UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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: 2,051,808 AT NOVEMBER 09,
1999.
Page 1 of 53
Exhibit Index on Page 51
COMM BANCORP, INC.
FORM 10-Q
SEPTEMBER 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 Three Months and Nine Months Ended September 30,
1999 and 1998.............................................. 3
Consolidated Balance Sheets - September 30, 1999, and
December 31,1998........................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1999............... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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...................................... 49
Item 2: Changes in Securities and Use of Proceeds.............. 49
Item 3: Defaults Upon Senior Securities........................ 49
Item 4: Submission of Matters to a Vote of Security Holders.... 49
Item 5: Other Information...................................... 49
Item 6: Exhibits and Reports on Form 8-K....................... 49
Signatures..................................................... 50
Exhibit Index.................................................. 51
* Not Applicable
<TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................ $5,340 $5,183 $15,422 $15,387
Tax-exempt......................................................... 112 100 302 299
Interest and dividends on investment securities available-for-sale:
Taxable............................................................ 1,149 880 3,291 2,500
Tax-exempt......................................................... 477 506 1,470 1,537
Dividends.......................................................... 32 39 92 113
Interest on federal funds sold....................................... 6 184 104 468
------ ------ ------- -------
Total interest income............................................ 7,116 6,892 20,681 20,304
------ ------ ------- -------
INTEREST EXPENSE:
Interest on deposits................................................. 3,504 3,540 10,304 10,423
Interest on short-term borrowings.................................... 44 60 7
Interest on long-term debt........................................... 1 2 3
------ ------ ------- -------
Total interest expense........................................... 3,548 3,541 10,366 10,433
------ ------ ------- -------
Net interest income.............................................. 3,568 3,351 10,315 9,871
Provision for loan losses............................................ 30 105 90 315
------ ------ ------- -------
Net interest income after provision for loan losses.............. 3,538 3,246 10,225 9,556
------ ------ ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions................................ 432 380 1,182 1,109
Net gains on sale of loans........................................... 17 4 53 4
Net gains on sale of investment securities........................... 235 235
------ ------ ------- -------
Total noninterest income......................................... 449 619 1,235 1,348
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................... 1,253 1,105 3,611 3,308
Net occupancy and equipment expense.................................. 363 303 1,013 960
Other expenses....................................................... 816 989 2,402 2,465
------ ------ ------- -------
Total noninterest expense........................................ 2,432 2,397 7,026 6,733
------ ------ ------- -------
Income before income taxes........................................... 1,555 1,468 4,434 4,171
Provision for income tax expense..................................... 355 318 984 871
------ ------ ------- -------
Net income....................................................... 1,200 1,150 3,450 3,300
------ ------ ------- -------
OTHER COMPREHENSIVE INCOME:
Unrealized gains (losses) on investment securities available-for-sale (191) 742 (2,094) 1,370
Reclassification adjustment for gains included in net income......... (235) (235)
Income tax expense (benefit) related to other comprehensive income... (65) 173 (712) 386
------ ------ ------- -------
Other comprehensive income (loss), net of income taxes........... (126) 334 (1,382) 749
------ ------ ------- -------
Comprehensive income............................................. $1,074 $1,484 $ 2,068 $ 4,049
====== ====== ======= =======
PER SHARE DATA:
Net income........................................................... $ 0.58 $ 0.52 $ 1.61 $ 1.50
Cash dividends declared.............................................. $ 0.15 $ 0.10 $ 0.41 $ 0.24
Average common shares outstanding.................................... 2,080,174 2,205,844 2,149,724 2,205,048
See notes to consolidated financial statements.
</TABLE>
<TABLE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 7,863 $ 11,464
Federal funds sold.................................................................. 1,850 7,700
Investment securities available-for-sale............................................ 112,534 109,626
Loans held for sale, net............................................................ 60 503
Loans, net of unearned income....................................................... 267,072 248,140
Less: allowance for loan losses................................................... 3,756 4,050
-------- --------
Net loans........................................................................... 263,316 244,090
Premises and equipment, net......................................................... 9,355 7,016
Accrued interest receivable......................................................... 2,249 2,297
Other assets........................................................................ 5,577 5,555
-------- --------
Total assets.................................................................... $402,804 $388,251
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 36,681 $ 36,024
Interest-bearing.................................................................. 325,343 308,229
-------- --------
Total deposits.................................................................. 362,024 344,253
Long-term debt...................................................................... 39 41
Accrued interest payable............................................................ 1,928 1,740
Other liabilities................................................................... 1,796 2,483
-------- --------
Total liabilities............................................................... 365,787 348,517
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STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
September 30, 1999, 2,076,465 shares; December 31, 1998, 2,207,022 shares.......... 686 729
Capital surplus..................................................................... 6,270 6,537
Retained earnings................................................................... 30,049 31,074
Net unrealized gain on available-for-sale securities................................ 12 1,394
-------- --------
Total stockholders' equity...................................................... 37,017 39,734
-------- --------
Total liabilities and stockholders' equity...................................... $402,804 $388,251
======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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........................................ 3,450 3,450
Dividends declared: $0.41 per share............... (870) (870)
Dividend reinvestment plan: 4,986 shares issued... 2 139 141
Repurchase and retirement: 135,543 shares......... (45) (406) (3,605) (4,056)
Net change in unrealized gain on securities....... (1,382) (1,382)
---- ------ ------- ------- -------
BALANCE, SEPTEMBER 30, 1999....................... $686 $6,270 $30,049 $ 12 $37,017
==== ====== ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 3,450 $ 3,300
Adjustments:
Provision for loan losses.............................................................. 90 315
Depreciation, amortization and accretion............................................... 1,325 911
Amortization of loan fees.............................................................. (124) (140)
Deferred income tax (benefit).......................................................... (48) (16)
Gains on sale of available-for-sale securities......................................... (235)
Losses (gains) on sales of other real estate........................................... (28) 131
Changes in:
Loans held for sale, net............................................................. 443 (229)
Interest receivable.................................................................. 48 300
Other assets......................................................................... 510 (332)
Interest payable..................................................................... 188 97
Other liabilities.................................................................... (712) 567
-------- --------
Net cash provided by operating activities.......................................... 5,142 4,669
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale securities..................................... 307
Proceeds from repayments of available-for-sale securities................................ 33,145 32,973
Purchases of available-for-sale investment securities.................................... (38,622) (32,276)
Proceeds from sale of other real estate.................................................. 192 144
Net increases in lending activities...................................................... (19,494) (457)
Purchases of premises and equipment...................................................... (2,823) (1,785)
-------- --------
Net cash used in investing activities.............................................. (27,602) (1,094)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ 22,362 2,617
Time deposits.......................................................................... (4,591) 4,979
Short-term borrowings.................................................................. (9,575)
Payments on long-term debt............................................................... (2) (2)
Proceeds from issuance of common shares.................................................. 141 120
Repurchase and retirement of common shares............................................... (4,056)
Cash dividends paid...................................................................... (845) (573)
-------- --------
Net cash provided by (used in) financing activities................................ 13,009 (2,434)
-------- --------
Net increase (decrease) in cash and cash equivalents............................... (9,451) 1,141
Cash and cash equivalents at beginning of year..................................... 19,164 17,265
-------- --------
Cash and cash equivalents at end of period......................................... $ 9,713 $ 18,406
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 10,178 $ 10,336
Income taxes........................................................................... 1,259 766
Noncash items:
Transfer of loans to other real estate................................................. 302 214
Change in net unrealized losses (gains) on available-for-sale securities............... 1,382 (750)
Cash dividends declared................................................................ $ 870 $ 530
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.
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-Q are forward-looking statements that
involve numerous risks and uncertainties. The following factors, among
others, may cause actual results to differ materially from projected
results:
Local, domestic and international economic and political conditions, and
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates,
tight money supply, real estate values, international conflicts and other
factors beyond the control of Comm Bancorp, Inc. and its subsidiary,
Community Bank and Trust Company (collectively, the "Company") may also
adversely affect its future results of operations. Management, consisting
of the Board of Directors and executive officers, expects that no particular
factor will affect the Company's results of operations. Downward trends in
areas such as real estate, construction and consumer spending, may adversely
impact the Company's ability to maintain or increase profitability.
