UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
521 MAIN STREET, FOREST CITY, PA 18421
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(Address of principal executive offices) (Zip Code)
(570) 785-3181
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 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: 1,989,242 at July 31, 2000.
Page 1 of 46
Exhibit Index on Page 44
COMM BANCORP, INC.
FORM 10-Q
JUNE 30, 2000
INDEX
CONTENTS PAGE NO.
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PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements.
Consolidated Statements of Income and Comprehensive Income -
for the Six Months Ended June 30, 2000 and 1999............ 3
Consolidated Balance Sheets - June 30, 2000 and December
31, 1999................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000..................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999............................... 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...................................... 41
Item 2: Changes in Securities and Use of Proceeds.............. 41
Item 3: Defaults Upon Senior Securities........................ 41
Item 4: Submission of Matters to a Vote of Security Holders.... 41
Item 5: Other Information...................................... 42
Item 6: Exhibits and Reports on Form 8-K....................... 43
SIGNATURES..................................................... 43
Exhibit Index.................................................. 44
* Not Applicable
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
-------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................ $5,824 $ 5,082 $11,440 $10,082
Tax-exempt............................................................. 123 97 247 190
Interest and dividends on investment securities available-for-sale:
Taxable................................................................ 893 1,133 1,857 2,142
Tax-exempt............................................................. 407 489 883 993
Dividends.............................................................. 31 30 64 60
Interest on federal funds sold........................................... 20 50 29 98
------ ------- ------- -------
Total interest income................................................ 7,298 6,881 14,520 13,565
------ ------- ------- -------
INTEREST EXPENSE:
Interest on deposits..................................................... 3,729 3,423 7,439 6,800
Interest on short-term borrowings........................................ 29 15 97 16
Interest on long-term debt............................................... 1 1 2 2
------ ------- ------- -------
Total interest expense............................................... 3,759 3,439 7,538 6,818
------ ------- ------- -------
Net interest income.................................................. 3,539 3,442 6,982 6,747
Provision for loan losses................................................ 90 30 180 60
------ ------- ------- -------
Net interest income after provision for loan losses.................. 3,449 3,412 6,802 6,687
------ ------- ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions.................................... 485 370 925 750
Net gains on sale of loans............................................... 4 1 36
Net gains on sale of investment securities............................... 1 173
------ ------- ------- -------
Total noninterest income............................................. 486 374 1,099 786
------ ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense................................... 1,300 1,194 2,579 2,358
Net occupancy and equipment expense...................................... 399 302 790 650
Other expenses........................................................... 1,002 870 1,959 1,586
------ ------- ------- -------
Total noninterest expense............................................ 2,701 2,366 5,328 4,594
------ ------- ------- -------
Income before income taxes............................................... 1,234 1,420 2,573 2,879
Provision for income tax expense......................................... 264 310 543 629
------ ------- ------- -------
Net income........................................................... 970 1,110 2,030 2,250
------ ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale.... 249 (1,476) 338 (1,903)
Reclassification adjustment for gains included in net income............. (1) (173)
Income tax expense (benefit) related to other comprehensive income (loss) 84 (501) 56 (647)
------ ------- ------- -------
Other comprehensive income (loss), net of income taxes............... 164 (975) 109 (1,256)
------ ------- ------- -------
Comprehensive income................................................. $1,134 $ 135 $ 2,139 $ 994
====== ======= ======= =======
PER SHARE DATA:
Net income............................................................... $ 0.48 $ 0.51 $ 1.01 $ 1.03
Cash dividends declared.................................................. $ 0.17 $ 0.13 $ 0.34 $ 0.26
Average common shares outstanding........................................ 1,991,303 2,161,775 2,004,035 2,185,075
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 14,159 $ 10,991
Federal funds sold..................................................................
Investment securities available-for-sale............................................ 90,683 105,630
Loans, net of unearned income....................................................... 287,850 276,850
Less: allowance for loan losses................................................... 3,456 3,799
-------- --------
Net loans........................................................................... 284,394 273,051
Premises and equipment, net......................................................... 9,841 9,537
Accrued interest receivable......................................................... 2,160 2,166
Other assets........................................................................ 6,041 5,737
-------- --------
Total assets.................................................................... $407,278 $407,112
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 39,439 $ 36,061
Interest-bearing.................................................................. 322,723 326,422
-------- --------
Total deposits.................................................................. 362,162 362,483
Short-term borrowings............................................................... 6,300 5,500
Long-term debt...................................................................... 37 39
Accrued interest payable............................................................ 1,926 1,976
Other liabilities................................................................... 1,726 1,639
-------- --------
Total liabilities............................................................... 372,151 371,637
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
June 30, 2000, 1,987,347 shares; December 31, 1999, 2,035,784 shares............... 656 672
Capital surplus..................................................................... 6,154 6,199
Retained earnings................................................................... 28,991 29,387
Accumulated other comprehensive loss................................................ (674) (783)
-------- --------
Total stockholders' equity...................................................... 35,127 35,475
-------- --------
Total liabilities and stockholders' equity...................................... $407,278 $407,112
======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS LOSS EQUITY
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<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999....................... $672 $6,199 $29,387 $(783) $35,475
Net income....................................... 2,030 2,030
Dividends declared: $0.34 per share.............. (680) (680)
Dividend reinvestment plan: 2,963 shares issued.. 1 109 110
Repurchase and retirement: 51,400 shares......... (17) (154) (1,746) (1,917)
Net change in other comprehensive loss........... 109 109
---- ------ ------- ----- -------
BALANCE, JUNE 30, 2000........................... $656 $6,154 $28,991 $(674) $35,127
==== ====== ======= =====
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 2,030 $ 2,250
Adjustments:
Provision for loan losses.............................................................. 180 60
Depreciation, amortization and accretion............................................... 908 844
Amortization of loan fees.............................................................. (49) (73)
Deferred income tax expense (benefit).................................................. 75 (83)
Gains on sale of investment securities available-for-sale.............................. (173)
Losses (gains) on sale of other real estate............................................ 47 (9)
Changes in:
Loan held for sale, net.............................................................. 6
Interest receivable.................................................................. 6 (1)
Other assets......................................................................... (329) 362
Interest payable..................................................................... (50) 19
Other liabilities.................................................................... 75 (856)
-------- --------
Net cash provided by operating activities.......................................... 2,720 2,519
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available-for-sale........................... 5,304
Proceeds from repayments of investment securities available-for-sale..................... 12,023 21,875
Purchases of investment securities available-for-sale.................................... (2,298) (35,843)
Proceeds from sale of other real estate.................................................. 70 128
Net increase in lending activities....................................................... (11,942) (6,667)
Purchases of premises and equipment...................................................... (711) (2,251)
-------- --------
Net cash provided by (used in) investing activities................................ 2,446 (22,758)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ (3,686) 5,951
Time deposits.......................................................................... 3,365 3,877
Short-term borrowings.................................................................. 800 3,355
Payments on long-term debt............................................................... (2) (1)
Proceeds from issuance of common shares.................................................. 110 93
Repurchase and retirement of common shares............................................... (1,917) (3,741)
Cash dividends paid...................................................................... (668) (574)
-------- --------
Net cash provided by (used in) financing activities................................ (1,998) 8,960
-------- --------
Net increase (decrease) in cash and cash equivalents............................... 3,168 (11,279)
Cash and cash equivalents at beginning of year..................................... 10,991 19,164
-------- --------
Cash and cash equivalents at end of period......................................... $ 14,159 $ 7,885
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 7,588 $ 6,799
Income taxes........................................................................... 476 919
Noncash items:
Transfer of loans to other real estate................................................. 468 115
Unrealized (gains) losses on investment securities available-for-sale.................. $ (109) $ 1,256
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, 1999.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
On June 15, 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133." SFAS No. 138 addresses a limited
number of issues causing implementation difficulties for a large number of
entities getting ready to apply SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Both Statements are effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
anticipated adoption of SFAS No. 133 and SFAS No. 138 on January 1, 2001,
is not expected to have a material effect on operating results or financial
position as the Company has no instruments that qualify as derivatives or
hedges, nor does it expect to be effected by the provisions for potential
reclassification of investment securities.
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 our control and that of our subsidiary, Community Bank and
Trust Company, referred to as Community Bank, may also adversely affect our
future results of operations. Our management team, consisting of the Board
of Directors and executive officers, expects that no particular factor will
affect the results of operations. Downward trends in areas such as real
estate, construction and consumer spending, may adversely impact our
ability to maintain or increase profitability. Therefore, we cannot assure
the continuation of our current rates of income and growth.
