 31,
1998. Loans, net of unearned income were $254.7 million at June 30, 1999,
a $6.6 million increase over the $248.1 million at December 31, 1998. In
an effort to expand its commercial loan portfolio, the Company added
staffing to its commercial loan department in the fourth quarter of 1998.
The Company was successful in its efforts as commercial loans and
commercial mortgages grew $3.1 million and $3.7 million, respectively, from
December 31, 1998 to June 30, 1999. Deposits totaled $354.1 million at June
30, 1999, a $9.8 million increase over the $344.3 million reported at
December 31, 1998. The Company had $3.4 million in short-term borrowings
outstanding at June 30, 1999. At December 31, 1998, the Company had
investments of $7.7 million in overnight funds. Stockholders' equity
declined $3,213 from December 31, 1998, to June 30, 1999. The Company's
repurchase and retirement of 126,143 shares of its commons stock for $3,741
relative to a stock repurchase program, authorized during the second
quarter, was the primary factor contributing to the decline. On April 21,
1999, the Board of Directors approved a stock repurchase program, which
authorizes management to repurchase up to 220,000 shares of the Company's
common stock. Net income of $2,250 offset in part by a net unrealized loss
on investment securities of $1,256 and cash dividends distributed to
stockholders of $466 also affected stockholders' equity. Consequently, the
Company experienced a decline in its leverage ratio from 9.5 percent at
year-end 1998 to 8.7 percent at June 30, 1999.
During the second quarter of 1999, the Company experienced significant
growth in its balance sheet. Total assets grew $11.2 million, an annualized
rate of 11.7 percent. Investments and loans both grew $6.1 million each
while deposits increased $12.9 million from March 31, 1999, to June 30,
1999. Stockholders' equity declined $3.8 million during the second quarter
of 1999, due primarily to the repurchase and retirement of common stock.
With respect to nonfinancial accomplishments in the second quarter of 1999,
management was successful in formulating a leasing subsidiary. On May 19,
1999, the Board of Directors approved a resolution for the formation of
Community Leasing Corporation, a wholly owned subsidiary of Community Bank
& Trust Company. Community Leasing Corporation offers direct lease
financing of commercial equipment to area businesses. For the six months
ended June 30, 1999, the Company did not have any activity relative to
Community Leasing Corporation.
INVESTMENT PORTFOLIO:
The most significant influence effecting investment portfolios during the
second quarter of 1999 was the change in interest rates. Interest rates
increased during the second quarter of 1999, as the market anticipated the
tightening action of the FOMC. Concerned about the potential for a buildup
of inflationary imbalances that could undermine the favorable economic
performance, the FOMC increased the federal funds rate by 25 basis points
from 4.75 percent to 5.00 percent on June 30, 1999. Higher compensation
which was not offset by greater productivity was the primary reason for
this action. Productivity increased 1.3 percent during the second quarter
of 1999 as compared to a 3.8 percent rise in unit labor costs. In addition,
the FOMC changed its policy stance from a neutral position, where they are
equally ready to raise or lower the federal funds rate, to a bias towards
tightening monetary policy. Such an inclination had an effect on the market
causing additional upward pressure on interest rates. This pressure is
particularly important to investment portfolios of financial institutions
as the market values of the portfolios, consisting primarily of bonds,
react inversely to interest rate changes. The Company's investment
portfolio consists primarily of short-term U.S. government agency mortgage-
backed securities and intermediate-term obligations of state and
municipalities. During the second quarter of 1999, the portions of the
yield curve most closely related to the average lives of these investments
changed significantly. Specifically, the two-year U. S. Treasury which is
closely related to the Company's holdings of mortgage-backed securities
increased 54 basis points from 4.98 percent at March 31, 1999, to 5.52
percent at June 30, 1999. Similarly, the ten-year U. S. Treasury
representative of the average life of the portfolio's municipal holdings
increased 56 basis points from 5.23 percent at the end of the first quarter
to 5.79 percent at the end of the second quarter. As a result of these
changes, the Company experienced a 1.1 percent decline in the market value
of the investment portfolio during the second quarter of 1999. Despite this
adverse change, the Company's portfolio fared better as compared to other
types of investments given the second quarter market rate changes. Market
values on two-year U. S. Treasuries declined 0.9 percent as compared to 0.6
percent in the Company's mortgage-backed portfolio having the same average
life. Moreover, the Company's municipal portfolio declined 2.5 percent in
value, approximately one-half of the drop experienced by municipal bonds
with the same average life but lower credit quality. The unrealized
holding gain of the investment portfolio amounted to $1,686 at March 31,
1999, and $209 at June 30, 1999. Management analyzes the effect interest
rate changes will have on the market value of the investment portfolio each
quarter utilizing "stress test" modeling. Accordingly, the model results at
June 30, 1999, indicate declines in the investment portfolio's value of
approximately 2.4 percent, 4.7 percent and 7.1 percent given rising rate
shocks of 100, 200 and 300 basis points, respectively.
Despite the unfavorable change in the investment portfolio's market value,
the Company outperformed 94.0 percent of all banks throughout the United
States with respect to total return over the past one- and three-year
periods. 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 one- and three-year periods ended June 30, 1999, the Company's
total return was 7.3 percent.
In addition to effecting the market value of an investment portfolio,
interest rate changes can have a significant impact on cash flows from
mortgage-backed securities. Cash receipts from short-term mortgage-backed
securities are an important source of funding for the Company's loan
demand. As interest rates increase prepayments on underlying mortgages
decline and could cause a reduction in cash receipts from such investments.
However, the aforementioned interest rate increase has not effected cash
flows from the Company's holdings as a result of the composition and
structure of these instruments. During the first six months of 1999, the
Company has consistently received $2.0 million of principal repayments from
its mortgage-backed securities. Management monitors its cash flow timing
risk by employing a model which utilizes median dealer prepayment
assumptions to project future principal cash flow streams under multiple
interest rate scenarios. Based on interest rate projections of plus or
minus 100 basis points at June 30, 1999, the Company would expect to
receive a minimum of $20.0 million or a maximum of $25.1 in principal
payments from its mortgage-backed portfolio throughout the coming year.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio at June 30, 1999, and December 31,
1998, are summarized as follows:
<TABLE>
<CAPTION
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
JUNE 30, DECEMBER 31,
1999 1998
---------------- ----------------
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities........................ $ 6,531 5.38% $ 11,060 10.09%
U.S. Government agencies........................ 644 0.53 637 0.58
State and municipals............................ 37,324 30.75 40,007 36.49
Mortgage-backed securities...................... 74,788 61.61 55,834 50.93
Equity securities............................... 2,103 1.73 2,088 1.91
-------- ------ -------- ------
Total......................................... $121,390 100.00% $109,626 100.00%
======== ====== ======== ======
</TABLE>
During the second quarter of 1999, the investment portfolio increased $6.1
million or 5.3 percent from $115.3 million at March 31, 1999, to $121.4
million at June 30, 1999. As a percentage of earning assets, investment
securities constituted 31.5 percent at March 31, 1999, and 32.2 percent at
June 30, 1999. The Company's tax-equivalent yield on its investment
portfolio declined from 6.7 percent for the quarter ended March 31, 1999,
to 6.6 percent for the quarter ended June 30, 1999. For the six months
ended June 30, 1999 and 1998, the investment portfolio averaged $112.7
million and $95.7 million, respectively. The tax-equivalent yield was 6.6
percent for the six months ended June 30, 1999 and 6.9 percent for the same
period last year. For the three and six months ended June 30, 1999, the
Company received repayments totaling $11.1 million and $21.9 million,
respectively. The proceeds not employed in the loan portfolio were used to
purchase short-term, mortgage-backed securities of U.S. Government
agencies. Increases in interest rates, improvements in the slope of the
yield curve and widening spreads were all factors for investing in such
instruments. During the first six months of 1999, the slope in the short
end of the yield curve has changed significantly as the spread between the
one-year and two-year, nonexistent at the beginning of the year, was 52
basis points at the end of the second quarter of 1999. In addition, on a
historic basis, spreads on non-treasury prices were fairly wide during the
second quarter of 1999. The spread on mortgage-backed securities classified
as Accretion Directed and Planned Amortization Class II having average
lives of two-years were between 71 basis points at the beginning of the
second quarter of 1999 to 67 basis points at the end. Moreover, these types
of instruments offer the Company greater total returns over various
interest rate patterns for a two-year time horizon as compared to the
comparable U.S. Treasury security. With respect to risk characteristics,
the mortgage-backed securities acquired were less risky than the comparable
Treasury, with the exception of credit quality. However, all of the
Company's mortgage-backed securities are those of U.S. government-sponsored
agencies. Although not backed by the full faith and credit quality of the
U.S. government, it is general knowledge that the government would
ultimately cover any default of a sponsored agency. As aforementioned,
loan demand improved during the latter part of the second quarter of 1999,
as a result management expects a reduction in the investment portfolio's
relationship to the Company's earning asset mix.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at June
30, 1999, are 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
MBS and equity securities. MBS have been presented based upon estimated
cash flows, assuming no change in the current interest rate environment.