Therefore, the Company cannot assure that it will continue its current rates
of income and growth.
The Company's earnings depend largely upon net interest income. The
relationship between the Company's cost of funds, deposits and borrowings,
and the yield on its interest-earning assets, loans and investments all
influence net interest income levels. This relationship, defined as the net
interest spread, fluctuates and is affected by regulatory, economic and
competitive factors that influence: (i) interest rates; (ii) the volume,
rate and mix of interest-earning assets and interest-bearing liabilities;
and (iii) the level of nonperforming assets. As part of its interest rate
risk ("IRR") management strategy, management monitors the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities to control its exposure to interest rate changes.
In originating loans, some credit losses are likely to occur. This risk of
loss varies with, among other things: (i) general economic conditions; (ii)
loan type; (iii) creditworthiness and debt servicing capacity of the
borrower over the term of the loan; and (iv) in the case of a
collateralized loan, the value and marketability of the collateral securing
the loan. Management maintains an allowance for loan losses based on, among
other things: (i) historical loan loss experience; (ii) known inherent
risks in the loan portfolio; (iii) adverse situations that may affect a
borrower's ability to repay; (iv) the estimated value of any underlying
collateral; and (v) an evaluation of current economic conditions. Management
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:
On August 24, 1999, the Federal Open Market Committee ("FOMC") raised the
federal funds rate to 5.25 percent from 5.00 percent. This marked the
second 25 basis point increase in 1999, the first increase came at the close
of the second quarter. In 1998, the FOMC was forced to lower the federal
funds rate 75 basis points from 5.50 percent to 4.75 percent in response to
foreign recessionary conditions. However, in 1999, foreign conditions have
rebounded. This rebound, coupled with sustained growth and potential for
inflationary conditions in the domestic economy, led to the FOMC's action
in 1999. In response to the second increase, banks again answered with
another 25 basis point increase in the prime rate to 8.25 percent, driving
up the cost of borrowing for consumers and businesses. The FOMC plans to
keep a close watch on inflationary pressures, such as the tight labor market
and the growth in demand, for the remainder of 1999. Should these pressures
intensify, the FOMC could further tighten monetary policy by raising rates
again before year-end.
Despite the rise in interest rates, the U.S. economy surged in the third
quarter of 1999, compared to a moderate second quarter. Fueled by strong
domestic demand, the nation's gross domestic product, the value of all
goods and services produced in the United States, grew at a robust annual
rate of 4.8 percent in the third quarter compared to a sluggish 1.9 percent
in the second quarter. Over the past four years, the U.S. economy has
posted considerable growth at 4.4 percent. Consumer spending, grew at an
annual rate of 4.3 percent, while business spending increased significantly
at a 22.0 percent annual rate during the third quarter of 1999. Sizeable
outlays for high technology items such as computers and software chiefly
influenced this spending rate. In addition, the price for these items
declined sharply at 3.0 percent for the third quarter, causing a ripple
effect of lowering the overall inflation rate. This is evidenced by the
rise in the chain weight deflator of only 1.0 percent in the third quarter
of 1999, compared to 1.3 percent in the second quarter. The labor market
remained tight but stable during the third quarter of 1999. Unemployment
dropped 0.1 percent to 4.2 percent at the end of the third quarter compared
to 4.3 percent at the end of the second quarter. Moreover, the third
quarter of 1999 employment cost index showed only a moderate increase of
0.8 percent compared to the 1.1 percent jump experienced in the second
quarter.
Positive earning trends continued for the banking industry during the third
quarter of 1999. Although net interest margins declined during the period,
the slope was not as severe as has been recently seen. Despite the two
recent 25 basis point actions taken by the FOMC, financial institutions
were unable to make a parallel shift in their loan pricing due to intense
competitive pressure, while having to fund asset growth with higher costing
funds. As a result of the slowdown in the deterioration of the net
interest margin and increased operating efficiencies, financial
institutions continued their favorable earning trends. However, should the
FOMC continue its tightening position towards monetary policy, net interest
margins may again deteriorate faster in the near term.
Contrary to the industry, the Company experienced improvement in its tax-
equivalent net interest margin to 4.05 percent for the third quarter of
1999, from 4.01 percent for the third quarter of 1998. This higher margin
factored into the overall improvement in the Company's third quarter
earnings. Net income for the three months ended September 30, 1999, was
$1,200 or $0.58 per share as compared to $1,150 or $0.52 per share for the
same three months of last year. The Company's return on average assets
equaled 1.18 percent for the three months ended September 30, 1999, and
1.19 percent for the same period last year. Return on average equity for
the three months ended September 30, 1999 and 1998, equaled 12.97 percent
and 11.72 percent, respectively. The Company had another comprehensive loss
of $126 for the three months ended September 30, 1999, compared to other
comprehensive income of $334 for the same period of 1998. A decline in the
market value of investment securities caused by the August 24, 1999, rate
increase resulted in the other comprehensive loss for the third quarter of
1999.
REVIEW OF FINANCIAL POSITION:
Total assets equaled $402.8 million at September 30, 1999, an increase of
$14.5 million over the $388.3 million recorded at December 31, 1998.
Greater loan demand primarily contributed to the increase in total assets.
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 $9.7 million and $5.0 million, respectively, from
December 31, 1998, to September 30, 1999. Overall, loans, net of unearned
income, increased $19.0 million to $267.1 million at September 30, 1999,
from $248.1 million at December 31, 1998. Deposits totaled $362.0 million
at September 30, 1999, a $17.7 million increase over the $344.3 million
reported at December 31, 1998. Stockholders' equity declined $2.7 million
from December 31, 1998, to September 30, 1999. During the second quarter
of 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. Since its inception, the Company repurchased and retired
135,543 shares of its common stock for $4.1 million, which was the primary
factor contributing to the decline in stockholder's equity. Consequently,
the Company experienced a decline in its leverage ratio from 9.5 percent at
year-end 1998 to 8.8 percent at September 30, 1999. Net income of $3,450
offset in part by a net unrealized loss on investment securities of $1,382
and net cash dividends distributed to stockholders of $729 also affected
stockholders' equity.
For the third quarter of 1999, total assets grew $5.4 or at an annualized
rate of 5.4 percent. Total assets averaged $402.2 for the third quarter of
1999, an increase of $7.8 million compared to the $394.4 million averaged
for the second quarter. The Company experienced significant loan demand in
the third quarter of 1999. Loans, net of unearned income grew $12.3
million or at annualized rate of 19.2 percent from the end of the second
quarter. Average loans, net of unearned income were $262.1 million for the
quarter ended September 30, 1999, an increase of $11.8 million from the
$250.3 averaged for the prior quarter. The Company was successful in
funding the majority of its third quarter loan demand through deposit
growth. Total deposits grew $7.9 million, an annualized rate of 8.9
percent from June 30, 1999. Deposits averaged $358.2 million for the third
quarter of 1999, an increase of $8.8 million compared to the $349.4 million
averaged for the second quarter. Repayments on investment securities funded
the Company's excess loan demand. Investment securities declined $8.9
million from the end of the second quarter. Average investment securities
remained relatively unchanged for the second and third quarters of 1999 at
$116.1 million and $116.9 million, respectively. In addition, $3.4 million
in short-term borrowings were repaid during the third quarter. At
September 30, 1999, the Company had a federal funds sold balance of $1.9
million. Stockholders' equity improved slightly from the end of the second
quarter. Net income of $1,200 was almost entirely offset by net cash
dividends declared of $263 and additional common stock repurchases of $315.
The Company's Leverage ratio also improved to 8.8 percent at September 30,
1999, from 8.7 percent at June 30, 1999.
In addition to these financial accomplishments, the Company opened its
fourteenth community banking office located in Dickson City, Lackawanna
County, Pennsylvania, in the third quarter of 1999.