Our earnings depend largely upon net interest income. The relationship
between our cost of funds, deposits and borrowings, and the yield on our
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 interest rates, the volume, rate and mix of interest-earning
assets and interest-bearing liabilities, and the level of nonperforming
assets. As part of our interest rate risk ("IRR") management strategy, we
monitor the maturity and repricing characteristics of interest-earning
assets and interest-bearing liabilities to control our exposure to interest
rate changes.
In originating loans, some credit losses are likely to occur. This risk of
loss varies with, among other things:
- General economic conditions,
- Loan type,
- Creditworthiness and debt servicing capacity of the
borrower over the term of the loan, and
- The value and marketability of the collateral securing
the loan.
We maintain an allowance for loan losses based on, among other things:
- Historical loan loss experience,
- Known inherent risks in the loan portfolio,
- Adverse situations that may affect a borrower's ability
to repay,
- The estimated value of any underlying collateral, and
- An evaluation of current economic conditions.
We currently believe that the allowance for loan losses is adequate, but we
cannot assure that nonperforming loans will not increase in the future.
To a certain extent, our success depends upon the general economic
conditions in the geographic market that we serve. Although we expect
economic conditions in our market area to remain favorable, we cannot
assure that these conditions will continue. Adverse changes to economic
conditions in our geographic market area would likely impair 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. We compete
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 us. We are constantly
striving to meet the convenience and needs of our customers and to enlarge
our customer base, however, we cannot assure that these efforts will be
successful.
OPERATING ENVIRONMENT:
Driven by rapid economic growth and an extremely tight labor market, the
Federal Open Market Committee ("FOMC") continued its pre-emptive stance
well into the second quarter. On May 16, 2000, the FOMC again raised the
federal funds rate, this time by 50 basis points to 6.50 percent. Overall,
the federal funds rate has increased 175 basis points since the FOMC began
taking action to slow the economy through tightening monetary policy at the
end of the second quarter of 1999. However, by the end of the second
quarter of 2000, indications are that the FOMC has changed its stance to
reactive. Despite the surprise jump in the gross domestic product ("GDP"),
the value of all goods and services produced in the United States, for the
second quarter, the economy appears to be showing signs of slowing. Strong
business and government investment propelled GDP to unexpected 5.2 percent
annual rate in the second quarter. On the consumer side, however, spending
slowed. Real consumer spending increased at a rate of only 3.0 percent in
the second quarter. This is significantly less than the 7.6 percent
spending rate posted for the previous quarter and the lowest rate since the
second quarter of 1997. In addition, the GDP deflator, a key inflation
indicator rose slightly at an annual rate of 2.2 percent in the second
quarter of 2000, compared to 3.8 percent in the first quarter. Increases
in the Nation's productivity, stemming from technological investment has
lead to strong economic growth without producing inflation. Productivity
growth was 5.3 percent for the second quarter and 5.1 percent over the last
year, the strongest pace since 1983. The FOMC, taking these factors into
consideration, is waiting but watchful going into the second half of 2000.
With regard to the banking industry, the general rise in market rates has
lead to intense competition in pricing loans and deposits. This fierce
competition, coupled with timing lags of asset and liability repricing in
a rising rate environment, has lead to compression of net interest margins.
In order to combat these pressures, banks have diversified from traditional
banking products into fee-based businesses such as trust, asset management
and brokerage services. Large banks that have strong fee-based businesses
fared better during the first half of 2000 compared to smaller community
banks that rely heavily on the traditional business mix.
REVIEW OF FINANCIAL POSITION:
Total assets amounted to $407.3 million at June 30, 2000, a slight increase
of $166 from the $407.1 million reported at year-end 1999. The composition
of the balance sheet continued to shift as we placed greater emphasis on
the loan portfolio during the first half of 2000. As a result, loans, net
of unearned income grew $11.0 million to $287.9 million at June 30, 2000,
from $276.9 million at December 31, 1999. Conversely, the investment
portfolio declined $14.9 million to $90.7 million at the end of the first
six months of 2000, from $105.6 million at year-end 1999. Proceeds from
repayments of mortgage-backed securities were used to fund the increased
loan demand. Total deposits remained relatively stable at $362.2 million
at June 30, 2000, compared to $362.5 million at December 31, 1999. However
the composition changed, as noninterest-bearing deposits increased $3.4
million, while interest-bearing deposits decreased $3.7 million from year-
end 1999. We had short-term borrowings outstanding of $6.3 million at June
30, 2000, and $5.5 million at December 31, 1999. Total stockholders'
equity declined $348 from the end of 1999. Common stock repurchases of
$1,917 and net cash dividends declared of $570, partially offset by net
income of $2,030 and a positive change of $109 in other comprehensive
income, caused the reduction.
In comparison to the end of the first quarter of 2000, we experienced a
slight decrease of $939 in total assets. Loans, net of unearned income,
increased $2.0 million, while the investment portfolio curtailed by $8.5
million. Intense interest rate competition in our local market area for
short-term time deposits caused a $6.0 million reduction in total deposits.
Total stockholders' equity remained relatively unchanged for the second
quarter of 2000.
We are currently focusing our efforts on developing new sources of fee
revenue, improving operating efficiencies and implementing technological
enhancements. We are in the process of upgrading our teller processing
software and will be introducing telephone and internet banking to
customers in the near future.
INVESTMENT PORTFOLIO:
In response to the signs of a slowing economy and the FOMC's change in
position from pre-emptive to reactive, the U.S. Treasury curve inched
downward at the end of the second quarter of 2000. Changes in the curve
impact the market value of our investment portfolio. Specifically, our
holdings of mortgage-backed securities and municipal obligations have
average lives that are closely related to the two-year and ten-year U.S.
Treasury securities. The two-year U.S. Treasury rate, which affects our
mortgage-backed securities, dropped 5 basis points to 6.48 percent at June
30, 2000, from 6.53 percent at the end of the previous quarter. The ten-
year U.S. Treasury, related to our municipal holdings, fell 16 basis points
to 6.10 percent at the end of the second quarter, from 6.26 percent at
March 31, 2000. As a result we experienced an increase in the market value
of our investment portfolio. We had an unrealized holding loss on our
investment portfolio of $1,270 at March 31, 2000. This loss decreased $251
to $1,019 at June 30, 2000. A change in the net unrealized holding loss on
mortgage-backed securities accounted for $210, while the unrealized gain on
state and municipal obligations increased by $36 from the end of the first
quarter.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio at June 30, 2000, and December 31,
1999, are summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES
JUNE 31, DECEMBER 31,
2000 1999
AMOUNT % AMOUNT %
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $ 2,991 3.30% $ 3,595 3.40%
U.S. Government agencies............................. 981 1.08 1,635 1.55
State and municipals................................. 31,304 34.52 34,781 32.93
Mortgage-backed securities........................... 53,532 59.03 63,523 60.14
Equity securities.................................... 1,875 2.07 2,096 1.98
------- ------ -------- ------
Total.............................................. $90,683 100.00% $105,630 100.00%
======= ====== ======== ======
</TABLE>
The investment portfolio decreased $14.9 million to $90.7 million at June
30, 2000, from $105.6 million at year-end 1999. Due to increased loan
demand, coupled with intense competition for deposit-gathering, the
investment portfolio served as a source of liquidity. As a result, the
investment portfolio played a less significant role in our earning assets
mix. Investment securities equaled 24.0 percent of earning assets at June
30, 2000, compared to 27.6 percent at December 31, 2000. The investment
portfolio averaged $94.4 million and $99.7 million for the three and six
months ended June 30, 2000, compared to $116.1 for the second quarter of
1999 and $112.7 million for the first half of 1999. The tax-equivalent
yield on the investment portfolio for the six months ended June 30, 2000,
was 6.58 percent, a 5 basis point decrease from 6.63 percent for the same
period last year. For the second quarter of 2000, the tax-equivalent yield
was 6.56 percent, compared to 6.59 percent for the first quarter.
In addition to yield analysis, we utilize a total return approach to
measure the investment portfolio's performance. This approach gives a more
complete picture of a portfolio's overall performance since it takes into
consideration both market value and reinvestment income from repayments.
The investment portfolio's total return is the sum of all interest income,
reinvestment income on all proceeds from repayments and capital gains or
losses, whether realized or unrealized. Total return for the investment
portfolio improved for the twelve months ended June 30, 2000, to 6.2
percent, compared to 4.6 percent for the twelve months ended March 31,
2000. Furthermore, our investment portfolio ranked in the upper 99th
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.
