UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
521 MAIN STREET, FOREST CITY, PA 18421
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 785-3181
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.33 PER SHARE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price: $56,730,575 AT JANUARY 31, 2000.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 2,017,034 AT JANUARY 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1999, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 2000 Proxy Statement are incorporated
by reference in Part III of this Annual Report.
Page 1 of 204
Exhibit Index on Page 41
COMM BANCORP, INC.
FORM 10-K INDEX
PART I Page
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Item 1. Business................................................. 3
Item 2. Properties............................................... 26
Item 3. Legal Proceedings........................................ 26
Item 4. Submission of Matters to a Vote of Security Holders...... *
PART II
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 27
Item 6. Selected Financial Data.................................. 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 28
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk..................................................... 28
Item 8. Financial Statements and Supplementary Data.............. 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... *
PART III
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Item 10. Directors and Executive Officers of the Registrant....... 29
Item 11. Executive Compensation................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 36
Item 13. Certain Relationships and Related Transactions........... 37
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 38
Signatures........................................................ 39
Exhibit Index..................................................... 41
*Not Applicable
COMM BANCORP, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
We are a registered bank holding company incorporated in 1983 as a
Pennsylvania business corporation and are headquartered in Clarks Summit,
Pennsylvania. We have one wholly-owned subsidiary, Community Bank and
Trust Company, or referred to as Community Bank. Our business consists
of the management and supervision of Community Bank. Our principal
source of income is dividends paid by Community Bank. At December 31,
1999, we had approximately:
- $407.1 million in total assets,
- $276.9 million in loans,
- $362.5 million in deposits, and
- $35.5 million in stockholders' equity.
Community Bank is a Pennsylvania commercial bank and a member of the
Federal Reserve System whose deposits are insured by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
Community Bank is a full-service commercial bank providing a range of
products and services, including time and demand deposit accounts,
consumer, commercial and mortgage loans, and commercial leases to
individuals and small- to medium-sized businesses in its Northeastern
Pennsylvania market area. At December 31, 1999, Community Bank had
fourteen branch banking offices which are located in the Pennsylvania
counties of Lackawanna, Susquehanna, Wayne and Wyoming.
In 1999, Community Bank organized a leasing subsidiary, Community Leasing
Corporation, which is a Pennsylvania business corporation, to engage in
commercial leasing.
We consider Community Bank's branch banking offices to be a single
operating segment because these branches have similar:
- Economic characteristics,
- Products and services,
- Operating processes,
- Delivery system,
- Customer bases, and
- Regulatory oversight.
We have not operated any other reportable operating segments in the
three-year period ended December 31, 1999.
As of December 31, 1999, we had 167 full-time equivalent employees. We
and Community Bank are not parties to any collective bargaining agreement
and employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the
regulatory framework applicable to us and Community Bank and provides
certain specific information. This regulatory framework is primarily
intended for the protection of investors in our common stock, depositors
of Community Bank and the BIF that insures bank deposits. To the extent
that the following information describes statutory and regulatory
provisions, it is qualified by reference to those provisions. A change
in the statutes, regulations or regulatory policies applicable to us or
Community Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of the
Federal Reserve Act, limit borrowings by us from Community Bank and also
limit various other transactions between us and Community Bank. For
example, Section 23A limits to no more than 10.0 percent of its total
capital the aggregate outstanding amount of Community Bank's loans and
other "covered transactions" with any particular nonbank affiliate, and
limits to no more than 20.0 percent of its total capital the aggregate
outstanding amount of Community Bank's covered transactions with all of
its affiliates. At December 31, 1999, approximately $3.8 million was
available for loans to us from Community Bank. Section 23A also
generally requires that Community Bank's loans to its nonbank affiliates
be secured, and Section 23B generally requires that Community Bank's
transactions with its nonbank affiliates be at arm's-length terms. Also,
we and Community Bank and its subsidiary are prohibited from engaging in
certain "tie-in" arrangements in connection with extensions of credit or
provision of property or services.
SUPERVISORY AGENCIES
As a Pennsylvania commercial bank and member of the Federal Reserve
System, Community Bank is subject to primary supervision, regulation, and
examination by the Pennsylvania Department of Banking and the Federal
Reserve Board. Community Bank is subject to extensive Pennsylvania and
federal statutes and regulations that significantly affect its business
and activities. Community Bank must file reports with its regulators
concerning its activities and financial condition and obtain regulatory
approval to enter into certain transactions. Community Bank is also
subject to periodic examinations by its primary and secondary regulators
to ascertain compliance with various regulatory requirements. Other
applicable statutes and regulations relate to insurance of deposits,
allowable investments, loans, leases, acceptance of deposits, trust
activities, mergers, consolidations, payment of dividends, capital
requirements, reserves against deposits, establishment of branches and
certain other facilities, limitations on loans to one borrower and loans
to affiliated persons, activities of subsidiaries, and other aspects of
the business of banks. Recent federal legislation has instructed federal
agencies to adopt standards or guidelines governing banks' internal
controls, information systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and benefits, asset
quality, earnings and stock valuation, and other matters. Legislation
adopted in 1994 gives the federal banking agencies greater flexibility in
implementing standards on asset quality, earnings and stock valuation.
Regulatory authorities have broad flexibility to initiate proceedings
designed to prohibit banks from engaging in unsafe and unsound banking
practices.
We and Community Bank and its subsidiary are also affected by various
other governmental requirements and regulations, general economic
conditions, and the fiscal and monetary policies of the federal
government and the Federal Reserve Board. The monetary policies of the
Federal Reserve Board influence to a significant extent the overall
growth of loans, leases, investments, deposits, interest rates charged on
loans, and interest rates paid on deposits. The nature and impact of
future changes in monetary policies are often unpredictable.
We are subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of our
securities. We are also subject to the SEC's rules and regulations
relating to periodic reporting, insider trading reports and proxy
solicitation materials. Our common stock is listed for quotation of
prices on The NASDAQ Stock Market and, therefore, we are subject to the
listing rules and regulations imposed by The NASDAQ Stock Market .
SUPPORT OF COMMUNITY BANK
Under current Federal Reserve Board policy, we are expected to act as a
source of financial and managerial strength to Community Bank by standing
ready to use available resources to provide adequate capital funds to
Community Bank during periods of financial adversity and by maintaining
the financial flexibility and capital-raising capacity to obtain
additional resources for assisting Community Bank. The support expected
by the Federal Reserve Board may be required at times when we may not
have the resources or inclination to provide it.
If a default occurred with respect to Community Bank, any capital loans
to Community Bank from us would be subordinate in right of payment to
payment of Community Bank depositors and certain of its other
obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
Community Bank can be held liable for any loss incurred, or reasonably
expected to be incurred, by the FDIC in connection with:
- The default of a commonly controlled FDIC-insured depository
institution, or
- Any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" is generally defined as the appointment of a conservator or
receiver, and "in danger of default" is generally defined as the
existence of certain conditions indicating that a default is likely to
occur in the absence of regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of Community Bank by any
receiver, federal legislation provides that deposits and certain claims
for administrative expenses and employee compensation against Community
Bank are afforded a priority over the general unsecured claims against
Community Bank, including federal funds and letters of credit.
ALLOWANCE FOR LOAN LOSSES
There are certain risks inherent in making all loans. These risks
include interest rate changes over the time period in which loans may be
repaid, risks resulting from changes in our Northeastern Pennsylvania
economy, risks inherent in dealing with individual borrowers, and, in the
case of a loan backed by collateral, the risks resulting from
uncertainties about the future value of the collateral. As a result, we
maintain an allowance for loan losses at a level believed adequate to
absorb potential losses resulting from these risks.
The information explaining our systematic analysis and procedural
discipline utilized for determining our allowance for loan losses and its
elements is filed at Exhibit 13 to this report and is incorporated in its
entirety by reference under this Item 1.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed
by the Federal Reserve Board, which are substantially similar to the
capital requirements and guidelines imposed by the Federal Reserve Board
on Community Bank. For this purpose, a bank's or bank holding company's
assets and certain specified off-balance sheet commitments are assigned
to four risk categories, each weighted differently based on the level of
credit risk that is ascribed to those assets or commitments. In
addition, risk-adjusted assets are adjusted for low-level recourse and
market-risk equivalent assets. A bank's or bank holding company's
capital, in turn, includes the following tiers:
- Core Tier I capital, which includes common equity, non-cumulative
perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets, and certain other assets, and
- Supplementary Tier II capital, which includes, among other items,
perpetual preferred stock not meeting the Tier I definition,
mandatory convertible securities, subordinated debt and
allowances for loan and lease losses, subject to certain
limitations, less certain required deductions.
We and Community Bank, like other bank holding companies and banks, are
required to maintain Tier I and Total Capital, the sum of Tier I and Tier
II capital, less certain deductions, equal to at least 4.0 percent and
8.0 percent of their total risk-adjusted assets, including certain off-
balance sheet items, such as unused lending commitments and standby
letters of credit. At December 31, 1999, we met both requirements, with
Tier I and Total Capital equal to 14.6 percent and 15.9 percent of total
risk-adjusted assets. Community Bank also met both requirements at
December 31, 1999, with Tier I and Total Capital equal to 14.2 percent
and 15.4 percent of total risk-adjusted assets.
The Federal Reserve Board has adopted rules to incorporate market and
interest rate risk components into their risk-based capital standards.
Amendments to the risk-based capital requirements, incorporating market
risk, became effective January 1, 1998. Under the new market-risk
requirements, capital will be allocated to support the amount of market
risk related to a financial institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies and banks
to maintain a minimum Leverage ratio, Tier I capital to adjusted total
assets, of 3.0 percent if the bank holding company has the highest
regulatory rating and meets certain other requirements, or of 3.0 percent
plus an additional cushion of at least 1.0 to 2.0 percentage points if
the bank holding company does not meet these requirements. At December
31, 1999, our Leverage ratio was 8.6 percent and Community Bank's
Leverage ratio was 8.3 percent.
The Federal Reserve Board may set capital requirements higher than the
minimums noted above for bank holding companies whose circumstances
warrant it. For example, bank holding companies experiencing or
anticipating significant growth may be expected to maintain strong
capital positions substantially above the minimum supervisory levels
without significant reliance on intangible assets. Furthermore, the
Federal Reserve Board has indicated that it will consider a Tangible Tier
I Leverage ratio, deducting all intangibles, and other indicia of capital
strength in evaluating proposals for expansion or new activities or when
a bank holding company faces unusual or abnormal risk.
Failure to meet capital requirements could subject us and Community Bank
to a variety of enforcement remedies, including the termination of
deposit insurance by the FDIC, and to certain restrictions on its
business. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), among other things, identifies five capital categories
for insured banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, and requires federal bank regulatory agencies to
implement systems for prompt corrective action for insured banks that do
not meet minimum capital requirements based on these categories. FDICIA
imposes progressively more restrictive constraints on operations,
management, and capital distributions, depending on the category in which
an institution is classified. Unless a bank is well capitalized, it is
subject to restrictions on its ability to offer brokered deposits, on
"pass-through" insurance coverage for certain of its accounts, and on
certain other aspects of its operations. FDICIA generally prohibits a
bank from paying any dividend or making any capital distribution or
paying any management fee to its holding company if the bank would
thereafter be undercapitalized. An undercapitalized bank is subject to
regulatory monitoring and may be required to divest itself of or
liquidate subsidiaries. Holding companies of the institutions may be
required to divest themselves of the institutions or divest themselves of
or liquidate other affiliates. An undercapitalized bank must develop a
capital restoration plan, and its parent bank holding company must
guarantee the bank's compliance with the plan up to the lesser of 5.0
percent of the bank's assets at the time it became undercapitalized or
the amount needed to comply with the plan. Critically undercapitalized
institutions are prohibited from making payments of principal and
interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Federal Reserve Board under FDICIA provide that a
state member bank is deemed to be well capitalized if the bank has a
total risk-based capital ratio of 10.0 percent or greater, a Tier I risk-
based capital ratio of 6.0 percent or greater, and a Leverage ratio of
5.0 percent or greater and the institution is not subject to a written
agreement, order, capital directive, or prompt corrective action
directive to meet and maintain a specific level of any capital measure.
As of December 31, 1999, we and Community Bank were well capitalized,
based on the prompt corrective action ratios and guidelines described
above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the Federal Reserve Board's
prompt corrective action regulations, and that the capital category may
not constitute an accurate representation of the bank's overall financial
condition or prospects.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits
unless it is well capitalized, or adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank
that is not well capitalized from paying an interest rate on brokered
deposits in excess of three-quarters of one percentage point over certain
prevailing market rates. As of December 31, 1999, Community Bank held no
brokered deposits.
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from Community Bank. In
general, under Pennsylvania law, we cannot pay a cash dividend if the
payment would render us insolvent. Our revenues primarily consist of
dividends paid by Community Bank. Various federal and state statutory
provisions limit the amount of dividends Community Bank can pay to us
without regulatory approval. Under Pennsylvania law, Community Bank may
declare and pay dividends to us only out of accumulated net earnings and
as long as the surplus of Community Bank would not be reduced below its
stated paid-in capital. At December 31, 1999, approximately $2.0 million
was available for payment of dividends to us.
In addition, federal bank regulatory agencies have authority to prohibit
Community Bank from engaging in an unsafe or unsound practice in
conducting its business. Depending upon the financial condition of the
bank in question, the payment of dividends could be deemed to constitute
an unsafe or unsound practice. The ability of Community Bank to pay
dividends in the future is currently influenced, and could be further
influenced, by bank regulatory policies and capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of Community Bank are insured up to regulatory limits by the
FDIC and, accordingly, are subject to deposit insurance assessments to
maintain the BIF administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance
assessment system. Under this system, the FDIC places each insured bank
in one of nine risk categories based on the bank's capitalization and
supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. An insured bank's insurance assessment rate is then
determined by the risk category into which it is classified.
In light of the recent favorable financial situation of the federal
deposit insurance funds and the low number of depository institution
failures, effective January 1, 1997, the annual insurance premiums on
bank deposits insured by the BIF vary between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the
lowest capital and supervisory evaluation categories. BIF assessment
rates are subject to semi-annual adjustment by the FDIC within a range of
up to five basis points without public comment. The FDIC also possesses
authority to impose special assessments from time to time. Community
Bank paid no BIF insurance premium in 1999.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the
BIF, in addition to assessments currently imposed on depository
institutions with respect to BIF-insured deposits, to pay for the cost of
Financing Corporation ("FICO") funding. The FDIC established the FICO
assessment rates effective for the fourth quarter 1999 at approximately
$0.012 per $100 annually for BIF-assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment
bases of the FDIC insurance funds and do not vary depending upon a
depository institution's capitalization or supervisory evaluations. In
1999, Community Bank paid FICO assessments of $40,048.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), we are subject to certain concentration limits and other
requirements:
- Bank holding companies, like ourselves, are permitted to acquire
banks and bank holding companies located in any state,
- Any bank that is a subsidiary of a bank holding company is
permitted to receive deposits, renew time deposits, close loans,
service loans, and receive loan payments as an agent for any
other depository institution subsidiary of that bank holding
company, and
- Banks are permitted to acquire branch offices outside their home
state by merging with out-of-state banks, purchasing branches in
other states, and establishing de-novo branch offices in other
states.
The ability of banks to acquire branch offices through purchases or
openings of other branches is contingent, however, on the host state
having adopted legislation "opting in" to those provisions of Riegle-
Neal. In addition, the ability of a bank to merge with a bank located in
another state is contingent on the host state not having adopted
legislation "opting out" of that provision of Riegle-Neal. Pennsylvania
has opted in to all of these provisions upon the condition that another
host state has similar or reciprocal requirements.
As of the date of this report, we are not contemplating any interstate
acquisitions of a bank or a branch office.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons
from acquiring "control" of a bank holding company, unless the Federal
Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board,
the acquisition of 10.0 percent or more of a class of voting stock of a
bank holding company with a class of securities registered under Section
12 of the Exchange Act, like ourselves, would, under the circumstances
set forth in the presumption, constitute acquisition of control of the
bank holding company.
In addition, a company is required to obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act before acquiring 25.0
percent, 5.0 percent in the case of an acquirer that is a bank holding
company, or more of any class of outstanding common stock of a bank
holding company, like ourselves, or otherwise obtaining control or a
controlling influence over that bank holding company.
PERMITTED NONBANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiary to engage in
nonbanking activities that are so closely related to banking or managing
or controlling banks. While the types of permissible activities are
subject to change by the Federal Reserve Board, the principal nonbanking
activities that presently may be conducted by a bank holding company or
its subsidiary without prior approval of the Federal Reserve Board are:
- Extending credit and servicing loans. Making, acquiring,
brokering, or servicing loans or other extensions of credit,
including factoring, issuing letters of credit and accepting
drafts, for the company's account or for the account of others.
- Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans
or other extensions of credit, as determined by the Federal
Reserve Board. The Federal Reserve Board has determined that
the following activities are usual in connection with making,
acquiring, brokering or servicing loans or other extensions of
credit:
- Real estate and personal property appraising, performing
appraisals of real estate and tangible and intangible
personal property, including securities.
- Arranging commercial real estate equity financing, acting
as intermediary for the financing of commercial or
industrial income-producing real estate by arranging for
the transfer of the title, control, and risk of such a real
estate project to one or more investors, if the bank
holding company and its affiliates do not have an interest
in, or participate in managing or developing, a real estate
project for which it arranges equity financing, and do not
promote or sponsor the development of the property.
- Check-guaranty services, authorizing a subscribing merchant
to accept personal checks tendered by the merchant's
customers in payment for goods and services, and purchasing
from the merchant validly authorized checks that are
subsequently dishonored.
- Collection agency services, collecting overdue accounts
receivable, either retail or commercial.
- Credit bureau services, maintaining information related to
the credit history of consumers and providing the
information to a credit grantor who is considering a
borrower's application for credit or who has extended
credit to the borrower.
- Asset management, servicing, and collection activities,
engaging under contract with a third party in asset
management, servicing, and collection of assets of a type
that an insured depository institution may originate and
own, if the company does not engage in real property
management or real estate brokerage services as part of
these services.
- Acquiring debt in default, acquiring debt that is in
default at the time of acquisition under certain
conditions.
- Real estate settlement servicing, providing real estate
settlement services.
- Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing
such property under certain conditions.
- Operating nonbank depository institutions:
- Industrial banking, owning, controlling, or operating an
industrial bank, Morris Plan bank, or industrial loan
company, so long as the institution is not a bank, or
- Operating savings association, owning, controlling or
operating a savings association, if the savings association
engages only in deposit-taking activities, lending, and
other activities that are permissible for bank holding
companies.
- Trust company functions. Performing functions or activities
that may be performed by a trust company, including
activities of a fiduciary, agency, or custodial nature, in
the manner authorized by federal or state law, so long as the
company is not a bank for purposes of the Bank Holding
Company Act.
- Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including,
without, in any way, limiting the foregoing:
- Serving as investment adviser, as defined in section 2(a)
(20) of the Investment Company Act of 1940, 15 U.S.C.
80a-2(a)(20), to an investment company registered under
that act, including sponsoring, organizing, and managing a
closed-end investment company,
- Furnishing general economic information and advice, general
economic statistical forecasting services, and industry
studies,
- Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged
buyouts, recapitalizations, capital structurings, financing
transactions and similar transactions, and conducting
financial feasibility studies,
- Providing information, statistical forecasting, and advice
with respect to any transaction in foreign exchange, swaps,
and similar transactions, commodities, and any forward
contract, option, future, option on a future, and similar
instruments,
- Providing educational courses, and instructional materials
to consumers on individual financial management matters,
and
- Providing tax-planning and tax-preparation services to any
person.
- Agency transactional services for customer investments:
- Securities brokerage. Providing securities brokerage
services, including securities clearing and/or securities
execution services on an exchange, whether alone or in
combination with investment advisory services, and
incidental activities, including related securities credit
activities and custodial services, if the securities
brokerage services are restricted to buying and selling
securities solely as agent for the account of customers
and does not include securities underwriting or dealing.
- Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of
customers as a "riskless principal" to the extent of
engaging in a transaction in which the company, after
receiving an order to buy or sell a security from a
customer, purchases or sells the security for its own
account to offset a contemporaneous sale to or purchase
from the customer. This does not include: (i) selling
bank-ineligible securities at the order of a customer that
is the issuer of the securities, or selling bank-ineligible
securities in any transaction where the company has a
contractual agreement to place the securities as agent of
the issuer; or (ii) acting as a riskless principal in any
transaction involving a bank-ineligible security for
which the company or any of its affiliates acts as
underwriter, during the period of the underwriting or for
30 days thereafter, or dealer.
- Private placement services. Acting as agent for the
private placement of securities in accordance with the
requirements of the Securities Act of 1933 ("1933 Act") and
the rules of the SEC, if the company engaged in the
activity does not purchase or repurchase for its own
account the securities being placed, or held in inventory
unsold portions of issues of these securities.
- Futures commission merchant. Acting as a futures
commission merchant for unaffiliated persons in the
execution, clearance, or execution and clearance of any
futures contract and option on a futures contract traded on
an exchange in the United States or abroad under certain
conditions.
- Other transactional services. Providing to customers as
agent transactional services with respect to swaps and
similar transactions.
- Investment transactions as principal:
- Underwriting and dealing in government obligations and
money market instruments. Underwriting and dealing in
obligations of the United States, general obligations of
states and their political subdivisions, and other
obligations that state member banks of the Federal Reserve
System may be authorized to underwrite and deal in under
12 U.S.C. 24 and 335, including bankers' acceptances and
certificates of deposit, under the same limitations as
would be applicable if the activity were performed by the
bank holding company's subsidiary member banks or its
subsidiary nonmember banks as if they were member banks.
- Investing and trading activities. Engaging as principal
in: (i) foreign exchange; (ii) forward contracts, options,
futures, options on futures, swaps, and similar contracts,
whether traded on exchanges or not, based on any rate,
price, financial asset, including gold, silver, platinum,
palladium, copper, or any other metal approved by the
Federal Reserve Board, nonfinancial asset, or group of
assets, other than a bank-ineligible security under certain
conditions; and (iii) forward contracts, options, futures,
options on futures, swaps, and similar contracts, whether
traded on exchanges or not, based on an index of a rate,
a price, or the value of any financial asset, nonfinancial
asset, or group of assets, if the contract requires such
settlement.
- Buying and selling bullion, and related activities.
Buying, selling and storing bars, rounds, bullion, and
coins of gold, silver, platinum, palladium, copper, or any
other metal approved by the Federal Reserve Board, for the
company's own account or the account of others, and
providing incidental services such as arranging for
storage, safe custody, assaying, and shipment.
- Management consulting and counseling activities:
- Management consulting. Providing management consulting
advice under certain conditions.
- Employee benefits consulting services. Providing
consulting services to employee benefit, compensation and
insurance plans, including designing plans, assisting in
the implementation of plans, providing administrative
services to plans, and developing employee communication
programs for plans.
- Career counseling services. Providing career counseling
services to: (i) a financial organization and individuals
currently employed by, or recently displaced from, a
financial organization; (ii) individuals who are seeking
employment at a financial organization; and (iii)
individuals who are currently employed in or who seek
positions in the finance, accounting, and audit departments
of any company.
- Support services:
- Courier services. Providing courier services for:
(i) checks, commercial papers, documents, and written
instruments, excluding currency or bearer-type negotiable
instruments, that are exchanged among banks and financial
institutions; and (ii) audit and accounting media of a
banking or financial nature and other business records and
documents used in processing such media.
- Printing and selling Magnetic Ink Character Recognition
("MICR")-encoded items. Printing and selling checks and
related documents, including corporate image checks, cash
tickets, voucher checks, deposit slips, savings withdrawal
packages, and other forms that require MICR-encoding.
- Insurance agency and underwriting:
- Credit insurance. Acting as principal, agent, or broker
for insurance, including home mortgage redemption
insurance, that is: (i) directly related to an extension
of credit by the bank holding company or any of its
subsidiaries; and (ii) limited to ensuring the repayment of
the outstanding balance due on the extension of credit in
the event of the death, disability, or involuntary
unemployment of the debtor.
- Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a
finance company that is a subsidiary of a bank holding
company under certain conditions.
- Engaging in any general insurance agency activities.
- Community development activities:
- Financing and investment activities. Making equity and
debt investments in corporations or projects primarily
designed to promote community welfare, such as the economic
rehabilitation and development of low-income areas by
providing housing, services, or jobs for residents.
- Advisory activities. Providing advisory and related
services for programs primarily designed to promote
community welfare.
- Money orders, savings bonds, and travelers' checks. The
issuance and sale at retail of money orders and similar
consumer-type payment instruments, the sale of U.S. savings
bonds, and the issuance and sale of travelers' checks.
- Data processing. Providing data processing and data
transmission services, facilities, including data processing
and data transmission hardware, software, documentation, or
operating personnel, data bases, advice, and access to such
services, facilities, or data bases by any technological
means under certain conditions.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended ("CRA"), and the
regulations promulgated to implement the CRA are designed to create a
system for bank regulatory agencies to evaluate a depository
institution's record in meeting the credit needs of its community. CRA
regulations establish tests for evaluating both small and large
depository institutions' investment in their community. A small bank is
defined as a bank having total assets of less than $250 million and is
independent or is an affiliate of a holding company with less than $1
billion in assets. A large retail institution is one which does not meet
the small bank definition. A large retail institution can be evaluated
under one of two tests: (i) a three-part test evaluating the
institution's lending, service and investment performance; or (ii) a
strategic plan designed by the institution with community involvement and
approved by the appropriate federal bank regulator. A large institution
must choose one of these options under which to be examined. In
addition, the CRA regulations include separate rules regarding the manner
in which wholesale banks and limited purpose banks will be evaluated for
compliance.