Community Leasing Corporation, formed in the second quarter of 1999 as a
wholly owned subsidiary of Community Bank & Trust Company, became fully
operational in the third quarter. Community Leasing Corporation offers
direct lease financing of commercial equipment to area businesses. Lease
originations amounted to $313 for the three months ended September 30,
1999.
INVESTMENT PORTFOLIO:
Demand for the Company's loan products intensified during the third
quarter of 1999. Accordingly, total investments declined $8.9 million from
June 30, 1999, as management redeployed cash flows from investment
repayments into the lending function. Investment activities for the third
quarter of 1999 included repayments of $11.3 million and purchases of $2.8
million. Management expects a continuation of loan demand during the final
quarter of 1999, which will lead to investments becoming less significant
in respect to the overall composition of the balance sheet. Proceeds from
investment portfolio repayments should equal $5.3 million if interest
rates remain stable during the final quarter of 1999. Based on an
instantaneous and parallel shift in the yield curve of plus and minus 100
basis points, repayments are not expected to change significantly at $5.1
million and $5.7 million, respectively. Accordingly, management expects
near term loan demand to be satisfied by investment cash flows
supplemented through normal deposit gathering.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio at September 30, 1999, and
December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities........................ $ 3,017 2.68% $ 11,060 10.09%
U.S. Government agencies........................ 1,649 1.47 637 0.58
State and municipals............................ 36,158 32.13 40,007 36.49
Mortgage-backed securities...................... 69,617 61.86 55,834 50.93
Equity securities............................... 2,093 1.86 2,088 1.91
-------- ------ -------- ------
Total......................................... $112,534 100.00% $109,626 100.00%
======== ====== ======== ======
</TABLE>
As a percentage of earning assets, investment securities constituted 29.5
percent at September 30, 1999, 32.2 percent at June 30, 1999, and 30.0
percent at December 31, 1998. The portfolio is comprised primarily of
short-term U.S. government agency mortgage-backed securities ("MBS") and
intermediate-term obligations of state and municipalities. At September 30,
1999, nearly two-thirds of all securities in the investment portfolio were
mortgage-backed securities. These securities provide liquidity for funding
future loan demand. State and municipal securities exempt from federal
income tax are the other major component accounting for 32.1 percent of
total investments at September 30, 1999. Subsequent to the end of the third
quarter of 1999, management decided to extend the average life of its
municipal portfolio as a result of the availability of higher yields on
these types of instruments in comparison to recent historical offerings.
Currently, the tax-equivalent yield on a 15-year municipal obligation is
approximately 7.85 percent. This level was last achieved during the early
part of the second quarter of 1997. Accordingly, management began selling
municipal obligations with shorter maturities and call features replacing
them with the same quality municipal securities having longer maturities
and call dates. All of the replacement securities were "AAA" rated insured
general obligations which are backed by the full faith, credit, and taxing
power of the governmental unit issuing the bond. Gains generated as a
result of such action will be used to offset a special allocation to the
loan loss reserve in the form of a provision when the amount of the loss
can be reasonably estimated. Further discussion of this allocation is
including in the section entitled "Asset Quality" in this Management's
Discussion and Analysis.
The Company's experienced a decline in the tax-equivalent yield in its
investment portfolio similar to that of the second quarter of 1999. The
tax-equivalent yield was 6.7 percent, 6.6 percent and 6.5 percent in first,
second and third quarters of 1999, respectively. Yield analysis does not
offer a complete picture of the performance of an investment portfolio
because it ignores changes in market value and reinvestment income from
repayments. Accordingly, management utilizes a total return approach to
measuring its investment portfolio's performance. Total return for bank
investment portfolios is the sum of all interest income, reinvestment
income on the proceeds from repayments and capital gains and losses,
whether realized or unrealized. The Company's investment portfolio ranked
in the upper 97th percentile of all banks throughout the United States over
the past twelve months according to latest results provided by a national
investment performance ranking company. For the twelve months ended
September 30, 1999, the Company's total return was 4.2 percent.
During the third quarter of 1999, the parts of the yield curve most closely
related to the average lives of the Company's investments did not
experience the significant change evidenced during the second quarter. The
two- and ten-year portions of the U.S. Treasury yield curve increased 54
basis points and 56 basis points, respectively, from March 31, 1999 to June
30, 1999. Comparatively, the respective parts of the yield curve increased
8 basis points and 9 basis points from the end of the second quarter to the
end of the third quarter of 1999. In response the Company did not
experience a similar devaluation of the investment portfolio in the third
quarter of 1999. The unrealized holding gain of the investment portfolio
declined from $1,686 at March 31, 1999, to $209 at June 30, 1999, a $1,477
reduction. The investment portfolio's positive carry to market decreased
$192 in the third quarter of 1999 to $17 at September 30, 1999.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at
September 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
-----------------------------------------------------------------------------
SEPTEMBER 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..... $ 3,039 5.07% $ 3,039 5.07%
U.S. Government agencies..... $ 650 4.00% 1,012 6.20 1,662 5.34
State and municipals......... 1,570 6.39 4,519 6.96 $11,292 8.49% $18,185 8.16% 35,566 8.03
Mortgage-backed securities... 20,483 5.99 46,337 5.94 3,579 6.05 70,399 5.96
Equity securities............ 1,851 6.64 1,851 6.64
------- ------- ------- ------- --------
Total...................... $22,703 5.96% $54,907 5.98% $14,871 7.90% $20,036 8.02% $112,517 6.59%
======= ======= ======= ======= ========
Fair value:
U.S. Treasury securities..... $ 3,017 $ 3,017
U.S. Government agencies..... $ 646 1,003 1,649
State and municipals......... 1,573 4,542 $11,557 $18,486 36,158
Mortgage-backed securities... 20,364 45,760 3,493 69,617
Equity securities............ 2,093 2,093
------- ------- ------- ------- --------
Total...................... $22,583 $54,322 $15,050 $20,579 $112,534
======= ======= ======= ======= ========
</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. Accordingly, the
housing market and the economic conditions affecting it may significantly
impact its lending activities. The recent boost in interest rates slowed
the robust housing market in the third quarter. However, continued low
unemployment, strong job and income growth and high consumer confidence
kept the overall trend in the housing market high. The 30-year mortgage
rate was up 27 basis points at the end of the third quarter to 7.82 percent
from 7.55 percent at June 30, 1999. Even though new and existing home sales
for September of 1999 lagged those posted for June, the third quarter of
1999 average new home sales were up 1.7 percent, while existing home sales
were down only 0.6 percent. Furthermore, on an annual basis new and
existing home sales averaged 9.0 percent and 7.9 percent higher at
September 30, 1999, compared to the same period last year. Although the
growth trend in the housing market continued, another 25 basis point
increase in rates could be enough to cause a downturn.
Despite the increase in the prime rate, commercial loan activity increased
for the third quarter of 1999. For all commercial banks, commercial and
industrial loans increased $18.1 billion from $962.3 billion at June 30,
1999, to $980.4 billion at September 30, 1999. Conversely, commercial
banks experienced a decline in the demand for consumer loans. Consumer
loans for all banks totaled $481.2 at the end of the third quarter, down
$10.1 million from $491.3 million at the end of the previous quarter. Both
commercial and consumer loan demand could be adversely affected if
borrowing costs continue to rise.