During the first half of 2000, we sold state and municipal obligations
having an amortized cost of $5.1 million and equity holdings of local
financial institutions having an amortized cost of $63. As previously
mentioned, the proceeds from the sales of state and municipals obligations
were used to aid in funding the increased loan demand. The equity holdings
of local financial institutions were sold due to the fact that they exhibit
a lower total return as compared to other investment alternatives. We
realized gains of $173 on the sale of investment securities for the six
months ended June 30, 2000.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at June
30, 2000, is summarized in the table that follows. The weighted-average
yield, based on amortized cost, has been computed for state and municipals
on a tax-equivalent basis using the statutory tax rate of 34.0 percent.
The distributions are based on contractual maturity with the exception of
mortgage-backed securities, collateralized mortgage obligations ("CMOs")
and equity securities. Mortgage-backed securities and CMOs have been
presented based upon estimated cash flows, assuming no change in the
current interest rate environment. Equity securities with no stated
contractual maturities are included in the after ten year maturity
distribution. Expected maturities may differ from contracted maturities
because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
JUNE 30, 2000 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..... $ 3,019 5.05% $ 3,019 5.05%
U.S. Government agencies..... $ 1,010 6.20% 1,010 6.20
State and municipals......... 1,215 6.43 3,460 6.80 $11,281 8.15% $15,272 7.97% 31,228 7.85
Mortgage-backed securities... 17,026 5.95 35,933 5.93 1,665 6.10 54,624 5.94
Equity securities............ 1,821 6.78 1,821 6.78
------- ------- ------- ------- -------
Total...................... $21,260 5.85% $40,403 6.01% $12,946 7.89% $17,093 7.84% $91,702 6.58%
======= ======= ======= ======= =======
Fair value:
U.S. Treasury securities..... $ 2,991 $ 2,991
U.S. Government agencies..... $ 981 981
State and municipals......... 1,213 3,441 $11,310 $15,340 31,304
Mortgage-backed securities... 16,809 35,125 1,598 53,532
Equity securities............ 1,875 1,875
------- ------- ------- ------- -------
Total...................... $21,013 $39,547 $12,908 $17,215 $90,683
======= ======= ======= ======= =======
</TABLE>
LOAN PORTFOLIO:
Loans to finance one-to-four family residential properties account for
over half of our total lending activities. Accordingly, the housing market
and the economic conditions affecting it significantly impact our lending
activities. Strong economic fundamentals such as low unemployment, strong
income growth and high consumer confidence have kept the housing market
strong. However, the housing boom experienced throughout 1999 and 1998
appears to be coming to an end, as this market is feeling the effects of
rising mortgage costs. The rate on a 30-year conventional mortgage closed
the second quarter at 8.29 percent, up 5 basis points from the end of the
previous quarter and 74 basis points from the end of the second quarter of
last year. Although sales of existing homes rose for the second month in a
row, average annual sales of existing homes of 5.04 million for the twelve
months ended June 30, 2000 were below the 5.15 million recorded for the
same period one year earlier. In addition, average annual new home sales
were down 1.2 percent to 896 compared to 907 last year. Furthermore, the
number of housing starts fell for the second month and the downward trend
in the number of permits issued indicates that there is no rebound in
sight.
Despite a 50 basis point increase in the prime rate to 9.50 percent from
9.00 percent, loan activity increased for all banks in the United States
for the second quarter of 2000. Commercial banks posted a $37.0 billion
increase in commercial loans to $1,068.1 billion at June 30, 2000, from
$1,031.1 billion at March 31, 2000. Similarly, consumer loans increased
$15.8 billion to $512.9 billion at the end of the second quarter of 2000,
from $497.1 billion at the previous quarter-end.
The composition of the loan portfolio at June 30, 2000, and December 31,
1999, is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
AMOUNT % AMOUNT %
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others............ $ 47,785 16.60% $ 43,907 15.86%
Real estate:
Construction.............................. 3,248 1.13 3,164 1.14
Mortgage.................................. 200,994 69.82 198,423 71.67
Consumer, net............................... 35,050 12.18 30,830 11.14
Lease financing, net........................ 773 0.27 526 0.19
-------- ------ -------- ------
Loans, net of unearned income............. 287,850 100.00% 276,850 100.00%
====== ======
Less: allowance for loan losses............. 3,456 3,799
-------- --------
Net loans............................... $284,394 $273,051
======== ========
</TABLE>
Loans, net of unearned income grew $11.0 million to $287.9 million at June
30, 2000, from $276.9 million at year-end 1999. We experienced strong
demand for all our loan products during the first half of 2000. Consumer
loans posted the greatest increase, growing $4.3 million to $35.1 million
at June 30, 2000, from $30.8 million at December 31, 1999. At the end of
the second quarter of 2000, consumer loans represented approximately 12.2
percent of our total loan portfolio, compared to 11.1 percent at year-end
1999. Increased demand for new and used automobile loans issued through
our indirect lending division was primarily responsible for the growth in
consumer loans. Commercial loans, including commercial mortgage loans,
grew $3.3 million and comprise approximated 33.5 percent of our total
portfolio at June 30, 2000, compared to 33.7 percent at year-end 1999.
Loans to finance one-to-four family residential mortgages grew $3.2 million
to $152.3 million at June 30, 2000, from $149.1 million at December 31,
1999. For the six months ended June 30, 2000, loans averaged $284.8
million, an increase of $35.4 million or 14.2 percent compared to $249.4
million averaged for the same period of 1999. However, amidst intense
competition and the recognition of the reversal of accrued interest on
loans placed on nonaccrual status during 2000, the tax equivalent yield on
the loan portfolio declined 5 basis points to 8.34 percent for the first
six months of 2000, from 8.39 percent for the same period of 1999. We
expect loan yields to increase for the remainder of 2000 due to the rise in
general market rates. However, yields could be adversely affected should
competition further intensify. Loan demand is facilitated though increases
in core deposits and repayments on loans and investment securities.
We continually examine the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and liquidity
strains. Approximately 35.5 percent of the lending portfolio is expected
to reprice within the next twelve months. Management will price loan
products in the near term in order to reduce the average term of fixed-rate
loans and increase its holdings of variable-rate loans in attempting to
reduce IRR in the loan portfolio.
The maturity and repricing information of the loan portfolio by major
classification at June 30, 2000, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
JUNE 30, 2000 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $ 24,850 $15,613 $ 7,322 $ 47,785
Real estate:
Construction....................... 3,248 3,248
Mortgage........................... 26,116 61,641 113,237 200,994
Consumer, net........................ 12,015 18,462 4,573 35,050
Lease financing, net................. 236 476 61 773
-------- ------- -------- --------
Total............................ $ 66,465 $96,192 $125,193 $287,850
======== ======= ======== ========
Repricing schedule:
Predetermined interest rates......... $ 36,613 $78,958 $106,778 $222,349
Floating or adjustable interest rates 65,501 65,501
-------- ------- -------- --------
Total............................ $102,114 $78,958 $106,778 $287,850
======== ======= ======== ========
</TABLE>
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at June 30, 2000
and 1999, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
United States........................................................... 4.0% 4.3%
Pennsylvania............................................................ 4.2 4.3
Lackawanna county....................................................... 4.4 5.2
Susquehanna county...................................................... 4.8 5.0
Wayne county............................................................ 4.8 4.9
Wyoming county.......................................................... 4.3% 5.1%
</TABLE>
Low unemployment continued throughout the first half of 2000. Not only did
the unemployment rate at June 30, 2000, improve for the United States and
the Commonwealth of Pennsylvania from the previous year, it improved in all
counties located within our market area. Lackawanna and Wyoming counties
posted significant improvements from 5.2 percent and 5.1 percent at June
30, 1999, to 4.4 percent and 4.3 percent at June 30, 2000.
Nonperforming assets were $4,208 at June 30, 2000, compared to $6,944 at
year-end 1999 and $4,726 at the end of the previous quarter. The ratio of
nonperforming assets as a percentage of loans, net of unearned income,
improved to 1.46 percent at the end of the second quarter of 2000, compared
to 2.51 percent at December 31, 1999 and 1.65 percent at March 31, 2000.
A decline in the amount of accruing loans past due 90 days or more
predominantly lead to the improvement from both year-end and the previous
quarter-end.
Accruing loans past due 90 days or more improved from $3,965 at December
31, 1999, to $891 at June 30, 2000. Real estate loans primarily contributed
to the improvement, while commercial and consumer loans contributed to a
lesser extent. Nonaccrual loans improved slightly, $13, while the amount of
foreclosures held in other real estate increased $351, from year-end 1999.