For the purposes of the CRA regulations, Community Bank is deemed to be a
large bank, based upon financial information as of December 31, 1999.
Community Bank will be examined under the three-part test relating to
lending, service and investment performance. Community Bank received an
"outstanding" rating in its last CRA examination which was held on March
22, 1999. "Outstanding" is the highest CRA rating that a depository
institution can receive.
CONCENTRATION
We are not dependent for deposits nor exposed by loan concentrations to a
single customer or to a small group of customers, the loss of any one or
more of which would have a materially adverse effect on our financial
condition.
FINANCIAL SERVICES MODERNIZATION
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Financial Services Modernization Act (the "Modernization Act")
which will, in general, take effect on March 11, 2000. The Modernization
Act contains some of the most far-reaching changes governing the
operations of companies doing business in the financial services
industry. The Modernization Act eliminates the restrictions placed on
the activities of banks and bank holding companies and creates two new
structures, financial holding companies and financial subsidiaries. We
and Community Bank will be allowed to provide a wider array of financial
services and products that were reserved only for insurance companies and
securities firms. In addition, we can now affiliate with an insurance
company and a securities firm. We would qualify to elect to become a
financial holding company. This election is made to the Federal Reserve
Board. A financial holding company has authority to engage in activities
referred to as "financial activities" that are not permitted to bank
holding companies. A financial holding company may also affiliate with
companies that are engaged in financial activities. A "financial
activity" is an activity that does not pose a safety and soundness risk
and is financial in nature, incidental to an activity that is financial
in nature, or complimentary to a financial activity.
The Modernization Act lists certain activities as financial in nature:
- Lending, investing or safeguarding money or securities,
- Underwriting insurance or annuities, or acting as an insurance
or annuity principal, agent or broker,
- Providing financial or investment advice,
- Issuing or selling interests in pools of assets that a bank
could hold,
- Underwriting, dealing in or making markets in securities,
- Engaging in any activity that the Federal Reserve Board found
before the Modernization Act to be related closely to banking,
see the section in this report entitled "Permitted Nonbanking
Activities",
- Engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
Federal Reserve Board determined before the Modernization Act
that the activity was usual in connection with banking or
other financial operations internationally,
- Merchant banking, acquiring or controlling ownership interests
in an entity engaged in impermissible activities, if: (i) the
interests are not held by a depository institution; (ii) the
interests are held by a securities affiliate or an investment
advisory affiliate of an insurance company as part of
underwriting, merchant or investment banking activity; (iii)
the interests are held long enough to enable their sale in a
manner consistent with the financial viability of such an
activity; and (iv) we do not control the entity except to the
extent necessary to obtain a reasonable return on the
investment, or
- Insurance portfolio investing, acquiring or controlling
ownership interests in an entity engaged in impermissible
activities, if: (i) the interests are not held by a
depository institution; (ii) the interests are held by an
insurance or annuity company; (iii) the interests represent
investments made in the ordinary course of business in
accordance with state law; and (iv) we do not control the
entity except to the extent necessary to obtain a reasonable
return on the investment.
The Modernization Act instructs the Federal Reserve Board to adopt a
regulation or order defining certain additional activities as financial
in nature, to the extent they are consistent with the purposes of the
Modernization Act. These are:
- Lending, exchanging, transferring, investing for others or
safeguarding financial assets other than money or securities,
- Providing any method of transferring financial assets, and
- Arranging, effecting or facilitating financial transactions
for third parties.
Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental to a financial activity if they meet
specified criteria. The Federal Reserve Board is instructed to consider:
(i) the purposes of the Modernization Act and the Bank Holding Company
Act; (ii) changes in the market in which financial holding companies
compete; (iii) changes in the technology used to deliver financial
services; and (iv) whether the proposed activity is necessary or
appropriate to allow a financial holding company and its affiliates to
compete effectively, deliver services efficiently and offer services
through the most advanced technological means available.
The Modernization Act gives national banks authority to use "financial
subsidiaries" to engage in financial activities. This authority has some
limitations. Community Bank is a Pennsylvania commercial bank. However,
the Pennsylvania Department of Banking has, in the past, adopted a policy
of parity with the permitted activities for national banks. Therefore,
Community Bank would, in all likelihood, be permitted to own a financial
subsidiary only if the subsidiary's activities are limited to those that
are financial in nature or that Community Bank could engage in directly.
However, a financial subsidiary of Community Bank may not, as a
principal:
- Underwrite insurance or annuities,
- Engage in real estate development or investment,
- Engage in merchant banking, or
- Engage in insurance portfolio investment activities.
A bank's investment in a financial subsidiary will affect the way it
calculates its capital. The bank must deduct from its assets and
stockholders' equity the total of its investments in financial
subsidiaries. Moreover, a bank must present its financial information in
two ways: in accordance with generally accepted accounting principles,
and, separately, in a manner that reflects the segregation of the bank's
investments in financial subsidiaries.
As of the date of this report, we have not decided whether to elect to
become a financial holding company, to engage in any financial
activities, or to establish any financial subsidiaries in addition to
Community Bank.
PRIVACY
The Modernization Act creates a minimum federal standard of privacy. A
state can impose a greater or more restrictive standard of privacy than
the Modernization Act. There is a mechanism established to protect the
confidentiality of a customer's nonpublic personal financial information.
The Modernization Act requires Community Bank to disclose to a consumer
or customer its policies and practices to protect the confidentiality and
security of nonpublic personal information and to alert the consumer or
customer that he or she may opt out of any sharing of such information
with any affiliated or nonaffiliated third party. This notice must be
given initially, and on an annual basis if the consumer becomes a
customer.
The term consumer is different from the term customer. A consumer means
an individual who obtains or has obtained a financial product or service
from Community Bank that is to be primarily used for personal, family or
household purposes or that of the individual's representative. A
customer is an individual with a continuous relationship with Community
Bank. The federal bank regulatory agencies issued proposed regulations
which give several examples of a consumer and customer relationship:
- An individual who applies to Community Bank for credit for
personal, family or household purposes is a consumer of a
financial service, regardless of whether the credit is
extended.
- An individual who provides nonpublic personal information to
Community Bank in order to obtain a determination about whether
he or she may qualify for a loan to be primarily used for
personal, family, or household purposes is a consumer of a
financial service, regardless of whether the loan is extended
by Community Bank or another financial institution.
- An individual who provides nonpublic personal information to
Community Bank in connection with obtaining or seeking to
obtain financial, investment or economic advisory services is a
consumer regardless of whether Community Bank establishes an
ongoing advisory relationship.
- An individual who negotiates a workout with Community Bank for
a loan that Community Bank owns is a consumer regardless of
whether Community Bank originally extended the loan to the
individual.
- An individual who has a loan from Community Bank is Community
Bank's consumer even if Community Bank:
- Hires an agent to collect on the loan,
- Sells the rights to service the loan, or
- Bought the loan from the financial institution that
originated the loan.
- An individual is not Community Bank's consumer solely because
Community Bank processes information about the individual on
behalf of a financial institution that extended the loan to the
individual.
On the other hand, the following are several examples of a customer
relationship:
- A consumer has a continuing relationship with Community Bank if
the consumer:
- Has a deposit, credit, trust or investment account with
Community Bank,
- Purchases an insurance product from Community Bank,
- Holds an investment product through Community Bank,
- Enters into an agreement or understanding with Community
Bank whereby Community Bank undertakes to arrange or broker
a home mortgage loan for the consumer,
- Has a loan that Community Bank services where Community Bank
owns the servicing rights,
- Enters into a lease of personal property with Community
Bank, or
- Obtains financial, investment, or economic advisory services
from Community Bank for a fee.
- A consumer does not, however, have a continuing relationship
with Community Bank and therefore is not a customer, if:
- The consumer only obtains a financial product or service in
an isolated transaction, such as withdrawing cash from
Community Bank's ATM or purchasing a cashier's check or
money order,
- Community Bank sells the consumer's loan and does not retain
the rights to service the loan, or
- Community Bank sells the consumer airline tickets, travel
insurance or travelers' checks in an isolated transaction.
In general, Community Bank cannot disclose to a nonaffiliated third party
any nonpublic personal information of its customers unless Community Bank
provides its customer with a notice that includes:
- The policies and practices of Community Bank with regard to:
- Disclosing nonpublic information to nonaffiliated third
parties,
- The categories of persons to whom the information is or may
be disclosed, and
- The policy for disclosure to former customers.
- Categories of nonpublic information that are collected by
Community Bank,
- The policies that Community Bank maintains to protect the
confidentiality and security of nonpublic personal information,
and
- The disclosure, if required, under the Fair Credit Reporting
Act.
The Modernization Act sets forth a new requirement that this notice to a
consumer or customer must be in clear and conspicuous or "plain English"
language and presentation. The proposed regulations give several
examples of the rules to follow in drafting these notices:
- Community Bank makes its notice reasonably understandable if,
Community Bank:
- Presents the information contained in the notice in clear,
concise sentences, paragraphs and sections,
- Uses short explanatory sentences and bullet lists, whenever
possible,
- Uses definite, concrete, everyday words and active voice,
whenever possible,
- Avoids multiple negatives,
- Avoids legal and highly technical business terminology, and
- Avoids boilerplate explanations that are imprecise and
readily subject to different interpretations.
- Community Bank designs its notice to call attention to the
nature and significance of the information contained in the
notice if, to the extent applicable, Community Bank:
- Uses a plain-language heading to call attention to the
notice,
- Uses a typeface and type size that are easy to read, and
- Provides wide margins and ample line spacing.
- If Community Bank provides a notice on the same form as another
notice or other documents, Community Bank designs its notice to
call attention to the nature and significance of the
information contained in the notice if Community Bank uses:
- Larger type size(s), boldface or italics in the text,
- Wider margins and line spacing in the notice, or
- Shading or sidebars to highlight the notice, whenever
possible.
The Modernization Act creates certain exceptions to the prohibition on
disclosure of nonpublic personal information of customers. Some of these
exceptions are:
- With the consent of the customer,
- To effect, administer or enforce a transaction requested or
authorized by the customer,
- The servicing or processing of a financial product or service
requested or authorized by the customer,
- The maintaining or servicing of the customer's account with
Community Bank or with another entity as part of a private
label credit card program,
- Disclosure to persons holding a legal or beneficial interest
relating to the customer or to persons acting in a fiduciary or
representative capacity on behalf of the customer,
- Providing information to insurance rate advisory organizations,
guaranty funds or agencies, rating agencies, persons assessing
Community Bank's compliance with industry standards and
Community Bank's attorneys, accountants and auditors, and
- Disclosure permitted under other laws, such as the Right to
Financial Privacy Act, to law enforcement agencies or under
local and state laws.
Community Bank cannot disclose an account number or similar form of
access code for a credit card account, deposit account or transaction
account of a customer to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing through
electronic mail to the customer.
COMMUNITY BANK
Community Bank's legal headquarters is located at 521 Main Street, Forest
City, Susquehanna County, Pennsylvania 18421. Community Bank is a
community bank that seeks to provide personal attention and professional
financial assistance to its customers. Community Bank is a locally
managed and oriented financial institution established to serve the needs
of individuals and small and medium-sized businesses. Community Bank's
business philosophy includes offering direct access to its President and
other officers and providing friendly, informed and courteous service,
local and timely decision making, flexible and reasonable operating
procedures and consistently-applied credit policies.
MARKETING AREA
Community Bank's primary market area comprises Lackawanna, Susquehanna,
Wayne and Wyoming counties located in the Northeast corner of the
Commonwealth of Pennsylvania. The largest municipality in this market
area is the City of Scranton with a population of approximately 82.0
thousand based upon 1990 census data. There are no Community Bank
branches located within the City of Scranton. All of the branches are
located outside of Scranton in rural or small-town settings. See Item 2
in this report for a description of the location of each branch office.
Community Bank competes with 18 commercial banks, three thrift
institutions and 23 credit unions, many of which are substantially larger
in terms of assets and liabilities. In addition, Community Bank
experiences competition for deposits from mutual funds and security
brokers. Consumer, mortgage and insurance companies compete for various
types of loans. Principal methods of competing for banking, permitted
nonbanking services and financial activities include price, nature of
product, quality of service and convenience of location.
FUTURE LEGISLATION
Various legislation, including proposals to substantially change the
financial institution regulatory system and to expand or contract the
powers of banking institutions and bank holding companies, is from time
to time introduced in Congress. This legislation may change banking
statutes and our operating environment in substantial and unpredictable
ways. If enacted, such legislation could increase or decrease the cost
of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and
other financial institutions. We cannot accurately predict whether any
of this potential legislation will ultimately be enacted, and if enacted,
the ultimate effect that it, or implementing regulations, would have upon
our financial condition or results of operations.
ITEM 2. PROPERTIES
Our corporate headquarters is located at 125 North State Street, Clarks
Summit, Lackawanna County, Pennsylvania. We own this facility which has
approximately 24,000 square feet. We built this facility to place
Community Bank's administrative operations into one facility for better
efficiency and communications among our staff. Our legal or registered
office remains at 521 Main Street, Forest City, Susquehanna County,
Pennsylvania in a facility that we own with approximately 7,100 square
feet.
Our remaining banking centers are described as follows:
APPROXIMATE
LOCATION TYPE OF OWNERSHIP SQUARE FOOTAGE
- ------------------------------------------------------------------------------
61 Church Street, Montrose, PA Owned 3,500
- ------------------------------------------------------------------------------
Route 106, Clifford, PA Owned 1,300
- ------------------------------------------------------------------------------
Route 6 West, Tunkhannock, PA Owned 3,500
- ------------------------------------------------------------------------------
Route 29, Eaton Township, PA Leased 2,175
- ------------------------------------------------------------------------------
Route 307, Lake Winola, PA Leased 1,250
- ------------------------------------------------------------------------------
Route 6, Eynon, PA Leased 1,850
- ------------------------------------------------------------------------------
97 College Avenue, Factoryville, PA Owned 1,850
- ------------------------------------------------------------------------------
125 North State Street, Clarks Summit, PA Owned 3,860
- ------------------------------------------------------------------------------
57 Main Street, Nicholson, PA Owned 6,000
- ------------------------------------------------------------------------------
1601 Main Street, Dickson City, PA Owned 5,330
- ------------------------------------------------------------------------------
347 Main Street, Simpson, PA Owned 5,500
- ------------------------------------------------------------------------------
37 Dundaff Street, Carbondale, PA Owned 4,300
- ------------------------------------------------------------------------------
Lake Como Road, Lakewood, PA Leased 900
- ------------------------------------------------------------------------------
We consider our facilities to be suitable and adequate for our current
and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
We and Community Bank are not parties to any legal proceedings that could
have any significant effect upon our financial condition or operating
results. In addition, we and Community Bank are not parties to any legal
proceedings under federal and state environmental laws.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
We had 1,106 stockholders of record, including individual participants in
security position listings, and 2,017,034 shares of common stock, par
value of $0.33 per share, the only authorized class of common stock
outstanding as of January 31, 2000. Our common stock trades on The
NASDAQ Stock Market as CommBcp under the symbol "CCBP." The high and
low closing sale prices and dividends per share of our common stock for
the four quarters of 1999 and 1998 are summarized in the following table:
Dividends
1999: High Low Declared
- --------------------------------------------------------------------------
First quarter $28 $25 1/2 $0.13
- --------------------------------------------------------------------------
Second quarter 32 24 0.13
- --------------------------------------------------------------------------
Third quarter 42 30 0.15
- --------------------------------------------------------------------------
Fourth quarter $40 1/2 $37 1/4 $0.16
- --------------------------------------------------------------------------
Dividends
1998: High Low Declared
- --------------------------------------------------------------------------
First quarter $38 $35 $0.07
- --------------------------------------------------------------------------
Second quarter 36 1/2 32 1/4 0.07
- --------------------------------------------------------------------------
Third quarter 35 27 1/2 0.10
- --------------------------------------------------------------------------
Fourth quarter $28 $25 $0.13
- --------------------------------------------------------------------------
We have paid cash dividends since 1983. It is our present intention to
continue the dividend payment policy, although the payment of future
dividends must necessarily depend upon earnings, financial position,
appropriate restrictions under applicable law and other factors relevant
at the time the Board of Directors considers any declaration of
dividends. For information on dividend restrictions on us and Community
Bank, refer to our consolidated financial statements and notes to these
statements filed at Exhibit 13 to this report and incorporated in their
entirety by reference under this Item 5.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is filed at Exhibit 13 to this
report and is incorporated in its entirety by reference under this Item
6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is filed at Exhibit 13 to this
report and is incorporated in its entirety by reference under this Item
7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is filed at Exhibit 13 to this
report and is incorporated in its entirety by reference under this Item
7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to these statements are
filed at Exhibit 13 to this report and are incorporated in their entirety
by reference under this Item 8.
The supplementary data is filed at Exhibit 13 to this report and is
incorporated in its entirety by reference under this Item 8.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
At December 31, 1999, we had ten directors. However, as of January 1,
2000, Joseph P. Moore, Jr. retired as a director as a result of a bylaw
requiring retirement for a person who attains 72 years of age. Joseph P.
Moore, Jr. continues to serve on the Board of Directors of Community
Bank.
Our directors are elected at each annual meeting of stockholders for a
one-year term and until their successors are elected and qualified.
The following information is presented for each of our current directors
and those persons who have been nominated to become a director at our
2000 Annual Stockholders Meeting. All of our current directors are also
nominees for director.
<TABLE>
<CAPTION>
AGE AS OF DIRECTOR
NAME JANUARY 31, 2000 PRINCIPAL OCCUPATION FOR PAST FIVE YEARS SINCE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David L. Baker 54 President and Chief Executive Officer of 1988
the Company and Community Bank since 1995.
- --------------------------------------------------------------------------------------------------------
Thomas M. Chesnick(1) 65 Retired. Vice President of Community Bank ----
from 1995 to 1999.
- --------------------------------------------------------------------------------------------------------
William F. Farber, Sr. 62 Retired. President of Farber's Restaurants 1983
from 1995 to 1998.
- --------------------------------------------------------------------------------------------------------
Judd B. Fitze 47 Partner in Farr, Davis & Fitze, a law firm. 1995
- --------------------------------------------------------------------------------------------------------
John P. Kameen 58 Publisher of The Forest City News. 1983
--- ------ ---- ----
- --------------------------------------------------------------------------------------------------------
William A. Kerl(1) 63 President of Carbondale Concrete Company, ----
Inc. and Kerl Coal, Oil & Trucking Company,
Inc.
- --------------------------------------------------------------------------------------------------------
Erwin T. Kost 56 President of Kost Tire Distributors, Inc. 1997
- --------------------------------------------------------------------------------------------------------
William B. Lopatofsky 67 Retired. 1983
- --------------------------------------------------------------------------------------------------------
Robert A. Mazzoni(1) 51 Partner in Mazzoni & Karam, a law firm. ----
- --------------------------------------------------------------------------------------------------------
J. Robert McDonnell 64 Owner of McDonnell's Restaurant. 1983
- --------------------------------------------------------------------------------------------------------
Joseph P. Moore, III(1)(2) 48 President of J.J. Motors, Inc. ----
- --------------------------------------------------------------------------------------------------------
Theodore W. Porosky 52 Owner of Porosky Lumber Company. 1997
- --------------------------------------------------------------------------------------------------------
Eric G. Stephens 48 Auto Dealer, H.L. Stephens & Son, 1988
an automobile dealership.
- --------------------------------------------------------------------------------------------------------
(1) A nominee for director, not a current director.
(2) A son of Joseph P. Moore, Jr., who is a director of Community Bank and owns beneficially more than five
percent of our common stock.
</TABLE>
PRINCIPAL OFFICERS
Our principal officers are appointed by the Board of Directors and serve
at the will of the Board of Directors, subject to certain change in
control agreements discussed later in this report.
The following information is presented for our principal officers:
<TABLE>
<CAPTION>
AGE AS OF
NAME AND POSITION HELD SINCE EMPLOYEE SINCE JANUARY 31, 2000
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David L. Baker
President and Chief Executive Officer 1995 1995 54
- ------------------------------------------------------------------------------------------
William F. Farber, Sr.
Chairman 1983 (1) 62
- -------------------------------------------------------------------------------------------
John P. Kameen
Secretary 1996 (1) 58
- -------------------------------------------------------------------------------------------
J. Robert McDonnell
Vice President 1983 (1) 64
- -------------------------------------------------------------------------------------------
Scott A. Seasock
Senior Vice President and
Chief Financial Officer 1989 1989 42
- -------------------------------------------------------------------------------------------
Thomas E. Sheridan
Senior Vice President and
Chief Operations Officer 1989 1985 42
- -------------------------------------------------------------------------------------------
(1) Not our employee or an employee of Community Bank.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers and directors and "beneficial owners" of more than
10.0 percent of our common stock must file initial reports of ownership
and reports of changes in ownership with the SEC and The NASDAQ Stock
Market pursuant to Section 16(a).
We have reviewed the reports and written representations from the
executive officers and directors. Based on this review, we believe that
all filing requirements were met during 1999.
ITEM 11. EXECUTIVE COMPENSATION
This section of the report contains a chart that show the amount of
compensation earned by our executive officers whose salary and bonus
exceeded $100,000. It also contains the performance graph comparing our
performance relative to a peer group and the report of our executive
compensation committee explaining the compensation philosophy for our
most highly paid officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------
OTHER ANNUAL RESTRICTED LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS STOCK PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($)(1) (#) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David L. Baker 1999 116,619 19,400 2,179 -0- -0- -0- -0-
President and 1998 116,151 19,400 3,245 -0- -0- -0- -0-
Chief Executive 1997 111,401 18,700 3,346 -0- -0- -0 -0-
Officer
- ----------------------------------------------------------------------------------------------------
Scott A. Seasock 1999 94,345 11,400 1,696 -0- -0- -0- -0-
Senior Vice 1998 92,486 11,400 2,453 -0- -0- -0- -0-
President and 1997 88,953 10,700 2,281 -0- -0- -0- -0-
Chief Financial
Officer
- ----------------------------------------------------------------------------------------------------
(1) Represents the contribution Community Bank made on behalf of Mr. Baker and Mr. Seasock pursuant
to the profit sharing plan. Aggregate perquisites and other personal benefits were less than
10.0 percent of the salary and bonus reported, and therefore, need not be presented.
</TABLE>
Executive officer compensation is determined by the Executive
Compensation Committee of Community Bank's Board of Directors. Salaries
and bonuses for the executive officers are reviewed annually. All
executive compensation is paid by Community Bank to the applicable
executive.
EXECUTIVE COMPENSATION COMMITTEE REPORT
The Board of Directors is responsible for the governance of us and
Community Bank. In fulfilling its fiduciary duties, the Board of
Directors acts in the best interests of our stockholders, customers and
the communities served by us and Community Bank. To accomplish our
strategic goals and objectives, the Board of Directors engages competent
persons who undertake to accomplish these objectives with integrity and
in a cost-effective manner. The compensation of these individuals is
part of the Board of Directors' fulfillment of its duties to accomplish
our strategic mission. Community Bank provides compensation to our
employees and those of Community Bank.
The fundamental philosophy of our and Community Bank's compensation
program is to offer competitive compensation opportunities for all
employees based on the individual's contribution and personal
performance. The objective of the Executive Compensation Committee is to
establish a fair compensation policy to govern executive officers' base
salaries and incentive plans to attract and motivate competent, dedicated
and ambitious managers whose efforts will enhance our products and
services, the results of which will be improved profitability, increased
dividends to our stockholders and subsequent appreciation in the market
value of our stock.
The compensation of our and Community Bank's top executives is reviewed
and approved annually by the Board of Directors. The top executives
whose compensation is determined by this committee include the Chief
Executive Officer and all other executive management. As a guideline for
review in determining base salaries, this committee uses information
comprised from a Pennsylvania bank peer group. This bank peer group is
different from the peer group utilized for the performance chart.
Pennsylvania peer group banks have been utilized because of common
industry issues and competition for the same executive talent group.
EXECUTIVE COMPENSATION
The Board of Directors has determined that the 1999 compensation for the
President and Chief Executive Officer of $136,019 and the Senior Vice
President and Chief Financial Officer of $105,745 were appropriate in
light of our 1999 performance accomplishments. There is no direct
correlation, however, between such compensation and our performance, nor
is there any weight given by the Executive Compensation Committee to any
specific individual criteria. Such 1999 compensation was based on the
Executive Compensation Committee's subjective determination after review
of all information that it deemed relevant.
EXECUTIVE OFFICERS
Compensation for our and Community Bank's executive officers is
determined by the Executive Compensation Committee based on its
subjective analysis of the individual's contribution to our strategic
goals and objectives. In determining whether strategic goals have been
achieved, the Board of Directors considers our performance as measured
by, among numerous other factors, the following: (i) earnings;
(ii) revenues; (iii) return on assets; (iv) return on equity; (v) market
share; (vi) total assets; and (vii) nonperforming loans. Although the
performance and increases in compensation are measured in light of these
factors, there is no direct correlation between any specific criterion
and the employees compensation, nor is there any specific weight provided
to any such criteria in this committee's analysis. The determination by
this committee is subjective after review of all information, including
the above, it deems relevant.