The composition of the Company's loan portfolio at September 30, 1999, and
December 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
1999 1998
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others.......... $ 40,706 15.24% $ 31,044 12.51%
Real estate:
Construction............................ 2,019 0.76 2,108 0.85
Mortgage................................ 194,117 72.68 186,004 74.96
Consumer, net............................. 30,230 11.32 28,984 11.68
-------- --------
Loans, net of unearned income........... 267,072 100.00% 248,140 100.00%
====== ======
Less: allowance for loan losses........... 3,756 4,050
-------- --------
Net loans............................. $263,316 $244,090
======== ========
</TABLE>
The Company experienced strong demand for all of its loan products during
the third quarter of 1999. Specifically, loans grew $12.4 million or 19.2
percent annualized for the quarter ended September 30, 1999. Overall,
loans, net of unearned income, totaled $267.1 million at September 30,
1999, an increase of $19.0 million from year-end 1998. Although all major
loan categories posted increases, greater demand in the commercial sector
was the primary factor contributing to the growth. Commercial loans grew
$6.5 million from the end of the second quarter of 1999, for total growth
of $9.7 million from December 31, 1998. In addition, commercial mortgage
loans totaled $47.7 million at September 30, 1999, an increase of $1.3
million and $5.0 million, respectively, from June 30, 1999 and year-end
1998. The growth in these two areas can be directly attributed to the
expansion of the Company's commercial loan department in the fourth quarter
of 1998. Residential mortgages and consumer loans also grew, although not
to the extent of commercial loans. Residential mortgages totaled $146.4
million at September 30, 1999, an increase of $2.7 million from June 30,
1999, which resulted in a $3.1 million from the end of 1998. Consumer loans
grew $1.5 million from the end of the second quarter of 1999, overturning
the $0.2 million decline experienced for the first six months of 1999. As
a result, of this increased demand in the commercial sector, 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 33.1 percent of loans, net of unearned
income at September 30, 1999, compared to 31.6 percent at June 30, 1999,
and 29.7 percent at December 31, 1998. Residential mortgages accounted for
55.6 percent, 57.1 percent and 58.6 percent of loans, net of unearned
income at September 30, 1999, June 30, 1999 and December 31, 1998,
respectively.
Loans, net of unearned income, averaged $253.7 million for the nine months
ended September 30, 1999, an increase of $6.3 million from the $247.4
million averaged for the same period of 1998. Intense competition for loans
and the relatively low historical interest rate environment resulted in a
19 basis point decline in the tax-equivalent yield on the loan portfolio
from 8.37 percent for the nine months ended September 30, 1999, compared to
8.56 percent for the same nine months of 1998. Despite the two recent 25
basis point increases in the prime rate, the average tax-equivalent yield
on the loan portfolio declined 4 basis points in the third quarter of 1999
to 8.34 percent, compared to 8.38 percent for the second quarter. If the
FOMC decides to further increase rates, management expects the tax-
equivalent yield on the loan portfolio to improve during the remainder of
this year. However, any improvement in the tax-equivalent yield could be
hampered if competitive pressures continue. The Company facilitates future
loan demand with increases in core deposits and repayments on loans and
investment securities.
The maturity and repricing information of the loan portfolio by major
category at September 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
SEPTEMBER 30, 1999 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $19,552 $10,692 $ 10,462 $ 40,706
Real estate:
Construction....................... 2,019 2,019
Mortgage........................... 22,254 55,432 116,431 194,117
Consumer, net........................ 10,111 15,689 4,430 30,230
------- ------- -------- --------
Total............................ $53,936 $81,813 $131,323 $267,072
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $30,657 $71,228 $108,245 $210,130
Floating or adjustable interest rates 56,942 56,942
------- ------- -------- --------
Total............................ $87,599 $71,228 $108,245 $267,072
======= ======= ======== ========
</TABLE>
Management continually examines the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit interest rate risk
and liquidity strains. Approximately 32.8 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 interest rate risk in the loan portfolio.
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at September 30,
1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
United States......................................................... 4.2% 4.4%
Pennsylvania.......................................................... 4.5 4.6
Lackawanna county..................................................... 4.7 5.0
Susquehanna county.................................................... 4.6 4.4
Wayne county.......................................................... 5.0 5.1
Wyoming county........................................................ 4.6% 6.1%
</TABLE>
The national, state and local economic conditions were constant during the
third quarter of 1999. The unemployment rate at September 30, 1999, was
slightly lower for both the nation and the Commonwealth of Pennsylvania
compared to one year earlier. Likewise, all but one of the four counties
in the Company's market area showed a slight improvement in their
unemployment rates in comparison to last year.
Information concerning nonperforming assets at September 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
SEPTEMBER 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others............................... $ 168 $ 78
Real estate:
Construction.................................................
Mortgage..................................................... 2,746 2,223
Consumer, net.................................................. 34 7
------ ------
Total nonaccrual loans..................................... 2,948 2,308
------ ------
Restructured loans............................................. 153 174
------ ------
Total impaired loans....................................... 3,101 2,482
------ ------
Loans past due 90 days or more:
Commercial, financial and others............................... 730 131
Real estate:
Construction.................................................
Mortgage..................................................... 1,889 1,035
Consumer, net.................................................. 326 387
------ ------
Total loans past due 90 days or more....................... 2,945 1,553
------ ------
Total nonperforming loans.................................. 6,046 4,035
------ ------
Foreclosed assets.............................................. 378 240
------ ------
Total nonperforming assets................................. $6,424 $4,275
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 1.16% 1.00%
Nonperforming loans as a percentage of loans, net.............. 2.26 1.63
Nonperforming assets as a percentage of loans, net............. 2.41% 1.72%
</TABLE>
In spite of the good local economic conditions, the Company experienced a
deterioration in its asset quality for the quarter and nine months ended
September 30, 1999. Nonperforming assets totaled $6,424 at September 30,
1999, $5,635 at June 30, 1999, and $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 the end of 1998 to 2.21 percent at June
30, 1999, and 2.41 percent at September 30, 1999. Primarily causing the
overall decline in nonperforming assets from year-end 1998, were increased
levels of accruing loans past due 90 days. Increased nonaccrual loans
predominantly contributed to the third quarter 1999 deterioration.
Accruing loans past due 90 days or more were $2,945 at September 30, 1999,
an increase of $1,392 from the $1,553 reported at December 31, 1998. Real
estate and commercial loans accounted for the majority of the increase.
Nonaccrual loans also increased from $2,308 at December 31, 1998, to $2,948
at September 30, 1999. However, two-thirds of this increase occurred in
the third quarter of 1999. Subsequent to the end of the third quarter of
1999, management took action to reverse this deterioration by hiring
additional staff for its collection department in an effort to bring
nonperforming assets to a more acceptable level. Management expects the
continued favorable employment conditions in the Company's market area to
aid in the collection process. 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.
Statement of Financial Accounting Standard ("SFAS") No. 5, "Accounting for
Contingencies," is the primary guidance on the accounting and reporting
treatment of loss contingencies, including credit losses. SFAS No. 5
requires a creditor to evaluate the collectibility of both contractual
principal and interest when assessing the need for a loss accrual. This
Statement requires that an estimated loss from a loss contingency should be
accrued by a charge to income if both of the following conditions are met:
(i) information available prior to the issuance of the financial statements
that indicates that it is probable that an asset had been impaired or a
liability had been incurred at the date of the financial statements; and
(ii) the amount of the loss can be reasonably estimated.
Included in nonaccrual loans at September 30, 1999, is a $862 loan secured
by real estate to one commercial customer. At September 30, 1999, it was
probable that impairment to the carrying value of this loan had in fact
occurred. However, the loss could not be reasonably estimated prior to the
release of the financial statements. Accordingly, no loss for such
property was accrued at September 30, 1999. Management is currently in the
process of obtaining and evaluating appraisals and other pertinent
information to determine the amount of the loss contingency.
Information relating to the Company's recorded investment in impaired loans
at September 30, 1999, and December 31, 1998, is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance....................................... $2,948 $2,308
With no related allowance...................................... 153 174
------ ------
Total........................................................ $3,101 $2,482
====== ======
</TABLE>
Impaired loans include a $153 restructured loan to one commercial customer.
This loan continued to perform in accordance with its modified terms for
the nine months ended September 30, 1999.