Due to the favorable economic conditions in our local market area, we
expect continued improvement in our asset quality for the remainder of
2000. However, should economic conditions weaken in our market area,
borrowers' ability to make timely loan payments could be limited, which may
cause our asset quality to deteriorate.
Information concerning nonperforming assets at June 30 2000, and December
31, 1999, is summarized as follows. The table includes loans or other
extensions of credit classified for regulatory purposes and all material
loans or other extensions of credit that cause management to have serious
doubts as to the borrowers' ability to comply with present loan repayment
terms.
DISTRIBUTION OF NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 450 $ 166
Real estate:
Construction.................................................
Mortgage..................................................... 2,018 2,272
Consumer, net.................................................. 8 33
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 2,476 2,471
------ ------
Restructured loans............................................. 131 149
------ ------
Total impaired loans....................................... 2,607 2,620
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 62 726
Real estate:
Construction.................................................
Mortgage..................................................... 428 2,768
Consumer, net.................................................. 401 471
Lease financing, net...........................................
------ ------
Total accruing loans past due 90 days or more.............. 891 3,965
------ ------
Total nonperforming loans.................................. 3,498 6,585
------ ------
Foreclosed assets.............................................. 710 359
------ ------
Total nonperforming assets................................. $4,208 $6,944
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 0.91% 0.95%
Nonperforming loans as a percentage of loans, net.............. 1.22 2.38
Nonperforming assets as a percentage of loans, net............. 1.46% 2.51%
</TABLE>
Information relating to the recorded investment in impaired loans at June
30, 2000 and December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance....................................... $2,476 $2,471
With no related allowance...................................... 131 149
------ ------
Total........................................................ $2,607 $2,620
====== ======
</TABLE>
Impaired loans include a $131 restructured loan to one commercial customer.
This loan continued to perform in accordance with its modified terms during
the first half of 2000.
The analysis of changes affecting the allowance for loan losses related to
impaired loans at June 30, 2000 is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000
---------------------------------------------------------------------------------------
<S> <C>
Balance at January 1.............................................................. $613
Provision for loan losses......................................................... 145
Loans charged-off................................................................. 210
Loans recovered...................................................................
----
Balance at period-end............................................................. $548
====
</TABLE>
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loan not been modified, the
aggregate amount of interest income recognized and the amount recognized
using the cash-basis method and the average recorded investment in impaired
loans for the three-month and six-month periods ended June 30, 2000 and
1999 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross interest due under terms................. $ 78 $ 64 $ 147 $ 122
Interest income recognized..................... 21 8 24 16
------ ------ ------ ------
Interest income not recognized................. $ 57 $ 56 $ 123 $ 106
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 21 $ 8 $ 24 $ 16
Average recorded investment in impaired loans. $2,407 $2,756 $2,524 $2,651
</TABLE>
Cash received on impaired loans applied as a reduction of principal totaled
$82 and $43 for the six months and three months ended June 30, 2000. For
the respective 1999 periods cash receipts on impaired loans amounted to
$202 and $121. There were no commitments to extend additional funds to
such parties at June 30, 2000. Impaired loans and nonperforming loans
equaled 0.91 percent and 1.22 percent of loans, net of unearned income at
June 30, 2000. In comparison, these ratios for our peer group equaled 0.66
percent and 0.98 percent.
Our 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. We maintain the allowance for loan losses at
a level believe adequate to absorb estimated potential credit losses. We
employ the federal banking regulatory agencies' Interagency Policy
Statement on the Allowance for Loan Losses as the primary analytical tool
in assessing the adequacy of the allowance account by assigning qualitative
factors to each element of the allowance. The allowance for loan losses
consists of two elements: allocated and unallocated.
We utilize the loss mitigation method for estimating the allocated portion
of the allowance for loan losses. Loss mitigation involves determining the
percentage of each classification of individual loans and loan pools that
are expected to ultimately result in loss based on historical experience.
This estimating method and assumptions used for the method have been
followed in a consistent manner. Commercial loans and commercial real
estate loans are classified and have historical percentages applied on an
asset by asset basis. Residential mortgages and consumer loans have
historical percentages applied on a pool by pool basis. The historical
loss percentages are updated quarterly and are based on the actual amount
of loans in each classification that resulted in loss over the past eight
quarters. The historical loss experience method is only the starting point
for estimating the allowance for loan losses. We add to these historical
loss percentages a qualitative percentage representing a number of other
relevant factors that may cause estimated credit losses associated with our
current portfolio to differ from historical loss. These risk factors
include:
- Changes in lending policies and procedures,
- Economic conditions,
- Nature and volume of the portfolio,
- Loan review system,
- Volumes of past due and impaired loans,
- Concentrations,
- Borrowers' financial status,
- Collateral value,
- Experience, ability and depth of lending management, and
- Other factors deemed relevant.
The volume of the allowance for loan losses and the composition of its
elements fluctuate based on changes in many of these risk factors. There
are no known trends which would lead us to believe that the current level
of the allowance for loan losses is not adequate to cover expected loan
losses.
The unallocated portion is used to cover inherent losses that exist as of
the evaluation date, but which have not been identified by the loss
mitigation method due to limitations in the process. One such limitation
is that it does not take into account deviations of current losses from
historical experience. This may cause estimated credit losses associated
with our current portfolio to differ from historical loss experience
resulting in an allowance that is higher or lower than the appropriate
level. We establish the unallocated element of the allowance based on
judgments made by considering a number of the risk factors similar to the
ones used for determining the allocated element.
We monitor the adequacy of the allocated portion of the allowance quarterly
and adjust the allowance for any deficiencies through normal operations.
This self-correcting mechanism reduces potential differences between
estimates and actual observed losses. In addition, the unallocated portion
of the allowance is examined to ensure that it remains relatively constant
in relation to the total allowance unless there are changes in the related
criteria that would indicate a need to either increase or decrease it. The
determination of the allowance for loan loss level inherently involves a
high degree of uncertainty due to the fact that knowledge of the portfolio
may be incomplete. Accordingly, we cannot ensure that charge-offs in
future periods will not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required
resulting in an adverse impact on operating results.
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.
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- --------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
--------------------------------------------------------------------------------------
<S> <C> <C> <C. <C>
Commercial, financial and others................... $1,060 16.60% $1,292 15.86%
Real estate:
Construction..................................... 1.13 1.14
Mortgage......................................... 1,261 69.82 1,289 71.67
Consumer, net...................................... 1,130 12.18 1,213 11.14
Lease financing, net............................... 5 0.27 5 0.19
------ ------ ------ ------
Total.......................................... $3,456 100.00% $3,799 100.00%
====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and illustration of
charge-offs and recoveries by major loan category for the six months ended
June 30, 2000, is summarized as follows:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
JUNE 30,
2000
----------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $3,799
Loans charged-off:
Commercial, financial and others............................................... 366
Real estate:
Construction.................................................................
Mortgage..................................................................... 44
Consumer, net.................................................................. 169
Lease financing, net...........................................................
------
Total...................................................................... 579
------
Loans recovered:
Commercial, financial and others............................................... 12
Real estate:
Construction.................................................................
Mortgage..................................................................... 1
Consumer, net.................................................................. 43
Lease financing, net...........................................................
------
Total...................................................................... 56
------
Net loans charged-off.......................................................... 523
------
Provision charged to operating expense......................................... 180
------
Allowance for loan losses at end of period..................................... $3,456
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.37%
Allowance for loan losses as a percentage of period end loans.................. 1.20%
</TABLE>
The allowance for loan losses was $3,456 at June 30, 2000, a decline of $60
compared to $3,516 at March 31, 2000. Net charge-offs of $150 exceeding the
provision for loans losses of $90 for the three months ended June 30, 2000,
caused the decline from the previous quarter-end. The allowance for loan
losses equaled 1.20 percent of loans, net of unearned income at the end of
the second quarter of 2000. In comparison, this ratio equaled 1.17 percent
for the peer group. The allowance account covered 98.8 percent and 84.3
percent of nonperforming loans at June 30, 2000 and March 31, 2000.
Relative to all nonperforming assets, the allowance covered 82.1 percent at
June 30, 2000, and 74.4 percent March 31, 2000.
Past due loans not satisfied through repossession, foreclosure or related
actions, are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan losses
account. Any subsequent recoveries are credited to the allowance account.
Net charge-offs were $523 or 0.37 percent of average loans outstanding for
the six months ended June 30, 2000, compared to $41 or 0.03 percent for the
same six months of last year.