Total compensation opportunities available to our employees and the
employees of Community Bank are influenced by general labor market
conditions, the specific responsibilities of the individual and the
individual's contributions to our success. Individuals are reviewed
annually on a calendar year basis. We strive to offer compensation that
is competitive with that offered by employers of comparable size in the
banking industry. Through these compensation policies, we strive to meet
our strategic goals and objectives to our constituencies and provide
compensation that is fair and meaningful to our employees.
Submitted by the Executive Compensation Committee
-------------------------------------------------
William F. Farber, Sr.
Judd B. Fitze
John P. Kameen
J. Robert McDonnell
Eric G. Stephens
ESTIMATED RETIREMENT BENEFITS
Community Bank has a profit sharing plan, which covers all employees who
have completed 1,000 hours of service, attained twenty-one (21) years of
age and have been employed by Community Bank for at least one year.
Normal retirement age is sixty-five (65). The normal retirement benefit
is the accumulated account balance of annual contributions, investment
income and forfeitures. The annual contribution is determined by the
Board of Directors. Contributions are allocated to each participant
based on a pro-rata share of compensation covered under the plan.
Investment income is allocated to each participant based on a pro-rata
share of the account balances accumulated at the beginning of the year.
Forfeitures are allocated to each participant based on a pro-rata share
of compensation covered under the plan. If a participant separates from
service prior to retirement, the participant will be entitled to a
portion of the profit sharing account based on years of service according
to the following schedule:
Years ofService Vested Interest
--------------- ---------------
Less than 1 0%
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 or more 100%
A participant is always one hundred percent (100%) vested in pension plan
transferred balances.
During 1999, $45,754 was allocated among the participants' accounts for
the plan. The amount contributed by Community Bank in 1999 to the plan
for Mr. Baker was $2,179 and Mr. Seasock was $1,696. Both Messrs. Baker
and Seasock have thirteen (13) years of credited service under the plan.
CHANGE IN CONTROL AGREEMENTS
We entered into agreements with David L. Baker, President and Chief
Executive Officer, Scott A. Seasock, Senior Vice President and Chief
Financial Officer, and Thomas E. Sheridan, Senior Vice President and
Chief Operations Officer, to provide these key officers with a reasonable
degree of financial security after the occurrence of a change in control.
These agreements contain the following principal features:
- During the 24 months following a change in control, if the
officer is terminated "without good cause" or "constructively
terminated," as these terms are defined in the agreement, then
we, or our successor, shall:
- Pay, in a lump sum or in 24 equal monthly installments, to the
terminated officer an amount equal to two times his highest
annual base salary rate during the five-year period ending on
the date of termination,
- Continue to provide the terminated officer and his dependents
for a period of 24 months after the date of termination all
health programs or their substantial equivalent at a cost to
the terminated officer not exceeding the equivalent cost of
coverage to senior management employees,
- Pay any additional monies to the terminated officer to place
him in the same after-tax position if there is imposed any
excise tax as a result of the amount of these payments, and
- Continue, for a six-year period, to provide indemnification
protection under our Amended Articles of Incorporation and
Bylaws and coverage under director's and officer's liability
and fiduciary liability insurance policies.
- Under these agreements, a change in control means:
- Acquisition of 25.0 percent or more of the voting power of all
outstanding stock by a person or group of persons,
- Combination of our Company into another entity in which our
stockholders do not hold at least 50.0 percent of the voting
power of the outstanding stock after the combination,
- Nomination and election of 50.0 percent or more of the members
of the Board without the recommendation of the Board, or
- The sale of Community Bank to another financial institution.
FIVE-YEAR PERFORMANCE GRAPH
The following line graph comparing the cumulative total stockholder
return on our common stock, based on the market price change and assuming
reinvestment of dividends, with the cumulative total return of the index
for The NASDAQ Stock Market (US Companies) and the index for Mid-
Atlantic Bank Stocks (Delaware, Maryland, New Jersey, New York,
Pennsylvania and Washington, D.C. Companies) during the five-year period
ended December 31, 1999. The stockholder return shown on the graph and
table below is not necessarily indicative of future performance. Our
common stock began trading on The NASDAQ Stock Market under the symbol
"CCBP" on June 17, 1996. Prior to that date, our common stock was quoted
on the Over-the-Counter Electronic Bulletin Board Interdealer System.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
- --------- Comm Bancorp, Inc............................. 100.0 106.6 202.5 280.4 226.7 320.7
- -- - - -- Total Returns Index for
The NASDAQ Stock Market (US Companies)....... 100.0 141.3 173.9 213.1 300.3 542.4
- --------- Total Returns Index for
Mid-Atlantic Bank Stocks...................... 100.0 160.0 229.7 326.4 361.9 459.8
NOTES:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indices are reweighed daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is
used.
D. The index level for all series was set to $100.0 on 12/31/94.
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This section describes how much stock our directors, nominees for
director and executive officers own. It also describes the persons or
entities that own more than 5.0 percent of our voting stock.
STOCK OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
This table indicates the number of shares of our common stock owned by
the directors, nominees for director and executive officers as of January
31, 2000. The aggregate number of shares owned by all directors,
nominees for director and executive officers is 17.94 percent. Unless
otherwise noted, each individual has sole voting and investment power for
the shares indicated below.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF INDIVIDUAL OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
David L. Baker 13,658.717 ----
- ----------------------------------------------------------------------------------------
Thomas M. Chesnick(2) 26,377.544 1.31%
- ----------------------------------------------------------------------------------------
William F. Farber, Sr. 184,020.000 9.12%
- ----------------------------------------------------------------------------------------
Judd B. Fitze 12,640.779 ----
- ----------------------------------------------------------------------------------------
John P. Kameen 20,391.552 1.01%
- ----------------------------------------------------------------------------------------
William A. Kerl(2) 12,500.368 ----
- ----------------------------------------------------------------------------------------
Erwin T. Kost 10,080.114 ----
- ----------------------------------------------------------------------------------------
William B. Lopatofsky 26,730.000 1.33%
- ----------------------------------------------------------------------------------------
Robert A. Mazzoni(2) 100.000 ----
- ----------------------------------------------------------------------------------------
J. Robert McDonnell 33,581.183 1.66%
- ----------------------------------------------------------------------------------------
Joseph P. Moore, III(2) 100.000 ----
- ----------------------------------------------------------------------------------------
Theodore W. Porosky 3,692.374 ----
- ----------------------------------------------------------------------------------------
Scott A. Seasock(3) 4,185.480 ----
- ----------------------------------------------------------------------------------------
Thomas E. Sheridan(3) 6,323.850 ----
- ----------------------------------------------------------------------------------------
Eric G. Stephens 7,409.653 ----
- ----------------------------------------------------------------------------------------
All Directors, Nominees and Officers 361,791.614 17.94%
as a group (9 Directors, 13 Nominees,
6 Officers, 15 persons in total)
- ----------------------------------------------------------------------------------------
(1) Includes shares held (i) directly; (ii) jointly with spouse; (iii) by spouse;
(iv) jointly with various relatives; (v) by the transfer agent in our dividend
reinvestment account; and (vi) in various trusts.
(2) A nominee for director, not a current director.
(3) Executive Officer, not a director or nominee.
</TABLE>
VOTING STOCK OWNED BY "BENEFICIAL OWNER"
The following are the persons or entities known by us to own beneficially
more than 5.0 percent of our common stock as of January 31, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENT OF CLASS
- -----------------------------------------------------------------------------
<S> <C> <C>
Joseph P. Moore, Jr.(2) 195,935.000 9.17%
400 Williamson Road
Gladwyne, PA 19035
- -----------------------------------------------------------------------------
William F. Farber, Sr. 184,020.000 9.12%
Crystal Lake Road
R.R.1, Box 1281
Carbondale, PA 18407
- -----------------------------------------------------------------------------
(1) Includes shares held (i) directly and (ii) in various trusts.
(2) Mr. Moore retired from our Board of Directors effective January 1, 2000,
due to the mandatory age requirement.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We encourage our directors and executive officers to have banking and
financial transactions with Community Bank. All of these transactions
are made on comparable terms and with similar interest rates as those
prevailing for other customers.
The total consolidated loans made by Community Bank at December 31, 1999,
to its directors and officers as a group, members of their immediate
families and companies in which they have a 10.0 percent or more
ownership interest was $4.1 million or 11.7 percent of our total
consolidated capital accounts. The largest amount for all of these loans
in 1999 was $4.2 million or 11.7 percent of our total consolidated
capital accounts. During 1999, advances and repayments on these loans
were $3.5 million and $3.1 million. These loans did not involve more
than the normal risk of collectibility nor did they present any other
unfavorable features.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements and notes to these
statements as well as the applicable reports of the independent
certified public accountants are filed at Exhibit 13 to this
report and are incorporated in their entirety by reference under
this Item 14(a)1.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or
notes to these statements.
3. The exhibits required by Item 601 of Regulation S-K are included
under Item 14(c) to this report.
(b) Reports on Form 8-K:
We filed no current reports on Form 8-K during the quarter ended December
31, 1999.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation SK Description of Exhibit
- -------------------------- ----------------------
2 None.
3 None.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report
to Stockholders for Fiscal
Year Ended December 31, 1999.
16 None.
18 None.
21 List of Subsidiaries.
22 None.
23 None.
24 None.
27 Financial Data Schedule.
99 None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto, duly authorized.
COMM BANCORP, INC.
(REGISTRANT)
BY:/s/ David L. Baker March 15, 2000
-------------------------------- ---
David L. Baker, President and
Chief Executive Officer/Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Capacity Date
/s/ David L. Baker March 15, 2000
- ------------------------------------- ---
David L. Baker, President and
Chief Executive Officer/Director
(Principal Executive Officer)
/s/ William F. Farber, Sr. March 15, 2000
- ------------------------------------- ---
William F. Farber, Sr.,
Chairman of the Board/Director
/s/ Judd B. Fitze March 15, 2000
- ------------------------------------- ---
Judd B. Fitze, Director
/s/ Stephanie A. Ganz March 15, 2000
- ------------------------------------- ---
Stephanie A. Ganz, VP of Finance
(Principal Accounting Officer)
/s/ John P. Kameen March 15, 2000
- ------------------------------------- ---
John P. Kameen, Secretary/Director
/s/ Erwin T. Kost March 15, 2000
- ------------------------------------- ---
Erwin T. Kost, Director
/s/ William B. Lopatofsky March 15, 2000
- ------------------------------------- ---
William B. Lopatofsky, Director
/s/ J. Robert McDonnell March 15, 2000
- ------------------------------------- ---
J. Robert McDonnell,
Vice President/Director
/s/ Theodore W. Porosky March 15, 2000
- ------------------------------------- ---
Theodore W. Porosky, Director
/s/ Scott A. Seasock March 15, 2000
- ------------------------------------- ---
Scott A. Seasock, Chief Financial
Officer (Principal Financial Officer)
/s/ Eric G. Stephens March 15, 2000
- ------------------------------------- ---
Eric G. Stephens, Director
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ----------- ----
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended
December 31, 1999 42
21 List of Subsidiaries of the Company 202
27 Financial Data Schedule 203
Comm Bancorp, Inc.
CONTENTS
-------------------------------------------------------------------
INTRODUCTION
44 President's Message to Stockholders
46 Consolidated Selected Financial Data
MANAGEMENT'S DISCUSSION AND ANALYSIS
47 Forward-Looking Discussion
48 Operating Environment
57 Review of Financial Position
108 Review of Financial Performance
CONSOLIDATED FINANCIAL STATEMENTS
124 Independent Auditors' Report
125 Consolidated Statements of Income and
Comprehensive Income
126 Consolidated Balance Sheets
127 Consolidated Statements of Changes in
Stockholders' Equity
128 Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
129 Summary of significant accounting policies
144 Cash and due from banks
145 Investment securities
147 Loans, nonperforming assets and allowance for
loan losses
150 Commitments, concentrations and contingent
liabilities
152 Premises and equipment, net
153 Other assets
154 Deposits
155 Short-term borrowings
156 Long-term debt
157 Fair value of financial instruments
157 Litigation recovery
157 Employee benefit plans
158 Income taxes
160 Parent Company financial statements
161 Regulatory matters
166 Summary of quarterly financial information
(unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS
1998 VERSUS 1997
167 Operating Environment
171 Review of Financial Position
187 Review of Financial Performance
DIRECTORS AND OFFICERS
194 Boards of Directors and Corporate Officers
195 Advisory Boards
196 Officers
OTHER INFORMATION
197 Locations
198 Glossary of Terms
201 Stockholder Information
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS
-------------------------------------------
1999 was the best of times. We boldly wrote the final chapter in a
century that experienced the birth of our Company. We achieved growth
and expansion milestones that surely had been evolving since 1934. We
are recognized in our communities as a sustaining partner in the
professional and personal lives of our families, friends and neighbors.
And ultimately I am proud to report that 1999 was a very prosperous year
for our Company.
Net income for 1999 totaled $4.6 million or $2.17 per share, a $0.13 per
share increase over the $4.5 million or $2.04 per share in 1998. Total
assets grew significantly, reporting an increase of $18.8 million over
the previous year. Heightened commercial loan activity was the primary
factor contributing to an unprecedented loan demand. Loans increased
11.6% while deposits increased 5.3% during 1999. Our stockholders also
enjoyed the Company's success this year, posting a solid 41% return on
their investment.
In April 1999, the Company implemented a stock repurchase program
authorizing management to purchase up to 220,000 shares of the Company's
common stock. We are pleased to report that this program has
successfully strengthened earnings per share and improved the return on
average equity. The completion of the announced buyback is expected
shortly.
In addition to our earnings success, 1999 was certainly a year of growth
for our Company. Amid high hopes and much excitement, we opened our
corporate center and thirteenth community banking office in Clarks Summit
and our fourteenth office in Dickson City. The corporate center has
greatly improved efficiency by consolidating the Company's administrative
and operational departments, and together with our two new offices, have
been successful in expanding the Company's delivery system. Both have
been well received by the people they serve and have the potential to
rank among our largest and most profitable branches.
We are pleased with achieving excellent growth in our traditional product
lines, along with the successful introduction of many new services to
customers during the past year. Community Leasing Corporation was
established during the second quarter 1999 to fill a void in our business
community. This leasing subsidiary provides direct lease financing for
various types of commercial equipment. Area businesses have been very
receptive to this borrowing alternative, and consequently our
stockholders are realizing additional income.
The success achieved in accomplishing the Company's endeavors during 1999
has given the Board and Management a sense of optimism as we look to
2000. We plan to continue the expansion of our delivery system and to
offer our customers a new array of non-banking products including various life,
disability, health and long-term care insurance, as well as variable
annuity products through our trust and financial services department. We
feel that by offering these types of products we can further solidify our
customer relationships. Additionally, we will continue to grow the
leasing portfolio and have received approval to expand across New York
State lines. And finally, we will always recognize our employees as a
most valuable asset who continually make a difference, honor our
commitment to excellence, and set us apart as a trusted and valued member
of our communities.
In closing, I would like to share a reflective thought with you. Our
achievements over the last six decades are truly something of which we
can be proud, but they were not accidental. Since 1934, visionaries like
you and I had dreams for our Company. While we kept our feet solidly
planted in the present, our eyes were ever on the future. We set goals,
made plans and followed through to successful completion. This, I
believe, has been our formula for success a worthy formula with which we
welcome a new millennium and its challenges. I eagerly anticipate
entering the future together with you, and I welcome your questions,
comments and ideas.
Sincerely,
/s/ David L. Baker
- -------------------------------------
David L. Baker
President and Chief Executive Officer
<TABLE>
<CAPTION>
Comm Bancorp, Inc.
CONSOLIDATED SELECTED FINANCIAL DATA
------------------------------------------------------------------------
(Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income......................................... $ 27,812 $ 27,224 $ 26,142 $ 25,059 $ 26,467
Interest expense........................................ 14,022 13,960 14,068 13,550 14,994
-------- -------- -------- -------- --------
Net interest income................................... 13,790 13,264 12,074 11,509 11,473
Provision for loan losses............................... 535 855 360 300 435
-------- -------- -------- -------- --------
Net interest income after provision for loan losses... 13,255 12,409 11,714 11,209 11,038
Noninterest income...................................... 2,112 2,673 1,776 1,387 (3,196)
Noninterest expense..................................... 9,429 9,364 7,956 7,383 8,194
-------- -------- -------- -------- --------
Income before income taxes............................ 5,938 5,718 5,534 5,213 (352)
Provision for income tax expense........................ 1,338 1,218 1,134 1,013 (552)
-------- -------- -------- -------- --------
Net income............................................ $ 4,600 $ 4,500 $ 4,400 $ 4,200 $ 200
======== ======== ======== ======== ========
CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities................................... $105,630 $109,626 $105,666 $101,994 $108,706
Net loans............................................... 273,051 244,090 246,429 231,859 209,932
Other assets............................................ 28,431 34,535 29,716 20,959 32,310
-------- -------- -------- -------- --------
Total assets.......................................... $407,112 $388,251 $381,811 $354,812 $350,948
======== ======== ======== ======== ========
Deposits................................................ $362,483 $344,253 $332,381 $320,456 $317,099
Short-term borrowings................................... 5,500 9,575
Long-term debt.......................................... 39 41 44 46 3,048
Other liabilities....................................... 3,615 4,223 3,709 3,054 2,906
Stockholders' equity.................................... 35,475 39,734 36,102 31,256 27,895
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity............ $407,112 $388,251 $381,811 $354,812 $350,948
======== ======== ======== ======== ========
PER SHARE DATA:
Net income.............................................. $ 2.17 $ 2.04 $ 2.00 $ 1.91 $ 0.09
Cash dividends declared................................. 0.57 0.37 0.30 0.28 0.21
Stockholders' equity.................................... $ 17.43 $ 18.00 $ 16.39 $ 14.21 $ 12.68
Cash dividends declared as a percentage of net income... 26.00% 18.14% 14.98% 14.83% 231.00%
Average common shares outstanding....................... 2,125,164 2,205,545 2,200,960 2,200,080 2,200,080
SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets.............. 1.16% 1.19% 1.22% 1.21% 0.06%
Net income as a percentage of stockholders' equity...... 12.02 11.71 13.40 14.57 0.77
Stockholders' equity as a percentage of total assets.... 9.66 10.18 9.14 8.30 7.25
Tier I capital as a percentage of adjusted total assets. 8.60 9.46 8.74 8.46 7.12
Net interest income as a percentage of earning assets... 4.01 4.06 3.87 3.79 3.48
Loans, net, as a percentage of deposits................. 73.20% 73.88% 75.02% 69.83% 62.81%
SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-adjusted assets.. 14.60% 17.69% 15.95% 15.72% 14.58%
Total capital as a percentage of risk-adjusted assets... 15.86 18.94 17.20 16.98 15.84
Allowance for loan losses as a percentage of loans, net. 1.37% 1.63% 1.52% 1.67% 1.83%
Full-time equivalent employees.......................... 167 161 161 149 147
Locations............................................... 14 12 12 10 10
Note: Per share information reflects the retroactive effects of a three-for-one stock split effective April
of 1996. Average balances were calculated using average daily balances. Average balances for loans include
nonaccrual loans. Tax-equivalent adjustments were calculated using the prevailing statutory rate of 34.0
percent.
</TABLE>
Management's Discussion and Analysis appearing on the following pages
should be read in conjunction with the Consolidated Financial Statements
beginning on page 124 and Management's Discussion and Analysis 1998
versus 1997 beginning on page 167.
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-K are forward-looking statements that
involve numerous risks and uncertainties. The following factors, among
others, may cause actual results to differ materially from projected
results:
Local, domestic and international economic and political conditions and
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates,
tight money supply, real estate values, international conflicts and other
factors beyond 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")
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, assurance
cannot be given that the 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 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:
Favorable economic growth is pivotal for financial institutions as their
primary function, lending, is dependent on the success of the economy.
Also key to their success is controlling the growth of inflation, as the
cost of funding loans is directly related to the change in prices. As
was the case in the previous year, 1999 marked another year of torrid
expansion, as well as, subdued inflation for the United States economy.
Strong productivity growth was the key factor spurring both the continued
expansion, set to become the longest peacetime expansion on record, and
the low inflationary conditions. The economy has been growing nonstop
since March 1991. In attempts to slow the economy and mitigate potential
inflationary conditions, the Federal Open Market Committee ("FOMC")
raised the federal funds rate by 25 basis point increments on three
separate occasions, June 30, 1999, August 24, 1999, and November 16,
1999. The federal funds rate closed the year at 5.50 percent. The FOMC
actions were based on historical evidence of the relationship between
continued strong economic growth and the onset of inflation. However,
the current expansion appears to be different from past expansions, as
increased productivity brought on by enhanced technology has counteracted
pricing pressure.
Despite the FOMC's efforts to bring economic growth into check, the gross
domestic product ("GDP"), the total output of goods and services produced
within the United States, grew at a robust rate of 4.1 percent in 1999.
This was the third consecutive year GDP grew by more than 4.0 percent.
GDP grew 4.3 percent in 1998 and 4.5 percent in 1997. Moreover, the
domestic economy closed the decade and millennium higher than most
analysts predicted by posting an annual growth rate of 6.9 percent for
the final quarter of 1999. The continued growth, however, has not led to
higher inflation. The consumer price index ("CPI") increased 2.7 percent,
while the producer price index ("PPI") increased 3.0 percent in 1999.
For 1998, the CPI registered an increase of 1.6 percent while the PPI
went unchanged. The 1999 increases, though slightly higher than last
year, were primarily due to sharp increases in energy costs. The core
indices, which do not include energy costs, posted very different
results. The core CPI rose only 1.9 percent in 1999 as compared to 2.4
percent in 1998. The core PPI rose 0.9 percent and 2.5 percent in 1999
and 1998.
The interest rate increases did not dampen consumer and business
confidence, which remained high in 1999. This was evidenced by increases
in both the University of Michigan's Sentiment Index and the Conference
Board Confidence Level. The University of Michigan's Sentiment Index
rose from 104.6 in 1998 to 105.8 in 1999, while the Conference Board
Confidence Level rose from 131.7 in 1998 to 135.3 in 1999. Improved
productivity, low inflation, ideal employment conditions, higher personal
income levels, and a wealth effect driven by stock market gains all
contributed to the greater confidence. Both consumer and business
spending flourished as a result of the improved confidence. Consumer
spending rose 7.0 percent in 1999, up from 6.0 percent in 1998. In
addition, corporate outlays for new technology, which account for 40.0
percent of all business investment, increased 22.0 percent in 1999.
Solid productivity growth is the passport to a low inflationary
environment, as was experienced for the majority of the past decade.
Productivity measures how efficiently the economy is turning workers'
labor into goods and services. Workforce productivity, the amount of
output produced per hour of work surged at a 2.9 percent annual rate.
This marked the third time in the past four years that productivity has
increased by close to 3.0 percent. Productivity increased 2.8 percent in
1998 and 2.7 percent in 1996. Furthermore, productivity rose by a larger
than expected 5.0 percent annual rate in the fourth quarter of 1999.
This was the largest growth experienced since the fourth quarter of 1992.
Companies, while keeping up with increased demand, can afford to pay
employees more without being forced to raise prices or cut profit
margins. This is significant given the extremely tight labor market and
increased consumer and business demand.
Favorable employment conditions continued throughout 1999. Substantial
job growth in service producing industries accounted for the majority of
the approximate 2.7 million new jobs created in 1999. Despite the 1.3
percent increase in the civilian work force, the unemployment rate fell
to a 30-year low of 4.1 percent at year-end 1999, from 4.3 percent at
year-end 1998. The labor market, although tight, has yet to show a
negative effect on employment costs. The annual increase in wages and
salaries slowed to 3.5 percent in 1999, compared to 3.7 percent in 1998.
In addition, average weekly earnings recorded an annualized increase of
3.2 percent to $463.68 at December 31, 1999, compared to an annualized
increase of 4.1 percent in 1998. Furthermore, the average workweek fell
to 34.5 hours in 1999, compared to 34.6 hours in 1998. Employees deemed
the current and foreseeable future of labor conditions favorable as
evidenced by the most recent survey of the Consumer Conference Board.
According to the survey, the share of households stating that jobs are
plentiful soared to a record high of 51.5 percent. This marked the first
ever reading above 50.0 percent. Moreover, the percentage of respondents
stating that jobs are hard to obtain remained virtually unchanged from
last year at 11.8 percent.
The Board of Governors of the Federal Reserve System's ("Federal Reserve
Board") worries of increased inflation due to unbridled growth and a
tight labor market, along with the resultant three 25 basis point
increases could not suppress the United States stock market prices
during 1999. Technology stocks led the unprecedented gains in the U.S.
Stock Market. Specifically, The NASDAQ Stock Market Composite
increased an incredible 85.6 percent. In addition, the Standard and
Poor's 500 and the Dow Jones Industrial Averages rose 19.5 percent and
25.2 percent. This marked the fifth consecutive year these key indices
posted double-digit growth. The wealth effect caused by the booming
stock market had a direct effect on consumer spending levels. Moreover,
annual personal income grew 5.9 percent in 1999. This growth, coupled
with stock market gains, left consumers confident, wealthy and eager to
spend. Personal spending rose 7.0 percent in 1999 compared to 6.0
percent in 1998. Furthermore, Americans are relying on future stock
market gains to help them meet long-term financial goals. As a result,
the annual savings rate declined sharply to 2.4 percent in 1999 from 3.7
percent in 1998.