The analysis of changes affecting the allowance for loan losses related to
impaired loans at September 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1999
- ---------------------------------------------------------------------------------------
<S> <C>
Balance at January 1............................................................. $642
Provision for loan losses........................................................ 26
Loans charged-off................................................................ 118
Loans recovered.................................................................. 7
----
Balance at period-end............................................................ $557
====
</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 September 30, 1999
and 1998, are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross interest due under terms................. $ 64 $ 40 $ 186 $ 128
Interest income recognized..................... 7 25 23 89
------ ------ ------ ------
Interest income not recognized................. $ 57 $ 15 $ 163 $ 39
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 7 $ 25 $ 23 $ 89
Average recorded investment in impaired loans. $2,798 $1,631 $2,700 $1,716
</TABLE>
The Company received cash on impaired loans applied as a reduction of
principal totaling $219 for the nine months ended September 30, 1999, and
$464 for the same period of 1998. For the quarter ended September 30,
1999, cash receipts on impaired loans amounted to $17 as compared to $254
for the quarter ended September 30, 1998. No commitments to extend
additional funds to these parties existed at September 30, 1999.
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 September 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
SEPTEMBER 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................... $1,354 15.24% $1,465 12.51%
Real estate:
Construction..................................... 0.76 0.85
Mortgage......................................... 1,257 72.68 1,308 74.96
Consumer, net...................................... 1,145 11.32 1,277 11.68
------ ------ ------ ------
Total.......................................... $3,756 100.00% $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 nine months ended
September 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30,
1999
- ---------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $4,050
Loans charged-off:
Commercial, financial and others............................................... 157
Real estate:
Construction.................................................................
Mortgage..................................................................... 90
Consumer, net.................................................................. 220
------
Total...................................................................... 467
------
Loans recovered:
Commercial, financial and others............................................... 11
Real estate:
Construction.................................................................
Mortgage..................................................................... 25
Consumer, net.................................................................. 47
------
Total...................................................................... 83
------
Net loans charged-off.......................................................... 384
------
Provision charged to operating expense......................................... 90
------
Allowance for loan losses at end of period..................................... $3,756
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............ 0.20%
Allowance for loan losses as a percentage of period-end loans................. 1.41%
</TABLE>
At September 30, 1999, the allowance for loan losses account equaled
$3,756, a decline of $313 from June 30, 1999. An increase in net charge-
offs of $343 was responsible for the decline. The monthly provisions to
the allowance for loan losses account totaled $30 for the third quarter of
1999. The ratio of the allowance for loan losses as a percentage of period
end loans declined from 1.60 percent of loans, net of unearned income
outstanding at June 30, 1999, to 1.41 percent at September 30, 1999. The
increase in net charge-offs coupled with the significant loan growth
experienced by the Company during the third quarter of 1999 caused the
decline. In comparison, this ratio was still well above 1.23 percent
recorded for peer group at September 30, 1999. The allowance account
covered 62.1 percent of nonperforming loans at September 30, 1999, compared
to 75.4 percent at June 30, 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 nine months ended
September 30, 1999, totaled $384 compared to net chargeoffs of $309 for the
same period of 1998.
DEPOSITS:
Deposits totaled $362.0 million at September 30, 1999, an increase of $7.9
million from the end of the second quarter of 1999, and an increase of
$17.7 million from year-end 1998. Increases in money market and NOW
accounts, along with time deposits less than $100 led to the overall rise
in deposits. An inflow of monies from local school districts contributed
to the increase in money market and NOW accounts. Promotional certificate
of deposit offerings related to the recent grand openings of two new branch
offices primarily caused the rise in time deposits.
Interest-bearing deposits averaged $312.3 million for the nine months ended
September 30, 1999, an increase of $10.0 million compared to the $302.3
million averaged for the same nine months of 1998. However, the average
cost of these deposits was 4.41 percent for the nine months ended September
30, 1999, a 20 basis point improvement, compared to 4.61 percent for the
same period of 1998. The relatively low interest rate environment coupled
with the Company's pricing strategies positively affected its cost of
interest-bearing deposits.
The Company also experienced significant growth in noninterest-bearing
deposits, as a result of a focused effort to increase these types of
deposits. Noninterest-bearing deposits averaged $36.7 million and
accounted for 10.5 percent of total average deposits for the nine months
ended September 30, 1999, compared to $31.7 million or 9.5 percent of total
average deposits for the same period last year.
The average amount of, and the rate paid on, the major classifications of
deposits for the nine months ended September 30, 1999, and 1998, are
summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 17,835 2.93% $ 17,393 3.05%
NOW accounts................................ 24,446 2.44 21,186 2.17
Savings accounts............................ 64,784 2.33 64,282 2.59
Time deposits less than $100................ 182,884 5.39 175,654 5.62
Time deposits $100 or more.................. 22,347 5.74 23,741 5.91
-------- --------
Total interest-bearing.................... 312,296 4.41% 302,256 4.61%
Noninterest-bearing......................... 36,743 31,739
-------- --------
Total deposits............................ $349,039 $333,995
======== ========
</TABLE>
Volatile deposits, time deposits $100 or more, equaled $24.6 million at
September 30, 1999, a decline of $2.5 million from the $27.1 million
reported at December 31, 1998. However, these deposits increased $2.1
million from the $22.5 million reported at June 30, 1999, as a result of
the aforementioned certificate of deposit promotions. Time deposits $100
or more averaged $22.3 million for the nine months ended September 30,
1999, compared to $23.7 million for the same period last year.
Maturities of time deposits $100 or more for September 30, 1999, and
December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS $100 OR MORE
SEPTEMBER 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within three months......................................... $ 9,383 $ 7,956
After three months but within six months.................... 1,754 4,939
After six months but within twelve months................... 6,580 8,802
After twelve months......................................... 6,927 5,391
------- -------
Total..................................................... $24,644 $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 September 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
SEPTEMBER 30, 1999 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $ 5,307 $ 17,276 $ 54,322 $ 35,629 $112,534
Loans held for sale, net............ 60 60
Loans, net of unearned income....... 63,817 23,782 71,228 108,245 267,072
Federal funds sold.................. 1,850 1,850
------- -------- -------- -------- --------
Total............................. $71,034 $ 41,058 $125,550 $143,874 $381,516
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 22,735 $ 22,735
NOW accounts........................ 24,714 24,714
Savings accounts.................... $ 77,355 77,355
Time deposits less than $100........ $35,611 65,340 74,651 $ 293 175,895
Time deposits $100 or more.......... 9,383 8,334 6,927 24,644
Long-term debt...................... 1 2 12 24 39
------- -------- -------- -------- --------
Total............................. $44,995 $121,125 $158,945 $ 317 $325,382
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $26,039 $(80,067) $(33,395) $143,557
Cumulative........................ $26,039 $(54,028) $(87,423) $ 56,134 $ 56,134
RSA/RSL ratio:
Period............................ 1.58 0.34 0.79 453.86
Cumulative........................ 1.58 0.67 0.73 1.17 1.17
</TABLE>
The Company's ratio of cumulative one-year rate sensitive assets to rate
sensitive liabilities improved to 0.67 at September 30, 1999, from 0.60 at
June 30, 1999. According to the results of the static gap model, the
Company is liability rate-sensitive as $54.0 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 0.07 change in the RSA/RSL ratio is primarily attributable to a
decrease in the level of time deposits less than $100 repricing within one
year as compared to June 30, 1999. The cumulative one-year RSA/RSL ratio
at September 30, 1999, falls outside the Company's asset/liability policy
guidelines of 0.70 and 1.30. During the second quarter and continuing
through the third quarter of 1999, management is offering higher yields on
the Company's longer-term time deposit accounts in an effort to bring this
ratio within policy guidelines.
Conversely, the Company experienced a 0.07 decline in its three-month
RSA/RSL ratio from 1.65 at June 30, 1999, to 1.58 at September 30, 1999,
The aggregate volume of RSA exceeding RSL within a three-month interval
decreased from $28.0 million at the end of the second quarter to 26.0
million at the end of the third quarter. An increase in time deposits $100
or more, partially offset by a reduction in time deposits less than $100
and the repayment of short-term borrowings outstanding at June 30, 1999,
primarily influenced 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.
Since 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 creates pro forma net interest income scenarios under various
interest rate shocks. Model results at September 30, 1999, indicate the
Company's net interest income is nearly insensitive to changes in interest
rates given a parallel and instantaneous change of plus or minus 100 basis
points. Management will attempt to retain the Company's favorable
interest rate risk position during the final quarter 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 September 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.