DEPOSITS:
The average amount of, and the rate paid on, the major classifications of
deposits for the six months ended June 30, 2000 and 1999, are summarized as
follows:
DEPOSIT DISTRIBUTION
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 21,274 3.54% $ 16,905 2.86%
NOW accounts................................ 25,585 2.48 23,937 2.44
Savings accounts............................ 73,387 2.52 63,498 2.33
Time deposits less than $100................ 177,178 5.58 182,130 5.42
Time deposits $100 or more.................. 31,279 5.88 22,136 5.86
-------- --------
Total interest-bearing.................... 328,703 4.55% 308,606 4.44%
Noninterest-bearing......................... 37,085 35,792
-------- --------
Total deposits............................ $365,788 $344,398
======== ========
</TABLE>
Total deposits decreased $6.0 million to $362.2 million at June 30, 2000,
from $368.2 million at March 31, 2000. In comparison to year-end 1999,
total deposits were unchanged. The decline in the second quarter was
primarily attributable to a decrease in time deposits. Rising interest
rates caused intense interest rate competition for short-term time deposits
within our local market area. As a result, we experienced a reduction of
$5.6 million in time deposits less than $100 to $173.1 million at June 30,
2000, from $178.7 million at March 31, 2000. In addition, time deposits
$100 or more decreased $4.3 million to $29.8 million at the end of the
second quarter from $34.1 at the end of the previous quarter. Partially
offsetting these declines, were increases in noninterest-bearing deposits
and money market accounts. Noninterest-bearing deposits increased $2.8
million and money market accounts grew by $1.6 million from the end of the
first quarter of 2000.
Total deposits averaged $365.8 million for the first half of 2000, an
increase of $21.4 million or 6.2 percent compared to $344.4 million average
for the same period last year. The general rise in market deposit rates as
a result of the FOMC's tightening position over the past year, forced us to
raise interest rates paid on deposits in order to remain competitive. As
a result, we experienced an increase in the average rate paid on all our
deposit categories. Our total cost of deposits increased 11 basis points
to 4.55 percent for the six months ended June 30, 2000, from 4.44 percent
for the same six months of 1999. However, interest rates appear to be
stabilizing with the change in the FOMC's position regarding further
tightening. Although our cost of deposits rose for the second quarter of
2000 in comparison to the previous quarter, it did not increase to the
extent seen in previous quarters. For the quarter ended June 30, 2000, our
cost of deposits was 4.56 percent, an increase of 2 basis points from 4.54
percent for the three months ended March 31, 2000. Although the FOMC has
softened their position, they still remain cautious to rising inflation.
Should inflation escalate, further rate increases could occur and we may
experience further increases in our cost of funds.
Despite the decline from the end of the first quarter of 2000, volatile
deposits, time deposits in denominations of $100 or more, increased $6.5
million from $23.3 million at December 31, 1999, to $29.8 million at June
30, 2000. This increase directly resulted from improved depository
relationships with tax exempt entities. The average cost of these deposits
increased 18 basis points from 5.79 percent for the first quarter of 2000
to 5.97 for the second quarter as a result of the variable pricing nature
of these deposits.
Maturities of time deposits of $100 or more at June 30, 2000, and December
31, 1999, are summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Within three months............................................ $ 3,639 $ 3,752
After three months but within six months....................... 14,421 5,240
After six months but within twelve months...................... 2,602 5,411
After twelve months............................................ 9,166 8,850
------- -------
Total........................................................ $29,828 $23,253
======= =======
</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. We have no exposure to foreign
currency exchange risk nor do we have any specific exposure to the
commodity price risk. Our major area of market risk exposure is IRR. Our
exposure to IRR can be explained as the potential for change in our
reported earnings and/or the market value of our net worth. Variations in
interest rates affect earnings by changing its net interest income and its
level of other interest-sensitive income and operating expenses. Interest
rate changes also affect the underlying economic value of our 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 our underlying economic value and provide a
basis for the expected change in future earnings related to interest rates.
IRR is inherent in the role of banks as financial intermediaries, however
a bank with a high exposure to IRR 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.
Interest rate sensitivity management attempts 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 this management has been delegated to the Asset/Liability
Management Committee ("ALCO"). Specifically, ALCO utilizes a number of
computerized modeling techniques to monitor and attempt to control the
influence that market changes have on our rate-sensitive assets and
liabilities. One such technique utilizes a static gap report, which
attempts to measure our interest rate exposure by calculating the net
amount of rate-sensitive assets ("RSA") and rate-sensitive liabilities
("RSL") that reprice within specific time intervals. A positive gap,
indicated by a RSA/RSL ratio greater than 1.0, implies that earnings will
be impacted favorably if interest rates rise and adversely if interest
rates fall during the period. A negative gap, a RSA/RSL ratio less than
1.0, tends to indicate that earnings will be affected inversely to interest
rate changes.
Our interest rate sensitivity gap position, illustrating RSA and RSL at
their related carrying values, is summarized as follows. The distributions
in the table are based on a combination of maturities, call provisions,
repricing frequencies and prepayment patterns. Variable-rate assets and
liabilities are distributed based on the repricing frequency of the
instrument. Mortgage instruments are distributed in accordance with
estimated cash flows, assuming there is no change in the current interest
rate environment.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
JUNE 30, 2000 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $ 4,801 $ 16,212 $ 39,547 $ 30,123 $ 90,683
Loans, net of unearned income....... 79,942 22,172 78,958 106,778 287,850
Federal funds sold..................
------- -------- -------- -------- --------
Total............................. $84,743 $ 38,384 $118,505 $136,901 $378,533
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 20,380 $ 20,380
NOW accounts........................ 26,739 26,739
Savings accounts.................... $ 72,725 72,725
Time deposits less than $100........ $27,572 44,339 100,644 $ 496 173,051
Time deposits $100 or more.......... 3,639 17,023 9,000 166 29,828
Short-term borrowings............... 6,300 6,300
Long-term debt...................... 1 2 12 22 37
------- -------- -------- -------- --------
Total............................. $37,512 $108,483 $182,381 $ 684 $329,060
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $47,231 $(70,099) $(63,876) $136,217
Cumulative........................ $47,231 $(22,868) $(86,744) $ 49,473 $ 49,473
RSA/RSL ratio:
Period............................ 2.26 0.35 0.65 200.15
Cumulative........................ 2.26 0.84 0.74 1.15 1.15
</TABLE>
Our cumulative one-year RSA/RSL ratio improved slightly from 0.83 at March
31, 2000, to 0.84 at June 30, 2000 and falls within our asset/liability
guidelines of 0.70 and 1.30. A decrease in the amount of RSL maturing or
repricing within one year was primarily responsible for the slight
improvement. Intense interest rate competition for short-term time deposits
in our local market area factored into a $13.4 million decrease in time
deposits maturing or repricing within one year. Partially offsetting this
decline was a $5.5 million increase in short-term borrowings from the
Federal Home Loan Bank of Pittsburgh.
We experienced a significant increase in our three-month ratio to 2.26 at
June 30, 2000, from 1.59 at the end of the previous quarter. Again, a
decline in RSL maturing or repricing within this time frame was the primary
factor contributing to the increased ratio. Time deposits $100 or more
maturing or repricing within three months declined $14.8 million, while
time deposits less than $100 decreased $8.1 million.
According to the results of the static gap report, we were liability rate-
sensitive for the cumulative one-year period. This indicates that should
general market rates increase, the likelihood exists that net interest
income would be adversely affected. Conversely, a decline in market rates
would likely have a favorable effect on net interest income. However,
these forward-looking statements are qualified in the aforementioned
section entitled "Forward-Looking Discussion" in this Management's
Discussion and Analysis.
Static gap analysis, although a credible measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First,
market rate changes normally do not equally or simultaneously affect all
categories of assets and liabilities. Second, assets and liabilities that
can contractually reprice within the same period may not do so at the same
time or to the same magnitude. Third, the interest rate sensitivity table
presents a one-day position. Variations occur daily as we adjust our rate
sensitivity throughout the year. Finally, assumptions must be made in
constructing such a table. For example, the conservative nature of our
Asset/Liability Management Policy assigns money market and NOW accounts to
the due after three but within twelve months repricing interval. In
reality, these items may reprice less frequently and in different
magnitudes than changes in general interest rate levels.
As the static gap report fails to address the dynamic changes in the
balance sheet composition or prevailing interest rates, we utilize a
simulation model to enhance our asset/liability management. This model is
used to create pro forma net interest income scenarios under various
interest rate shocks. Model results at June 30, 2000, produced results
similar to those indicated by the one-year static gap position. Given a
parallel and instantaneous rise in interest rates of 100 basis points, net
interest income should decrease 2.6 percent. Conversely, a similar decline
in interest rates would result in a 2.6 percent increase in net interest
income.