National economic expectations for 2000 remain optimistic. Economic
growth is expected to continue, however, at a slightly slower pace. Real
GDP is expected to grow at a tempered pace of 3.0 percent during 2000.
There are five factors driving these positive expectations:
- Low inflation,
- Recurring federal budget surpluses,
- Rising stock prices,
- High consumer confidence, and
- Improving global economic conditions.
Forecasters anticipate lower inflation and stable unemployment during
2000. The CPI and the PPI are expected to rise just 2.5 percent and 2.0
percent. Unemployment is expected to remain steady at 4.2 percent.
However, should energy prices escalate, job markets further tighten,
productivity falter, or technology stocks tumble, the results could be
very different. The Federal Reserve Board remains vigilant in its
efforts to keep the United States economy in balance. The FOMC tightened
rates 25 basis points a fourth time on February 2, 2000. One, possibly
two more, 25 basis point increases are expected by mid-year.
Economic activity in our four-county market area has kept pace with that
of the Nation and Commonwealth as indicated by unemployment reductions
and wage gains. The unemployment rate for Lackawanna county declined
beyond the levels of the United States and Pennsylvania to 3.6 percent in
1999. Wayne and Wyoming counties recorded significant unemployment rate
reductions in 1999 of 1.0 percent and 1.5 percent from year-end 1998,
while the unemployment rate for Susquehanna county remained in line with
that of the Nation and Commonwealth. Service producing industries,
especially retail trade and personal and business services, posted the
largest job gains during 1999, and offset decreases in manufacturing and
construction.
National, Pennsylvania and market area unemployment rates at December 31,
1999 and 1998, are summarized as follows:
December 31 1999 1998
- ----------------------------------------------------------------------------
National....................................................... 4.1% 4.3%
Pennsylvania................................................... 4.1 4.4
Lackawanna County.............................................. 3.6 4.4
Susquehanna County............................................. 4.3 4.6
Wayne County................................................... 5.6 6.6
Wyoming County................................................. 4.5% 6.0%
Employees within our market area recorded wage gains similar to those of
the Commonwealth. During 1999, the average hourly earnings of a local
manufacturing employee rose 24 cents or 1.9 percent, only slightly lower
compared to the 28 cents or 2.0 percent increase for all Pennsylvania
workers. Both the market area and Commonwealth were behind the Nation.
The average hourly earnings of a United States manufacturing worker
increased 46 cents or 3.5 percent in 1999. Despite the gain, employees in
the four-county market area still lag National and Pennsylvania employees
with respect to their hourly rate. The average hourly rates paid to a
manufacturing employee at December 31, 1999, throughout the Nation,
Commonwealth and market area were $13.44, $14.48 and $13.14. Contrary to
the Nation, the market area and Commonwealth experienced increases in
their average workweeks. Average hours worked for the market area and
Commonwealth increased 0.4 hours and 0.1 hours in 1999. As
aforementioned, the average weekly hours worked for the Nation declined
from 34.6 at year-end 1998 to 34.5 at year-end 1999. The civilian labor
force, the total number of individuals employed and those actively
seeking employment, increased for the Nation by 1.3 percent. Similarly,
the pool of available workers increased for the Commonwealth by 0.6
percent. However, the market area showed a decline in its labor force of
0.8 percent. Although the tight labor market appears benign, the Federal
Reserve Board is concerned that it could force employers to raise wages
to attract workers. Should productivity falter and not be able to
compensate for increased wages, companies could try to pass the higher
employment costs onto consumers.
The outlook for our market area, Northeastern Pennsylvania, remains
bright for 2000. The Lackawanna Valley Industrial Highway Project, one of
the area's top projects aimed at improving the infrastructure, was
completed in 1999. The opening of the highway is expected to
significantly impact the region's growth. There is already evidence of
expansion along the highway. A Scranton-based manufacturer is
constructing a new 200,000 square foot, state-of-the-art plant in an
industrial park located off one of the highway exits. The plant is
expected to add 180 new jobs to the region. Elsewhere in the area, three
national companies recently unveiled plans to establish or expand
operations in Northeastern Pennsylvania. If the plans are implemented,
the region would see an increase of 2,150 jobs. Completion of a civic
arena and convention center in Luzerne county in 1999 has also given the
area a sense of well-being. The completion of this project will greatly
further entertainment, tourism and culture in our area.
The Nation's financial institutions continued to perform well during
1999. Improvements in noninterest income and noninterest expense, coupled
with lower loan loss provisions, helped to mitigate the effects of
compressed net interest margins. The FOMC easing of monetary policy and
overall declines in interest rates during 1998 caused interest margins to
trend lower. The three 25 basis point interest rate hikes beginning at
the end of the second quarter of 1999 put further pressure on margins.
The inherent timing lag between asset and liability repricing in a rising
rate environment, coupled with an intensely competitive loan and deposit
market, forced banks to raise rates paid to depositors before passing on
the higher rates to borrowers. In addition, banks' core deposit growth
slowed, making it difficult to supply increased loan demand with low-cost
funds. In order to alleviate the effects of margin compression on
earnings, banks placed more significance on fee revenue. Noninterest
income continued to account for a greater percentage of total revenues as
compared to the past. With respect to noninterest expense, the industry
did not experience the significant one-time charges for merger and
acquisition related restructuring charges and Y2K remediation expenses in
1999, as it did in 1998. Furthermore, banks lowered their provisions for
loan losses in response to flat or lower relevant credit ratios.
Provisions in 1998 were higher than those in 1999 because they included
replenishments to the reserves for write-offs of loans to emerging
countries and hedge funds. As aforementioned, the FOMC again raised
rates by 25 basis points on February 2, 2000, and is anticipating one,
possibly two more, rate increases. Until rates stabilize, net interest
margins are expected to tighten further. Banks will have to continue to
place greater emphasis on, or diversify into, fee-based businesses such
as trust, asset management and brokerage services, to offset the
anticipated pressure on net interest income growth.
Most segments of the banking industry faired well in 1999. Both large
financial institutions, represented by the Nation's top 30 banks, and
banks located in the Northeast Region of the United States experienced
improved net income levels. Although both categories of banks felt the
effects of net interest margin compression, growth in noninterest income,
improved efficiency and lower provisions for loan losses, helped to
mitigate the net interest margin declines. Net income for the top 30
banks increased $6.8 billion or 22.1 percent to $37.6 billion in 1999,
from $30.8 billion in 1998. Net interest income on a tax-equivalent
basis rose from $90.5 billion in 1998 to $93.4 billion in 1999. This
increase was primarily a result of higher volumes of average earning
assets, as the average tax-equivalent net interest margin for the group
declined 8 basis points to 4.05 percent in 1999 from 4.13 percent in
1998. Noninterest income grew $9.0 billion or 14.4 percent as financial
institutions are relying more heavily on income from fee-based divisions.
The group lowered their provision for loan losses 13.8 percent in 1999.
Provisions in 1998 included replenishment charges for write-offs of loans
to emerging countries and hedge funds. Also causing reductions in the
provision was an improvement in the ratio of net loans charged-off as a
percentage of average loans declining from 0.50 percent in 1998 to 0.43
percent in 1999. The top 10 banks experienced an even more significant
decline in the charge-off ratio from 0.77 percent in 1998 to 0.64 percent
in 1999. Noninterest expenses rose only 3.0 percent to $91.6 billion in
1999 from $88.9 billion in 1998, as banks concentrated on improving
efficiencies. As a result, the operating efficiency ratio improved from
57.9 percent in 1998 to 56.7 percent in 1999.
Banks in the Northeast Region of the United States exhibited similar
performance to that of the top 30 banks. However, these banks did not
experience additional net interest margin compression, as did their
larger counterparts. Net income for these banks increased $144.3 million
or 10.5 percent in 1999. Improvements in net interest income and
noninterest income along with lower provisions for loan losses more than
offset increases in operating expenses. For the year, tax-equivalent net
interest income increased $450.9 million, or 10.9 percent over the
comparable period last year. Net interest margins improved slightly to
4.29 percent in 1999, compared to 4.26 percent in 1998. The loan loss
provision declined slightly from $250.7 million in 1998 to $235.3 million
in 1999. Lower volumes of nonperforming assets and net loans charged-off
were primarily responsible for the reduced provision. The ratio of
nonperforming assets to loans improved from 0.68 percent in 1998 to 0.52
percent in 1999. Similarly, the net charge-off ratio for these banks
improved from 0.36 percent in 1998 to 0.35 percent in 1999. Northeast
banks also placed greater emphasis on their fee-based businesses. As a
result, noninterest revenues increased $173.3 million or 13.5 percent.
These banks experienced only a slight increase in noninterest expense of
2.9 percent in 1999. Furthermore, their efficiency ratios improved to
49.8 percent in 1999 from 54.5 percent in 1998. There is a great deal of
risk for future earnings growth of all financial institutions. Net
interest margin compression is likely to continue with further rate
increases. Financial institutions will have to continue to rely less on
the traditional business mix and place greater emphasis on fee-based
revenue. In addition, banks will again try to reduce operating expenses
in order to preserve earnings growth.
Bank merger and acquisition activity was limited in 1999. The
devaluation of bank stocks, earnings problems and century date change
issues all played a role in the reduced number of deals in 1999.
Specifically, the Standard and Poor's Regional Bank Stock Index was down
16.3 percent in 1999, compared to a 19.5 percent rise in the Standard and
Poor's Industrial Stock Index. Rising interest rates and the prospects
for future rate increases, net interest margin pressure, higher
nonperforming assets and reduced earnings all factored into the poor
showing of bank stocks in 1999. Furthermore, five of the Nation's top 10
banks posted lower than expected earnings in 1999. The number of bank
deals throughout the Nation, the majority of which were completed during
the first half of the year, totaled 327 in 1999, compared to 506 in 1998.
The aggregate deal value decreased significantly to $75.7 billion in
1999, from $281.7 billion in 1998. The average price to book value for
financial institution mergers in 1999 was 2.2 times, while the median
price to earnings was 22.2 times. For the prior year, the comparable
multiples of book and earnings were 2.5 times and 23.2 times. The largest
deal during 1999 involved Fleet Financial Group, Inc. and BankBoston
Corporation with a value of $16.3 billion and a price to book value and a
price to earnings of 3.5 times and 21.0 times. Aggregate deal values in
the Northeast Region decreased from $100.2 billion in 1998 to $31.4
billion in 1999. Included in the $31.4 billion is the $16.3 billion for
the Fleet Financial-BankBoston merger. The average price to book for this
region declined from 2.4 times in 1998 to 2.1 times in 1999. The median
price to earnings multiple also declined from 28.3 times in 1998 to 24.6
times in 1999.
Merger activity in 2000 is expected to increase as a result of the
elimination of pooling-of-interests accounting and the elimination of
Glass-Steagall restrictions through the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999. On September 7, 1999, the Financial
Accounting Standards Board ("FASB") issued an exposure draft of a
proposed Statement of Financial Accounting Standards ("SFAS"), "Business
Combinations and Intangible Assets," which would eliminate the pooling-
of-interests method of accounting for business combinations by amending
Accounting Principals Board ("APB") Opinion No. 16. Under the pooling
method, assets and liabilities previously recorded are carried forward to
the surviving company. No other assets or liabilities are recognized in
the combination, and any excess of the purchase price over the net assets
of the acquired company is not recorded. Under the purchase method, the
acquiring company is required to record the assets acquired and
liabilities assumed at their fair value, which may result in recording
goodwill, the excess of the price paid over the net assets received. APB
Opinion No. 16 was intended to limit the number of business combinations
accounted for under the pooling-of-interests method by specifying twelve
criteria that must be met in order to qualify for this accounting
treatment. However, the number of poolings have increased in recent
years because companies have structured transactions to qualify for the
pooling method. In light of the increase in merger and acquisition
activity, the Securities and Exchange Commission ("SEC") is concerned
about the deficiencies of the pooling method and the need for convergence
of the accounting of business combinations with international standards,
which are accounted for under the purchase method. These factors have
led the SEC to encourage the FASB to reconsider APB Opinion No. 16 and
make the purchase method the only acceptable accounting treatment for
business combinations. The proposed Statement would be effective
sometime in early 2001. This could lead to an increase in the number of
deals announced for 2000, as companies may try to take advantage of the
pooling method before it is eliminated.
On November 12, 1999, President Clinton signed into law historic
legislation that affects every facet of the financial services industry.
One of the main provisions of The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999, the ("Modernization Act") is the repeal of the
Glass-Steagall Act. The Glass-Steagall Act, enacted in 1933, restricts
the affiliation of banks, insurance companies and securities firms. The
Modernization Act breaks down the Federal and State barriers prohibiting
these affiliations, and establishes a statutory framework pursuant to
which full affiliations can occur between the different types of
entities. Under the statutory framework, financial services
organizations will have the flexibility in structuring these new
affiliations through a financial holding company structure or a financial
subsidiary. Finally, the Modernization Act provides for the regulation
of the various financial services to the appropriate Federal regulatory
authorities. The need for new legislation arose out of the widespread
view that events in the marketplace made the current structure of United
States financial institutions obsolete. In recent years, technological
advancements and market innovations have combined to replace traditional
banking services with those offered by noninsured financial institutions.
Federal bank regulators have gradually allowed banks to buy into certain
areas of insurance and securities. However, under the Glass-Steagall
Act, insurance companies and securities firms were not allowed the
reciprocal. One major example was the 1998 merger of Citicorp and
Travelers Group, Inc. into what we know today as Citigroup, Inc. The new
legislation removes restrictions and puts all three financial service
providers on the same playing field. The Modernization Act could propel
a variety of mergers and acquisitions among the three groups and give
consumers the opportunity to shop for almost any financial service from
checking accounts to life insurance to on-line securities trading all in
one place. The Modernization Act will, in general, take effect March 11,
2000.
REVIEW OF FINANCIAL POSITION:
We, through our subsidiary, Community Bank, operate fourteen full-service
branch banking offices. These offices are all similar with respect to the
following:
- Economic characteristics,
- Products and services,
- Operating processes,
- Delivery system,
- Customer bases, and
- Regulatory oversight.
Based on these similarities, we consider our branch banking offices to be
a single operating segment. We did not have any other reportable
operating segments during the three years ended December 31, 1999.
Total assets increased $18.8 million to $407.1 million at December 31,
1999, from $388.3 million at December 31, 1998. The single most important
factor effecting asset growth in 1999 was the expansion of our delivery
system through additional branch banking offices. Total assets averaged
$396.2 million in 1999, an increase of $18.8 million or 5.0 percent as
compared to the $377.4 million in 1998. Our growth rate was lower in
comparison to the 9.4 percent growth experienced for the local peer group
of 20 community banks located in Northeastern Pennsylvania. The
composition of our earning assets remained relatively constant in 1999 as
compared to 1998. Average investments and federal funds sold to average
earning assets equaled 31.0 percent and 30.7 percent in 1999 and 1998.
Average loans as a percentage of average earning assets was 69.0 percent
in 1999 and 69.3 percent in 1998. In total, average earning assets as a
percentage of average total assets equaled 94.4 percent in 1999 and 94.7
percent in 1998. The slight decline is attributable to lower volumes of
federal funds sold, as these excess funds were used to fund increased
loan demand, investment purchases and delivery system expansion projects.
Our ratio was similar to that of our peer group. The ratio of average
earning assets to total average assets for the peer group equaled 94.6
percent in 1999 and 94.5 percent in 1998.
Total investments decreased $4.0 million to $105.6 million at December
31, 1999, from $109.6 million at December 31, 1998. In 1999, investments
averaged $13.1 million or 13.2 percent higher at $112.5 million, compared
to $99.4 million averaged in 1998. The composition of our investment
portfolio continued to shift in 1999, as cash flows from maturing U.S.
Treasury securities were reinvested into short-term U.S. Government
agency mortgage-backed securities to serve future liquidity requirements.
The majority of investment purchases in 1999 occurred during the first
six months. During the second half of 1999, cash flows from U.S.
Government agency mortgage-backed securities were used to fund increased
loan demand. The tax-equivalent yield on the investment portfolio
declined 26 basis points to 6.51 percent in 1999 from 6.77 percent in
1998. Declining yields on both taxable and tax-exempt investments
contributed to the overall reduction in yield.
Loans, net of unearned income, totaled $276.9 million at December 31,
1999, an increase of $28.8 million from $248.1 million at December 31,
1998. Average loans outstanding grew $10.3 million or 4.2 percent to
$258.2 million in 1999 from $247.9 million in 1998. Increases in
commercial loans and real estate loans, both commercial and residential,
significantly influenced the overall expansion of our loan portfolio.
The relatively low interest rate environment and intense loan competition
in our market area had a negative effect on our loan yields. The tax-
equivalent yield on our loan portfolio decreased 22 basis points to 8.33
percent in 1999, from 8.55 percent in 1998.
We experienced a deterioration in our asset quality during 1999. Ninety
percent of this downturn was caused by an increase in accruing loans past
due 90 days or more. Nonperforming assets increased $2.6 million to $6.9
million at December 31, 1999, from $4.3 million at year-end 1998. The
ratios of nonperforming loans and nonperforming assets as a percentage of
loans, net of unearned income, equaled 2.38 percent and 2.51 percent at
the end of 1999, compared to 1.63 percent and 1.72 percent at the end of
1998. As a percentage of loans, net of unearned income, the allowance
for loan losses decreased to 1.37 percent at December 31, 1999, from 1.63
percent at December 31, 1998. A lower provision for loan losses, coupled
with increased net charge-offs, contributed to the lower ratio. Although
we experienced a decline, our ratio continued to be above that of our
peer group. For the peer group, this ratio also declined to 1.17 percent
in 1999 from 1.26 percent in 1998.
Total deposits increased $18.2 million to $362.5 million at December 31,
1999, from $344.3 million at December 31, 1998. Total deposits averaged
$352.7 million in 1999, an increase of $17.1 million or 5.1 percent,
compared to $335.6 million averaged in 1998. Similar to the previous
year, we experienced significant growth in average noninterest-bearing
deposits of 12.9 percent. Interest-bearing deposits averaged 4.3 percent
higher than last year. Deposit growth is primarily related to the
establishment of higher concentrations of commercial customer
relationships as a result of the delivery system expansion. Our cost of
funds declined 18 basis points to 4.42 percent in 1999, from 4.60 percent
in 1998 as a result of improvements in the deposit mix to lower costing
transaction accounts and a general decline in rates paid.
Our interest sensitivity position improved while our liquidity position
weakened from year-end 1998 to year-end 1999. Interest sensitivity, as
measured by the ratio of cumulative one-year, rate sensitive assets
("RSA") to rate sensitive liabilities ("RSL"), improved from 0.70 at
December 31, 1998, to 0.75 at December 31, 1999. Both ratios were within
the acceptable guidelines set forth in our Asset/Liability Management
Policy. The net noncore funding dependence and net short-term noncore
funding dependence ratios best illustrate our liquidity position. The
net noncore funding dependence ratio equaled 0.5 percent at December 31,
1999, as compared to negative 4.0 percent at December 31, 1998. Our
short-term noncore funding dependence ratio at December 31, 1999 and
1998, was negative 0.5 percent and negative 5.7 percent.
Stockholders' equity totaled $35.5 million at December 31, 1999, compared
to $39.7 million one year ago. The primary factor contributing to the
$4.2 million reduction in capital was $5.7 million in common stock
repurchases. Also affecting stockholders' equity was net income of $4.6
million, net cash dividends of $1.0 million and a net unrealized loss on
securities of $2.1 million. Pursuant to the buyback of common stock, our
Leverage ratio, Tier I capital as a percentage of total average assets
less intangibles, decreased to 8.6 percent at December 31, 1999, from 9.5
percent at December 31, 1998. We exceeded all relevant regulatory capital
measurements and were considered well capitalized at December 31, 1999.
Our main goals in 1999 included improving and expanding our delivery
system, providing new products and services and enhancing stockholder
value. With regard to delivery system improvement and expansion,
foremost in 1999, was the completion of the two construction projects
which began in 1998. We opened our Corporate Center and thirteenth
branch office during the first quarter of 1999. The 24,000 square foot
facility located in Clarks Summit, Lackawanna County, Pennsylvania,
accommodates a full-service banking facility and eight administrative
divisions. The centralization of many of our divisions improved the
efficiency and effectiveness of our overall operations. In addition,
during the third quarter of 1999, we opened our fourteenth full-service
banking office located in Dickson City, Lackawanna County, Pennsylvania.
During 1999, we also set out to improve our delivery system through
technological advancements. In the third quarter, we converted our
applications processing system to CoreDirector, a windows-based system.
Converting to a windows-based system for our core banking functions
offered:
- Conformity with industry trends and standards,
- Compatibility with our general PC operating and other windows-
based software, and
- Company-wide uniformity of software applications.
Pursuant to the goal of providing new products and services, during the
second quarter of 1999, we established Community Leasing Corporation as a
wholly-owned subsidiary of Community Bank. Community Leasing
Corporation, by providing direct financing leases for various types of
business equipment, offers another borrowing alternative for commercial
customers.
In an effort to promote stockholder value, on April 21, 1999, our Board
of Directors approved a stock repurchase program. The program authorized
the purchase of up to 220,000 shares of our outstanding common stock. The
repurchase of stock affords us the opportunity to enhance value to our
stockholders through appreciation in earnings per share and return on
equity.
We intend to further these goals in the current year. We plan to expand
our service base by offering a new array of nonbanking products and by
introducing new technological advancements. Through our Trust and
Financial Services Division, we expect to introduce various insurance
products such as life, disability, health and long-term care insurance.
For the convenience of our customers, we plan to offer the benefits of
new technology such as internet and telephone banking. Customers will
have access to banking services, via the internet or telephone, without
leaving their homes or places of business.
INVESTMENT PORTFOLIO:
The total return on our investment portfolio was 4.0 percent in 1999,
compared to 7.2 percent in 1998. Total return is a comprehensive
industrywide approach measuring investment portfolio performance by
considering the sum of all interest income, reinvestment income on all
proceeds from repayments, and capital gains and losses whether realized
or unrealized. Despite the decline, our 1999 performance ranked in the
upper 92nd percentile among all Federal Deposit Insurance Corporation
("FDIC")-insured financial institutions and outperformed the industry
standard index. The Lehman Brothers' aggregate-bond index, a benchmark
used by most investment managers, scored a negative 0.6 percent total
return in 1999. Our total return also exceeded the local peer group's
total return of 2.4 percent in 1999. The value of exceeding the peer
group's total return by 160 basis points, based on the average volume of
our investment portfolio in 1999, approximated $1.8 million. Moreover,
our investment portfolio was ranked in the upper 94th percentile, based
on a national investment performance ranking company, over three- and
five-year time horizons.
Rising interest rates, concerns over inflation and worries about the year
2000 ("Y2K") computer disruption depressed bond prices, causing total
returns on most bond categories to plummet. The global economic crisis of
1998 dissipated in 1999, causing fixed-income investors to no longer seek
the safety of U.S. Treasury securities. With the removal of this threat,
investors began to focus their concerns on the continued strength of the
U.S. economy and the potential for inflation. Investors began selling
their bond portfolios, causing prices to drop and yields to escalate. The
FOMC's influences of tightening monetary policy through three interest
rate hikes added emphasis to investor inflationary fears. During the
final quarter of 1999, companies began selling their portfolios to
increase liquidity in the wake of the century date change. This action
further reduced bond values. Long-term investment yields, represented by
the benchmark 30-year U.S. Treasury bond, increased 139 basis points to
6.48 percent at year-end 1999 from 5.09 percent at the end of 1998. The
long part of the U.S. Treasury yield curve increased less than the short-
and intermediate-term segments. Normally, yields on longer-term bonds
experience a greater increase so as to compensate investors for the
greater risk of lending their money for longer periods. In August 1999,
the Treasury proposed a rule under which it could repurchase its own
securities in the market. This caused stronger demand in the longer part
of the curve increasing the price of the 30-year bond and restricting the
rise in its yield. Short-term yields, indicated by the two-year U.S.
Treasury note, increased 170 basis points from 4.54 percent at year-end
1998 to 6.24 percent at year-end 1999. As a result, the spread between
short- and long-term Treasuries tightened during 1999 from a high of 64
basis points at the end of the first quarter to a low of 24 basis points
at year-end.
Accordingly, all of our investment securities acquired during 1999 were
confined to either short-term collateralized mortgage obligations
("CMOs") of U.S. Government-sponsored agencies or intermediate-term state
and municipal obligations. We were successful in timing our acquisitions
to the periods in 1999 when spreads were the widest for a particular
sector. Our CMO purchases occurred during the early part of 1999 when
short-term spreads between a two-year U.S. Treasury and a U.S. Government
agency CMO with a weighted-average life of two-years, were between 70 and
80 basis points. In comparison, spreads tightened to between 50 and 60
basis points in the latter part of 1999. Our acquisitions of tax-exempt
obligations of states and municipalities occurred during the early part
of the fourth quarter. Spreads between 15-year, bank-qualified, tax-
exempt municipal securities and a 15-year U.S. Treasury bond were in
excess of 180 basis points when these securities were being acquired.
Comparable spreads during the end of the first quarter and beginning of
the second quarter were between 117 and 132 basis points.
Similar to the approach taken in assessing our performance with respect
to return, we evaluate our risk in comparison to all other financial
institutions. Risk is assessed by quantifying the average life of the
investment portfolio as compared to U.S. Treasury securities. Average
life is derived from the standard deviation or volatility of our total
return to that of U.S. Treasury securities over a one-year time horizon.