The Company's liquidity position improved slightly during the third quarter
of 1999, as cash and cash equivalents increased $1.8 million from $7.9
million at June 30, 1999, to $9.7 million at September 30, 1999. Contrary
to the improvement in cash and cash equivalents, the Company's key
liquidity ratios declined during the third quarter. 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 1.2 percent at June 30
1999, compared to negative 0.06 percent at September 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 3.1
percent at June 30, 1999, and negative 1.9 percent at September 30, 1999.
Although weakening, the Company's liquidity ratios remained well above
those of the peer group. The net noncore funding dependence and net short-
term noncore funding dependence ratios for the peer group were positive
12.8 percent and positive 6.5 percent, respectively, at September 30, 1999.
Management believes the Company's liquidity position is sufficient to meet
its present financial obligations. In addition, management ensures there
will be enough liquidity to support future growth by maintaining adequate
cash flows from its investment securities and by competitively pricing its
deposit products.
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 $9.5
million during the nine months ended September 30, 1999. Net cash provided
by operating activities totaled $5.1 million and resulted primarily from
net income of $3,450.
Net cash used in investing activities equaled $27.6 million and was the
primary reason for the net cash outflow. A net increase in lending
activities of $19.5 million primarily caused the cash outflow. Purchases
of available-for-sale securities of $38.6 million partially offset by
repayments from these securities of $33.1 million and premises and
equipment additions also contributed to the net cash outflow.
Net deposit increases of $17.8 million partially offset by the repurchase
of $4.1 million of the Company's common stock was the primary reason for
the net cash provided from financing activities.
CAPITAL ADEQUACY:
The Company's stockholders' equity improved $496 for the quarter ended
September 30, 1999. Net income of $1,200, offset in part by common stock
repurchases of $315, net cash dividends declared of $263, and a negative
change in the net unrealized gain on securities of $126, contributed to the
slight improvement. For the nine months ended September 30, 1999,
stockholders' equity declined $2.7 million. This reduction resulted from
the implementation of the stock repurchase program in 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
September 30, 1999, 61.6 percent of the shares authorized under the
repurchase program have be reacquired.
The Company declared dividends of $311 or $0.15 per share and $870 or $0.41
per share for the three months and nine months ended September 30, 1999,
respectively. Dividends per share increased 50.0 percent and 70.8 percent,
respectively, from the same periods last year. As a percentage of net
income, dividends declared for the nine months ended September 30, 1999,
equaled 25.2 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.
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 September 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 September 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
------------------------------------------------------------------
SEPTEMBER 30, 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIS FOR RATIOS:
Tier I capital to risk-adjusted assets... $ 34,472 $ 34,376 $ 9,347 $ 8,282 $14,020 $12,423
Total capital to risk-adjusted assets.... 37,403 36,979 18,694 16,564 23,367 20,704
Tier I capital to total average assets
less goodwill........................... 34,472 34,376 $15,631 $14,873 $19,539 $18,591
Risk-adjusted assets..................... 218,684 200,007
Risk-adjusted off-balance sheet items.... 14,986 7,037
Average assets for Leverage ratio........ $390,770 $371,818
RATIOS:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items................................... 14.8% 16.6% 4.0% 4.0% 6.0% 6.0%
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items................. 16.0 17.9 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill............ 8.8% 9.2% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The Company exceeded all relevant regulatory capital measurements at
September 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. As aforementioned, a disadvantage of implementing a
stock repurchase program is lower capital levels, which in turn lower the
above risked-based capital ratios. The decline in the Company's risked-
based capital ratios at September 30, 1999, directly resulted from the
repurchase and retirement of common stock. The Company's Leverage ratio
equaled 8.8 percent at September 30, 1999, compared to 9.2 percent one year
earlier. Based on the closing price on September 30, 1999, had the Company
been successful in repurchasing the entire 220,000 shares by the end of the
third quarter of 1999, the exposure to the Leverage ratio would have been
an additional decline of 0.8 percent to 8.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
Higher net interest income, coupled with a reduction in the provision for
loan losses, partially offset by increased noninterest expense positively
influenced the Company's 1999 earnings. Net income for the three months and
nine months ended September 30, 1999, totaled $1,200 and $3,450,
respectively, compared to $1,150 and $3,300 for the same periods of 1998.
On a per share basis, earnings equaled $0.58 for the three months and $1.61
for the nine months ended September 30, 1999. Earnings per share for the
respective periods of 1998, were $0.52 and $1.50. Net income for the third
quarter of 1998 included a $235 gain on the sale of equity securities.
This gain offset losses recognized on foreclosed property devaluations and
interest income adjustments caused by placing certain loans on nonaccrual
status. The Company also experienced higher noninterest income. After
adjusting for the above gain, noninterest income improved $65 for the
quarter and $122 for the nine months ended September 30, 1999, over the
previous year. Return on average assets was 1.18 percent for the three
months and 1.17 percent for the nine months ended September 30, 1999,
compared to 1.19 percent and 1.18 percent for the respective 1998 periods.
The Company's return on average equity improved to 12.97 percent for the
third quarter and 11.85 percent for the nine months ended September 30,
1999, from 11.72 percent and 11.67 percent, respectively, for the same
periods of the previous year. In comparison, the peer group posted a
return on average assets of 1.08 percent and a return on average equity of
12.21 percent for the nine months ended September 30, 1999.
An increasingly relevant 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: Non-compliant Upgrade to Complete Yes
Unix operating system Version 3.0.2
Account processing: Certification None Complete Yes
Software, Release 3.0 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 certifiction Perform Complete Yes
available internal
testing
Trust accounting:
Software Version 5.0 Certification None Complete Yes
from responsible
vendor
Loan document preparation:
Software Certification None Complete Yes
from responsible
vendor
- --------------------------------------------------------------------------------------------------------------
NONMISSION-CRITICAL IT
SYSTEMS:
Communications Certification None Complete Yes
Software/Data 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 systems will
will be reviewed be upgraded or
for compliance converted to new
products
Other items-date stamps, Review items for Internal Complete Yes
forms, checks, date sensitivity testing will be
calculators, etc. 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
September 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 nine months ended September
30, 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 third quarter of 1999, net interest margins for financial
institutions, throughout the United States, continued their slight downward
trend, which began in the first quarter. The median net interest margin of
124 banks declined from 4.31 percent in the first quarter of 1999, to 4.28
percent and 4.24 percent in the second and third quarters, respectively.
Financial institutions located in the eastern region also experienced a
decline in the third quarter of 1999 to 4.13 percent from 4.22 percent in
the second quarter. Competitive pressures continue to be the primary factor
to margin compression as many institutions are unable to increase loan
pricing despite the recent interest rate increases while being forced to
offer higher yields to depositors in order to meet funding requirements.