Financial institutions are affected differently by inflation than are
commercial and industrial companies that have significant investments in
fixed assets and inventories. Most of our assets are monetary in nature
and change correspondingly with variations in the inflation rate. It is
difficult to precisely measure the impact inflation has on us, however we
believe that our 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. Our principal sources of
liquidity are core deposits and loan and investment payments and
prepayments. Providing a secondary source of liquidity is our available-
for-sale portfolio. As a final source of liquidity, we can exercise
existing credit arrangements. We manage liquidity daily, thus enabling us
to effectively monitor fluctuations in our liquidity position and to adapt
the position according to market changes. We believe our liquidity is
adequate to meet both present and future financial obligations and
commitments on a timely basis. There are presently no known trends,
demands, commitments, events or uncertainties that have resulted or are
reasonably likely to result in material changes with respect to our
liquidity.
Our liquidity position at June 30, 2000, improved slightly from the
previous quarter-end. The net noncore funding dependence ratio and net
short-term noncore funding dependence ratio best illustrate the change in
our liquidity position. The net noncore funding dependence ratio, defined
as the difference between noncore funds, time deposits $100 or more and
brokered time deposits less than $100, and short-term investments to long-
term assets, improved to 2.5 percent at the end of the second quarter of
2000, from 3.3 percent at March 31, 2000. In addition, 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 0.1 percent at June 30,
2000, and 0.7 percent at March 31, 2000. We consider our liquidity
position adequate to meet our present and future financial obligations and
commitments. Management believes maintaining adequate volumes of short-
term investments and remaining competitive in our deposit pricing will
ensure sufficient liquidity to support future growth.
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents, consisting of cash on hand, cash items in the process
of collection, noninterest-bearing deposits with other banks, balances with
the Federal Reserve Bank of Philadelphia ("FRB") and the Federal Home Loan
Bank of Pittsburgh ("FHLB-Pgh"), and federal funds sold, increased $3.2
million in the first half of 2000. Net cash provided by operating
activities totaled $2.7 million. Net income of $2,030 earned for the six
months ended June 30, 2000, was the primary factor contributing to the net
cash inflow.
Proceeds of $5.3 million from the sale of investment securities and
repayments of investment securities of $12.0 million partially offset by a
net increase in lending activities of $11.9 million and investment security
purchases of $2.3 million, were the predominant factors leading to the $2.4
million in net cash provided by investing activities for the first half of
2000.
Net cash used in financing activities for the six months ended June 30,
2000, equaled $2.0 million. Funds of $1.9 million used for the repurchase
and retirement of common stock primarily caused the net cash outflow.
CAPITAL ADEQUACY:
Stockholders' equity totaled $35.1 million at June 30, 2000, a slight
decline of $348 from December 31, 1999. Common stock repurchases of $1,917
coupled with net cash dividends declared of $570 more than offset net
income of $2,030. A total of 51,400 shares of our common stock was
repurchased and retired during the first six months of 2000. Also
affecting stockholders' equity was a positive change in the accumulated
other comprehensive loss, which resulted entirely from a net unrealized
gain of $109 on available-for-sale investment securities.
Dividends declared for the six months ended June 30, 2000, were $680 or
$0.34 per share. Dividends declared for the same six months of 1999
totaled $559 or $0.26 per share. The dividend payout ratio for the first
half of 2000 was 33.5 percent compared to 24.8 percent for the same period
last year. It is the intention of the Board of Directors to continue to
pay cash dividends in the future. However, these decisions are affected by
operating results, financial and economic decisions, capital and growth
objectives, appropriate dividend restrictions and other relevant factors.
Our dividend reinvestment plan allows stockholders to automatically
reinvest their dividends in shares of our common stock. During the first
half of 2000, 2,963 shares were issued under this plan.
We attempt to assure capital adequacy by monitoring our current and
projected capital positions 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. Our minimum Leverage ratio
was 4.0 percent at June 30, 2000 and 1999. 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. We have elected not to include such
unrealized gains in our Tier II capital.
Our and Community Bank's capital ratios at June 30, 2000 and 1999, 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 are summarized as
follows:
RISK-ADJUSTED CAPITAL
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
JUNE 30, 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basis for ratios:
Tier I capital to risk-adjusted assets:
Consolidated........................... $ 33,635 $ 33,729 $ 9,675 $ 8,777 $14,513 $13,166
Community Bank......................... 32,368 32,515 9,618 8,719 14,427 13,079
Total capital to risk-adjusted assets:
Consolidated........................... 36,664 36,488 19,351 17,554 24,189 21,943
Community Bank......................... 35,379 35,256 19,237 17,438 24,046 21,798
Tier I capital to total average assets
less goodwill:
Consolidated........................... 33,635 33,729 16,212 15,445 20,265 19,306
Community Bank......................... 32,368 32,515 $16,135 $15,319 $20,169 $19,149
Risk-adjusted assets:
Consolidated........................... 226,912 208,099
Community Bank......................... 225,482 206,649
Risk-adjusted off-balance sheet items:
Consolidated........................... 14,975 11,328
Community Bank......................... 14,975 11,328
Average assets for Leverage ratio:
Consolidated........................... 405,303 386,124
Community Bank......................... $403,384 $382,982
Ratios:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items:
Consolidated............................ 13.9% 15.4% 4.0% 4.0% 6.0% 6.0%
Community Bank.......................... 13.5 14.9 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:
Consolidated............................ 15.2 16.6 8.0 8.0 10.0 10.0
Community Bank.......................... 14.7 16.2 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill:
Consolidated............................ 8.3 8.7 4.0 4.0 5.0 5.0
Community Bank.......................... 8.0% 8.5% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The continuation of the common stock repurchase plan into the first half of
2000 directly caused the decline in our risk-based capital ratios from the
previous year. Despite the decline, we exceeded all relevant regulatory
capital measurements at June 30, 2000, and were considered well
capitalized. Regulatory agencies define institutions not under a written
directive to maintain certain capital levels as well capitalized if they
exceed the following:
- a Tier I risk-based ratio of at least 6.0 percent,
- a total risk-based ratio of at least 10.0 percent, and
- a Leverage ratio of at least 5.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
Net income for the three months and six months ended June 30, 2000 totaled
$970 or $0.48 per share and $2,030 or $1.01 per share. Net income for the
comparable 1999 periods were $1,110 or $0.51 per share and $2,250 or $1.03
per share. Higher net interest income and noninterest income were more than
offset by a higher amount of loan loss provision and increases in
noninterest expense relative to the delivery system expansions throughout
1999. Other factors which contributed to the decline in earnings were
opportunity costs associated with the stock repurchase program and the
reversal of interest earned on loans placed on nonaccrual status during the
first half of 2000. Return on average assets for the six months ended June
30, 2000, equaled 1.00 percent compared to 1.17 percent for the same six
months of 1999. Return on average equity for the first half of 2000 and
1999 was 11.61 percent and 11.33 percent. In comparison, the peer group's
return on average assets and return on average equity were 1.05 percent and
12.62 percent for the first six months of 2000. We had other comprehensive
income, entirely related to net unrealized gains and losses on investment
securities, of $164 and $109 for the three months and six months ended June
30, 2000, compared to an other comprehensive losses of $975 and $1,256 for
the respective periods of 1999.
NET INTEREST INCOME:
Our major source of operating income is derived from net interest income.
Net interest income is defined as the excess amount of income, interest
and fees, from earning assets over the cost of interest-bearing liabilities
supporting those assets. The primary sources of earning assets are loans
and investment securities, while deposits, short-term borrowings and long-
term debt comprise interest-bearing liabilities. Net interest margin is
the percentage of net interest income on a tax-equivalent basis to average
earning assets. Variations in volumes and rates of earning assets and
liabilities, in response to changes in general market rates, are the
primary factors affecting net interest income. The composition of earning
assets and interest-bearing liabilities and the volume of nonperforming
assets also influence the levels of interest income.
We analyze 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.