This risk measure deteriorated slightly from 0.67 years in 1998 to 1.19
years in 1999. Despite this slight change, our portfolio continued to
rank in the upper one-third of all banks located in the United States for
having low risk. Moreover, the risk associated with our portfolio was
less than that of the local peer group having an average life of 1.63
years. Another assessment of risk is effective duration, which measures
the investment portfolio's exposure to market value volatility as a
result of interest rate fluctuations. At December 31, 1999, our
investment portfolio, primarily consisting of government securities,
obligations of states and municipalities and mortgage-backed securities
had an effective duration of 2.9 years. The increase in the investment
portfolio's effective duration from 1.4 years in 1998 slightly increased
our portfolio's exposure to future market value depreciation from rising
interest rates.
Understanding inherent risks and their potential effects are essential to
managing an investment portfolio. Specifically, federal regulations
mandate that investment portfolio managers and bank directors must be
able to prove that they understand and can manage various risk elements
in the bank's investment portfolio. Investment portfolio managers must
demonstrate by performing pre- and post-purchase tests for the impact of
interest rate changes on price volatility, cash flows and average life.
Moreover, regulations require, at a minimum, that investment oversight
has:
- Developed adequate investment policies, procedures and risk
limits,
- Implemented effective internal control programs,
- Identified, measured, monitored and controlled associated risks,
- Assured effective oversight of the investment function from
directors and management, and
- Proved compliance with related laws, regulations, policies and
accounting standards.
Our Investment Policy specifies approved investments and sets limits to
risk exposure on both individual securities and the overall portfolio.
We evaluate and limit our risk exposure by using quantitative techniques,
subjective analysis, regulatory guidance and the investment policy.
Specifically, banks must have procedures in place to manage various risk
elements inherent in the investment portfolio, particularly:
- Market or IRR,
- Timing risk,
- Credit risk,
- Liquidity risk,
- Operational risk, and
- Legal risk.
Market or IRR relates to the inverse relationship between bond prices and
market yields. This risk is defined as the risk that increases in
general market rates will result in market value losses. Market risk
represents the greatest risk to our bond portfolio. We quantify and
limit such exposure through "stress test" modeling and by limiting the
duration of individual securities and the portfolio as a whole. Stress
test modeling measures the change in value of an investment given an
immediate and parallel shift in the yield curve or "shock." Our policy
requires us to analyze an investment's price sensitivity utilizing stress
testing prior to purchase. Moreover, we perform quarterly post-
acquisition assessments of the market value volatility for all
investments. Stress tests conducted on our portfolio at December 31,
1999, indicated expected market value declines of 3.2 percent for an
increase in general market rates of 100 basis points, 6.2 percent for an
increase of 200 basis points and 8.0 percent for an increase of 300 basis
points. The investment portfolio had a lower market risk exposure at
year-end 1998, as indicated by anticipated reductions of 0.8 percent, 1.7
percent and 2.6 percent given the same rate shocks. Despite the slightly
higher level of risk exposure, we deem the present level of market risk
appropriate given our capital position and the overall composition of the
balance sheet.
Although not to the extent of the losses experienced by the peer group,
our investment portfolio lost value during 1999 as a result of
inflationary threats and increased interest rates. Approximately two-
thirds of our portfolio consists of CMOs with a weighted-average life of
two years. The remaining portion of the portfolio is in 15-year tax-
exempt municipal obligations. At December 31, 1999, the weighted-average
life of the entire portfolio was 4.6 years compared to 3.7 years at the
end of 1998. The short- and intermediate-term portions of the yield
curve which these securities are most closely related to, and priced off
of, increased 170 basis points and 162 basis points. As a result, our
portfolio experienced a marked devaluation. Adjusting for the realization
of net gains of $408 on the sale of certain municipal securities, the net
unrealized holding adjustment would have decreased $2,891 or 2.6 percent
in 1999. Comparatively, the peer group experienced a 4.9 percent decrease
in 1999. At December 31, 1999, the fair value of our investment portfolio
represented 99 cents per dollar of amortized cost compared to only 96
cents per dollar of amortized cost for the peer group. We reported a net
unrealized holding loss of $783, net of income tax benefits of $403, at
December 31, 1999, and a net unrealized holding gain of $1,394, net of
income taxes of $719, at December 31, 1998.
In addition to affecting the market value of an investment portfolio,
interest rate changes can have a significant impact on the amount and
timing of cash flow receipts. Cash receipts from CMOs are an important
source of funding for our loan demand. As interest rates increase,
prepayments on underlying mortgages generally decline, which could cause
a marked reduction in cash flows from these instruments. Despite the 170
basis point rise in short-term interest rates, we did not experience a
significant change in the pattern or timing of our cash flows from CMOs.
CMO principal payments did not fluctuate by more than $400 during any one
month in 1999 and ranged from a low of 2.7 percent to a high of 3.8
percent as a percentage of principal outstanding. We attribute the
stability of our cash flows to the fact that we purchase and hold only
CMO classes designated as Accretion Directed or Planned Amortization
Class ("PAC") II. These classes possess the highest quality with respect
to their structure and composition, which effectively reduces their
exposure to changes in mortgage payment rates. We monitor our cash flow
timing risk by employing a model which utilizes median dealer prepayment
assumptions to project future cash flow streams under multiple interest
rate scenarios. Based on interest rate projections of plus or minus 100
basis points at December 31, 1999, we expect to receive a minimum of
$18.5 million or a maximum of $20.0 million in principal repayments from
our CMOs in 2000.
We mitigate credit risk, the probability that an issuer cannot meet
principal and interest payments on a timely basis, through concentration
limitations. U.S. Treasury securities and U.S. Government-sponsored
agencies, including CMOs, accounted for 65.1 percent of aggregate
investments at December 31, 1999. Except for U.S. Treasury securities
and U.S. Government-sponsored agencies, there were no securities of any
individual issuer that exceeded 10.0 percent of our stockholders' equity
at December 31, 1999 and 1998. Although not backed by the full faith and
credit of the U.S. Government, credit risk is limited on U.S. Government-
sponsored agencies as it is general knowledge that the government would
ultimately cover any default. Except for $313 of tax-exempt obligations
of local municipalities, all of the investment securities in our
portfolio are considered "investment grade," receiving a rating of "Baa"
or higher from Moody's or "BBB" or higher from Standard and Poor's rating
services at December 31, 1999. We maintain periodic financial statements
on nonrated securities of local municipalities. It is our policy to
assess the creditworthiness of the issuer or counterparty prior to
purchasing an investment. We consider repayment sources, municipal bond
insurance, credit quality and changes in credit ratings when dealing in
the municipal bond sector. We also consider settlement and pre-settlement
credit risk with respect to investment brokers. Brokers must be approved
each year by the Board of Directors prior to conducting business with us.
As part of its approval process, the Board of Directors requires
financial statements, resumes, National Association of Securities
Dealers inquiries and general information pertaining to the ability of a
broker to honor commitments.
Liquidity risk refers to the ease in converting a security to cash at or
near its true value. On a quarterly basis, we review the spread between
the bid price and the ask price quoted by a dealer in order to ensure
liquidity in the investment portfolio. We consider our liquidity risk
exposure limited because of the high concentration of short-term, high-
quality U.S. Government-sponsored agency CMOs, which normally offer the
greatest liquidity relative to other similar investments. The average
bid-ask spread on our CMO portfolio was 6/32's representing $126 or 0.2
percent of its value at December 31, 1999. During 1999 and 1998, we did
not own any securities that were not actively traded in a liquid market.
Additionally, we did not own any investments that had highly volatile
market values relative to small changes in interest rates, which would
have caused a material effect on operating results or liquidity.
Operational risk is the risk that deficiencies in information systems or
internal controls will result in unexpected loss. Sources of operational
risk include inadequate procedures, human error, system failure or fraud.
We limit our operational risk by separation of duties and supervision of
persons executing transactions from those responsible for operational
functions. The exposure to operational risk is also controlled through
procedures to ensure independent portfolio pricing and by providing
strong technical oversight and proper documentation. Moreover, the
investment function is reviewed at least annually for internal control
deficiencies from an independent internal auditing firm as well as an
external certified public accounting firm. Based on the latest reports of
these firms at December 31, 1999, we are unaware of any operational or
internal control deficiencies which would materially affect our operating
results or financial position.
Legal risk is the risk that contracts are not legally enforceable or
documented correctly. We limit this type of risk by evaluating investment
agreements and ensuring the authority of the counterparty. In addition,
prior to acquisition, we evaluate whether a given security will be
considered unsuitable for regulatory purposes causing an adverse impact
on the securities value.
We consider many other types of risk including reinvestment, yield curve,
inflation, event, sector, and volatility. Most of these risks are
substantially mitigated through the previously-discussed techniques or by
limitations on the quality, quantity and maximum maturity of each type of
security as specified in our Investment Policy.
The Investment Committee, as part of its oversight of the investment
function, considers various strategies from time to time aimed at
minimizing risk and maximizing return. During 1999, we considered
leveraging techniques to increase earnings through the employment of
excess capital. Leveraging is simply a technique whereby a bank borrows
funds at a specified interest rate and makes a spread over this rate by
purchasing higher yielding investment securities. After a comprehensive
analysis, the Committee decided to forgo the use of these techniques as
the increase to current earnings was far outweighed by the potential for
future reductions in earnings. These reductions would result from an
increased exposure to many of the previously mentioned risk factors
inherent in the assets and liabilities used to implement these
techniques. It was concluded that it was not possible to achieve what the
Committee considered an adequate increase in current earnings without
escalating the amount of leverage beyond a point where capital adequacy
levels would be in jeopardy, or subjecting us to an inordinate amount of
interest rate and other forms of risk. Accordingly, we were not involved
in any form of leveraging at December 31, 1999 or 1998.
Investment securities took less prominence in our earning assets mix
during 1999, declining from 28.2 percent of total assets at year-end 1998
to 25.9 percent at the end of 1999. This reduction was a direct
reflection of our desire to satisfy increased loan demand as loans
typically yield between 200 to 300 basis points more than investments
with the same maturities. As previously mentioned, the mix of the
investment portfolio is comprised of two-thirds in short-term CMOs to
provide liquidity and the remainder in intermediate-term obligations of
states and municipalities to lower our tax burden. Moreover, this
combination of short- and intermediate-term investments assist us in
maximizing our total return over various interest rate scenarios. Short-
term CMOs will outperform in periods of rising rates while intermediate-
term municipals will maximize total return in a falling rate environment.
We classified all securities as available-for-sale over the past five
years. By classifying the portfolio in this manner, we have the
flexibility to use these securities to implement asset/liability
strategies in response to changes in interest rates, prepayment risk,
liquidity requirements or other identified circumstances.
The carrying values of the major classifications of available-for-sale
securities as they relate to the total investment portfolio are
summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $ 3,595 3.40% $ 11,060 10.09% $ 28,583 27.05% $ 35,619 34.92% $ 43,751 40.25%
U.S. Government agencies..... 1,635 1.55 637 0.58 10,388 9.83 18,606 18.24 26,213 24.11
State and municipals......... 34,781 32.93 40,007 36.49 39,887 37.75 38,295 37.55 30,512 28.07
Mortgage-backed securities... 63,523 60.14 55,834 50.93 23,746 22.47 7,058 6.92 6,154 5.66
Equity securities............ 2,096 1.98 2,088 1.91 3,062 2.90 2,416 2.37 2,076 1.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total ..................... $105,630 100.00% $109,626 100.00% $105,666 100.00% $101,994 100.00% $108,706 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Proceeds from the sale of available-for-sale securities amounted to $11.1
million in 1999 and $1.7 million in 1998. During the fourth quarter of
1999, we decided to extend the average maturity and enhance the call
protection of our municipal portfolio as a result of the favorable market
conditions. These conditions included wider spreads and higher yields on
municipals not seen since 1997. Moreover, this action will provide
stronger preparedness in the event rates decrease as municipal securities
outperform in a declining rate environment. Accordingly, we began
selling municipal obligations with shorter maturities and call features,
replacing them with the same quality municipal securities having longer
maturities and call dates. The weighted-average maturity of the
municipal obligations sold was 9.2 years compared to 13.0 years for those
purchased as replacements. The weighted-average call date increased from
3.8 years to 9.7 years as a result of the restructuring. All of the
replacement securities were bank-qualified, "AAA" rated, insured general
obligations which are backed by the full faith, credit and taxing power
of the governmental unit issuing the obligation. Net gains generated as a
result of the 1999 sales totaled $408. The 1998 investment sales
consisted of certain equity securities of local financial institutions.
The Investment Committee made the decision to sell these securities in
the third and fourth quarters of 1998 as a result of general declines in
the values of bank stocks and the high price multiples of these specific
holdings as compared to peers. In 1998, we recognized net gains of $1.1
million.
Repayments from investment securities totaled $39.1 million in 1999 and
$45.2 million in 1998. Based on the investment portfolio at December 31,
1999, we expect to receive $21.0 million of repayments in 2000, assuming
no change in the current interest rate environment.
Investment purchases amounted to $49.7 million in 1999. Specifically, we
purchased:
- $3.7 million in short-term U.S. Treasury securities,
- $1.0 million in U.S. Government agencies,
- $34.3 million in short-term CMOs, and
- $10.7 million in intermediate-term state and municipal
obligations.
During 1999, we purchased CMOs as an alternative to U.S. Treasuries, in
order to suffice future funding requirements, because these securities
offer superior returns for a similar amount of risk. The total return on
our CMO portfolio was 4.3 percent in 1999. In comparison, the total
return for a portfolio consisting of two-year U.S. Treasuries was 3.0
percent in 1999. Based on the average volume of CMOs held in our
portfolio of $67.2 million during 1999, we increased our wealth $874 by
investing in the portfolio of CMOs having a weighted-average life of two
years instead of an alternative portfolio of two-year U.S. Treasuries.
Municipals, the other major portion of our portfolio, recorded a total
return of 3.0 percent in 1999. Although loan demand continues to be
brisk, we plan to redirect any excess funds to investments in short-term
U.S. Government CMOs in order to ensure funding for loan demand and to
meet pledging requirements of local municipalities.
We experienced a decline in the tax-equivalent yield on the investment
portfolio from 6.77 percent in 1998 to 6.51 percent in 1999. Proceeds
from repayments and sales of available-for-sale securities approximated
the amount of investment purchases, however, the weighted-average tax-
equivalent yield on the acquired securities was 34 basis points lower at
6.26 percent than those retired at 6.60 percent. The yield on taxable
investments declined 13 basis points to 5.83 percent in 1999, while the
tax-equivalent yield on tax-exempt investments declined 11 basis points
to 7.96 percent. The peer group experienced a similar yield decline from
6.43 percent in 1998 to 6.24 percent in 1999.
At December 31, 1999, investment securities with an amortized cost of
$35,157 were pledged to secure deposits, to qualify for fiduciary powers
and for other purposes required or permitted by law. At December 31,
1998, the amortized cost of pledged securities equaled $28,895. The fair
value of such securities equaled $34,406 at December 31, 1999, and
$28,836 at December 31, 1998.
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at
December 31, 1999, is summarized as follows. The weighted-average yield,
based on amortized cost, has been computed for state and municipals on a
tax-equivalent basis using the statutory tax rate of 34.0 percent. The
distributions are based on contractual maturity with the exception of
mortgage-backed securities, CMOs and equity securities. Mortgage-backed
securities and CMOs have been presented based upon estimated cash flows,
assuming no change in the current interest rate environment. Equity
securities with no stated contractual maturities are included in the
"After ten years" maturity distribution. Expected maturities may differ
from contracted maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
DECEMBER 31, 1999 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities.... $ 599 4.05% $ 3,032 5.06% $ 3,631 4.89%
U.S. Government agencies.... 650 5.74 1,011 6.20 1,661 6.02
State and municipals........ 1,320 7.28 3,975 6.67 $8,195 7.91% $21,438 7.96% 34,928 7.78
Mortgage-backed securities.. 19,226 5.97 44,555 5.95 967 6.02 64,748 5.96
Equity securities........... 1,848 6.32 1,848 6.32
------- ------- ------ ------- --------
Total..................... $21,795 5.99% $52,573 5.96% $9,162 7.71% $23,286 7.83% $106,816 6.52%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $ 599 $ 2,996 $ 3,595
U.S. Government agencies.... 650 985 1,635
State and municipals........ 1,320 3,957 $8,161 $21,343 34,781
Mortgage-backed securities.. 19,012 43,585 926 63,523
Equity securities........... 2,096 2,096
------- ------- ------ ------- --------
Total..................... $21,581 $51,523 $9,087 $23,439 $105,630
======= ======= ====== ======= ========
</TABLE>
On July 7, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." This Statement delayed the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," for
one year. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, collectively referred to as derivatives, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the Consolidated Balance
Sheets and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. If certain conditions are
met, a derivative may be specifically designated as:
- A hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm
commitment,
- A hedge of the exposure to variable cash flows of a forecasted
transaction, or
- A hedge of foreign currency exposures.
SFAS No. 133 was originally scheduled to be effective for fiscal years
beginning after June 15, 1999. SFAS No. 137 amended SFAS No. 133 making
the Statement effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier adoption encouraged. The
anticipated adoption of SFAS No. 133 on January 1, 2001, is not expected
to have a material effect on operating results or financial position as
we have no instruments that qualify as derivatives or hedges nor do we
expect to be affected by the provisions for potential reclassification of
investment securities.
We adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise," on January 1, 1999. This Statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to
require that after securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests as held-to-
maturity, available-for-sale or trading, based on its ability and intent
to sell or hold those investments, in accordance with the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Statement also requires a mortgage banking enterprise to
classify as trading any retained mortgage-backed securities that it
commits to sell before or during the securitization process. The adoption
of SFAS No. 134 did not have an effect on our operating results or
financial position as we have no retained mortgage-backed securities or
other interests from the securitization of mortgage loans held for sale.
LOAN PORTFOLIO:
Loans are the most significant assets of financial institutions and
generate the largest portion of revenues. There are many factors that
affect the overall lending environment. Specifically, the housing market
and the economic conditions affecting it may significantly impact lending
activities, since loans to finance one-to-four family residential
properties account for a predominant share of lending activities in most
financial institutions. Residential mortgage lending activities account
for over half of our total lending activities.
The housing market, although slightly slowing toward year-end, reached
record levels in 1999. Rising interest rates during the second half of
the year caused the downturn. However, low unemployment, high consumer
confidence and strong personal income growth more than offset these
interest rate influences and caused record results in 1999. New home
sales in 1999 rose to a record annual rate of 907 homes compared to 890
homes in 1998. Existing home sales reached 5.2 million sold in 1999, an
increase of 4.0 percent over the 5.0 million sales recorded in 1998. In
addition, low inflation also impacted the housing market as the median
selling prices of new and existing homes rose only 4.4 percent and 3.5
percent from 1998. Although slower than last year, 1999 marked another
good year for the construction sector. Nationally, homebuilders started
1.68 million single-family homes and apartment units in 1999, an increase
of 3.7 percent over the 1.62 million started in 1998. Similarly, for the
Northeast, housing starts in 1999 were up 3.0 percent over 1998 levels.
Overall, the housing market gains reflected favorably on real estate
lending for banks in 1999. Mortgage loan rates trended higher as a result
of the three rate hikes by the FOMC and the threat for additional
increases in the near term. The higher trend, as evidenced by a 49 basis
point increase in the average rate on 30-year mortgages to 7.43 percent
in 1999 from 6.94 percent in 1998, had little affect on the demand for
real estate loans during most of the year. The aggregate dollar amount of
real estate loans outstanding for all commercial banks grew to $1.5
trillion at December 31, 1999, from $1.3 trillion at December 31, 1998.
The FOMC's actions also caused the prime rate to increase 75 basis points
from 7.75 percent at year-end 1998, to 8.50 percent at year-end 1999. The
strength of the economy extinguished any negative impact the increased
rates may have had on business spending. Companies continued to spend on
technological improvements, which account for 40.0 percent of all
business spending. Such outlays increased 22.0 percent in 1999. As a
result, total outstanding commercial and industrial loans to U.S.
commercial banks at December 31, 1999, grew $55.7 billion or 5.8 percent
to $1,008.2 billion, from $952.5 billion at December 31, 1998.
As a result of the strong commercial loan demand in 1999, regulators were
alerted to an increased level of credit risk at the Nation's financial
institutions. On September 28, 1999, the Federal Reserve Board issued
Supervisory Release ("SR") 99-23, "Recent Trends in Bank Lending
Standards for Commercial Loans," to announce, based on its ongoing
supervisory monitoring of bank lending practices, that some banks have
relaxed their credit discipline in certain key areas. The Federal
Reserve Board noted that the volume of weak or potentially weak loans
rose over the past several quarters. The increases were significant given
the continuing favorable economic environment. The Federal Reserve Board
noted that relaxed credit discipline is evident in three pivotal and
related areas:
- Undue reliance on optimistic outlooks for borrowers and
continued favorable economic and financial market conditions,
- Insufficient consideration of stress testing, and
- Weakening of key internal controls in the lending process.
Unlike many institutions, we continue to apply loan policies and
procedures on a consistent basis to foster sound lending practices. These
policies and procedures include standards that assist lenders in making
judgements regarding the character, capacity, capital structure and
collateral of the borrower. More importantly, loan approval is primarily
determined on a borrower's ability to repay the debt over a range of
business conditions.
Results of the Federal Reserve Board's January of 2000 "Senior Loan
Officer Opinion Survey on Bank Lending Practices," indicated that most
banks heeded the warnings put forth in SR 99-23 as lenders reported they
became more cautious in recent months without reducing credit
availability to borrowers. The survey results point to a continued
firming of business lending practices. The survey cited 11.0 percent of
domestic banks were tightening standards on commercial and industrial
loans to large- and middle-market firms and 10.0 percent were tightening
standards for small firms, as compared to only 9.0 percent and 2.0
percent in the November of 1999 survey. In addition, 35.0 percent of
domestic banks reported charging higher premiums and higher spreads of
loan rates over their cost of funds on riskier loans to large- and
middle-market firms, while 22.0 percent increased terms for small firms.
Domestic banks cited the tightening was a result of reduced tolerance for
risk and a more uncertain economic outlook. With respect to commercial
real estate loans, 11.0 percent of domestic banks reported somewhat
tighter standards. On the consumer side, banks reported a somewhat
stronger willingness to make consumer loans and only a small fraction had
indicated tightening credit standards. Regarding loan demand, 9.0 percent
and 11.0 percent of domestic banks reported stronger demand for
commercial and industrial loans and commercial real estate loans.
However, 64.0 percent reported weaker demand for home mortgage loans
compared to 41.0 percent in the November survey. Furthermore, only 10.0
percent of respondents reported decreased demand for consumer loans.
With regard to our commercial loan practices, we were ranked 13th out of
209 Pennsylvania banks in 1999 by the U.S. Small Business
Administration's Office of Advocacy for our "small business friendly"
lending activities.
Four variables are used to rank small business lending activities:
- The ratio of small business loans, loans less than $250, to
total assets,
- The ratio of small business loans to total business loans,
- The dollar value of small business loans, and
- The number of small business loans.
Consumer lending did not experience the same success in 1999 as was
evidenced for real estate and commercial lending. Personal income growth
fueled by higher employment, rising wages and increased wealth from a
thriving stock market allowed individuals to spend without having to rely
on borrowing to support their purchases. Similar to last year, banks
again did not reap any benefits from this increased spending.
Outstanding consumer loans declined $2.2 billion from $497.9 billion at
December 31, 1998, to $495.7 billion at December 31, 1999.
A trend that is becoming more popular with financial institutions is
subprime lending. Subprime lending involves lending to people with
tarnished credit histories, low income relative to debt levels and
lending money that far exceeds any underlying collateral. The majority
of this type of lending involves mortgage and home equity loans.
Popularity for these loans arose from fierce competition in the lending
industry, as banks vie for new customers and additional sources of
revenue. These types of loans appear attractive with higher fees and
interest rates, resulting in higher profit margins. However, these high
profit margins come with a price in the form of higher volatility and
greater default rates.
In response to this trend, on March 1, 1999, regulatory agencies jointly
issued the Interagency Guidance on Subprime Lending, that discusses the
risks inherent in subprime lending and establishes the expectations for
proper business planning, risk management and controls. Subprime lending,
as defined by the agencies, involves extending credit to borrowers who
exhibit characteristics indicating a significantly higher risk of default
than traditional bank lending characteristics. As a result of the higher
amount of credit risk, regulators require institutions to determine if
the risks are acceptable and controllable given the institution's staff,
financial condition, size and capital position. In addition, this
guidance requires the establishment of subprime lending specific, board-
approved policies and procedures, as well as internal controls that
identify, measure, monitor, and control the additional risks associated
with this lending. Institutions engaging in subprime lending are
required to have systems in place commensurate with the risk level. If
risks associated with this activity are not properly controlled, the
agencies will consider subprime lending a high-risk activity that is
unsafe and unsound resulting in an increased amount of regulatory
intervention on the financial institution. Moreover, such a condition
would require the institution to maintain higher minimum capital adequacy
ratios and pay greater FDIC insurance premiums. The guidance concluded
that the following items are essential components of a well-structured
risk management program for subprime lenders:
- Planning and strategy,
- Staff expertise,
- Lending policy,
- Purchase evaluation,
- Loan administration procedures,
- Loan review and monitoring,
- Consumer protection,
- Securitization and sale, and
- Reevaluation.
We did not engage in subprime lending during the years ended December 31,
1999 and 1998. Moreover, we do not anticipate entering into these
activities in the future.