Contrary to these net interest margin reductions, the Company kept its tax-
equivalent net interest margin at 4.05 percent which was equal to the level
achieved during the first two quarters of 1999. The tax-equivalent net
interest margin was 4.07 percent in 1998. For the nine months ended
September 30, the Company's tax-equivalent net interest spread was 3.37
percent in 1999 compared to 3.38 percent in 1998. However, management
expects the tax equivalent net interest spread to exceed 1998's rate by the
end of the year, as it has been improving going from 3.34 percent in the
first quarter of 1999 to 3.37 percent and 3.40 percent in the second and
third quarters, respectively. Continued vigilance in deposit product
pricing along with a higher concentration of loans should assist the
Company in achieving its goal of bettering its net interest margin and
spread.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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............................. $ 157 $ (1) $ 158 $ 35 $(277) $ 312
Tax-exempt.......................... 18 (38) 56 5 (47) 52
Investments:
Taxable............................. 262 (30) 292 770 (55) 825
Tax-exempt.......................... (43) 4 (47) (101) (3) (98)
Federal funds sold.................... (178) (22) (156) (364) (61) (303)
----- ----- ----- ----- ----- -----
Total interest income............. 216 (87) 303 345 (443) 788
----- ----- ----- ----- ----- -----
Interest expense:
Money market accounts................. 6 (3) 9 (6) (16) 10
NOW accounts.......................... 38 17 21 103 46 57
Savings accounts...................... (20) (39) 19 (119) (129) 10
Time deposits less than $100.......... (15) (50) 35 (7) (135) 128
Time deposits $100 or more............ (45) (24) (21) (90) (30) (60)
Short-term borrowings................. 44 44 53 (1) 54
Long-term debt........................ (1) (2) 1 (1) (1)
----- ----- ----- ----- ----- -----
Total interest expense............ 7 (101) 108 (67) (266) 199
----- ----- ----- ----- ----- -----
Net interest income............... $ 209 $ 14 $ 195 $ 412 $(177) $ 589
===== ===== ===== ===== ===== =====
</TABLE>
For the nine months ended September 30, the Company's net interest income
on a tax-equivalent basis improved $412 from $10,817 in 1998 to $11,229 in
1999. More than one-half of this improvement occurred during the third
quarter as net interest income increased $209 from $3,664 in 1998 to $3,873
in 1999. The net change for the comparable first and second quarters of
1998 and 1999 was $68 and $135, respectively. The Company continued its
positive trend as net interest income increased $130 during the past two
quarters of 1999. Comparatively, net interest income improved $63 comparing
the first and second quarters of 1998 and $56 comparing the second and
third quarters of 1998. Management expects such trend to continue as
additional loan volumes are originated from the two community banking
offices opened in 1999.
Specifically, the year-to-date improvement in tax-equivalent net interest
income of $412 resulted from an increase in the volume of average earning
assets in excess of average interest-bearing liabilities offset partially
by a slightly faster decline in the earning asset yield as compared to the
reduction in the cost of funds. The $589 favorable volume variance resulted
from a $15.2 million rise in average earning assets exceeding the $11.4
million increase in average interest-bearing liabilities. The average
earning asset increase accounted for a $788 improvement in interest income.
The primary causes for the improvement were increased average volumes of
taxable loans and investment. Taxable loans increased $5.7 million from
$240.1 million for the nine months ended September 30, 1998, to $245.7
million for the same period this year. This $5.7 million change caused
interest income to increase $312. The growth of average taxable investments
of $18.9 million resulted in additional interest income of $825. Declines
in average federal funds sold of $8.4 million and average tax-exempt
investment securities of $1.6 million caused partial interest income
reductions of $303 and $98, respectively. Offsetting this interest income
improvement of $788 was additional interest expense of $199 from the growth
in the average volume of interest-bearing liabilities. Increased average
volumes of time deposits less than $100, NOW accounts and short-term
borrowings offset partially by a reduction in the average volume of time
deposits $100 or more caused the interest expense increase. Growth in
average volumes of time deposits less than $100 of $7.2 million, NOW
accounts of $3.3 million and short-term borrowings of $1.4 million resulted
in additional interest expense of $128, $57 and $54, respectively. These
increases were partially offset by a $1.4 million decrease in the average
volume of time deposits $100 or more. Such decline caused interest expense
to be reduced by $60 for the comparable nine months ended September 30,
1999 and 1998.
The Company's net interest income was also effected by changes in earning
asset yields and fund costs. Such change accounted for a reduction in net
interest income of $177 comparing the nine months ended September 30, 1998
and 1999. A 20 basis point decrease in the weighted average yield on
earning assets caused interest income to decrease $443. This was partially
offset by a 19 basis point decrease in the cost of funds which resulted in
a $266 decline in interest expense. The primary factors causing the
unfavorable rate variance were a reduction in the weighted average yield on
taxable loans offset partially by reductions in the costs of savings
accounts and time deposits less than $100. The weighted average yield on
taxable loans declined 18 basis point from 8.57 percent in 1998 to 8.39
percent in 1999. Such decline resulted in a reduction in interest income of
$277. This decline was partially offset by reductions of 26 basis points in
savings accounts and 17 basis points in time deposits less than $100.
For the quarter ended September 30, 1999, net interest income on a tax-
equivalent basis increased $209 compared to the same period last year. The
favorable change was attributed primarily to a $195 volume variance aided
to a lessor degree by a positive rate variance. The growth in average
taxable investments of $9.6 million and average taxable investments of
$20.2 million resulted in additional interest income of $158 and $292,
respectively. Offsetting these gains was a reduction in federal funds sold
of $12.8 million accounting for a negative volume variance of $156.
Interest expense increased $108 as a result of changes in the volumes of
interest-bearing liabilities. Increases in the volume of Now accounts,
savings accounts, time deposits less than $100 and short-term borrowings
less a reduction in the volume of time deposits $100 or more caused the
$108 increase. Net interest income was also aided by a $14 positive rate
variance. The Company's cost of funds declined at a faster pace of 23 basis
points versus only a 13 basis point reduction in the weighted average tax-
equivalent earning assets yield. As a result of these rate variances,
interest expense declined $101 while interest income dropped $87 for the
third quarters of 1998 and 1999. Specifically, major influences to the
reduction in interest expense were savings accounts declining 23 basis
points and time deposits less than $100 declining 4 basis points. These
changes resulted in interest expense reductions of $39 and $50,
respectively. The weighted average tax-equivalent yield reductions of 115
basis points on tax-exempt loans and 21 basis points on taxable investment
caused corresponding reductions in interest income of $38 and $30,
respectively. In addition, a 11 basis point decline in the yield on federal
funds sold caused a $22 reduction in interest income.
The average balances of assets and liabilities, corresponding interest
income and expense and resulting average yields or rates paid for the nine
months ended September 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
SEPTEMBER 30, 1999 SEPTEMBER 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..................................... $245,732 $15,422 8.39% $240,053 $15,387 8.57%
Tax-exempt.................................. 7,941 458 7 71 7,298 453 8.30
Investments:
Taxable..................................... 77,214 3,383 5.86 58,295 2,613 5.99
Tax-exempt.................................. 36,908 2,228 8.07 38,541 2,329 8.08
Federal funds sold............................ 2,952 104 4.71 11,313 468 5.53
-------- ------- -------- -------
Total earning assets...................... 370,747 21,595 7.79% 355,500 21,250 7.99%
Less: allowance for loan losses.............. 4,065 3,899
Other assets.................................. 26,620 23,233
-------- --------
Total assets.............................. $393,302 $374,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 17,835 391 2.93% $ 17,393 397 3.05%
NOW accounts.................................. 24,446 447 2.44 21,186 344 2.17
Savings accounts.............................. 64,784 1,127 2.33 64,282 1,246 2.59
Time deposits less than $100.................. 182,884 7,379 5.39 175,654 7,386 5.62
Time deposits $100 or more.................... 22,347 960 5.74 23,741 1,050 5.91
Short-term borrowings......................... 1,509 60 5.32 141 7 6.64
Long-term debt................................ 40 2 6.68 43 3 9.33
-------- ------- -------- -------
Total interest-bearing liabilities........ 313,845 10,366 4.42% 302,440 10,433 4.61%
Noninterest-bearing deposits.................. 36,743 31,739
Other liabilities............................. 3,795 2,862
Stockholders' equity.......................... 38,919 37,793
-------- --------
Total liabilities and stockholders' equity $393,302 $374,834
======== ------- ======== -------
Net interest/income spread................ $11,229 3.37% $10,817 3.38%
======= =======
Net interest margin....................... 4.05% 4.07%
Tax equivalent adjustments:
Loans......................................... $ 156 $ 154
Investments................................... 758 792
------- -------
Total adjustments......................... $ 914 $ 946
======= =======
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 $1,159 and $2,857 at September 30,
1999 and 1998, respectively, 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.
For the nine months ended September 30, 1999, the Company's loan loss
provision totaled $90 compared to $315 for the same period last year. The
loan loss provision for the comparable third quarters of 1999 and 1998 was
$30 and $105, respectively. The ratio of the allowance for loan losses as
percentage of loans, net of unearned income, decreased from 1.63 percent at
September 30, 1998, to 1.41 percent at September 30, 1999. A higher volume
of loans at the end of the third quarter of 1999 was primarily responsible
for the decrease. Although adequate, management expects to increase the
provision for loan losses in the future in order to reverse the recent
decline in the allowance for loan loss ratio. In addition, management is
anticipation making a special provision for a loss on one commercial real
estate loan during the fourth quarter of 1999. Management is currently in
the process of evaluating the $862 credit for loss exposure.