Equity securities with no stated contractual maturities are included in the
after ten year maturity distribution. Expected maturities may differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
JUNE 30, 1999 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..... $ 3,503 5.57% $ 3,045 5.06% $ 6,548 5.33%
U.S. Government agencies..... 650 2.83 650 2.83
State and municipals......... 1,790 6.26 4,944 6.95 $10,248 8.50% $19,692 8.16% 36,674 8.00
Mortgage-backed securities... 20,942 5.99 50,300 5.94 4,216 6.05 75,458 5.96
Equity securities............ 1,851 6.47 1,851 6.47
------- ------- ------- ------- --------
Total...................... $26,885 5.88% $58,289 5.98% $14,464 7.79% $21,543 8.02% $121,181 6.53%
======= ======= ======= ======= ========
Fair value:
U.S. Treasury securities..... $ 3,506 $ 3,025 $ 6,531
U.S. Government agencies..... 644 644
State and municipals......... 1,795 4,977 $10,517 $20,035 37,324
Mortgage-backed securities... 20,851 49,799 4,138 74,788
Equity securities............ 2,103 2,103
------- ------- ------- ------- --------
Total...................... $26,796 $57,801 $14,655 $22,138 $121,390
======= ======= ======= ======= ========
</TABLE>
LOAN PORTFOLIO:
Loans to finance one-to-four family residential properties account for well
over one half of the Company's total lending activities. Therefore, the
housing market and the economic conditions affecting it may significantly
impact its lending activities. Continued low unemployment and interest
rates, coupled with high consumer confidence and wealth kept the housing
market strong for most of the second quarter of 1999. Annual sales of new
and existing home sales were up 7.1 percent and 9.3 percent, respectively.
However, the recent 25 basis point increase in the fed funds rate and the
possible additional increases for the remainder of 1999 pushed mortgages
rates up towards the end of the second quarter. The thirty-year mortgage
rate was 7.55 percent at June 30, 1999, up 51 basis points from 7.04 at
March 31, 1999. This increase and possible further increases could cause
a slowdown in the housing market, which could spill over to financial
institutions through a lower volume of mortgage originations.
Commercial loan activity increased while consumer loan activity declined
for all banks for the second quarter of 1999. For all commercial banks,
commercial and industrial loans increased $4.6 billion from $952.5 billion
at March 31, 1999, to $957.1 billion at the end of the second quarter.
Conversely, consumer loans declined $5.0 billion from $500.3 billion to
$495.3 billion for the same periods, respectively. Both commercial and
consumer loan activity could be hampered in the second half of 1999 if
borrowing costs increase as expected.
The composition of the Company's loan portfolio at June 30, 1999, and
December 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
JUNE 30, DECEMBER 31,
1999 1998
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others.......... $ 34,157 13.41% $ 31,044 12.51%
Real estate:
Construction............................ 1,691 0.66 2,108 0.85
Mortgage................................ 190,133 74.64 186,004 74.96
Consumer, net............................. 28,743 11.29 28,984 11.68
-------- ------ -------- ------
Loans, net of unearned income........... 254,724 100.00% 248,140 100.00%
====== ======
Less: allowance for loan losses........... 4,069 4,050
-------- --------
Net loans............................. $250,655 $244,090
======== ========
</TABLE>
For the first six months of 1999, loans, net of unearned income grew $6.6
million, an annualized rate of 5.4 percent. Increased demand in the
commercial sector was the primary factor contributing to the growth.
Commercial loans and commercial mortgage loans grew $3.1 million and $3.7
million, respectively, from year-end 1998 to June 30, 1999. This growth can
be directly attributed to the expansion of the Company's commercial loan
department in the fourth quarter of 1998. The Residential mortgage,
construction and consumer loan portfolios all remained relatively constant
from December 31, 1998 to June 30, 1999. As a result, commercial loans,
including commercial mortgages, played a more dominant role in the
composition of the Company's loan portfolio. Together commercial loans
and commercial mortgages comprised 31.6 percent of loans, net of unearned
income at June 30, 1999, compared to 29.8 percent at December 31, 1998.
Residential mortgages accounted for 57.1 percent and 58.5 percent of loans,
net of unearned income at June 30, 1999 and December 31, 1998,
respectively. Loan volumes for the Company averaged $249.4 million for the
first half of 1999 compared to $245.8 million for the same period of 1998.
Intense competition for loans and the relatively low historical interest
rate environment resulted in a 23 basis point decline in the tax-equivalent
yield on loan portfolio from 8.39 percent for the first six months of 1999,
compared to 8.62 percent for the same six months of 1998. Based on the
recent 25 basis point increase in the prime rate, management expects the
tax-equivalent yield on the loan portfolio to improve during the second
half of this year. However, any improvement in the tax-equivalent yield
could be hampered if competitive pressures intensify. The Company
facilitates future loan demand with increases in core deposits and
repayments on loans and investment securities.
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and liquidity
strains. Approximately 32.2 percent of the lending portfolio is expected
to reprice within the next twelve months. Management will price loan
products in the near term in order to reduce the average term of fixed-rate
loans and increase its holdings of variable-rate loans in attempting to
reduce IRR in the loan portfolio.
The maturity and repricing information of the loan portfolio by major
category at June 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
JUNE 30, 1999 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $16,984 $10,158 $ 7,015 $ 34,157
Real estate:
Construction....................... 1,691 1,691
Mortgage........................... 23,779 53,831 112,523 190,133
Consumer, net........................ 9,630 14,942 4,171 28,743
------- ------- -------- --------
Total............................ $52,084 $78,931 $123,709 $254,724
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $29,355 $68,501 $104,256 $202,112
Floating or adjustable interest rates 52,612 52,612
------- ------- -------- --------
Total............................ $81,967 $68,501 $104,256 $254,724
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at June 30, 1999
and 1998, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
United States......................................................... 4.3% 4.5%
Pennsylvania.......................................................... 4.3 4.6
Lackawanna county..................................................... 5.2 5.6
Susquehanna county.................................................... 5.0 5.0
Wayne county.......................................................... 4.9 5.2
Wyoming county........................................................ 5.1% 6.3%
</TABLE>
The trend of high job growth and low unemployment continued throughout the
first half of 1999. The nation posted a strong average annual job growth
of 202 thousand for the twelve months ended June 30, 1999. In addition, at
June 30, 1999, the unemployment rate for both the nation and the
Commonwealth of Pennsylvania was 4.3 percent, compared to 4.5 percent and
4.6 percent, respectively, one year earlier. Similarly, the unemployment
rate for the four counties in the Company's market either improved or
remained constant in comparison to last year.
Nonperforming assets were $5,635 at June 30, 1999, compared to $4,275 at
December 31, 1998. The ratio of nonperforming assets as a percentage of
loans, net of unearned income deteriorated from 1.72 percent at December
31, 1998 to 2.21 percent at June 30, 1999, however, this ratio improved
from 2.36 percent at March 31, 1999. Increased levels of accruing loans
past due 90 days or more, and to a lesser extent, nonaccrual loans caused
the declination.
Accruing loans past due 90 days or more were $2,728, an increase of $1,175
from the $1,553 reported at December 31, 1998. Commercial loans accounted
for the majority of the increase. Nonaccrual loans also increased from
$2,308 at December 31, 1998, to $2,514 at June 30, 1999. However, both
accruing loans past due 90 days or more and nonaccrual loans improved from
the $2,896 and $2,601, respectively, reported at March 31, 1999. As a
result of the favorable employment conditions in the Company's market area,
management expects the level of nonperforming loans to improve during the
remainder of 1999. However, should a downturn in the local economy occur,
the Company's nonperforming asset levels may weaken as borrowers' ability
to make timely loan payments could be hindered.
Information concerning nonperforming assets at June 30, 1999, and December
31, 1998, is summarized in the following table. The table includes loans or
other extensions of credit classified for regulatory purposes and all
material loans or other extensions of credit that cause management to have
serious doubts as to the borrowers' ability to comply with present loan
repayment terms.
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others............................... $ 124 $ 78
Real estate:
Construction.................................................
Mortgage..................................................... 2,319 2,223
Consumer, net.................................................. 71 7
------ ------
Total nonaccrual loans..................................... 2,514 2,308
------ ------
Restructured loans............................................. 157 174
------ ------
Total impaired loans....................................... 2,671 2,482
------ ------
Loans past due 90 days or more:
Commercial, financial and others............................... 890 131
Real estate:
Construction.................................................