The composition of our loan portfolio at year-end for the past five years
is summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
DECEMBER 31 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others.... $ 43,907 15.86% $ 31,044 12.51% $ 38,996 15.58% $ 36,416 15.44% $ 45,554 21.30%
Real estate:
Construction...................... 3,164 1.14 2,108 0.85 2,096 0.84 3,657 1.55 992 0.46
Mortgage.......................... 198,423 71.67 186,004 74.96 180,123 71.98 165,868 70.34 144,649 67.65
Consumer, net....................... 30,830 11.14 28,984 11.68 29,012 11.60 29,862 12.67 22,640 10.59
Lease financing, net................ 526 0.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans, net of unearned income..... 276,850 100.00% 248,140 100.00% 250,227 100.00% 235,803 100.00% 213,835 100.00%
====== ====== ====== ====== ======
Less: allowance for loan losses..... 3,799 4,050 3,798 3,944 3,903
-------- -------- -------- -------- --------
Net loans....................... $273,051 $244,090 $246,429 $231,859 $209,932
======== ======== ======== ======== ========
</TABLE>
Loans, net of unearned income, increased $28.8 million or 11.6 percent to
$276.9 million at December 31, 1999, from $248.1 million at December 31,
1998. Although we experienced an increase in all major lending
activities, the growth in our loan portfolio is primarily attributable to
an increase in commercial lending. Commercial loan activity heightened
due to our entrance into the Clarks Summit and Dickson City market areas.
Commercial loans grew $12.9 million or 41.4 percent to $43.9 million at
December 31, 1999, from $31.0 million at the end of last year. In
addition, commercial mortgages grew $6.6 million or 15.5 percent from
year-end 1998. With regard to retail lending, one-to-four family
residential mortgage loans rose $5.8 million or 4.0 percent, and consumer
loans rose $1.9 million or 6.4 percent in 1999. Total average loan
volumes increased $10.3 million or 4.1 percent in 1999. The ratio of
average loans, net of unearned income, to total average assets declined
slightly to 65.2 percent in 1999 from 65.7 percent in 1998. Increases in
average investments and other assets, partially offset by decreases in
average federal funds sold contributed to the small decline. In
comparison, during 1999, the peer group's average loans accounted for
61.4 percent of total average assets. We expect loan demand to remain
strong in 2000. However, additional rate increases could cause further
slowing in the real estate market. Moreover, increases in the prime rate
could result in a decrease in commercial activity. Should these
conditions occur, we may experience a decline in loan demand.
The composition of the loan portfolio changed during 1999 as commercial
lending served a more prominent role in our overall lending activities.
Heightened commercial loan activity, coupled with a slowing in demand for
residential mortgages, contributed to the change. At December 31, 1999,
commercial loans totaled $43.9 million and comprised 15.9 percent of
total loans outstanding, compared to $31.0 million or 12.5 percent one
year ago. Total real estate loans amounted to $201.6 million and
comprised approximately 72.8 percent of the loan portfolio at December
31, 1999. In comparison, at December 31, 1998, these loans totaled
$188.1 million or 75.8 percent of total loans outstanding. In addition,
26.1 percent of real estate loans outstanding at year-end 1999 were
secured by commercial properties, compared to 23.3 percent at year-end
1998.
During the second quarter of 1999, we established Community Leasing
Corporation as a subsidiary of Community Bank. Through this subsidiary,
we began offering direct finance leases for various types of commercial
equipment to area businesses. Direct finance leases provide business
customers with an additional borrowing alternative that allows them the
right to use the equipment without tying up working capital. We had $526
in direct finance leases, net of unearned income, outstanding at December
31, 1999.
The recent rate increases did little to impact loan yields in 1999, as
financial institutions are still feeling the effects of the FOMC's easing
of monetary policy and overall declines in interest rates during 1998.
Moreover, competitive pricing pressure restricted financial institutions
to the extent they were allowed to raise loan rates. As a result, the
tax-equivalent yield on the loan portfolio declined 22 basis points from
8.55 percent in 1998 to 8.33 percent in 1999. We experienced progressive
declines in loan yields throughout the year. The tax-equivalent yields
in the first and second quarters of 1999 remained relatively unchanged at
8.39 percent and 8.38 percent. However, the tax-equivalent rate in the
third quarter decreased to 8.34 percent and further decreased to 8.23
percent in the fourth quarter.
Fueled by consistently low mortgage rates in recent years, the volume of
refinancing intensified as borrowers consolidated bills, credit card
balances and regular consumer loans to reduce monthly debt payments and
take advantage of the tax deductibility of interest payments. However,
the recent interest rate increases caused a corresponding change on
mortgage rates. Higher mortgage rates caused a reduction in refinancings
in 1999, since the majority of homeowners have mortgages with rates lower
than those currently offered. Our volume of refinanced residential
mortgages declined $0.8 million in 1999 to $11.7 million from $12.5
million in 1998. Approximately two-thirds of the total refinancings
occurred in the first six months of 1999, before interests rates began to
rise.
In 1998, we implemented a secondary mortgage banking program and began
originating mortgage loans for sale on the secondary market. This program
allows us to competitively price conforming one-to-four family
residential mortgage loans while, at the same time, reduce our exposure
to IRR, increase liquidity and provide an additional source of
noninterest income. We have elected to retain servicing of the loans sold
under this program. During 1999 and 1998, we sold $3.4 million and $2.1
million of residential mortgage loans to one investor, the Federal
National Mortgage Association ("FNMA"). Net gains on the sale of these
loans included in noninterest income were $57 and $43 in 1999 and 1998.
At December 31, 1999, we did not have any residential mortgage loans held
for sale. There were $503 of residential mortgage loans held for sale at
December 31, 1998. In addition, at December 31, 1999, we serviced loans
for the FNMA in the amount of $5.5 million.
Mortgage servicing rights are included in other assets. Amortization of
the rights is included in noninterest income as a charge against mortgage
servicing fees. At December 31, 1999 and 1998, the cost of the mortgage
servicing rights approximated their fair value.
In the normal course of business, we are a party to financial instruments
with off-balance sheet risk to meet the financing needs of our customers.
These instruments involve, to varying degrees, elements of credit and IRR
in excess of the amount recognized in the financial statements. We do
not anticipate that losses, if any, that may occur as a result of funding
off-balance sheet commitments, would have a material adverse effect on
our results of operations or financial position.
Our involvement in, and exposure to, credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of home equity and credit
card lines and commercial letters of credit is represented by the
contractual amounts of those instruments. Commitments to extend credit
are agreements to lend to a customer as long as the conditions of the
contract are not violated. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee.
Commercial letters of credit are conditional commitments issued by us to
support customers in the purchase of commercial goods. The letters of
credit are automatically renewable upon their anniversary date unless
canceled at our option prior to that date.
We employ the same credit policies and requirements in making off-balance
sheet credit commitments as we do for on-balance sheet instruments.
Provision for loan losses, if any, is included in the allowance for loan
losses. No provision was deemed necessary at December 31, 1999 and 1998.
These commitments are generally issued for one year or less and often
expire unused in whole or part by the customer. The amount of collateral
obtained is based on the credit evaluation of the customer. The type of
collateral varies but may include property, plant and equipment,
residential properties, and to a lesser extent, income-producing
properties. Our exposure related to off-balance sheet commitments was
$26.4 million at December 31, 1999, and $18.1 million at December 31,
1998.
At December 31, 1999, we had no loan concentrations exceeding 10.0
percent of total loans, excluding locational concentrations, to
individuals or multiple borrowers engaged in activities that would cause
them to be similarly affected by changes in economic or other conditions.
We limit our exposure to concentrations of credit risk by the nature of
our lending limits, as approximately 53.9 percent of total loans
outstanding are secured by residential properties. The average mortgage
outstanding on a residential property was $42 at December 31, 1999. In
addition, we maintain a policy restricting the loan-to-value ratio at
80.0 percent. Furthermore, the loan portfolio does not consist of any
form of credit involving highly-leveraged transactions, defined as
financing transactions that involve the buyout, acquisition or re-
capitalization of an existing business and include credits extended to
highly-leveraged individuals.
Based on our asset/liability simulation model, management feels confident
that it can facilitate loan demand through payments and prepayments on
investments and loans and increases in core deposits. Management expects
to receive approximately $85.3 million from repayments on loans and
investment securities during 2000. In the event an unforeseen increase
in loan demand arises, we could facilitate the demand by aggressively
competing for deposits or by utilizing various credit products available
through the Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh").
We continually examine the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and
liquidity strains. Approximately 35.6 percent of the loan portfolio is
expected to reprice within the next twelve months. This percentage
increased in comparison to 31.1 percent repricing within the same time
period at December 31, 1998. As a result of the increased demand for
commercial loans, adjustable-rate loans increased $13.5 million to $62.1
million at December 31, 1999, from $48.6 million at December 31, 1998.
Similarly, fixed-rate loans increased $15.3 million to $214.8 million at
year-end 1999, from $199.5 million at the end of 1998. Fixed-rate loans
and adjustable-rate loans accounted for 77.6 percent and 22.4 percent of
the loan portfolio at December 31, 1999, compared to 80.4 percent and
19.6 percent at year-end 1998. We will price loan products in the near
term in order to reduce the average term of fixed-rate loans and increase
our holdings of adjustable-rate loans in an attempt to reduce IRR in the
loan portfolio.
The maturity distribution and repricing information of the loan portfolio
by major classification at December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1999 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others.......................... $22,752 $14,148 $ 7,007 $ 43,907
Real estate:
Construction............................................ 3,164 3,164
Mortgage................................................ 25,719 59,808 112,896 198,423
Consumer, net............................................. 11,983 15,324 3,523 30,830
Lease financing, net...................................... 156 370 526
------- ------- -------- --------
Total................................................. $63,774 $89,650 $123,426 $276,850
======= ======= ======== ========
Repricing schedule:
Predetermined interest rates.............................. $36,593 $74,578 $103,607 $214,778
Floating-or adjustable-interest rates..................... 62,072 62,072
------- ------- -------- --------
Total................................................. $98,665 $74,578 $103,607 $276,850
======= ======= ======== ========
</TABLE>
ASSET QUALITY:
The favorable economic conditions, characterized by low unemployment,
interest rates and inflation, have helped many households reduce debt
burdens. As a result, personal bankruptcy filings have steadily
declined. Based on the most recent data released by the Administrative
Office of the U.S. Courts, the number of new personal bankruptcy cases
filed within the past year decreased 5.3 percent to 1.3 million as
compared to the same 12-month period of 1998. In addition, the number of
business bankruptcies declined 18.0 percent to 39 cases over the same
timeframe.
Generally, as a result of the strong economy and declines in
bankruptcies, asset quality for banks remained steady. Nationally, the
top 30 banks experienced a slight deterioration in their asset quality
during 1999. This deterioration primarily resulted from an increase in
nonperforming assets related to loans to companies in the healthcare
industry, specifically those companies that are in the long-term care
sector. The top 30 bank's average nonperforming asset ratio,
nonperforming assets as a percentage of total loans, increased 8.5
percent from 0.47 percent at year-end 1998 to 0.51 percent at year-end
1999. However, charge-offs as a percentage of average loans for these
banks averaged only 0.43 percent in 1999, compared to 0.50 percent in
1998.
Banks located within the Northeast Region experienced improvement in
their asset quality in 1999. The average nonperforming asset ratio for
these banks improved to 0.52 percent at December 31, 1999, compared to
0.68 percent at the end of 1998. The average charge-off ratio for
Northeast banks declined slightly to 0.35 percent in 1999 from 0.36
percent in 1998.
We manage credit risk by diversifying the loan portfolio and applying
policies and procedures designed to foster sound lending practices.
These policies include certain standards that assist lenders in making
judgments regarding the character, capacity, capital structure and
collateral of the borrower. In addition, the lender must determine the
borrower's ability to repay the credit based on prevailing and expected
business conditions. Although supervised by a central loan committee,
each branch banking office is responsible for the credit administration
of its respective loan portfolio. Specific responsibilities include
analyzing credit applications and making lending approvals within
specified limits, in order to minimize credit risk. The Board of
Directors establishes the lending authority of all credit officers and
reviews this authority at least annually. Credits beyond the scope of
the branch lending officer are forwarded to a centralized lending
committee. This committee, comprised of senior lending management and
board members, attempts to assure the quality of the loan portfolio
through careful analysis of credit applications, adherence to credit
policies and examination of outstanding loans and delinquencies. These
procedures assist in the early detection and timely follow-up of problem
loans. Credits in excess of $500 are subject to approval by the Board of
Directors.
Credit risk is also minimized by an annual internal loan review of our
portfolio. In addition, we contract with an external loan review company
to perform an annual independent review of the portfolio. The independent
loan review aids management in identifying deteriorating financial
conditions of borrowers, allowing them to assist customers in remedying
these situations. The results of an independent loan review conducted by
an external reviewer at June 30, 1999, indicated no material difference
from the assets identified through our own loan review program.
In accordance with generally accepted accounting principals ("GAAP"), we
consider a loan impaired when, based on current information and events,
it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impairment is
measured based on the present value of expected future cash flows
discounted at a loan's effective interest rate, the loan's observable
market price or the fair value of collateral if the loan is collateral-
dependent. When the measure of an impaired loan is less than the
recorded investment in the loan, the impairment is recognized by
adjusting the allowance for loan losses with a corresponding charge to
the provision for loan losses.
Nonperforming assets consist of nonperforming loans and foreclosed
assets. Nonperforming loans include accruing loans past due 90 days or
more and impaired loans. Impaired loans consist of nonaccrual and
restructured loans. A loan is classified as nonaccrual when it is
determined that the collection of all or a portion of interest or
principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual, interest
accruals discontinue and uncollected accrued interest is reversed against
income in the current period. Interest collections after a loan has been
placed on nonaccrual status are credited to income when received unless
the collectibility of principal is in doubt, causing all collections to
be applied as principal reductions. A nonaccrual loan is returned to
performing status when the loan is current as to principal and interest
and has performed with the contractual terms for a minimum of six months.
Restructured loans are loans with original terms, interest rates, or
both, that have been modified as a result of a deterioration in the
borrower's financial condition. Interest income on restructured loans is
recognized when earned using the interest method. We had the same one
restructured loan during 1999 and 1998.
Foreclosed assets are comprised of properties acquired through
foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosures. These properties are
included in other assets. A loan is classified as in-substance
foreclosure when we have taken possession of the collateral regardless of
whether formal foreclosure proceedings take place. Foreclosed assets are
recorded at the lower of the related loan balance or 80.0 percent of its
appraised fair value at the time of acquisition. Any excess of the loan
balance over the recorded value is charged to the allowance for loan
losses. Subsequent declines in the recorded value of the property prior
to its disposal and costs to maintain the assets are included in other
expenses. In addition, any gain or loss realized upon disposal is
included in other income or expense. The historical average holding
period for such properties is less than twelve months.
Information concerning nonperforming assets for the past five years is
summarized as follows. The table includes credits classified for
regulatory purposes and all material credits that cause management to
have serious doubts as to the borrowers' ability to comply with present
loan repayment terms.
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
DECEMBER 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and others................................. $ 166 $ 78 $ 197 $ 251 $ 167
Real estate:
Construction...................................................
Mortgage....................................................... 2,272 2,223 2,063 1,018 1,164
Consumer, net.................................................... 33 7 12
Lease financing, net.............................................
------ ------ ------ ------ ------
Total nonaccrual loans....................................... 2,471 2,308 2,272 1,269 1,331
------ ------ ------ ------ ------
Restructured loans............................................... 149 174 189 225 262
------ ------ ------ ------ ------
Total impaired loans......................................... 2,620 2,482 2,461 1,494 1,593
------ ------ ------ ------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others................................. 726 131 321 359 181
Real estate:
Construction...................................................
Mortgage....................................................... 2,768 1,035 2,536 1,247 1,633
Consumer, net.................................................... 471 387 312 291 336
Lease financing, net.............................................
------ ------ ------ ------ ------
Total accruing loans past due 90 days or more................ 3,965 1,553 3,169 1,897 2,150
------ ------ ------ ------ ------
Total nonperforming loans.................................... 6,585 4,035 5,630 3,391 3,743
------ ------ ------ ------ ------
Foreclosed assets................................................ 359 240 405 420 441
------ ------ ------ ------ ------
Total nonperforming assets................................... $6,944 $4,275 $6,035 $3,811 $4,184
====== ====== ====== ====== ======
Ratios:
Impaired loans as a percentage of loans, net..................... 0.95% 1.00% 0.98% 0.63% 0.74%
Nonperforming loans as a percentage of loans, net................ 2.38 1.63 2.25 1.44 1.75
Nonperforming assets as a percentage of loans, net............... 2.51% 1.72% 2.41% 1.62% 1.96%
</TABLE>
Nonperforming assets, comprised of nonperforming loans and foreclosed
assets, totaled $6.9 million at December 31, 1999, compared to $4.3
million at December 31, 1998. Foreclosed assets increased $119 during
1999. Nine loans totaling $379 were transferred to foreclosed assets.
Seven properties with an aggregate carrying value of $260 were sold for
$280, resulting in a net realized gain of $20. The carrying values of all
properties included in other real estate at December 31, 1999, did not
exceed 80.0 percent of their collateral values.
Nonperforming loans, consisting of accruing loans past due 90 days or
more and impaired loans, increased $2.6 million from $4.0 million at
December 31, 1998, to $6.6 million at December 31, 1999. The increase in
nonperforming loans primarily resulted from an increase in accruing loans
past due 90 days or more. A $1.7 million increase in real estate loans
past due 90 days or more accounted for this increase. Our historical
recovery rate on real estate loans is extremely high. However, as a
preventative measure, we continually monitor and improve our internal
procedures regarding delinquent credits. These procedures focus on early
detection and timely follow-up of past due loans in order to identify
potential problem loans and attempt to correct them before they
deteriorate. We experienced some deterioration in our asset quality
ratios in 1999. This is evidenced by an increase in our ratio of
nonperforming assets to loans, net of unearned income, to 2.51 percent at
December 31, 1999, from 1.72 percent one year ago. This ratio for our
peer group improved slightly to 0.94 percent at year-end 1999, from 0.99
percent at year-end 1998. In light of this recent deterioration in our
asset quality, we hired additional staff in our special assets and
collection departments to enhance recovery efforts and bring our
nonperforming assets to a more acceptable level. Despite a slight
increase in impaired loans, our ratio of impaired loans to loans, net of
unearned income, improved to 0.95 percent at the end of 1999, compared to
1.00 percent one year earlier.
At December 31, 1999 and 1998, we had a recorded investment in impaired
loans of $2,620 and $2,482. The recorded investment in impaired loans
averaged $2,721 in 1999 and $1,867 in 1998. At December 31, 1999, the
amount of recorded investment in impaired loans for which there was a
related allowance for loan losses and the amount of the allowance was
$2,471 and $613. Comparatively, the amount of these loans and their
related allowance was $2,308 and $642, at December 31, 1998. The amount
of recorded investment for which there was no related allowance for loan
losses was $149 and $174 at December 31, 1999 and 1998. During 1999,
activity in the allowance for loan losses account related to impaired
loans included a provision charged to operations of $472, losses charged
to the allowance of $546 and recoveries of impaired loans previously
charged-off of $45. The activity in 1998 in the allowance for loan
losses account related to impaired loans included a provision charged to
operations of $342, losses charged to the allowance of $286 and
recoveries of impaired loans previously charged-off of $45. Interest
income related to impaired loans would have been $253 in 1999 and $175 in
1998, had the loans been current and the terms of the loans not been
modified. Interest recognized on impaired loans amounted to $38 in 1999
and $98 in 1998. Included in these amounts was interest recognized on a
cash basis of $38 and $98. Cash received on impaired loans applied as a
reduction of principal totaled $267 in 1999 and $650 in 1998. There were
no commitments to extend additional funds to customers with impaired
loans at December 31, 1999 and 1998.
Classified assets are those cited by bank examiners, or by the bank's
internal rating system, as having an undesirable degree of risk.
Regulators separate classified assets into three major categories based
on degree of risk:
- Substandard,
- Doubtful, and
- Loss.
Accordingly, as part of their routine annual examination process,
regulators classified our assets at September 30, 1999. The result of
the review indicated that the ratio of classified assets as a percentage
of Tier I capital remained relatively unchanged from the 1998
examination.
One of the primary concerns of banking regulators in 1999 was the need
for appropriate underwriting standards and internal controls related to
the accounting for and financial reporting of the allowance for loan
losses. Accordingly, on July 12, 1999, the SEC, Office of the Comptroller
of the Currency, Federal Reserve Bank of Philadelphia ("FRB"), FDIC and
the Office of Thrift Supervision jointly issued a letter to financial
institutions on the allowance for loan losses. The letter provides
enhanced guidance on appropriate methodologies, disclosures, and
supporting documentation for loan loss allowances. The agencies agreed to
assure compliance with authoritative accounting guidance on the allowance
for loan losses contained in SFAS No. 5, "Accounting for Contingencies,"
and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
along with the April 12, 1999, FASB Viewpoints article which addresses
the application of these Statements. Specifically, the agencies agreed
on the following aspects of the loan loss allowance practices:
- Arriving at an appropriate allowance involves a high degree of
management judgement and results in a range of estimated losses,
- Prudent, conservative, but not excessive, loan loss allowances
that fall within an acceptable range of estimated losses are
appropriate,
- Determining the allowance for loan losses is inevitably
imprecise, and an appropriate allowance falls within a range of
estimated losses,
- An unallocated loan loss allowance is appropriate when it
reflects an estimate of probable losses, determined in
accordance with GAAP, and is properly supported,
- Allowance estimates should be based on a comprehensive, well-
documented, and consistently-applied analysis of the loan
portfolio, and
- The allowance should consider all available information existing
as of the financial statement date, including industry,
geographical, economic and political factors.
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 believed 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 is
only a 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 varied throughout 1999 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. This was the case in 1999, as we
reallocated a greater percentage of the overall allowance for loan losses
from the unallocated element to the allocated element as a result of
changes in asset quality. 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.
In addition to classifying our assets, regulatory agencies, as an
integral part of their examination process, periodically review our
allowance for loan losses. These agencies may require us to recognize
additions to the allowance based on information available to them at the
time of their examination. We are unaware of any such requirements based
on the results of our latest regulatory examination at September 30,
1999.
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, allocation of the
reserve among the major categories of loans is summarized as follows.
However, it should not be interpreted as an indication that charge-offs
in future periods will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends.
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A AS A
% OF % OF % OF % OF % OF
DECEMBER 31 AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and others... $1,292 15.86% $1,465 12.51% $1,322 15.58% $1,396 15.44% $1,358 21.30%
Real estate:
Construction..................... 1.14 0.85 0.84 1.55 0.46
Mortgage......................... 1,289 71.67 1,308 74.96 1,277 71.98 1,326 70.34 1,333 67.65
Consumer, net...................... 1,213 11.14 1,277 11.68 1,199 11.60 1,222 12.67 1,212 10.59
Lease financing, net............... 5 0.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.......................... $3,799 100.00% $4,050 100.00% $3,798 100.00% $3,944 100.00% $3,903 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and illustration of
charge-offs and recoveries by major loan category for the past five years
are summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period................. $4,050 $3,798 $3,944 $3,903 $3,576
Loans charged-off:
Commercial, financial and others................................. 587 410 271 523 136
Real estate:
Construction...................................................
Mortgage....................................................... 108 119 211 88 171
Consumer, net.................................................... 269 260 175 115 86
Lease financing, net.............................................
------ ------ ------ ------ ------
Total........................................................ 964 789 657 726 393
------ ------ ------ ------ ------
Loans recovered:
Commercial, financial and others................................. 57 67 15 284 80
Real estate:
Construction...................................................
Mortgage....................................................... 50 46 40 130 144
Consumer, net.................................................... 71 73 96 53 61
Lease financing, net.............................................
------ ------ ------ ------ ------
Total........................................................ 178 186 151 467 285
------ ------ ------ ------ ------
Net loans charged-off............................................ 786 603 506 259 108
------ ------ ------ ------ ------
Provision for loan losses........................................ 535 855 360 300 435
------ ------ ------ ------ ------
Allowance for loan losses at end of period....................... $3,799 $4,050 $3,798 $3,944 $3,903
====== ====== ====== ====== ======
Ratios:
Net loans charged-off as a percentage of average loans
outstanding..................................................... 0.30% 0.24% 0.21% 0.12% 0.05%
Allowance for loan losses as a percentage of period end loans.... 1.37% 1.63% 1.52% 1.67% 1.83%
</TABLE>
At December 31, 1999, the allowance for loan losses, against which loans
are charged-off, equaled $3.8 million and represented 1.37 percent of
loans, net of unearned income. The allowance was $4.1 million and
represented 1.63 percent of loans, net of unearned income, at December
31, 1998. In comparison, the peer group reported a 1.17 percent ratio at
December 31, 1999, a reduction from the 1.26 percent ratio reported last
year. An increase in net loans charged-off in 1999 resulted in a decline
in the allowance for loan losses. Based on historical net charge-offs
over the past five years, the allowance for loan losses at December 31,
1999, would be adequate to cover 8.4 times the average charge-off level
and 4.8 times the highest charge-off level.