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 VS. 1999 2000 VS. 1999
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............................. $ 742 $ 32 $ 710 $1,358 $ (12) $1,370
Tax-exempt.......................... 41 (12) 53 86 (85) 171
Investments:
Taxable............................. (239) 2 (241) (281) (4) (277)
Tax-exempt.......................... (123) (1) (122) (166) (19) (147)
Federal funds sold.................... (30) 141 (171) (69) 140 (209)
----- ----- ----- ------ ----- ------
Total interest income............. 391 162 229 928 20 908
----- ----- ----- ------ ----- ------
Interest expense:
Money market accounts................. 52 32 20 135 65 70
NOW accounts.......................... 4 (6) 10 26 5 21
Savings accounts...................... 93 38 55 186 64 122
Time deposits less than $100.......... (3) 127 (130) 20 253 (233)
Time deposits $100 or more............ 160 4 156 272 2 270
Short-term borrowings................. 14 4 10 81 5 76
Long-term debt........................ 0 1 (1) 0 1 (1)
----- ----- ----- ------ ----- ------
Total interest expense............ 320 200 120 720 395 325
----- ----- ----- ------ ----- ------
Net interest income............... $ 71 $ (38) $ 109 $ 208 $(375) $ 583
===== ===== ===== ====== ===== ======
</TABLE>
Net interest income on a tax-equivalent basis for the first half of 2000
improved $208 to $7,564, from $7,356 for the same period of 1999. An
increase in tax-equivalent interest income of $928 partially offset by a
$720 rise in interest expense caused the overall change. An advantageous
volume variance of $583, partially offset by an unfavorable rate variance
of $375, lead to the improvement. Specifically, loans, net of unearned
income, averaged $35.4 million higher for the six months ended June 30,
2000 compared to the same period one year earlier, and contributed $1,541
in additional tax-equivalent interest income. Partially offsetting the
favorable volume variance from loans was a $633 reduction in tax-equivalent
interest income, which resulted from a $16.2 million decrease in average
investments and federal funds sold. As previously mentioned, repayments of
investment securities were used to fund loan demand. Net interest income
was also adversely affected by additional interest expense of $325, which
resulted from a $22.6 million increase in average interest-bearing
liabilities. We experienced growth in all major deposits types except time
deposits less than $100. In addition, short-term borrowings averaged $2.5
million higher during the first half of 2000, compared to one year ago.
Partially mitigating the positive influence of volume changes on tax-
equivalent net interest income was a negative rate variance of $375.
Specifically, a 12 basis point increase in our cost of funds to 4.57
percent for the six months ended June 30, 2000, from 4.45 percent for the
same period one year earlier caused a reduction in tax-equivalent net
interest income of $395. As a result of intense interest rate competition
for deposits in our local market area we experienced cost of fund increases
in every category of interest-bearing liabilities. Specifically, a 16 basis
point increase in the rate paid on time deposits less than $100 accounted
for $253 or 64.1 percent of the total increase. The 8 basis point increase
in the tax-equivalent yield on earning assets to 7.88 percent for the first
half of 2000 had very little effect on net interest income. Overall, we
experienced a 4 basis point decline in the net interest spread to 3.31
percent for the six months ended June 30, 2000, from 3.35 percent for the
same period of 1999.
For the three months ended June 30, 2000, tax-equivalent net interest
income increased $71 compared to the same three months of last year.
Similar to the year-to-date change, we experienced a favorable volume
variance of $109 partially offset by an unfavorable rate variance of $38.
Earning assets averaged $13.4 million higher for the second quarter
compared to the same quarter of 1999 and accounted for a $229 increase in
tax-equivalent interest income. Specifically, average loans, net of
unearned income, increased $37.9 million, while average investments and
federal funds sold decreased $24.5 million. Adversely affecting net
interest income due to volume, was a $17.0 increase in average interest-
bearing liabilities for the second quarter of 2000, compared to the same
quarter last year. Due to this increase we incurred additional interest
expense of $120. In addition, a 16 basis point increase in the tax-
equivalent yield on earning assets was more than offset by a 18 basis point
increase in the cost of funds, resulting in a $38 reduction in tax-
equivalent net interest income due to rate.
Maintenance of an adequate net interest margin is one of our primary
concerns. Our net interest margin weakened to 3.95 percent for the first
half of 2000 from 4.05 percent for the same period of 1999. In a rising
rate environment deposits tend to reprice faster than loans, this has led
to the margin compression. Additional rate increases by the FOMC could
cause interest margins to tighten even further. We believe following
prudent pricing practices coupled with careful implementation of resources,
will keep our net interest margin in check. However, no assurance can be
given that net interest income will not be adversely affected should
general market rates continue to increase and competition further
intensify.
The average balances of assets and liabilities, corresponding interest
income and expense and resulting average yields or rates paid for the six
months ended June 30, 2000 and 1999, 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.
SUMMARY OF NET INTEREST INCOME
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
--------------------------- ---------------------------
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..................................... $274,694 $11,440 8.38% $242,201 $10,082 8.39%
Tax-exempt.................................. 10,068 374 7.47 7,183 288 8.09
Investments:
Taxable..................................... 65,535 1,921 5.89 75,253 2,202 5.90
Tax-exempt.................................. 34,131 1,338 7.88 37,452 1,504 8.10
Federal funds sold............................ 1,070 29 5.45 4,228 98 4.67
-------- ------- -------- -------
Total earning assets...................... 385,498 15,102 7.88% 366,317 14,174 7.80%
Less: allowance for loan losses............... 3,563 4,076
Other assets.................................. 25,534 26,537
-------- --------
Total assets.............................. $407,469 $388,778
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 21,274 375 3.54% $ 16,905 240 2.86%
NOW accounts.................................. 25,585 316 2.48 23,937 290 2.44
Savings accounts.............................. 73,387 919 2.52 63,498 733 2.33
Time deposits less than $100.................. 177,178 4,914 5.58 182,130 4,894 5.42
Time deposits $100 or more.................... 31,279 915 5.88 22,136 643 5.86
Short-term borrowings......................... 3,183 97 6.13 651 16 4.96
Long-term debt................................ 38 2 10.58 40 2 10.08
-------- ------- -------- -------
Total interest-bearing liabilities........ 331,924 7,538 4.57% 309,297 6,818 4.45%
Noninterest-bearing deposits.................. 37,085 35,792
Other liabilities............................. 3,304 3,639
Stockholders' equity.......................... 35,156 40,050
-------- --------
Total liabilities and stockholders' equity $407,469 $388,778
======== ------- ======== -------
Net interest/income spread................ $ 7,564 3.31% $ 7,356 3.35%
======= =======
Net interest margin....................... 3.95% 4.05%
Tax equivalent adjustments:
Loans......................................... $ 127 $ 98
Investments................................... 455 511
------- -------
Total adjustments......................... $ 582 $ 609
======= =======
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 loss of $1,399 for the first half of 2000 and
an unrealized holding gain of $1,657 for the first half of 1999 included in other assets. Tax-equivalent
adjustments were calculated using the prevailing statutory tax rate of 34.0 percent.
</TABLE>
PROVISION FOR LOAN LOSSES:
We make provisions for loan losses based on evaluations of the adequacy of
the 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 our most recent evaluation, we believe that the
allowance is adequate to absorb any known and inherent losses in the
portfolio.
The provision for loan losses totaled $180 for the six months ended June
30, 2000, an increase of $120 compared to $60 for the same six months of
1999. For the second quarter of 2000, the provision for loan losses was
$90. This was an increase of $60 in comparison to the same quarter of 1999.
We believe that maintaining a standard monthly charge to operations in the
form of a provision is warranted, based on loan growth and the level of
nonperforming assets. If loan demand intensifies or nonperforming asset
levels deteriorate, we will consider adjusting the monthly provision amount
for the remainder of 2000.
NONINTEREST INCOME:
For the six months ended June 30, 2000, we recorded noninterest income of
$1,099. Noninterest income for the same period of 1999 amounted to $786.
Included in noninterest income for the first half of 2000 were gains on the
sale of investment securities of $173. The majority of these gains resulted
from the sale of equity securities of local financial institutions. The
decision to sell these securities was based on a decline in their total
return compared to alternative investments. Adjusting for these gains,
noninterest income increased $140 or 17.8 percent over the previous year.
An increase in service charges, fees and commissions of $175 was partially
offset by a $35 decrease in gains on the sale of one-to-four family
residential mortgages on the secondary market.
For the second quarter of 2000, noninterest income totaled $486, an
increase of $112 or 29.9 percent in comparison to $374 recorded for the
same quarter last year.
NONINTEREST EXPENSE:
We categorize noninterest expense into three main groups:
- employee-related expenses,
- occupancy and equipment expenses, and
- other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and
equipment expenses, the costs related to the maintenance of facilities and
equipment, include depreciation, general maintenance and repairs, real
estate taxes, rental expense offset by any rental income, and utility
costs. Other expenses include general operating expenses such as
advertising, contractual services, insurance including FDIC assessment,
other taxes and supplies. Several of these costs and expenses are variable
while the remainder are fixed. We utilize budgets and other related
strategies in an effort to control the variable expenses.