Mortgage..................................................... 1,350 1,035
Consumer, net.................................................. 488 387
------ ------
Total loans past due 90 days or more....................... 2,728 1,553
------ ------
Total nonperforming loans.................................. 5,399 4,035
------ ------
Foreclosed assets.............................................. 236 240
------ ------
Total nonperforming assets................................. $5,635 $4,275
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 1.05% 1.00%
Nonperforming loans as a percentage of loans, net.............. 2.12 1.63
Nonperforming assets as a percentage of loans, net............. 2.21% 1.72%
</TABLE>
Information relating to the Company's recorded investment in impaired loans
at June 30, 1999, and December 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance....................................... $2,514 $2,308
With no related allowance...................................... 157 174
------ ------
Total........................................................ $2,671 $2,482
====== ======
</TABLE>
Impaired loans include a $157 restructured loan to one commercial customer.
This loan continued to perform in accordance with its modified terms during
the first half of 1999.
The analysis of changes affecting the allowance for loan losses related to
impaired loans at June 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999
- ---------------------------------------------------------------------------------------
<S> <C>
Balance at January 1............................................................. $642
Provision for loan losses........................................................ 28
Loans charged-off................................................................ 26
Loans recovered.................................................................. 7
----
Balance at period-end............................................................ $651
====
</TABLE>
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loan not been modified, the
aggregate amount of interest income recognized and the amount recognized
using the cash-basis method and the average recorded investment in impaired
loans for the three-month and six-month periods ended June 30, 1999 and
1998, are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross interest due under terms................. $ 64 $ 54 $ 122 $ 88
Interest income recognized..................... 8 44 16 64
------ ------ ------ ------
Interest income not recognized................. $ 56 $ 10 $ 106 $ 24
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 8 $ 44 $ 16 $ 64
Average recorded investment in impaired loans. $2,756 $2,382 $2,651 $2,365
</TABLE>
The Company received cash on impaired loans applied as a reduction of
principal totaling $202 for the six months ended June 30, 1999, and $210
for the same period of 1998. For the quarter ended June 30, 1999, cash
receipts on impaired loans amounted to $121 as compared to $167 for the
quarter ended June 30, 1998. No commitments to extend additional funds to
these parties existed at June 30, 1999. The Company's ratios of impaired
loans and nonperforming loans to loans, net of unearned income, equaled
1.05 percent and 2.12 percent, respectively, at June 30, 1999. In
comparison, these ratios for the peer group at June 30, 1999, were 0.58
percent for impaired loans and 1.03 percent for nonperforming loans.
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 GAAP, the allowance for loan losses related to
impaired loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral-dependent loans. Management uses historical loss experience as
a starting point for evaluating the adequacy of the Company's allowance
account. However, it also considers a number of relevant factors that
would likely cause estimated credit losses associated with the Company's
current portfolio to differ from historical loss experience. These factors
include, among others, changes in lending policies and procedures, economic
conditions, nature and volume of the portfolio, loan review system, volumes
of past due and classified loans, concentrations, borrowers' financial
status and collateral value.
In addition to management's assessment, various regulatory agencies, as an
integral part of their routine annual examination process, review the
Company's allowance for loan losses. These agencies may require the
Company to recognize additions to the allowance, beyond normal monthly
provisions, based on their judgments concerning information available to
them at the time of their examination. No such charge was deemed necessary
upon the conclusion of the latest examination during the third quarter of
1998, as regulators considered the Company's allowance for loan losses
account adequate based on risk characteristics and size of the loan
portfolio. Upon reviewing the 1998 report, management was unaware of any
significant recommendation with respect to the loan portfolio that would
materially affect future liquidity or capital resources.
Management utilizes the federal banking regulatory agencies' Interagency
Policy Statement on the Allowance for Loan and Lease Losses in assessing
the adequacy of its allowance for loan losses account. The policy
statement provides guidance on the nature and purpose of the allowance,
related responsibilities of management and examiners, loan review systems
and international transfer risk matters. The analytical tool for assessing
the reasonableness of the allowance for loan losses account included in
this policy statement has been used on a consistent basis by the Company.
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 June 30, 1999, 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
JUNE 30, DECEMBER 31,
1999 1998
--------------- --------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others................... $1,473 13.41% $1,465 12.51%
Real estate:
Construction..................................... 0.66 0.85
Mortgage......................................... 1,306 74.64 1,308 74.96
Consumer, net...................................... 1,290 11.29 1,277 11.68
------ ------ ------ ------
Total.......................................... $4,069 100.00% $4,050 100.00%
====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and an illustration of
charge-offs and recoveries by major loan category for the six months ended
June 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30,
1999
- --------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $4,050
Loans charged-off:
Commercial, financial and others............................................... 27
Real estate:
Construction.................................................................
Mortgage..................................................................... 21
Consumer, net.................................................................. 61
------
Total...................................................................... 109
------
Loans recovered:
Commercial, financial and others............................................... 10
Real estate:
Construction.................................................................
Mortgage..................................................................... 24
Consumer, net.................................................................. 34
------
Total...................................................................... 68
------
Net loans charged-off.......................................................... 41
------
Provision charged to operating expense......................................... 60
------
Allowance for loan losses at end of period..................................... $4,069
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............ 0.03%
Allowance for loan losses as a percentage of period end loans................. 1.60%
</TABLE>
The allowance for loan losses account equaled $4,069 at June 30, 1999. In
comparison to March 31, 1999, the allowance account remained relatively
unchanged. An increase in net charge-offs of $32 was almost entirely
offset by regular monthly provisions to the account totaling $30 for the
second quarter of 1999. The allowance for loan losses accounted for 1.60
percent of loans, net of unearned income outstanding at June 30, 1999.
This ratio declined slightly from the 1.64 percent reported at the end of
the first quarter of 1999. The decline was a direct result of the
significant loan growth experienced by the Company during the second
quarter of 1999. For the peer group, the allowance for loan losses was
1.25 percent of loans, net of unearned income at June 30, 1999. The
allowance account covered 75.4 percent of nonperforming loans at June 30,
1999, and 71.8 percent at March 31, 1999.
The Company evaluates past due loans that have not been satisfied through
repossession, foreclosure or related actions, individually to determine if
all or part of the outstanding balance should be charged against the
allowance for loan losses account. Any subsequent recoveries are credited
to the allowance account. Net chargeoffs for the six months ended June 30,
1999, totaled $41 compared to net chargeoffs of $119 for the same period of
1998.
DEPOSITS:
The average amount of, and the rate paid on, the major classifications of
deposits for the six months ended June 30, 1999, and June 30, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
JUNE 30, JUNE 30,
1999 1998
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 16,905 2.86% $ 16,773 3.03%
NOW accounts................................ 23,937 2.44 20,825 2.18
Savings accounts............................ 63,498 2.33 64,237 2.61
Time deposits less than $100................ 182,130 5.42 174,689 5.64
Time deposits $100 or more.................. 22,136 5.86 23,477 5.91
-------- --------
Total interest-bearing.................... 308,606 4.44% 300,001 4.63%
Noninterest-bearing......................... 35,792 30,754
-------- --------
Total deposits............................ $344,398 $330,755
======== ========
</TABLE>
Total deposits amounted to $354.1 million at June 30, 1999, a $12.9 million
increase over the $341.2 million reported at March 31, 1999. This
increase, primarily due to a rise in money market and NOW accounts and time
deposits, more than overturned the $3.0 million decline experienced in the
first quarter of 1999. The increase in money market and NOW accounts,
resulted from an influx of deposits from local schools districts. Time
deposits less than $100 and time deposits $100 or more rose $3.5 million
and $1.9 million, respectively, as a result of a promotional certificate of
deposit offering related to the Corporate Center opening. Total deposits
averaged $344.4 million for the first half of 1999, a $13.6 million
increase compared to $330.8 million reported for the same period of 1998.
The Company's average cost of interest-bearing deposits for the first six
months of 1999 was 4.44 percent, a decline of 19 basis points in comparison
to the average cost of 4.63 percent paid during the first half of 1998.
This improvement was a result of the relatively low interest rate
environment and the Company's continuing effort to bring funds costs to a
more acceptable level through pricing strategies. In addition, the Company
also concentrated on building its noninterest-bearing deposits base to
reduce its cost of funds. As a result, the Company sustained significant
growth in this area. Average noninterest-bearing deposits rose $5.0
million or 16.2 percent to $35.8 million for the first half of 1999, from
$30.8 million for the same period of 1998. Average noninterest-bearing
deposits as a percentage of average total deposits equaled 10.4 percent for
the first six months of 1999, compared to 9.3 percent for the same six
months of 1998. The recent 25 basis point increase had little impact on the
Company's fund costs. However, the FOMC is contemplating raising interest
rates further, 25 or possibly 50 basis points, by the end of 1999. Should
this upswing in interest rates occur, the Company may have to raise the
rates it pays for deposits and thereby experience a negative effect on its
cost of funds for the second half of 1999.