NONINTEREST INCOME:
For the nine months ended September 30, 1999, noninterest income totaled
$1,235, a $113 decrease as compared to the same period last year. The
decrease is a direct result of recognizing a $235 gain on the sale of
equity securities in the third quarter of 1998. This gain offset losses
recognized on foreclosed property devaluations and interest income
adjustments caused by placing certain loans on nonaccrual status. Adjusting
for this nonrecurring gain, noninterest income for the nine months ended
September 30, 1999, increased from $1,113 to $1,235 for the comparable
period of 1999, a $122 or 11.0 percent increase. Higher amounts of service
charges on deposits as a result of opening the new branch offices along
with an increase in fiduciary fees and gains generated from secondary
mortgage banking activities were the primary reasons for the improvement.
For the quarter ended September 30, 1999, noninterest income totaled $449
compared to $619 for the same period last year. Noninterest income
excluding the net gain on the sale of equity securities equaled $384 in
1998. The $65 or 16.9 percent improvement is attributable to the same
reasons given for the year-to-date increase.
NONINTEREST EXPENSE:
The general components of noninterest expense include the cost of providing
salaries and necessary benefits to employees, maintaining facilities and
general operating costs such as insurance, supplies, advertising, data
processing and other related expenses. Several of these costs and expenses
are variable while the remainder are fixed. In its efforts to control the
variable portion of these expenses, management employs budgets and other
related strategies.
For the three quarters ended September 30, 1999, noninterest expenses
totaled $7,026, an increase of $293 or 4.4 percent as compared to the same
period of 1998. Such increase was a significant improvement over the
noninterest expense growth evidenced during the past few years. Comparing
growth for the nine month of 1997 versus 1998 and 1996 versus 1997,
noninterest expense grew $853 or 14.5 percent and $345 or 6.2 percent,
respectively. As a result the Company's net overhead ratio for the nine
months ended September 30, 1999, was 1.97 percent, a slight improvement as
compared to 2.01 percent for the same period last year. Such ratio
outperformed the comparable ratio of the peer group at 2.61 percent.
Moreover the Company's operating efficiency ratio, as defined as
noninterest expense adjusted for other real estate expense as a percentage
of net interest income and noninterest income less nonrecurring gains and
losses, also improved and was superior to the peer group. The Company's
operating efficiency ratio for the nine months ended September 30, 1999,
was 60.9 percent compared to 61.7 percent for the same period of 1998. The
peer group recorded a ratio equal to 64.3 percent for the three quarters
ended September 30, 1999. For the quarter ended September 30, 1999, the
Company's efficiency ratio continued its downward trend declining to 60.8
percent.
Major components of noninterest expenses for the three months and nine
months ended September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $1,073 $ 933 $3,092 $2,810
Employee benefits.............................. 180 172 519 498
------ ------ ------ ------
Salaries and employee benefits expense....... 1,253 1,105 3,611 3,308
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 156 123 457 393
Equipment expense.............................. 207 180 556 567
------ ------ ------ ------
Net occupancy and equipment expense.......... 363 303 1,013 960
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 69 129 226 258
Other taxes.................................... 81 73 238 206
Stationery and supplies........................ 112 94 315 275
Contractual services........................... 265 253 729 699
Insurance including FDIC assessment............ 30 25 91 62
Other.......................................... 259 415 803 965
------ ------ ------ ------
Other noninterest expenses................... 816 989 2,402 2,465
------ ------ ------ ------
Total noninterest expense.................. $2,432 $2,397 $7,026 $6,733
====== ====== ====== ======
</TABLE>
All of the increase in year-to-date noninterest expense can be explained by
costs related to salaries and employee benefits as the slight increase in
net occupancy and equipment expenses was checked by a similar decrease in
other expenses. For the nine months ended September 30, 1999, salaries and
employee benefit expenses amounted to $3,611, a $303 or 9.2 percent
increase as compared to the comparable period last year. The unfavorable
variance was a result of meeting the personnel requirements in opening the
two community banking offices along with merit increases associated with
personnel performance appraisals. Despite this increase, the Company
continues to experience a lower level of personnel expense in comparison to
the peer group. Specifically, as a percentage of average assets personnel
expenses represented an annual rate of 1.2 percent in 1999 compared to 1.8
percent for the peer group.
Net occupancy and equipment expenses increase slightly from $960 for the
nine months ended September 30, 1998, to $1,013 for the same period of
1999. The increase reflects additional depreciation expenses related to the
opening of the Clarks Summit property. Offsetting this increase was a
reduction in operating lease expenses related to the relocation of the
Company's administrative offices. As a percentage of average assets, the
Company's occupancy expenses represented 0.3 percent in 1999 compared to
0.5 percent for the peer group. Management expects net occupancy and
equipment expense to increase next year as the Company records its first
full year of depreciation expense on the two new buildings and newly
installed computer system.
Year-to-date September 30, other expenses amounted to $2,402 in 1999, a
decrease from $2,465 in 1998. Reductions in marketing costs, legal and
consulting expenses and postage expenses contributed to the lower level.
The Company's other expenses as a percent of average assets was 0.8 percent
in 1999 as compared to 1.0 percent for the peer group in 1999.
For the quarter ended September 30, noninterest expense increase from
$2,397 in 1998 to $2,432 in 1999. Personnel and occupancy expenses
increased $148 and $60, respectively, while other expenses declined $173
over the comparable three month periods of 1998 and 1999. The increases in
personnel and occupancy expenses can be explained by the same reasons given
for the year-to date changes. The reduction in other expenses is primarily
a function of recording write-downs incurred on foreclosed property
devaluations during 1998. No such expenses were incurred during 1999.
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.
INCOME TAXES:
For the nine months ended September 30, 1999, the Company reported a
provision for income tax expense of $984, an effective tax rate of 22.2
percent. For the same period of 1998, the Company reported a provision for
income tax expense of $871 and an effective tax rate of 20.9 percent. For
the third quarters of 1999 and 1998, the Company's provision for income tax
expense equaled $355 and $318, respectively. The effective tax rates for
the respective quarters were 22.8 percent and 21.7 percent. 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 9.0 percent for the nine months
ended September 30, 1998, to 8.6 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.
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27-Financial Data Schedule
(b) Reports on Form 8-K
None
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
--------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: November 12, 1999 /s/ David L. Baker
------------------ ---------------------------------
David L. Baker
Chief Executive Officer
Date: November 12, 1999 /s/ Scott A. Seasock
------------------ ---------------------------------
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 /s/ Stephanie A. Ganz
------------------ ---------------------------------
Stephanie A. Ganz, VP of Finance
(Principal Accounting Officer)
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ----------- ----
27 Financial Data Schedule 52
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,863
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,534
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 267,072
<ALLOWANCE> 3,756
<TOTAL-ASSETS> 402,804
<DEPOSITS> 362,024
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,724
<LONG-TERM> 39
0
0
<COMMON> 686
<OTHER-SE> 36,331
<TOTAL-LIABILITIES-AND-EQUITY> 402,804
<INTEREST-LOAN> 15,724
<INTEREST-INVEST> 4,853
<INTEREST-OTHER> 104
<INTEREST-TOTAL> 20,681
<INTEREST-DEPOSIT> 10,304
<INTEREST-EXPENSE> 10,366
<INTEREST-INCOME-NET> 10,315
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,026
<INCOME-PRETAX> 4,434
<INCOME-PRE-EXTRAORDINARY> 4,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,450
<EPS-BASIC> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 7.79
<LOANS-NON> 2,948
<LOANS-PAST> 2,945
<LOANS-TROUBLED> 153
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,050
<CHARGE-OFFS> 467
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 3,756
<ALLOWANCE-DOMESTIC> 3,756
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