As a percentage of nonperforming loans, the allowance account covered
57.7 percent at December 31, 1999. The coverage ratio was 100.4 percent
at December 31, 1998. The allowance covered 54.7 percent and 94.7
percent of nonperforming assets at December 31, 1999 and 1998. We expect
to continue to make provisions to the allowance in 2000 based on our
adequacy evaluations. Should further deterioration of asset quality
occur, we would make a corresponding increase to our monthly provision.
Past due loans not satisfied through repossession, foreclosure or related
actions, are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan
losses. Any subsequent recoveries are credited to the allowance account.
Net charge-offs were $786 or 0.30 percent of average loans outstanding in
1999 compared to $603 or 0.24 percent in 1998. The peer group's net
charge-off levels were 0.18 percent and 0.24 percent in 1999 and 1998.
Based on the additions to our collection staff and the overall positive
outlook for our market area, we are cautiously optimistic that net
charge-off levels will decline in 2000. However, we will closely monitor
net charge-off levels should local economic conditions deteriorate.
DEPOSITS:
The stock market recorded another impressive showing in 1999, causing
more difficulties for financial institutions to obtain needed funding to
support asset growth. The Dow Jones Industrial Average increased 25.2
percent in 1999, surpassing the significant pace of 16.1 percent in 1998.
As a result, savings deposits at commercial banks throughout the Nation
increased during 1999 at a velocity only one-half the rate of the
previous year. These growth rates were 8.5 percent in 1999 and 16.1
percent in 1998. The resource growth rate of nonbank competitors has
surpassed the annualized rate for commercial banks. Based on the latest
FRB data, commercial bank resources grew at an annualized rate of 2.8
percent over a ten-year period compared to credit unions of 7.2 percent,
securities firms of 13.0 percent and mutual funds of 18.6 percent.
Moreover, saving patterns declined in 1999 as individuals felt less of a
need to save as their wealth increased from the improving values of their
equity holdings. Savings as a percentage of personal disposable income
declined from 3.7 percent in 1998 to 2.4 percent in 1999. In order to
fill the void not met through deposit acquisitions, many financial
institutions increased their level of borrowings. FHLB-Pgh member
advances grew nearly five times the percentage growth rate of deposits at
39.0 percent in 1999. At December 31, 1999, aggregate borrowings as a
percentage of total assets for FHLB-Pgh members were 16.1 percent. This
ratio is expected to increase to 25.0 percent in the near term.
In 1999, total deposits for all commercial banks in the Commonwealth of
Pennsylvania increased 4.5 percent. This increase was entirely due to
higher-costing nontransaction accounts as lower-costing transaction
deposits declined 4.5 percent in 1999. Borrowings at these financial
institutions increased 17.0 percent during 1999. In comparison to all
Pennsylvania banks, deposits grew at a faster pace for the local peer
group at 6.4 percent during 1999. Similar to the results of the larger
peer group, growth for the local banks primarily occurred in
nontransaction accounts growing 7.6 percent as opposed to a mere 1.7
percent growth in transaction accounts. Our total deposits grew 5.3
percent from year-end 1998, and 5.1 percent comparing average balances in
1999 and 1998. Our growth was segmented differently from that of both
peer groups as nontransaction accounts declined 2.7 percent while
transaction accounts increased 17.1 percent comparing year-end 1998 to
year-end 1999. Specifically, money market accounts grew 29.7 percent, NOW
accounts grew 12.4 percent and savings accounts grew 17.3 percent. The
majority of these increases were generated from the commercial sector as
the retail side accounted for only 12.0 percent of the change. Our recent
delivery system expansions, through building community banking offices in
areas having a greater concentration of business activity, were
responsible for the favorable change in commercial accounts. Prior to the
establishment of these offices, our relationships with many Lackawanna
county customers were limited to meeting their lending needs as it was
not physically feasible for them to have a deposit relationship with us.
Moreover, we were able to establish many new commercial customers as a
result of our favorable fee structure and personalized service as
compared to larger regional competitors. To a lesser extent, the new
locations assisted us in attracting retail customers through new trust
relationships. We plan to build on the success achieved in the commercial
area and reflect this same success to the retail side through promotion
of our favorable fee structure, flexible office hours, quality
personalized service and active product and service marketing.
Deposit rates increased throughout 1999 as a change in the FOMC's
monetary policy stance towards tightening increased general interest
rates. In addition, the increased competitiveness of nonbank deposit
gatherers put pressure on banks in retaining core deposits. Although not
having a substantial effect on transaction accounts, the rising interest
rate environment caused certificates of deposit rates in Northeastern
Pennsylvania to increase 28 basis points on short-term maturities and 66
basis points on long-term maturities. The average rate on a six-month
certificate increased from 4.33 percent at the end of 1998 to 4.61
percent at year-end 1999. Over the same period, the average yield on a
five-year certificate increased from 4.89 percent to 5.55 percent. The
Northeast continues to have the highest cost for short-term maturities
relative to other parts of the Commonwealth and is second only to the
Southeast with respect to long-term maturities. Our market area has a
high population of older citizens who shop wisely for the highest
certificate rates, which is primarily responsible for this phenomenon.
Rather than compete aggressively for all types and maturities, we took an
alternate approach to pricing deposits by competing for those maturities
not aggressively sought by other financial institutions. For example, we
designed a pricing strategy for transaction accounts of large deposit
public entities. In addition, we competed for certificates of deposit
with maturities of three years or more, as most of the aggressive
competition from the local peers was in six-month to one-year maturities.
This lengthening should assist us in slowing down the increase in our
fund costs, as longer maturity certificates will not reprice as
frequently if interest rates continue to rise. As a result, the average
maturity of the certificate of deposit portfolio extended from under two
years to nearly three years in 1999.
The average amount of, and the rate paid on, the major classifications of
deposits for the past five years are summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
YEAR ENDED DECEMBER 31 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....... $ 19,466 3.12% $ 17,643 3.13% $ 16,854 3.16% $ 18,144 2.92% $ 21,869 3.47%
NOW accounts................ 24,671 2.45 21,366 2.19 18,464 2.18 16,661 2.02 15,550 1.96
Savings accounts............ 67,920 2.38 64,113 2.58 65,081 2.92 67,144 3.00 71,911 3.25
Time deposits less than $100 181,164 5.42 175,954 5.61 165,487 5.70 157,271 5.67 155,183 5.75
Time deposits $100 or more.. 22,710 5.69 23,936 5.89 29,092 6.17 27,755 5.93 29,336 6.04
-------- -------- -------- -------- --------
Total interest-bearing.... 315,931 4.41% 303,012 4.60% 294,978 4.77% 286,975 4.69% 293,849 4.80%
Noninterest-bearing......... 36,757 32,550 27,448 26,329 24,090
-------- -------- -------- -------- --------
Total deposits............ $352,688 $335,562 $322,426 $313,304 $317,939
======== ======== ======== ======== ========
</TABLE>
Deposit volumes increased from $344.3 million at December 31, 1998, to
$362.5 million at December 31, 1999. The $18.2 million improvement was
attributable to increases of $7.5 million in money market accounts, $3.2
million in NOW accounts and $13.1 million in savings deposits partially
offset by declines of $5.6 million in time deposits. As aforementioned,
the increase in transaction accounts resulted from additional commercial
relationships, whereas the decline in time deposits is a combination of
not aggressively bidding for large denomination time deposits and
increased competitive conditions for time deposits under $100. Total
deposits averaged $335.6 million in 1998 compared to $352.7 million in
1999. Based on average volumes, all major classifications of deposits,
with the exception of time deposits $100 or more, increased over the
previous year as a result of the delivery system expansion. We were
pleased that nearly one-half of the $5.2 million improvement in average
time deposits resulted from IRAs, as increases to these accounts indicate
strength in long-term relationships. Although not evidencing growth in
comparing demand deposit volumes at year-ends 1999 and 1998, the average
balance of demand deposits increased $4.2 million or 12.9 percent. We
continually attempt to attract low-cost demand deposit accounts through
competitively priced service charges and technological improvements
related to account processing. Specifically, we plan to install a new
teller software and hardware system during the second quarter of 2000.
This system will improve customer service by increasing transaction
speeds, mitigating errors and benefitting customers by making them aware
of the availability of other products and services through cross-selling
functions. The majority of our deposit growth occurred during the second
and third quarters of 1999. Deposits grew at annualized rates of 14.9
percent in the second quarter and 8.9 percent in the third quarter. It
appears strong loan demand will persist in the near term which may lead
us to be more aggressive in deposit gathering through pricing and
marketing efforts. However, deposits should increase as we solidify newly
established commercial deposit relationships and promote the retail side
by offering superior customer service akin to that offered in the rural
communities we serve.
The cost of deposits for all Pennsylvania banks declined from 4.56
percent in 1998 to 4.11 percent in 1999. The local peer group experienced
a similar decline from 4.36 percent to 4.12 percent over the same period.
The FOMC's easing of monetary policy and overall declines in interest
rates during 1998 more than offset the recent interest rate rises. As a
result of increased volumes of lower-costing transaction accounts and the
steep decline in interest rates last year, our cost of deposits decreased
from 4.60 percent in 1998 to 4.41 percent in 1999. However, the FOMC's
actions of raising short-term interest rates by 75 basis points beginning
at the end of the second quarter partially counteracted these positive
influences by raising our cost of deposits by year end. This cost
declined from 4.49 percent in the first quarter to 4.40 percent and 4.35
percent in the second and third quarters of 1999. As it became certain in
the marketplace that inflation was present, competitors began raising
rates on deposit products. Accordingly, most of the gains of the previous
quarters were eliminated as our cost of deposits rose to 4.42 percent in
the final quarter of 1999. We expect an increase in our deposit cost in
the near term as general market rates continue upward and competitive
pressures intensify. We plan to offset some of the increase by attempting
to attract a higher concentration of low-costing transaction accounts of
larger balance commercial customers. In addition, some of the pricing
pressure may be offset through offering customers alternative investment
products through our Trust and Financial Services Division, such as
mutual funds and fixed-rate annuities.
Volatile deposits, time deposits $100 or more, decreased from $27.1
million at December 31, 1998, to $23.3 million at December 31, 1999. The
decline was caused by not being as aggressive in pricing these types of
deposits. Large denomination certificates of deposit are typically short-
term, higher-costing funds. We continued to be less reliant on this type
of funding as compared to the peer group in 1999. Average volatile
deposits, as a percentage of average total deposits, was 6.4 percent in
1999 as compared to 11.0 percent for the peer group. Our average cost of
these funds declined 20 basis points from 5.9 percent in 1998 to 5.7
percent in 1999. The peer group's cost for volatile deposits declined 40
basis points during 1999.
Maturities of time deposits $100 or more for the past five years are
summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS $100 OR MORE
DECEMBER 31 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within three months...................................... $ 3,752 $ 7,956 $ 3,195 $ 8,598 $ 6,466
After three months but within six months................. 5,240 4,939 2,819 9,958 6,646
After six months but within twelve months................ 5,411 8,802 6,334 11,262 8,590
After twelve months...................................... 8,850 5,391 8,484 6,047 7,982
------- ------- ------- ------- -------
Total.................................................. $23,253 $27,088 $20,832 $35,865 $29,684
======= ======= ======= ======= =======
</TABLE>
As aforementioned, many financial institutions turned to borrowing as an
alternative funding source because of reduced deposit growth rates in
1999. Although our average volume of borrowed funds rose from $228 in
1998 to $1,433 in 1999, this rise was primarily for meeting temporary
funding requirements. Unless deposit channels compress significantly, we
do not expect this more expensive wholesale means to become a permanent
source of our funding. For example at December 31, 1999, the cost of a
two-year fixed-rate advance was 6.91 percent compared to the cost of our
two-year certificate of deposit at 5.87 percent. There are many other
lower-costing forms of borrowing available, however, we chose not to
consider these alternatives as they involve an inordinate amount of
optionality risk which disallows repayments in periods of falling rates
or convert to higher variable cost instruments in times of rising rates
when liquidity is lower due to the abundance of attractive assets.
Short-term borrowings available to us consist of a line of credit and
advances with the FHLB-Pgh secured under terms of a blanket collateral
agreement by a pledge of FHLB-Pgh stock and certain other qualifying
collateral, such as investment and mortgage-backed securities and
mortgage loans. The line is limited to our maximum borrowing capacity
("MBC") with the FHLB-Pgh, which is based on a percentage of qualifying
collateral assets. At December 31, 1999, our MBC was $165.2 million.
Interest accrues daily on the line based on the rate of FHLB-Pgh discount
notes. This rate resets each day. The line is renewable annually on its
anniversary date and carries no associated commitment fees. The FHLB-Pgh
has the right to reduce or terminate the line at any time without prior
notice and we may repay the line at any time without incurring prepayment
penalties. Short-term advances are issued with maturities less than one
year based on the FHLB-Pgh's current cost of funds rate. Advances are
limited to our MBC and are not prepayable. There are no commitment fees
associated with the advances, except for those of forward settlement that
are based on FHLB-Pgh hedging costs.
We had short-term borrowings of $5,500 outstanding at December 31, 1999.
There were no short-term borrowings outstanding at December 31, 1998,
under the line of credit agreement. The average daily balance and
weighted-average rate on aggregate short-term borrowings was $1,393 at
5.3 percent in 1999 and $185 at 6.0 percent in 1998. The maximum amount
of all short-term borrowings outstanding at any month-end was $7,025
during 1999 and $695 during 1998. Short-term borrowings during 1999 and
1998 consisted entirely of the FHLB-Pgh line of credit.
Long-term debt at December 31, 1999 and 1998, entirely consisted of a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program. This advance matures on September 2, 2009. The
scheduled principal payments on the note for the next five years total $3
for each of the four years 2000 through 2003 and $4 for 2004. The
prepayment fee applicable to the advance is equal to the present value of
the difference between cash flows generated at the advance rate from the
date of the prepayment until the original maturity date, and the cash
flows that would result from the interest rate posted by the FHLB-Pgh on
the date of prepayment for an advance of comparable maturity. The note
is secured under terms of a blanket collateral agreement by a pledge of
qualifying investment and mortgage-backed securities, certain mortgage
loans and a lien on FHLB-Pgh stock. The average daily balance on long-
term debt in 1999 was $40 with a weighted-average rate of 7.5 percent.
In 1998, the average daily balance on long-term debt was $43 with a
weighted-average rate of 7.0 percent.
MARKET RISK SENSITIVITY:
Market risk is the risk to a company's financial position resulting from
adverse changes in market rates or prices, such as interest rates,
foreign exchange rates or equity prices. We have no exposure to foreign
currency exchange risk or any specific exposure to 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 net interest income and the 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 the
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 the interest rate.
IRR is inherent in the role of banks as financial intermediaries, however
a bank with a high IRR level may experience lower earnings, impaired
liquidity and capital positions, and most likely, a greater risk of
insolvency. Therefore, banks must carefully evaluate IRR to promote
safety and soundness in their activities.
The responsibility for our market risk sensitivity management has been
delegated to the Asset/Liability Committee ("ALCO"). Specifically, ALCO
utilizes several computerized modeling techniques to monitor and attempt
to control the influence that market changes have on RSA and RSL.
Market risk continues to be a major focal point of regulatory emphasis.
In accordance with regulation, each bank is required to develop its own
IRR management program depending on its structure, including certain
fundamental components which are mandatory to ensure sound IRR
management. These elements include appropriate board and management
oversight as well as a comprehensive risk management process that
effectively identifies, measures, monitors and controls risk. Should a
bank have material weaknesses in its risk management process or high
exposure relative to its capital, the bank regulatory agencies will take
action to remedy these shortcomings. Moreover, the level of a bank's IRR
exposure and the quality of its risk management process is a determining
factor when evaluating a bank's capital adequacy.
We utilize the tabular presentation alternative in complying with
quantitative and qualitative disclosure rules. Information with respect
to maturities and fair values of other financial instruments at December
31, 1999, is summarized as follows. For expected maturity distributions,
other financial assets and liabilities are presented based on their
carrying values, except for investment securities, which are based on
amortized costs. Investment security distributions and their related
weighted-average interest rates are based on contractual maturities, with
the exception of mortgage-backed securities and equity securities.
Mortgage-backed securities are presented based upon estimated principal
cash flows and related weighted-average interest rates, assuming no
change in the current interest rate environment. The amount of, and
weighted-average interest rate earned on, equity securities are included
in the "Thereafter" maturity category. Loans and their related weighted-
average interest rates are categorized based on payment due dates,
assuming no change in current interest rates. For noninterest-bearing
deposits, money market, NOW and savings accounts that have no contractual
maturity, principal cash flows and related weighted-average interest
rates are presented based on our historical experience, judgment and
statistical analysis, as applicable, concerning their most likely
withdrawal behaviors. The table presents distributions and related
weighted-average interest rates for time deposits, short-term borrowings
and long-term debt based on contractual maturities assuming no change in
current interest rates. The weighted-average yields of tax-exempt
securities and loans have been computed on a tax-equivalent basis using
the statutory tax rate of 34.0 percent. For additional information on
the assumptions used to determine fair values, reference is made to Note
1, "Summary of significant accounting policies," in our Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
MARKET RISK DISCLOSURES
EXPECTED MATURITY DATE
--------------------------------------------------------------------------
THERE- FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other financial assets:
Cash and due from banks........... $ 10,991 $ 10,991 $ 10,991
Average interest rate.............
Investment securities:
U.S. Treasuries and agencies:
Fixed-rate...................... 599 $ 3,032 $ 1,011 4,642 4,580
Average interest rate........... 4.05% 5.06% 6.20% 5.18%
Adjustable-rate................. 650 650 650
Average interest rate........... 5.74% 5.74%
State and municipals.............. 1,320 1,460 $ 1,680 $ 645 190 $ 29,633 34,928 34,781
Average interest rate............. 7.28% 6.50% 6.61% 7.45% 5.91% 7.95% 7.78%
Mortgage-backed securities........ 19,226 15,048 13,527 9,008 6,972 967 64,748 63,523
Average interest rate............. 5.97% 5.95% 5.95% 5.95% 5.95% 6.02% 5.96%
Equity securities................. 1,848 1,848 2,096
Average interest rate............. 6.32% 6.32%
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... 21,795 19,540 15,207 9,653 8,173 32,448 106,816 105,630
Average interest rate........... 5.99% 5.85% 6.02% 6.05% 5.98% 7.80% 6.52%
Net loans:
Fixed-rate........................ 36,091 22,726 20,389 15,691 14,749 102,185 211,831 210,554
Average interest rate............. 8.35% 8.50% 8.36% 8.26% 8.18% 8.00% 8.18%
Adjustable-rate................... 26,808 3,911 5,954 2,354 2,646 19,547 61,220 61,220
Average interest rate............. 8.95% 8.47% 8.61% 8.63% 8.61% 8.68% 8.77%
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... 62,899 26,637 26,343 18,045 17,395 121,732 273,051 271,774
Average interest rate........... 8.61% 8.50% 8.42% 8.31% 8.25% 8.11% 8.31%
Accrued interest receivable....... 2,166 2,166 2,166
Average interest rate.............
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... $ 97,851 $46,177 $41,550 $27,698 $25,568 $154,180 $393,024 $390,561
======== ======= ======= ======= ======= ======== ======== ========
Other financial liabilities:
Noninterest-bearing deposits...... $ 7,573 $ 6,852 $ 6,130 $ 5,409 $ 4,688 $ 5,409 $ 36,061 $ 36,061
Average interest rate.............
Interest-bearing liabilities:
Money market, NOW and savings..... 26,644 24,114 21,576 19,037 16,499 19,038 126,908 126,908
Average interest rate............. 2.78% 2.78% 2.78% 2.78% 2.78% 2.78% 2.78%
Time deposits..................... 103,745 32,047 40,905 15,475 7,195 147 199,514 201,561
Average interest rate............. 5.37% 5.46% 5.86% 5.86% 5.57% 5.86% 5.53%
Short-term borrowings............. 5,500 5,500 5,500
Average interest rate............. 5.25% 5.25%
Long-term debt.................... 3 3 3 3 4 23 39 39
Average interest rate............. 7.49% 7.49% 7.49% 7.49% 7.49% 7.49% 7.49%
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... 135,892 56,164 62,484 34,515 23,698 19,208 331,961 334,008
Average interest rate........... 4.86% 4.30% 4.80% 4.16% 3.63% 2.81% 4.47%
Accrued interest payable.......... 1,976 1,976 1,976
Average interest rate.............
-------- ------- ------- ------- ------- -------- -------- --------
Total........................... $145,441 $63,016 $68,614 $39,924 $28,386 $ 24,617 $369,998 $372,045
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
At December 31, 1999, investments of $21.8 million with a weighted-
average, tax-equivalent yield of 6.00 percent were scheduled to mature
within one year. In addition, net loans of $62.9 million with a
weighted-average, tax-equivalent yield of 8.61 percent were scheduled to
mature within the same timeframe. Overall, interest-earning assets
scheduled to mature within one year totaled $84.7 million with a
weighted-average, tax-equivalent yield of 7.94 percent. With respect to
interest-bearing liabilities, based on historical withdrawal patterns,
interest-bearing transaction accounts, defined as money market, NOW and
savings accounts, of $26.6 million with a weighted-average cost of 2.78
percent were scheduled to mature within one year. In addition, time
deposits totaling $103.7 million with a weighted-average cost of 5.37
percent were scheduled to mature in the same timeframe. Finally, there
were $5.5 million in short-term borrowings with a weighted-average cost
of 5.25 percent scheduled to mature within one year. Total interest-
bearing liabilities scheduled to mature within one year equaled $135.9
million with a weighted-average rate of 4.86 percent.
Limitations of the market risk disclosure model include, among others:
- Magnitude,
- Timing, and
- Frequency of interest rate changes of other financial assets and
liabilities.
Historical withdrawal patterns with respect to interest-bearing and
noninterest-bearing transaction accounts are not necessarily indicative
of future performance as the volume of cash flows may increase or
decrease. Loan information is presented based on payment due dates,
which may materially differ from actual results due to prepayments caused
by changes in:
- Interest rates,
- Sociological conditions,
- Demographics, and
- Economic climate.
Maturity distributions and fair values are primarily based on contractual
maturities or payment due dates and do not consider repricing frequencies
for adjustable-rate assets and liabilities. The table does not include
maturity distribution and fair value information on certain assets and
liabilities, which are not considered financial, and does not anticipate
future business activity. Actual results will, more likely than not,
differ from results presented in the table.
Additionally, we supplement the market risk disclosure model through
simulation analysis utilizing interest rate "shocks." The model analyzes
the effects instantaneous parallel shifts of plus or minus 100 basis
points will have on the economic values of other financial instruments.
The results of the model at December 31, 1999, are summarized as follows:
<TABLE>
<CAPTION>
CHANGES IN FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
FAIR VALUE
------------------------------
DECEMBER 31, 1999 +100 BPS LEVEL -100 BPS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER FINANCIAL ASSETS:
Cash and due from banks................................. $ 10,991 $ 10,991 $ 10,991
Investment securities................................... 102,279 105,630 108,275
Net loans............................................... 261,299 271,774 288,534
Accrued interest receivable............................. 2,166 2,166 2,166
-------- -------- --------
Total................................................. $376,735 $390,561 $409,966
======== ======== ========
OTHER FINANCIAL LIABILITIES:
Noninterest-bearing deposits............................ $ 36,061 $ 36,061 $ 36,061
Money market, NOW and savings accounts.................. 126,908 126,908 126,908
Time deposits........................................... 198,971 201,561 204,224
Short-term borrowings................................... 5,500 5,500 5,500
Long-term debt.......................................... 39 39 39
Accrued interest payable................................ 1,976 1,976 1,976
-------- -------- --------
Total................................................. $369,455 $372,045 $374,708
======== ======== ========
</TABLE>
Models that consider repricing frequencies of RSA and RSL in addition to
maturity distributions are also used to monitor IRR. One such technique
utilizes a static gap report, which attempts to measure our interest rate
exposure by calculating the net amount of RSA and RSL that reprice within
specific time intervals. A positive gap, indicated by a RSA/RSL ratio
greater than 1.0, implies that earnings will be impacted favorably if
interest rates rise and adversely if interest rates fall during the
period. A negative gap, a RSA/RSL ratio less than 1.0, tends to indicate
that earnings will be affected inversely to interest rate changes.
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. Adjustable-
rate assets and liabilities are distributed based on the repricing
frequency of the instrument. Mortgage instruments are distributed in
accordance with estimated cash flows, assuming there is no change in the
current interest rate environment.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
DECEMBER 31, 1999 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Investment securities................ $ 7,008 $ 14,573 $ 51,523 $ 32,526 $105,630
Loans, net of unearned income........ 75,194 23,471 74,578 103,607 276,850
------- -------- -------- -------- --------
Total.............................. $82,202 $ 38,044 $126,101 $136,133 $382,480
======= ======== ======== ======== ========
Rate-sensitive liabilities:
Money market accounts................ $ 25,401 $ 25,401
NOW accounts......................... 25,408 25,408
Savings accounts..................... $ 76,099 76,099
Time deposits less than $100......... $28,404 60,938 86,772 $ 147 176,261
Time deposits $100 or more........... 3,752 10,651 8,850 23,253
Short-term borrowings................ 5,500 5,500
Long-term debt....................... 1 2 13 23 39
------- -------- -------- -------- --------
Total.............................. $37,657 $122,400 $171,734 $ 170 $331,961
======= ======== ======== ======== ========
Rate-sensitivity gap:
Period............................. $44,545 $(84,356) $(45,633) $135,963
Cumulative......................... $44,545 $(39,811) $(85,444) $ 50,519 $ 50,519
RSA/RSL ratio:
Period............................. 2.18 0.31 0.73 800.78
Cumulative......................... 2.18 0.75 0.74 1.15 1.15
</TABLE>
At December 31, 1999, our cumulative one-year, RSA/RSL ratio was 0.75, a
slight improvement from 0.70 at year-end 1998. This ratio falls within
our asset/liability guidelines of 0.70 and 1.30. A reduction in the
amount of time deposits repricing within one year was primarily
responsible for the improvement. The goal of our deposit pricing strategy
in 1999 was to effectively shift the average lives of repricing time
deposits into longer-term maturities. At December 31, 1999, time deposits
maturing or repricing within one year totaled $103.7 million, a decline
of $24.9 million from one year earlier.