Volatile deposits, time deposits in denominations of $100 or more,
decreased $4.6 million from $27.1 million at December 31, 1998, to $22.5
million at June 30, 1999. This decline is primarily attributed to the
reduction in these type of deposits from local school districts. However,
the Company's volatile deposits increased $1.9 million from the $20.6
million recorded at March 31, 1999. This increase from the end of the
first quarter is due to the aforementioned certificate of deposit promotion
offered by the Company during the second quarter of 1999. The average cost
of these deposits increased 5 basis points for the second quarter of 1999
to 5.88 percent from 5.83 percent for the first quarter of 1999.
Maturities of time deposits of $100 or more for June 30, 1999, and December
31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
JUNE 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within three months......................................... $ 2,242 $ 7,956
After three months but within six months.................... 7,989 4,939
After six months but within twelve months................... 5,944 8,802
After twelve months......................................... 6,349 5,391
------- -------
Total..................................................... $22,524 $27,088
======= =======
</TABLE>
MARKET RISK SENSITIVITY:
Market risk is the risk to a company's financial position resulting from
changes in market rates or prices, such as, interest rates, foreign
exchange rates or commodity 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
interest rate risk. The Company's exposure to interest rate risk 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 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 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
interest rates. Interest rate risk is inherent in the role of banks as
financial intermediaries, however a bank with a high exposure to interest
rate risk may experience lower earnings, impaired liquidity and capital
positions and, most likely, a greater risk of insolvency. Therefore, banks
must carefully evaluate interest rate risk to promote safety and soundness
in their activities.
The Company utilizes interest rate sensitivity management in an attempt to
limit and, to the extent possible, control the effects interest rate
fluctuations have on net interest income and the market value of financial
instruments. The responsibility of such management has been delegated to
the Asset Liability Management Committee ("ALCO"). Specifically, ALCO
utilizes a number of computerized modeling techniques to monitor and
attempt to control influences that market changes have on the Company's
rate sensitive assets and liabilities. One such technique utilizes a static
gap report, which attempts to measure the Company's interest rate exposure
by calculating the net amount of rate sensitive assets ("RSA") and rate
sensitive liabilities ("RSL") that reprice within specific time intervals.
A positive gap, indicated by an RSA/RSL ratio greater than 1.0, means that
earnings will be impacted favorably if interest rates rise and adversely if
interest rates fall during the period. A negative gap tends to indicate
that earnings will be affected inversely to interest rate changes.
The following table sets forth the Company's interest rate sensitivity gap
position at June 30, 1999, illustrating RSA and RSL at their related
carrying values. 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
JUNE 30, 1999 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $10,132 $ 16,664 $ 57,801 $ 36,793 $121,390
Loans held for sale, net............ 497 497
Loans, net of unearned income....... 60,383 21,584 68,501 104,256 254,724
------- -------- -------- -------- --------
Total............................. $71,012 $ 38,248 $126,302 $141,049 $376,611
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 18,570 $ 18,570
NOW accounts........................ 25,945 25,945
Savings accounts.................... $ 64,940 64,940
Time deposits less than $100........ $37,460 80,265 67,879 $ 879 186,483
Time deposits $100 or more.......... 2,242 13,933 6,345 4 22,524
Short-term borrowings............... 3,355 3,355
Long-term debt...................... 1 2 12 25 40
------- -------- -------- -------- --------
Total............................. $43,058 $138,715 $139,176 $ 908 $321,857
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $27,954 $(100,467) $(12,874) $140,141
Cumulative........................ $27,954 $ (72,513) $(85,387) $ 54,754 $ 54,754
RSA/RSL ratio:
Period............................ 1.65 0.28 0.91 155.34
Cumulative........................ 1.65 0.60 0.73 1.17 1.17
</TABLE>
At June 30, 1999, the Company's ratio of cumulative one-year rate sensitive
assets to rate sensitive liabilities weakened from 0.65 at March 31, 1999,
to 0.60 at June 30, 1999. According to the results of the static gap
model, the Company is liability rate-sensitive as $72.5 million of RSL
reprice faster than RSA over a one year period. This indicates that should
general market rates increase, the likelihood exists that net interest
income would be adversely affected. Conversely, a decline in market rates
would likely have a favorable effect on net interest income. However,
these forward-looking statements are qualified in the aforementioned
section entitled "Forward-Looking Discussion" in this Management's
Discussion and Analysis. The .05 change in the RSA/RSL ratio is primarily
attributable to an increase in the level of money market, NOW and retail
time deposit accounts repricing within one year as compared to March 31,
1999. In addition, the Company held $3.4 million of short-term funding
from the Federal Home Loan Bank of Pittsburgh at the end of the second
quarter of 1999. The cumulative one-year RSA/RSL ratio at June 30, 1999,
falls outside the Company's asset/liability policy guidelines of 0.70 and
1.30. During the second quarter of 1999, management began offering higher
yields on the Company's longer-term time deposit accounts. As a result,
management expects such ratio to be within policy guidelines prior to year-
end 1999.
Conversely, the Company experienced an increase in its three-month RSA/RSL
ratio from 1.45 at March 31, 1999, to 1.65 at June 30, 1999. The aggregate
volume of RSA exceeding RSL within a three-month interval increased from
$21.1 million at the end of the first quarter to $28.0 million at the end
of the second quarter. An increase in loans, net of unearned income and a
reduction in time deposits less than $100 were primarily responsible for
the change.
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 June 30, 1999, produced
results similar to those indicated by the one-year static gap position.
Given a parallel and instantaneous rise in interest rates of 100 basis
points, net interest income should decrease 1.3 percent. Conversely, a
similar decline in interest rates would result in a 1.3 percent increase in
net interest income. Management will attempt to retain the Company's
favorable interest rate risk position during the final half of 1999 through
continued vigilance in its product pricing.
In addition to the aforementioned techniques, the Company utilizes a
tabular presentation in complying with the Quantitative and Qualitative
disclosure requirements about market risk in accordance with Regulation S-K
of the Securities Exchange Act of 1934. Such information is only required
for interim financial statements if there has been a material change in the
Company's reported market risks since the end of the most recent fiscal
year. Management, after reviewing the results of the report, deemed no such
disclosure to be required at June 30, 1999.
Inflation impacts financial institutions differently than it does
commercial and industrial companies that have significant investments in
fixed assets and inventories. Most of the Company's assets are monetary in
nature and change correspondingly with variations in the inflation rate.
It is difficult to precisely measure the impact of inflation on the
Company, however management believes that its exposure to inflation can be
mitigated through asset/liability management.
LIQUIDITY:
Liquidity is defined as a company's ability to generate cash at a
reasonable cost in order to satisfy commitments to borrowers as well as to
meet the demands of depositors and debtholders. 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. The Company manages
liquidity daily, thus enabling management to effectively monitor
fluctuations in the Company's liquidity position and to adapt its position
according to market changes. 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 believes the Company's liquidity position is sufficient to meet
its present and future financial obligations and commitments, however, this
position has become less favorable in comparison to the end of the first
quarter of 1999. The net noncore funding dependence ratio and net short-
term noncore funding dependence ratio best illustrate the change in the
Company's liquidity position. The net noncore funding dependence ratio,
defined as the difference between noncore funds, time deposits $100 or more
and brokered time deposits less than $100, and short-term investments to
long-term assets, was negative 3.5 percent at March 31, 1999, compared to
negative 1.2 percent at June 30, 1999. The net short-term noncore funding
dependence ratio, defined as the difference between noncore funds maturing
within one year, including borrowed funds, less short-term investments to
long-term assets, equaled negative 5.2 percent at March 31, 1999, and
negative 3.1 percent at June 30, 1999. Although deteriorating slightly
during the second quarter of 1999, the Company's liquidity continued its
superior performance relative to the peer group. The net noncore funding
dependence and net short-term noncore funding dependence ratios were
positive 10.5 percent and positive 3.8 percent, respectively, at June 30,
1999. Management plans to maintain the current liquidity ratio levels
through assuring the Company has an adequate amount of short-term
investments and by competitively pricing time deposits having longer stated
maturities.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents, consisting of cash on hand, cash items in the process
of collection, noninterest-bearing deposits with other banks, balances with
the Federal Reserve Bank of Philadelphia ("FRB") and the Federal Home Loan
Bank of Pittsburgh ("FHLB-Pgh"), and federal funds sold, decreased $11.3
million in the first half of 1999. Net cash provided by operating
activities totaled $2.5 million, primarily due to the Company's net income
of $2,250 earned in the first six months of 1999.