Major components of noninterest expense for the three months and six months
ended June 30, 2000 and 1999, are summarized as follows:
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $1,101 $1,023 $2,194 $2,019
Employee benefits.............................. 199 171 385 339
------ ------ ------ ------
Salaries and employee benefits expense....... 1,300 1,194 2,579 2,358
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 175 135 368 301
Equipment expense.............................. 224 167 422 349
------ ------ ------ ------
Net occupancy and equipment expense.......... 399 302 790 650
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 86 118 173 157
Other taxes.................................... 54 77 138 157
Stationery and supplies........................ 102 96 223 203
Contractual services........................... 286 246 558 464
Insurance including FDIC assessment............ 40 30 83 61
Other.......................................... 434 303 784 544
------ ------ ------ ------
Other noninterest expenses................... 1,002 870 1,959 1,586
------ ------ ------ ------
Total noninterest expense.................. $2,701 $2,366 $5,328 $4,594
====== ====== ====== ======
</TABLE>
Delivery system expansions, which occurred throughout the previous year,
impacted all three of our major categories of noninterest expense for the
first half of 2000. As a result, we recorded noninterest expense of $5,328
for the six months ended June 30, 2000, an increase of $734 or 16.0 percent
compared to the same period one year earlier. Our productivity and
efficiency were also negatively affected by the expansion. This is
evidenced by increases in both the operating efficiency ratio and the
overhead ratio. The operating efficiency ratio, defined as noninterest
expenses less other real estate expenses to net interest income and
noninterest income less any nonrecurring gains, was 66.4 percent for the
first half of 2000 compared to 61.0 percent for the same period of 1999.
For the first six months of 2000 our overhead ratio, noninterest expense as
a percentage of total average assets increased to 2.6 percent from 2.0
percent for the same six months of last year. This ratio, however is in
line with that of our peer group which also posted an overhead ratio of 2.6
percent for the six months ended June 30, 2000.
Salaries and employee benefit expenses, which comprise the majority of our
noninterest expense, totaled $2,579 or 48.4 percent of noninterest expense
for the six months ended June 30, 2000. In comparison, these expenses were
$2,358 or 51.3 percent of noninterest expense for the same six months of
1999. Additional staffing needs relative to the opening of the Dickson
City branch office along with merit increases related to personnel
performance appraisals were the primary reasons for the increase. For the
second quarter of 2000, employee-related expenses totaled $1,300, an
increase of $106 compared to the second quarter of 1999.
Net occupancy and equipment expenses increased $140 to $790 for the first
half of 2000. Additional expenses associated with the operation of the
Clarks Summit and Dickson City branch offices and the corporate center, as
well as, data processing enhancements contributed to the increase. For the
three months ended June 30, 2000, net occupancy and equipment expenses
amounted to $399, an increase of $97 compared to $302 recorded for the same
three months of 1999.
Net losses from properties held in other real estate coupled with
additional costs necessary to operate the two new branches resulted in a
$373 increase in other expenses for the first half of 2000. We recorded
other expenses of $1,959 and $1,002 for the six and three months ended June
30, 2000, compared to $1,586 and $870 for the respective 1999 periods.
Included in the net losses from other real estate were donations of
foreclosed properties to Habitat for Humanity.
Recently, the Federal Deposit Insurance Corporation ("FDIC") decided to
retain the existing Bank Insurance Fund ("BIF") and Savings Association
Insurance Fund ("SAIF") assessment schedules of 0 to 27 basis points per
year for the second semiannual assessment period of 2000. According to
FDIC statistics:
- 93.7 percent of all BIF-member institutions and 91.6 percent of
SAIF-member institutions are estimated to be listed in the lowest
risk category, thus paying no premiums,
- Only 0.1 percent of BIF-member and SAIF-member institutions are
estimated to be in the highest risk category, paying a premium of
27 cents per 100 dollars in deposits,
- The average annual assessment rate is projected to be 11 cents
per 100 dollars for BIF-member institutions and 22 cents per 100
dollars for SAIF-member institutions,
- The FDIC-approved rate schedules are expected to maintain the
reserve ratios for both the BIF and SAIF above the Congressional
mandated 1.25 percent through year-end 2000,
- At December 31, 1999, the BIF reserve ratio was 1.36 percent and
the SAIF reserve ratio was 1.45 percent, and
- There will continue to be a separate levy assessed on all FDIC-
insured institutions to bear the cost of bonds sold by the
Finance Corporation ("FICO") between 1987 and 1989 in support of
the former Federal Savings and Loan Insurance Corporation. As of
January 1, 2000, all institutions are assessed the same rate by
FICO, as provided for in the Deposit Insurance Funds Act of 1996.
We were included in the 93.7 percent of all BIF-member institutions
classified in the well capitalized supervisory risk subgroup at June 30,
2000. Accordingly, we will be exempt from paying a BIF assessment for the
second half of 2000. However, along with all banks, we continue to be
assessed quarterly for assistance in interest payments on FICO bonds used
to capitalize the SAIF. Our assessments totaled $37 and $20 for the six
months ended June 30, 2000 and 1999.
INCOME TAXES:
For the six months ended June 30, 2000, income tax expense totaled $543.
This resulted in an effective tax rate of 21.1 percent. For the same
period of 1999, income tax expense was $629 with an effective tax rate of
21.8 percent. Our effective tax rate is more favorable in comparison to
that of our peer group. For the first six months of 2000 and 1999, the peer
group posted effective tax rates of 22.1 percent and 23.4 percent. We
expect our effective tax rate to remain relatively stable for the remainder
of 2000 through emphasizing income on tax-exempt investments and loans as
well as utilizing investment tax credits available through its investment
in a residential housing program for elderly and low- to moderate-income
families.
The difference between the amount of income tax currently payable and the
provision for income tax expense reflected in the income statements arise
from temporary differences. Temporary differences are differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements, which result in deferred tax assets or liabilities.
We perform quarterly reviews on the tax criteria related to the recognition
of deferred tax assets. We decided not to establish a valuation reserve
for the deferred tax assets since it is more likely than not that these
assets could be principally realized through carry-back to taxable income
in prior years and by future reversals of existing taxable temporary
differences or, to a lesser extent, through future taxable income.
Comm Bancorp, Inc.
OTHER INFORMATION
-----------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGES IN SECURITIES.
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AT THE
COMPANY'S ANNUAL MEETING OF STOCKHOLDERS HELD ON APRIL 28, 2000,
FOR WHICH PROXIES WERE SOLICITED PURSUANT TO SECTION 14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, THE FOLLOWING MATTERS WERE VOTED
UPON BY THE STOCKHOLDERS.
1. To elect thirteen directors to serve for a one-year term and
until their successors are duly elected and qualified.
All nominees of the Board of Directors were elected. The number of
votes cast for or opposed to each of the nominees for election to the
Board of Directors were as follows:
<TABLE>
<CAPTION>
Nominee For Against
------- --- -------
<S> <C> <C>
David L. Baker 1,720,047.699 16,110.739
Thomas M. Chesnick 1,722,360.359 13,798.079
William B. Farber, Sr. 1,720,597.890 15,560.548
Judd B. Fitze 1,722,940.359 13,218.079
John P. Kameen 1,721,690.359 14,468.079
William A. Kerl 1,700,279.572 35,878.866
Erwin T. Kost 1,722,340.359 13,818.079
William B. Lopatofsky 1,722,639.572 13,518.866
Robert A. Mazzoni 1,720,519.562 15,638.876
J. Robert McDonnell 1,718,323.717 17,834.721
Joseph P. Moore, III 1,720,535.118 15,623.320
Theodore W. Porosky 1,699,816.662 36,341.776
Eric G. Stephens 1,722,940.359 13,218.079
</TABLE>
2. To ratify the selection of Kronick, Kalada, Berdy & Co. of
Kingston, Pennsylvania, Certified Public Accountants, as the
independent auditors for the year ending December 31, 2000. The
votes cast on this matter were as follows:
For Against
--- -------
1,732,725.604 4,432.834
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: August 11, 2000 /s/ David L. Baker
-------------------------- -------------------------------
David L. Baker
Chief Executive Officer
Date: August 11, 2000 /s/ Scott A. Seasock
-------------------------- -------------------------------
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 2000 /s/ Stephanie A. Ganz
-------------------------- -------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
----------- ----------- ----
27 Financial Data Schedule 46