Net cash used in investing activities equaled $22.8 million and was the
primary reason for the first quarter net cash outflow. Purchases of
available-for-sale securities of $35.8 million partially offset by
repayments from such securities of $21.9 million was the predominant cause
for the cash outflow. To a lesser extent, net increases in lending
activities of $6.7 million and purchases of premises and equipment of $2.3
million also contributed to the net cash outflow.
Net deposit increases of $9.8 million along with short-term borrowings of
$3.4 million partially offset by the repurchase of $3.7 million of the
Company's common stock were the primary reasons for the net cash inflow
from financing activities.
CAPITAL ADEQUACY:
Stockholders' equity totaled $36.5 million at June 30, 1999, a decline of
$3.2 million from December 31, 1998. The Company experienced net income of
$2,250 for the first six months of 1999, partially offset by cash dividends
of $466 and a $1,256 negative change in the unrealized gain on available-
for-sale securities. This negative change in the unrealized gain came in
response to the aforementioned increase in interest rates. However, the
primary factor influencing the change in stockholders' equity was the
repurchase and retirement of 126,143 shares of the Company's common stock
for $3,741 as part of a stock repurchase program implemented during the
second quarter of 1999.
On April 21, 1999, the Company's Board of Directors authorized management
to purchase up to 220,000 shares of the Company's common stock. The
repurchase of stock affords the Company an opportunity to enhance
shareholder value through appreciation in earnings per share and return on
equity. Noted disadvantages of repurchasing stock are a decrease in the
book value of common stock and an overall decline in capital. Management
believes that the initial decrease in book value will be temporary and will
reverse in the next three to five years due to the increase in earnings per
share. The reduction of capital in not considered to be significant since
the Company's capital level after the repurchase is still well over the
threshold to be considered well-capitalized by regulatory standards. At
June 30, 1999, 57.3 percent of the shares authorized under the repurchase
program have be reacquired.
The Company declared a $271 or $0.13 per share dividend for the second
quarter of 1999. Total dividends declared during the first half of 1999
were $559 or $0.26 per share, an 80.9 percent increase compared to the
first half of 1998. As a percentage of net income, dividends declared for
the six months ended June 30, 1999, equaled 24.8 percent. It is the
present intention of the Company's Board of Directors to continue to pay
cash dividends in the future. However, these decisions are affected by
operating results, financial and economic conditions, capital and growth
objectives, dividend restrictions imposed on the Company and other relevant
factors.
The Company's dividend reinvestment plan allows stockholders to
automatically reinvest their dividends in shares of the Company's common
stock. During the first half of 1999, 3,381 shares were issued under this
plan.
Management attempts to assure capital adequacy by monitoring the current
and projected positions of the Company to support future growth, while
providing stockholders with an attractive long-term appreciation of their
investments. According to bank regulation, at a minimum, banks must
maintain a Tier I capital to risk-adjusted assets ratio of 4.0 percent and
a total capital to risk-adjusted assets ratio of 8.0 percent.
Additionally, banks must maintain a Leverage ratio, defined as Tier I
capital to total average assets less intangibles, of 3.0 percent. The
minimum Leverage ratio of 3.0 percent only applies to institutions with a
composite rating of one under the Uniform Interagency Bank Rating System,
that are not anticipating or experiencing significant growth and have well-
diversified risk. An additional 100 to 200 basis points are required for
all but these most highly-rated institutions. The Company's minimum
Leverage ratio was 4.0 percent at June 30, 1999 and 1998. If an
institution is deemed to be undercapitalized under these standards, banking
law prescribes an increasing amount of regulatory intervention, including
the required institution of a capital restoration plan and restrictions on
the growth of assets, branches or lines of business. Further restrictions
are applied to significantly or critically undercapitalized institutions,
including restrictions on interest payable on accounts, dismissal of
management and appointment of a receiver. For well capitalized
institutions, banking law provides authority for regulatory intervention
where the institution is deemed to be engaging in unsafe and unsound
practices or receives a less than satisfactory examination report rating.
The Board of Governors of the Federal Reserve Board, ("Federal Reserve
Board")in conjunction with the other federal banking agencies recently
amended their respective risk-based capital standards for banks, bank
holding companies and thrifts with regard to the regulatory treatment of
unrealized holding gains on certain available-for-sale equity securities.
Currently under GAAP, unrealized gains are reported as a component of
equity capital, however, unrealized gains have been excluded from
regulatory capital under the capital standards of the federal banking
agencies. Under the amended rule, institutions that legally hold equity
securities are permitted, but not required, to include up to 45.0 percent
of the pretax net unrealized holding gains on certain available-for-sale
equity securities in Tier II capital. The Company has elected not to
include such unrealized gains in its Tier II capital.
The Company's capital ratios at June 30, 1999 and 1998, as well as the
required minimum ratios for capital adequacy purposes and to be well
capitalized under the prompt corrective action provisions as defined by the
Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") are summarized
as follows:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------------------------------------------------
JUNE 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIS FOR RATIOS:
Tier I capital to risk-adjusted assets... $ 33,729 $ 33,301 $ 8,777 $ 7,749 $13,166 $11,624
Total capital to risk-adjusted assets.... 36,488 35,741 17,555 15,499 21,943 19,374
Tier I capital to total average assets
less goodwill........................... 33,729 33,301 $15,453 $14,706 $19,316 $18,382
Risk-adjusted assets..................... 208,104 186,531
Risk-adjusted off-balance sheet items.... 11,328 7,204
Average assets for Leverage ratio........ $386,318 $367,649
RATIOS:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 15.4% 17.2% 4.0% 4.0% 6.0% 6.0%
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items................. 16.6 18.4 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.7% 9.1% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at June
30, 1999, and was considered well capitalized. Regulatory agencies define
institutions not under a written directive to maintain certain capital
levels as well capitalized if they exceed the following: (i) a Tier I risk-
based ratio of at least 6.0 percent; (ii) a total risk-based ratio of at
least 10.0 percent; and (iii) a Leverage ratio of at least 5.0 percent.
The Company continues to improve its capital level as illustrated by the
positive change in its Leverage ratio. At June 30, 1999, the Company's
Leverage ratio equaled 8.7 percent as compared to 9.6 percent at March 31,
1999 and 9.5 percent at December 31, 1998. The decline in the Leverage
ratio is a direct result of aforementioned repurchase and retirement of
common stock. Based on the closing price on June 30, 1999, had the
Company been successful in repurchasing the entire 220,000 shares by the
end of the second quarter of 1999, the exposure to the Leverage ratio
would have been an additional decline of 0.7 percent to 8.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
Net income for the three months ended June 30, 1999, was $1,110 or $0.51
per share. Net income for the first six months of 1999 totaled $2,250 or
$1.03 per share, or 4.65 percent increase over the $2,150 or $0.98 per
share reported for the same period last year. The primary factors
affecting the increased earnings were improvements in net interest income
and noninterest income coupled with a reduction in the provision for loan
losses. Partially offsetting these improvements was a higher level of
noninterest expense. The Company's return on average assets equaled 1.17
percent for the six months ended June 30, 1998 and 1998. For the first six
months of 1999, return on average equity equaled 11.32 percent compared to
11.65 percent for the same period last year. In comparison, the peer groups
return on average assets and return on average equity equaled 1.14 percent
and 12.04 percent, respectively.
The most significant factor that can have a material effect on the
financial performance of all industries is the Y2K. The Y2K issue arose
because many existing computer programs use the last two digits rather than
four to define the applicable year. These programs may interpret a date
ending in "00" as the year 1900 instead of the year 2000. Although the Y2K
problem affects all industries, its impact on the banking industry is
extensive. Banks depend on computers to perform virtually every function
from item processing to operating automated teller machines. If not
corrected, the consequences could be far-reaching. For banks in
particular, failure could result in system malfunction or miscalculation
causing a disruption of operations, including, among other things, a
temporary inability to process transactions or engage in normal business
activities.
The Company is very dependent upon information technology ("IT") systems to
perform its daily operations. Early in 1997, management initiated an
enterprise-wide program to address the Y2K issue and the effects it will
have on the Company. A formal Century Date Change Preparedness ("CDC")
Policy was devised and approved by the Board of Directors. This CDC Policy
called for a Y2K project plan to coordinate and oversee the various phases,
assessment, renovation, testing and implementation of the Company's Y2K
preparedness. The Chief Operating Officer of the Company was appointed
coordinator of the Y2K project plan and the Data Processing Steering
Committee serve as oversight for the project. The progress of the Y2K
project plan including: (i) an overview of the plan's progress; (ii) the
status of compliance for mission-critical hardware and software; (iii) the
results of hardware and software testing and implementation; (iv) the
evaluation of significant customers in addressing Y2K issues in their
business; and (v) the assessment of the need for implementation of any
contingency plan for those areas that will not be compliant, is reported to
the Board of Directors on a quarterly basis or more frequently as
significant events occur.
It has always been the Company's pro-active position to remain current in
its IT systems. In doing so, the Company's exposure to risk related to Y2K
compliance of its IT systems has been greatly reduced. The following
operations of the Company have been identified as mission-critical, vital
to the successful continuance of a core business activity: (i) system
hardware; (ii) account processing; (iii) items processing; (iv) image
statement rendering; (v) teller transaction; (vi) trust accounting; and
(vii) loan document preparation software. In addition, there are IT
systems and non-IT systems that are not considered mission-critical. The
following table provides a description of the Company's systems, how the
assessment, renovation and testing for each system is being addressed,
whether or not the system is compliant, target dates for completion and
contingency plans for non-compliant systems:
<TABLE>
<CAPTION>
Y2K ESTIMATED
COMPLIANT COMPLETION CONTINGENCY
DESCRIPTION OF SYSTEM ASSESSMENT RENOVATION TESTING (YES/NO) DATE PLAN
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MISSION-CRITICAL IT
SYSTEMS:
Hardware:
System 4300 processor Certification None Complete Yes
from responsible
vendor
Operating:
Unix operating system Non-compliant Upgrade to Complete Yes
Version 3.0.2
Account processing:
Software, Release 3.0 Certification None Complete Yes
from responsible
vendor
Item processing:
Software Version 3.22 Certification None Complete Yes
from responsible
vendor
Image statement rendering:
Software Version 1.2 Certification None Complete Yes
from responsible
vendor
Teller transaction:
Software No certification Perform Complete Yes
available internal
testing
Trust accounting:
Software Version 5.0 Certification from None Complete Yes
responsible vendor
Loan document preparation:
Software Certification from None Complete Yes
responsible vendor
- --------------------------------------------------------------------------------------------------------------
NONMISSION-CRITICAL IT
SYSTEMS:
Communications
Software/Data Certification None Complete Yes
requested and will
be reviewed for
compliance
Hardware No certification Perform Complete Yes
available internal
testing on all
hardware
- --------------------------------------------------------------------------------------------------------------
NONMISSION-CRITICAL
NON-IT SYSTEMS:
Imbedded technology Certification Non-compliant Complete Yes
requested and will systems will
be reviewed for be upgraded or
compliance converted to
new products
Other items-date stamps, Review items for Internal Complete Yes
forms, checks, date sensitivity testing will
calculators, etc. be performed
if needed
Items will be
replaced as
needed
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that through completion of its Y2K project plan it
will successfully mitigate any Y2K problems associated with its mission-
critical IT systems. All mission-critical IT systems are currently Y2K
compliant. Significant testing has been performed on all software and
hardware that is currently Y2K compliant to ensure compliance. The Company
is fully compliant relative to its IT systems and non-IT systems at June
30, 1999. Costs expended in 1998 relative to disposition of non-compliant
hardware and software were $78 and $9, respectively. There were no Y2K
remediation costs expended during the first six months of 1999. Any
further costs relative to the Company's Y2K efforts will be expensed as
incurred. Management does not expect these costs to have a material effect
on the operating results or financial position of the Company.
The effects of the Y2K on the Company depend not only on its efforts to
address those issues, but also on the way the issues are addressed by third
parties with whom the Company has a significant relationship. These third
parties include, but are not limited to, major loan and deposit customers,
businesses that provide products and services to the Company and
governmental agencies. Management is taking various steps to assess the
risks and mitigate the potential problems that may arise in the event a
significant third party is not Y2K compliant.
The Company recognizes that a commercial customer's profitability and
liquidity positions could be adversely affected if their systems fail to
properly handle the date change. This could lead to delinquencies on
loans, possible defaults and bankruptcy filings, in extreme cases. The
Company reviewed its commercial loan files and enumerated: (i) all
commercial customers with loan balances in excess of $125 whose business is
somewhat dependent on technology; and (ii) any commercial loan customer
whose business is totally dependent on technology. The Company contacted
these customers and informed them of the Y2K and the possible effects it
could have on their business and inquired about any efforts the customer is
taking to mitigate those effects. In addition, a questionnaire regarding
the Y2K is incorporated into the commercial loan application process and
requires all potential loan customers to attest to their compliance.
The Company also realizes that education is a key element in trying to
mitigate potential Y2K problems. During the second quarter of 1998, the
Company used several mediums to convey Y2K readiness to its current and
prospective individual and business customers. With the ever-growing
popularity of the Internet, the Company chose to discuss the Y2K in its
home page on the World Wide Web. The Company also conducted a series of
breakfast seminars for its customers. The purpose of these seminars was to
aid the customers in identifying their potential exposure to any problems
associated with the Y2K. Brochures discussing Y2K awareness were included
in customers' deposit statements in the fourth quarter of 1998. The
brochures were in a question and answer format and addressed the following
issues: (i) the effect of the Y2K date change on federal deposit insurance
coverage; (ii) steps financial institutions and regulatory agencies are
taking to minimize the effect of the Y2K date change; and (iii) steps
customers should take to prepare for the Y2K.
Regardless of the Company's efforts, there can be no assurance that
significant third parties will be successful in adequately addressing their
own Y2K issues. The Company is preparing contingency plans to address the
possibility that significant third parties will not be successful. This
involves: (i) identifying alternate vendors and sources for products and
services; (ii) determining means of internal corrective action; and (iii)
allocating a portion of the allowance for loan losses to specifically cover
any potential credit losses related to the Y2K. However, no assurance can
be made, that these plans will alleviate any risks to the Company. There
may also be certain significant third parties, such as utility and
telecommunication companies, where alternative arrangements or sources are
limited or unavailable. Y2K issues, if not adequately addressed by the
Company and third parties, could have a material effect on the Company's
business, consolidated results of operations and financial position.
The preceding Y2K discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements include, but are not limited to: (i) whether or not testing will
be accurate; (ii) the estimated costs associated with becoming Y2K
compliant; (iii) the date by which the Company expects to be fully
compliant; and (iv) the successfulness of any contingency plans. These
statements are made using current estimates and assumptions about future
events. There can be no assurance that these estimates will be achieved
and actual results could differ materially from those anticipated. The
factors that might lead to material differences include, among others: (i)
the ability to accurately identify all mission-critical systems; (ii)
accuracy of the testing performed; (iii) whether or not third party
certifications are accurate; (iv) whether or not material customers,
suppliers, governmental agencies and other significant third parties are
successful in their Y2K efforts; (v) the adequacy of contingency plans; and
(vi) the ability to implement contingency plans.
NET INTEREST INCOME:
During the second quarter of 1999, net interest margins for financial
institutions throughout the United States stabilized as compared to the
downturn experienced during the previous two years. For the nation's top 50
banks, average tax-equivalent net interest margins remained at the 3.97
percent level reported for the first quarter of the year. Conversely, the
local peer group continued to experience a deterioration in its net
interest margin declining 11 basis points from the first quarter of 1999.
Similar to the net interest margin trend experienced by the top banks, the
Company's also had a stabilization in its net interest margin remaining at
4.05 percent during the second quarter of 1999 as compared to the previous
quarter. For the six months ended June 30, 1999 and 1998, the Company's
tax-equivalent net interest margin was 4.05 percent and 4.10 percent,
respectively. The Company's tax-equivalent net interest spread was 3.42
percent for the six months ended June 30, 1998, and 3.35 percent for the
comparable period of 1999.
Maintenance of an adequate net interest margin is a primary concern for the
Company. Based on the strength of recent economic indicators, management
expects the FOMC to continue to raise interest rates in the near term by
invoking monetary policy. This action may have an adverse effect on the
Company's net interest income as its cost of funds increases with the
changes in general market rates while management is unable to increase loan
prices to offset these increases as a result of competitive pressures.
Management analyzes interest income and interest expense by segregating
rate and volume components of earning assets and interest-bearing
liabilities. 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 are summarized
in the following table. The net change attributable to the combined impact
of rate and volume has been allocated proportionately to the change due to
rate and the change due to volume.
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 VS. 1998 1999 VS. 1998
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............................. $ (28) $(123) $ 95 $(122) $(276) $ 154
Tax-exempt.......................... (6) (3) (3) (13) (9) (4)
Investments:
Taxable............................. 336 (22) 358 508 (25) 533
Tax-exempt.......................... (38) (3) (35) (58) (7) (51)
Federal funds sold.................... (152) (25) (127) (186) (39) (147)
----- ----- ----- ----- ----- -----
Total interest income............. 112 (176) 288 129 (356) 485
----- ----- ----- ----- ----- -----
Interest expense:
Money market accounts................. (9) (11) 2 (12) (13) 1
NOW accounts.......................... 35 15 20 65 29 36
Savings accounts...................... (42) (39) (3) (99) (90) (9)
Time deposits less than $100.......... 9 194 (185) 8 (85) 93
Time deposits $100 or more............ (31) (2) (29) (45) (6) (39)
Short-term borrowings................. 15 15 9 (1) 10
Long-term debt........................ 1 (1)
----- ----- ----- ----- ----- -----
Total interest expense............ (23) 157 (180) (74) (165) 91
----- ----- ----- ----- ----- -----
Net interest income............... $ 135 $(333) $ 468 $ 203 $(191) $ 394
===== ===== ===== ===== ===== =====
</TABLE>
The Company's net interest income on a tax-equivalent basis improved $203
from $7,153 for the first half of 1998 to $7,356 for the same period of
1999. This change was attributed to a rise in interest income of $129
coupled with a decline in interest expense of $74. The favorable volume
variance of $394 offset partially by the unfavorable rate variance of $191
caused the net interest income improvement. The volume variance resulted
from a $14.5 million rise in average earning assets exceeding the $9.0
million increase in average interest-bearing liabilities. The volume change
in earning assets accounted for $485 of interest income which was partially
offset by additional interest expense of $91 from the growth in interest-
bearing liabilities. Specifically, the growth in average taxable
investments of $18.3 million and average taxable loans of $3.7 million
resulted in additional interest income of $533 and $154, respectively.
These increases were primarily offset by a $6.1 million decrease in average
federal funds sold which caused a negative volume variance of $147. The
major contributor to the increased interest expense due to volume changes
was the $7.4 million increase in time deposits less than $100 from $174.7
million for the first six months of 1998 to $182.1 million for the
comparable period of 1999.
The $394 gain in interest income as a result of improvements in volumes was
offset by a $191 reduction due to rate changes. The tax-equivalent yield on
earning assets declining more than the cost of funds caused the unfavorable
variance. The weighted average tax-equivalent yield on earning assets
declined from 8.05 percent for the first half of 1998 to 7.80 percent for
the comparable period of 1999. This yield reduction accounted for a $356
decline in interest income. The yield on the taxable portion of the loan
portfolio was primarily responsible for the total variance due to changes
in earning asset yields. For the six months ended June 30, the yield on
taxable loans declining from 8.62 percent in 1998 to 8.39 percent in 1999.
This 23 basis point reduction resulted in a drop in interest income of
$276. Although not able to recover the entire $356 reduction in interest
income due to rates changes on earning assets, a 7 basis point improvement
in the Company's cost of funds aided the Company in offsetting $165 of the
rate variance. Interest rate reductions of 28 basis points in savings
accounts and 22 basis points in time deposits less than $100 were the major
influences for the improvement. Specifically, the cost of savings accounts
declined from 2.61 percent in 1998 to 2.33 percent in 1999 caused a $90
savings in interest expense. In addition, the interest rate change on time
deposits less than $100 from 5.64 percent in 1998 to 5.42 percent in 1999
caused a $85 reduction in interest expense.
For the quarter ended June 30, 1999, net interest income on a tax-
equivalent basis increased $135 compared to the same period last year.
Similar to the year-to-date variance, the Company experienced a favorable
volume variance offset partially by an unfavorable rate variance.
Circumstances similar to those given for the six month period provide the
reasons for the favorable change. The growth of earning assets occurring at
a quicker pace than interest-bearing liabilities resulted in a positive
volume variance amounting to $468. Offsetting this favorable volume
variance was a negative rate variance accounting for a $333 reduction in
net interest income as a result of a 3 basis point decline in the net
interest spread for the comparable second quarters of 1999 and 1998.
As was evidenced during the first half of 1999, management expects the
majority of the net interest income growth to result from the growth in
earning assets exceeding that of interest-bearing liabilities as the net
interest spread continues to be pressured based on the pending interest
rate increases and strength in the competitive environment.
The average balances of assets and liabilities, corresponding interest
income and expense and resulting average yields or rates paid for the
quarters ended June 30, 1999 and 1998, are summarized as follows. Earning
assets averages include nonaccrual loans. Investment averages include
available-for-sale securities at amortized cost. Income on investment
securities and loans are adjusted to a tax-equivalent basis using a
statutory tax rate of 34.0 percent.
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
JUNE 30, 1999 JUNE 30, 1998
--------------------------- ---------------------------
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..................................... $242,201 $10,082 8.39% $238,503 $10,204 8.63%
Tax-exempt.................................. 7,183 288 8.09 7,291 301 8.33
Investments:
Taxable..................................... 75,253 2,202 5.90 57,006 1,694 5.99
Tax-exempt.................................. 37,452 1,504 8.10 38,717 1,562 8.14
Federal funds sold............................ 4,228 98 4.67 10,313 284 5.55
-------- ------- -------- -------
Total earning assets...................... 366,317 14,174 7.80% 351,830 14,045 8.05%
Less: allowance for loan losses.............. 4,076 3,904
Other assets.................................. 26,537 22,861
-------- --------
Total assets.............................. $388,778 $370,787
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 16,905 240 2.86% $ 16,773 252 3.03%
NOW accounts.................................. 23,937 290 2.44 20,825 225 2.18
Savings accounts.............................. 63,498 733 2.33 64,237 832 2.61
Time deposits less than $100.................. 182,130 4,894 5.42 174,689 4,886 5.64
Time deposits $100 or more.................... 22,136 643 5.86 23,477 688 5.91
Short-term borrowings......................... 651 16 4.96 212 7 6.66
Long-term debt................................ 40 2 10.08 43 2 9.38
-------- ------- -------- -------
Total interest-bearing liabilities........ 309,297 6,818 4.45% 300,256 6,892 4.63%
Noninterest-bearing deposits.................. 35,792 30,754
Other liabilities............................. 3,639 2,561
Stockholders' equity.......................... 40,050 37,216
-------- --------
Total liabilities and stockholders' equity $388,778 $370,787
======== ------- ======== -------
Net interest/income spread................ $ 7,356 3.35% $ 7,153 3.42%
======= =======
Net interest margin....................... 4.05% 4.10%
Tax equivalent adjustments:
Loans......................................... $ 98 $ 102
Investments................................... 511 531
------- -------
Total adjustments......................... $ 609 $ 633
======= =======
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 $1,657 for the first half of 1999 and
$2,624 for the first half of 1998 included in other assets. Tax-equivalent adjustments were calculated
using the prevailing statutory rate of 34.0 percent.
</TABLE>
PROVISION FOR LOAN LOSSES:
The Company makes provisions for loan losses based on evaluations of its
allowance for loan losses account. Factors such as previous loan
experience, overall loan portfolio characteristics, prevailing economic
conditions and other relevant factors are considered when determining the
provision. Based on its most recent evaluation, management believes that
the allowance is adequate to absorb any known and inherent losses in the
portfolio.
The Company's loan loss provision totaled $60 for the first six months of
1999, a $150 decrease from the $210 recorded for the same period last year.
For the second quarter of 1999, the Company recorded a loan loss provision
of $30, this was $75 less than the $105 reported for the second quarter of
1998. The ratio of allowance for loan losses as a percentage of loans, net
of unearned income, increased from 1.58 percent at June 30, 1998, to 1.60
at June 30, 1999, despite the decline in the provision. Management
believes that maintaining a standard monthly charge to operations in the
form of a provision is warranted. Should loan demand continue to intensify
or nonperforming asset levels deteriorate, management will consider
adjusting this provision during the remainder of 1999.
NONINTEREST INCOME:
For the six months ended June 30, 1999, the Company recorded noninterest
income of $786, an increase of $57 or 7.8 percent compared to $729 reported
for the same six months of 1998. The primary factor contributing to the
increase was a $36 gain on the sale of residential mortgages on the
secondary market. The Company began selling these types of loans on the
secondary market in the second half of 1998. Accounting for the remainder
of the increase were net gains of $9 on the sale of properties held in
other real estate, additional service charges on deposit accounts of $5 and
increased trust service revenue of $7.
The amount of noninterest income recorded for the quarters ended June 30,
1999 and 1998 remained relatively constant. The Company recorded
noninterest income of $374 for the three months ended June 30, 1999, as
compared to $376 for the same period last year.
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.
Noninterest expense for the six months ended June 30, 1999, totaled $4,594,
an increase of $258 or 6.0 percent over the $4,336 recorded for the same
period last year. The Company's operating efficiency remained constant as
indicated by its overhead ratio, noninterest income less noninterest
expense to average assets. This ratio equaled 2.0 percent for the first
half of both 1999 and 1998 and continues to outperform that of the peer
group which recorded an overhead ratio of 2.5 percent for the first six
months of 1999. The Company also measures its efficiency with the
operating efficiency ratio. This ratio is defined as noninterest expense,
excluding other real estate expense, as a percentage of net interest income
and noninterest income less nonrecurring gains and losses. The Company's
operating efficiency ratio for the first six months of 1999 was 61.0
percent compared to 59.3 percent for the same period of 1998. The
weakening in this ratio resulted from additional expenses incurred relative
to the opening of the Clarks Summit branch and corporate center during the
first half of 1999.
Salaries and employee benefit expenses comprise the majority of the
Company's noninterest expense. These expenses totaled $2,358 or 51.3
percent of noninterest expense for the six months ended June 30, 1999. In
comparison, these expenses were $2,203 or 50.8 percent of noninterest
expense for the same period of 1998. This increase of $155 was primarily
due to additional staffing needs related to opening the Clarks Summit
branch office along with merit increases associated with personnel
performance appraisals.
Net occupancy and equipment expenses remained relatively constant. For the
first six months of 1999 these expenses totaled $650 as compared to $657
for the same period last year. Construction of the Company's fourteenth
branch office, started in the first quarter of this year, is near
completion. This office which has been funded through normal operations is
located in Dickson City, Lackawanna County, Pennsylvania and is scheduled
to open for business in the third quarter. In addition, the Company is
converting its core bank processing system to CoreDirector, a windows-based
operating system. This project is also expected to be completed during the
third quarter of 1999.
Other expenses amounted to $1,586 for the first half of 1999, an increase
of $110 over the $1,476 reported for the same period of 1998. The primary
causes for this increase are a greater amount of state shares tax and
increased marketing and supply costs related to the operation of the Clarks
Summit facility.
Management anticipates increased salary and benefit expenses, occupancy and
equipment expenses and other expenses related to the opening of the Dickson
City branch during the second half of 1999. Management also expects
further increases in occupancy and equipment expenses during the remainder
of 1999 relative to the conversion of the operating system to a windows-
based system.
On April 8, 1999, the Federal Deposit Insurance Corporation ("FDIC")
announced that existing insurance premiums would be retained for the second
half of 1999. Risk-related assessment rates for both the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") were kept
in the 0 to 27 basis point range on an annual basis. It was noted by the
FDIC that: (i) over 95.0 percent of all BIF-member institutions pay no
premiums as they are in the lowest risk category. Of these same
institutions, only 0.1 percent fall into the 27 cents per 100 dollars
insurance premium category. The average annual assessment rate for all
BIF-member institutions is projected at 0.10 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 December 31, 1999;
(ii) approximately 92.4 percent of all SAIF-member institutions pay no
premiums. The average annual assessment rate is estimated to be 0.25 cents
per 100 dollars, which is expected to maintain SAIF reserves over the
mandated 1.25 percent ratio; (iii) a separate levy will be assessed on all
FDIC-insured institutions to bear the cost of the 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 equal one-fifth the rate for SAIF-
assessable deposits until January 1, 2000, or earlier if the two funds
merge.
For the quarter ended June 30, 1999, the Company experienced a $160 or 7.3
percent increase in noninterest expenses of as compared to the same period
of 1998. The reasons for the quarterly changes are similar to those
presented for the year-to-date changes.
Major components of noninterest expenses for the three months and six
months ended June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $1,023 $ 942 $2,019 $1,877
Employee benefits.............................. 171 167 339 326
------ ------ ------ ------
Salaries and employee benefits expense....... 1,194 1,109 2,358 2,203
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 135 132 301 270
Equipment expense.............................. 167 173 349 387
------ ------ ------ ------
Net occupancy and equipment expense.......... 302 305 650 657
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 118 78 157 129
Other taxes.................................... 77 70 157 133
Stationery and supplies........................ 96 94 203 181
Contractual services........................... 246 223 464 446
Insurance including FDIC assessment............ 30 18 61 37
Other.......................................... 303 309 544 550
------ ------ ------ ------
Other noninterest expenses................... 870 792 1,586 1,476
------ ------ ------ ------
Total noninterest expense.................. $2,366 $2,206 $4,594 $4,336
====== ====== ====== ======
</TABLE>
INCOME TAXES:
For the first half of 1999, the Company reported tax expense of $629, an
effective tax rate of 21.8 percent. For the same period of 1998, the
Company reported tax expense of $553, an effective tax rate of 20.5
percent. Additionally, the Company reported tax expense of $310, a rate of
21.8 percent, for the second quarter of 1999 compared to $277, a rate of
20.4 percent, for the second quarter of 1998. Higher earnings along with
a lower amount of tax-exempt income contributed to the increased effective
tax rate. Tax-exempt interest income as a percentage of total interest
income declined from 9.2 percent for the first half of 1998 to 8.7 percent
for the same period this year. Management expects the Company's effective
tax rate to remain stable for the remainder of 1999 by emphasizing income
on tax-exempt investments and loans as well as utilizing investment tax
credits available through its investment in a residential housing program
for elderly and low- to moderate-income families.
It is management's determination that a valuation reserve need not be
established for the deferred tax assets as it is more likely than not that
these assets could be principally realized through carryback to taxable
income in prior years and by future reversals of existing taxable temporary
differences or, to a lesser extent, through future taxable income. The
Company performs quarterly reviews on the tax criteria related to the
recognition of deferred tax assets.
COMM BANCORP, INC.
OTHER INFORMATION
-------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AT THE
COMPANY'S ANNUAL MEETING OF STOCKHOLDERS HELD ON JUNE 11, 1999,
FOR WHICH PROXIES WERE SOLICITED PURSUANT TO SECTION 14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, THE FOLLOWING MATTERS WERE VOTED
UPON BY THE STOCKHOLDERS.
1. To elect ten directors to serve for a one-year term and until
their successors are duly elected and qualified.
All nominees of the Board of Directors were elected. The number of
votes cast for or opposed to each of the nominees for election to the
Board of Directors were as follows:
Nominee For Against
------- ------------- ---------
David L. Baker 1,715,665.756 3,400.000
William F. Farber, Sr. 1,711,552.640 7,513.116
Judd Fitze 1,715,665.756 3,400.000
John P. Kameen 1,715,185.756 3,880.000
Erwin T. Kost 1,715,065.756 4,000.000
William B. Lopatofsky 1,715,665.756 3,400.000
J. Robert McDonnell 1,703,565.756 15,500.000
Joseph P. Moore, Jr. 1,714,585.756 4,480.000
Theodore W. Porosky 1,684,055.756 35,010.000
Eric Stephens 1,715,665.756 3,400.000
2. To ratify the selection of Kronick, Kalada Berdy & Co. of
Kingston, Pennsylvania, Certified Public Accountants, as the
independent auditors for the year ending December 31, 1999. The
votes cast on this matter were as follows:
For Against
------------- ----------
1,724,407.013 18,040.000
COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)
-------------------------------------------------
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE
(b) Reports on Form 8-K
5 - On April 22, 1999, the Company filed a report on Form 8-
K, disclosing the Board of Directors authorization of the
purchase of up to 220,000 shares of the Company's issued and
outstanding common stock, from time to time, in open market
purchases, through a licensed broker-dealer in accordance
with the terms, conditions and restrictions contained in
Rule 10b-18.
7(c) - Form of Press Release detailing the Company's plans
to purchase up to 220,000 shares of its issued and
outstanding common stock.
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
--------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: August 12, 1999 /s/ David L. Baker
---------------------- ------------------------------
David L. Baker
Chief Executive Officer
Date: August 12, 1999 /s/ Scott A. Seasock
---------------------- ------------------------------
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1999 /s/ Stephanie A. Ganz
---------------------- ------------------------------
Stephanie A. Ganz, VP of Finance
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,885
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,390
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 254,724
<ALLOWANCE> 4,069
<TOTAL-ASSETS> 397,368
<DEPOSITS> 354,081
<SHORT-TERM> 3,355
<LIABILITIES-OTHER> 3,371
<LONG-TERM> 40
0
0
<COMMON> 688
<OTHER-SE> 35,833
<TOTAL-LIABILITIES-AND-EQUITY> 397,368
<INTEREST-LOAN> 10,272
<INTEREST-INVEST> 3,195
<INTEREST-OTHER> 98
<INTEREST-TOTAL> 13,565
<INTEREST-DEPOSIT> 6,800
<INTEREST-EXPENSE> 6,818
<INTEREST-INCOME-NET> 6,747
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,594
<INCOME-PRETAX> 2,879
<INCOME-PRE-EXTRAORDINARY> 2,879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,250
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 7.80
<LOANS-NON> 2,514
<LOANS-PAST> 2,728
<LOANS-TROUBLED> 157
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,050
<CHARGE-OFFS> 109
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 4,069
<ALLOWANCE-DOMESTIC> 4,069
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