In an attempt to decrease our exposure to rising interest rates, we began
offering special rates on long-term certificates during 1995 and 1996.
Many of these certificates renewed during 1999. Due to the relatively low
competition for these longer-term maturities, we were able to retain
renewing certificates and attract new funds to these terms, which
extended the average lives of time deposits and at the same time lowered
our overall cost of funds for these products. As a result of heightened
commercial loan demand, loans, net of unearned income, repricing within
one year increased by $21.5 million from the same period last year.
Partially offsetting the positive effects of the improved loan repricing
frequency were declines in investment securities repricing within one
year and federal funds sold. A lower amount of U.S. Treasuries and U.S.
Government agencies was primarily responsible for the decline in
investment securities. In addition, we had $7.7 million in federal funds
sold outstanding at December 31, 1998. At December 31, 1999, we had
outstanding short-term borrowings of $5.5 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 general market rates would
likely have a favorable effect on net interest income. However, these
forward-looking statements are qualified in the aforementioned section
entitled "Forward-Looking Discussion" in this Management's Discussion and
Analysis.
Similar to the results of the cumulative one-year ratio, our three-month
RSA/RSL ratio increased from 2.02 at December 31, 1998, to 2.18 at
December 31, 1999. A rise in the volume of RSA repricing within three
months was primarily responsible for the increase. In total, the volume
of RSA repricing within three months increased $8.1 million. Loans, net
of unearned income, increased $19.5 million, while loans held for sale,
investments and federal funds sold declined $0.5 million, $3.2 million
and $7.7 million. The explanations for the changes in RSA repricing
within three months are similar to those discussed for the changes in RSA
repricing within one year. RSL repricing within three months remained
relatively stable. At December 31, 1999, RSL repricing within three
months totaled $37.7 million compared to $36.7 million at year-end 1998.
An increase in short-term borrowings of $5.5 million was almost entirely
offset by a decrease in time deposits $100 or more of $4.2 million.
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 December 31, 1999, substantiate
the results indicated by the one-year static gap position. Specifically,
instantaneous and parallel shifts in general market rates of plus 100
basis points will cause net interest income to decrease by $280 or 1.9
percent over the subsequent twelve months. Conversely, a shift of the
same magnitude in the opposite direction will cause a $277 or 1.8 percent
increase in net interest income for the same time period. Possible
further interest rate increases in 2000 could negatively affect net
interest income. We will attempt to retain our IRR position during 2000
through continued vigilance in our product pricing strategies.
Financial institutions are affected differently by inflation rather than
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 the liquidity position and to
adapt our position according to market fluctuations. 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.
We develop a liquidity plan annually. The plan's mission is to ensure
the generation of cash at a reasonable cost in order to satisfy
commitments to borrowers as well as to meet the demands of depositors and
debtholders. The liquidity plan assesses the current liquidity position
and includes determining appropriate standards for the volume, mix, price
and maturity of loans, investments and deposits. In addition, we
ascertain the appropriate level of short-term assets required to fund
normal day-to-day operations and to ensure the ability to meet off-
balance sheet commitments and unanticipated deposit withdrawals. The
plan includes controls and monitoring procedures for evaluating the daily
liquidity position. Finally, the plan introduces strategies to ensure
future liquidity. These strategies, which we consider proprietary in
nature, include the maintenance of a minimum net federal funds sold
cushion, a capital contingency strategy and enhanced strategies on loan
and deposit pricing. Based on the 2000 liquidity plan, our ratio of core
deposits to total assets is expected to exhibit the same strength at 83.3
percent as was evidenced at year-end 1999. Core deposits are important in
maintaining a strong liquidity position as they represent a stable and
relatively low-costing source of funds.
Our liquidity position declined in 1999, however our position remained
superior to that of our peer group. This was evidenced by recording
stronger comparable net noncore funding dependence and net short-term
noncore funding dependence ratios. Our net noncore funding dependence
ratio, defined as the difference between noncore funds, time deposits
$100 or more and brokered time deposits under $100 and short-term
investments to long-term assets, was 0.5 percent and negative 4.0 percent
at December 31, 1999 and 1998. The peer group's comparable ratios were
14.7 percent and 10.0 percent. 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, weakened slightly to negative 0.5
percent at year-end 1999 from negative 5.7 percent at year-end 1998. The
peer group experienced a similar deterioration in its short-term ratio to
8.3 percent from 3.6 percent. We believe that by maintaining adequate
volumes of short-term investments and implementing competitive pricing
strategies on deposits, we can ensure adequate liquidity to support
future growth.
The consolidated statements of cash flows present the change in cash and
cash equivalents from operating, investing and financing activities.
Cash and cash equivalents consist of cash on hand, cash items in the
process of collection, noninterest-bearing deposits with other banks,
balances with the FRB and FHLB-Pgh and federal funds sold. A greater
amount of net cash used in investing activities over net cash provided by
financing activities resulted in a decrease in cash and cash equivalents
of $8.2 million in 1999. Cash and cash equivalents totaled $11.0 million
at December 31, 1999, compared to $19.2 million at the end of 1998. Net
cash provided by operating activities totaled $6.9 million and primarily
resulted from our net income in 1999 of $4.6 million.
The net cash used in investing activities totaled $32.1 million in 1999.
Greater demand for commercial loans and commercial mortgage loans fueled
a $29.7 million net increase in lending activities, which primarily
accounted for the net cash outflow. Expenditures for premises and
equipment, principally related to the new corporate center and two branch
banking offices totaling $3.2 million, also affected the net cash
outflow. Proceeds from repayments and sales of available-for-sale
investment securities of $39.1 million and $11.1 million were almost
entirely offset by purchases of $49.7 million.
Net increased volumes of deposits and short-term borrowings, partially
offset by cash outflows for repurchases of common stock and dividends,
resulted in net cash provided by financing activities of $17.1 million in
1999. Increases in transaction accounts and short-term borrowings
provided funds of $23.8 million and $5.5 million, while decreases in time
deposits reduced funds $5.6 million. Funds used to purchase and retire
outstanding shares, relative to the stock repurchase program, totaled
$5.7 million. In addition, cash dividends paid amounted to $1.1 million.
CAPITAL ADEQUACY:
We believe a strong capital position is essential to our continued growth
and profitability. A solid capital base provides depositors and
stockholders with a margin of safety, while allowing us to take advantage
of profitable opportunities, support future growth and provide protection
against any unforseen losses.
As a result of increased earnings, our capital ratios have risen
substantially over the past five years and well exceed the minimum levels
required by federal banking authorities for well capitalized
institutions. In addition to monitoring our capital position, we
continually strive to promote increased stockholder value. As
aforementioned, on April 21, 1999, the Board of Directors approved a
stock repurchase program, which authorized the repurchase of up to
220,000 shares of our outstanding common stock. Stock repurchase programs
were popular during 1999 as more than 30.0 percent of the Nation's small-
capitalized companies reduced their number of shares outstanding by
utilizing buybacks. The main goal of this buyback was to effectively
deploy excess capital in order to enhance stockholder value through
appreciation in earnings per share and return on equity. As of December
31, 1999, 177,647 shares having an average cost of $32.00 per share have
been repurchased and retired under this program. The total cost of
repurchases in 1999 amounted to $5.7 million. The resulting reduction in
total capital and shares outstanding, in combination with increased
earnings, has translated into improved earnings per share and return on
equity. Earnings per share was $2.17 in 1999 compared to $2.04 in 1998.
Return on equity improved to 12.02 percent in 1999 from 11.71 percent in
1998. We anticipate repurchasing and retiring the remaining authorized
shares in 2000.
Stockholders' equity totaled $35.5 million at December 31, 1999, compared
to $39.7 million at December 31, 1998. The primary factor contributing
to the $4.2 million reduction was $5.7 million in common stock
repurchases. Net income of $4.6 million, net cash dividends of $1.0
million and a net unrealized loss on securities of $2.1 million also
affected the change in stockholders' equity. The recent FOMC actions
taken in the second half of 1999 had a negative effect on the market
value of our investment portfolio. As a result, we sustained a net
unrealized holding loss of $2,891, net of an applicable income tax
benefit of $983, which was increased by a $408 reclassification
adjustment, net of applicable income taxes of $139, for gains realized on
the sale of securities. At December 31, 1999, the net unrealized holding
loss totaled $783. The net unrealized holding gain was $1,394 at
December 31, 1998.
Total dividends declared for the year ended December 31, 1999, totaled
$1,196 compared to $816 for the same period of 1998. On a per share
basis, dividends declared increased 54.1 percent to $0.57 per share in
1999 from $0.37 per share in 1998. In 1999, the dividend payout ratio
increased to 26.0 percent from 18.1 percent in 1998. In comparison, the
dividend payout ratio for our peer group was 39.7 percent in 1999 and
38.9 percent in 1998. It is the intention of our Board of Directors to
continue to pay cash dividends in the future. However, these decisions
are based on our operating results, financial and economic conditions,
capital and growth objectives, appropriate dividend restrictions and
other relevant factors. The primary source of funds for payment of
dividends has been the dividends received from our subsidiary, Community
Bank. Community Bank's ability to pay dividends is subject to federal
and state regulations. Accordingly, Community Bank, without prior
regulatory approval, may declare dividends to us totaling $2,014 plus net
profits earned for the period from January 1, 2000, through the date of
declaration, less any dividends previously paid in 2000.
Our dividend reinvestment plan ("DRP") offers stockholders the
opportunity to automatically reinvest their dividends in shares of our
common stock. Three hundred thousand shares are registered with the SEC
under the DRP. During the years ended December 31, 1999 and 1998, 6,409
shares and 4,617 shares were issued under the plan.
Bank regulatory agencies consider capital to be a significant factor in
ensuring the safety of a depositor's accounts. These agencies, in light
of past bank failures, adopted minimum capital adequacy requirements that
include mandatory and discretionary supervisory actions for
noncompliance. These requirements, otherwise known as risk-based capital
standards, generally measure the amount of a bank's required capital in
relation to the degree of risk perceived in its assets and its off-
balance sheet exposure. 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 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 highly-rated institutions. Our minimum
Leverage ratio was 4.0 percent at December 31, 1999 and 1998. If an
institution is deemed to be undercapitalized under these standards,
banking law prescribes an increasing amount of regulatory intervention,
including the required institution of a capital restoration plan, and
restrictions 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 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 unrealized gains in Tier II capital.
Our and Community Bank's capital ratios at December 31, 1999 and 1998, as
well as the required minimum ratios for capital adequacy purposes and to
be well capitalized under the prompt corrective action provisions as
defined by Federal Deposit Insurance Corporation Improvement Act of 1991,
are summarized as follows:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-----------------------------------------------------------------
DECEMBER 31 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basis for ratios:
Tier I capital to risk-adjusted assets:
Consolidated........................... $ 33,848 $ 35,444 $ 9,271 $ 8,017 $13,907 $12,025
Community Bank......................... 32,619 34,266 9,216 7,959 13,824 11,938
Total capital to risk-adjusted assets:
Consolidated........................... 36,757 37,968 18,543 16,033 23,179 20,042
Community Bank......................... 35,510 36,772 18,432 15,917 23,040 19,897
Tier I capital to total average assets
less intangibles:
Consolidated........................... 33,848 35,444 15,752 14,981 19,690 18,726
Community Bank......................... 32,619 34,266 $15,641 $14,946 $19,551 $18,682
Risk-adjusted assets:
Consolidated........................... 218,915 191,609
Community Bank......................... 217,526 190,162
Risk-adjusted off-balance sheet items:
Consolidated........................... 12,871 8,806
Community Bank......................... 12,871 8,806
Average assets for Leverage ratio:
Consolidated........................... 393,794 374,524
Community Bank......................... $391,016 $373,644
Ratios:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items:
Consolidated........................... 14.6% 17.7% 4.0% 4.0% 6.0% 6.0%
Community Bank......................... 14.2 17.2 4.0 4.0 6.0 6.0
Total of Tier I and Tier II capital as a
percentage of risk-adjusted assets and
off-balance sheet items:
Consolidated........................... 15.9 18.9 8.0 8.0 10.0 10.0
Community Bank......................... 15.4 18.5 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less intangibles:
Consolidated........................... 8.6 9.5 4.0 4.0 5.0 5.0
Community Bank......................... 8.3% 9.2% 4.0% 4.0% 5.0% 5.0%
</TABLE>
During 1999, our capital ratios declined as a direct result of the common
stock repurchases. The Leverage ratio was 8.6 percent at December 31,
1999, as compared to 9.5 percent at December 31, 1998. The Tier I
capital and total capital to risk-adjusted assets ratios were 14.6
percent and 15.9 percent at December 31, 1999. In comparison, these
ratios at December 31, 1998, were 17.7 percent and 18.9 percent. Despite
the decline, each of these ratios still exceeded the minimum levels
required for adequately capitalized institutions of 4.0 percent, 4.0
percent and 8.0 percent, and the levels required for well capitalized
institutions of 5.0 percent, 6.0 percent and 10.0 percent at December 31,
1999. Community Bank's capital ratios also declined as a function of the
stock repurchase program, as repurchased shares were funded through
dividends from Community Bank. Based on the most recent notification from
the FDIC, we and Community Bank were categorized as well capitalized
under the regulatory framework for prompt corrective action at December
31, 1999 and 1998. There are no conditions or events since this
notification that management believes have changed our category.
The ALCO continually reviews our capital position. As part of its
review, the ALCO considers:
- The current and expected capital requirements, including the
maintenance of capital ratios in excess of minimum regulatory
guidelines,
- The market value of our securities and the resulting effect on
capital,
- Any planned asset growth,
- The anticipated level of net earnings and capital position,
taking into account the projected asset/liability position and
exposure to changes in interest rates, and
- The source and timing of additional funds to fulfill future
capital requirements.
REVIEW OF FINANCIAL PERFORMANCE:
Higher amounts of fee income, better control of operating expenses and
lower provisions for loan losses all contributed to the earnings
performance improvement for the top 30 commercial banks in 1999. This
group posted composite net income of $37.6 billion in 1999, a 22.1
percent increase from the $30.8 billion reported in 1998. The return on
average assets and return on average equity ratios were 1.50 percent and
19.18 percent in 1999 and 1.42 percent and 17.82 percent in 1998.
Regional and local community banks also experienced improvements during
1999. Net income for Northeast Region banks was $1.52 billion, a 10.5
percent increase from the $1.38 billion in 1998. Return on average
assets was 1.10 percent in 1998 and 1.27 percent in 1999. Similarly,
return on average equity improved from 12.80 percent in 1998 to 16.20
percent in 1999. Local community banks were successful, to a lesser
extent, in achieving higher levels of net income this year compared to
the prior year. Although not reporting the impressive 22.2 percent
earnings growth of the larger banks, net income after tax increased $2.7
million or 4.3 percent from $62.0 million in 1998 to $64.7 million in
1999. The return on average assets was 1.14 percent in 1999 and 1.22
percent in 1998. The return on average equity was 12.83 percent in 1999
and 12.26 percent in 1998. Unlike their larger competitors, the adverse
effects of declining net interest margins overshadowed the positive
effects of increases in noninterest income.
We reported net income of $4.6 million or $2.17 per share in 1999,
compared to $4.5 million or $2.04 per share in 1998. Higher net interest
income primarily contributed to the improved earnings. Our return on
average assets and return on average equity in 1999 were 1.16 percent and
12.02 percent. In 1998, these ratios were 1.19 percent and 11.71 percent.
Net interest income on a tax-equivalent basis improved $459 or 3.2
percent to $14,979 in 1999 from $14,520 in 1998. Tax-equivalent interest
revenue rose $521, meanwhile interest expense grew only $62. Growth in
average earning assets of $16.4 million more than offset a 21 basis point
decline in yield. The effects of a $14.2 million increase in average
interest-bearing liabilities was almost entirely offset by an 18 basis
point reduction in the cost of funds. Contributing to the growth in
earning assets was a $10.2 million increase in average loans. We
experienced significant commercial loan demand, however intense local
competition forced loan yields lower. The tax-equivalent yield on our
loan portfolio was 8.33 percent in 1999, compared to 8.55 percent in
1998. We experienced cost of funds reductions for all major deposit
categories except for NOW accounts. The overall cost of funds improved
to 4.42 percent in 1999, compared to 4.60 percent in 1998.
The provision for loan losses amounted to $535 in 1999, compared to $855
in 1998. The provisions in 1999 and 1998 include replenishments to the
reserve of $410 and $435 for loans charged-off in response to a change in
the regulatory classification of certain loans.
Noninterest income for the year ended December 31, 1999, totaled $2,112,
a decline of $561 compared to $2,673 for the same period of 1998.
Included in noninterest income were gains on the sale of investment
securities of $408 in 1999 and $1,128 in 1998. Gains on the sale of one-
to-four family residential mortgage loans totaled $57 in 1999 and $43 in
1998. Service charges, fees and commissions increased $145 or 9.7 percent
to $1,647 for the year ended December 31, 1999, from $1,502 for the same
period last year.
We experienced a less than 1.0 percent increase in noninterest expense in
1999 compared to last year. Noninterest expense increased $65 or 0.7
percent to $9,429 in 1999, from $9,364 in 1998. Salaries and employee
benefits expense and net occupancy and equipment expense rose $379 and
$52, while other expenses declined $366 in 1999. Additional expenses
associated with the opening of the corporate center and two new branch
offices primarily contributed to the increases in salaries and employee
benefits and net occupancy and equipment expense. Cost control
improvements in 1999 and nonrecurring charges which occurred in 1998 were
the main factors affecting the decline in other expenses.
One of the most significant issues addressed by financial institutions in
the latter part of the 1990's was the Y2K. The Y2K issue arose because
many existing computer programs used the last two digits rather than four
to define the applicable year. These programs could have interpreted a
date ending in "00" as the year 1900 instead of the year 2000. Although
the Y2K problem affected all industries, the potential impact on the
banking industry could have been extensive. The SEC and the federal
banking agencies required financial institutions to complete extensive
assessment, testing and remediation of their existing information systems
to ensure that they would function correctly into the year 2000.
We are very dependent upon information technology systems to perform our
daily operations. Early in 1997, we initiated an enterprisewide program
to address the Y2K issue and the effects it could have on us. A formal
Century Date Change Preparedness Policy was devised and approved by the
Board of Directors. This Policy called for a Y2K project plan to
coordinate and oversee the various phases, assessment, renovation,
testing and implementation of our Y2K preparedness. Our Chief Operating
Officer was appointed coordinator of the Y2K project plan and the Data
Processing Steering Committee served as oversight for the project. The
Y2K project plan included:
- An overview of the plan's progress,
- The status of compliance for mission-critical hardware and
software,
- The results of hardware and software testing and implementation,
- The evaluation of significant customers in addressing Y2K issues
in their business, and
- The assessment of the need to implement a contingency plan, for
those areas that would not have been compliant, were reported to
the Board of Directors on a quarterly basis or more frequently
as significant events occurred.
Based on estimates from third party vendors and an assessment by the Data
Processing Steering Committee, we expected to spend approximately $200 to
become fully compliant. Total costs expended related to the Y2K project
plan and included in our Consolidated Statements of Income and
Comprehensive Income were $87 in 1998. We incurred no such costs in
1999. We do not expect to incur any further costs associated with the
Y2K. The excess budgeted funds over the actual total costs incurred of
$87 will be used in the implementation of proposed new technology.
It has always been our pro-active position to remain current in our
information systems. This position greatly reduced our exposure to risk
and minimized our costs associated with Y2K. By the end of the third
quarter of 1999, our information systems were fully Y2K-compliant. The
completion of our Y2K project plan successfully mitigated any problems
associated with the century date change.
At its November 18, 1999, meeting, the FASB's Emerging Issues Task Force
("EITF") reached a consensus on Issue No. 99-11, "Subsequent Events
Caused by Year 2000." The issue is when costs or losses associated with
Y2K failures that are detected subsequent to the balance sheet date but
prior to the issuance of financial statements should be recognized. The
Y2K failures involve products or systems that an entity did not know
would fail prior to the actual failures. The AICPA Codification of
Statements on Auditing Standards, AU Section 560, "Subsequent Events,"
describes two types of subsequent events, Type I and Type II, that
require consideration by management and evaluation by an independent
auditor. Type I subsequent events consist of those events that provide
additional evidence with respect to conditions that existed at the date
of the balance sheet and affect the estimates inherent in the process of
preparing the financial statements. In this case, the financial
statements should be adjusted for any changes in estimates resulting from
the use of such evidence. Type II subsequent events consist of those
events that provide evidence with respect to conditions that did not
exist at the date of the balance sheet but arose subsequent to that date.
These events should not result in adjustments of the financial
statements. However, disclosure could be required to keep the financial
statements from being misleading.
Issue No. 99-11 provides thirteen cases to illustrate how various
transactions could be impacted by Y2K failures. Each case assumes that
based on its documentation and testing, the company believes it would not
have any significant Y2K problems, and the loss contingency from the Y2K
failure is probable and can be reasonably estimated prior to the issuance
of the company's financial statements. One case provided, involving
loans receivable, has relevance to financial institutions. This case
involves a financial institution that has loans receivable balances that
appear collectable at its balance sheet date. In a subsequent month,
prior to the issuance of the financial statements, it becomes apparent
that the company will be unable to collect all amounts due as a result of
some of its customers experiencing unexpected Y2K failures. The EITF
concluded that this type of circumstance provided evidence of a
condition existing at the balance sheet date and therefore represented a
Type I subsequent event. Any cost, loss or impairment should be
recognized in the financial statements.
We realize that subsequent problems or issues relative to the Y2K could
still develop. Areas where these issues could arise involve Y2K related
problems of major customers. We recognize that a commercial customer's
profitability and liquidity positions could be adversely affected if
their systems fail to operate properly. This could lead to delinquencies
on loans, possible defaults and bankruptcy filings, in extreme cases.
During 1999, we contacted these customers and informed them of the Y2K
and the possible effects it could have on their business and inquired
about any efforts they were taking to mitigate those effects. In
addition, a questionnaire regarding the Y2K was incorporated into the
commercial loan application requiring all potential loan customers to
attest to their compliance. As part of our loan review process, we
continue to evaluate the continuing operations of our customers. To our
knowledge, there were no Y2K related subsequent events including those
involving Y2K failures of customers, that represent a condition that
existed at December 31, 1999, and should be recognized in our 1999
financial statements.
Regardless of our efforts, there can be no assurance that such subsequent
Y2K issues will not arise. As part of our Y2K remediation efforts, we
prepared contingency plans, which are still in effect, to address the
possibility that significant customers would incur Y2K related issues.
However, no assurance can be made, that these plans will alleviate any
risks. Y2K issues, if not adequately addressed, could have a material
effect on our business, consolidated results of operations and financial
position.
NET INTEREST INCOME:
For the Nation's top 30 banks, net interest income rose from $90.5
billion in 1998 to $93.4 billion in 1999. The growth of average earning
assets exceeding average interest-bearing liabilities caused the 3.2
percent improvement as the tax-equivalent net interest margin declined
from 4.13 percent in 1998 to 4.05 percent in 1999. The margin compression
was attributable to the effects of FOMC's actions of easing monetary
policy in 1998 which more than offset the impact of their tightening
actions in the latter part of 1999. Strong competitive pressure in
pricing loans and deposits also caused the margin decline. Commercial
banks in the Northeast Region recorded net interest income of $4.1
billion in 1998 and $4.6 billion in 1999. An increase in the net
interest margin of 3 basis points, coupled with the favorable growth of
average earning assets over the growth of average interest-bearing
liabilities, resulted in the $500.0 million improvement. The Northeast
Region's net interest margin increased from 4.26 percent in 1998 to 4.29
percent in 1999. Contrary to the net interest margin improvement for the
Northeast Region, the local peer group's tax-equivalent margin compressed
29 basis points from 4.05 percent in 1998 to 3.76 percent in 1999.
Our major source of operating income is net interest income. Net
interest income is defined as the difference between income, interest and
fees on earning assets, and 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 tax-equivalent net interest income to average
earning assets. Variations in volumes and rates of earning assets and
interest-bearing liabilities, in response to changes in general market
rates, are the main 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 net interest
income.
One of our primary concerns is the maintenance of an adequate net
interest margin. The possibility of future interest rate hikes in 2000
could cause interest margins to tighten even further. We believe
following prudent deposit pricing practices, coupled with careful
investing and loan pricing,
will keep our net interest margin in check. However, no assurance can be
given that general market conditions will continue. Changes in general
market rates or intensified competition could adversely affect net
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 volumes of earning assets and
interest-bearing liabilities have on net interest income are summarized
as follows. The net change attributable to the combined impact of rate
and volume has been allocated proportionately to the change due to rate
and the change due to volume.
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
1999 VS. 1998 1998 VS. 1997
------------------------ -----------------------
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............................................ $ 292 $(412) $ 704 $ 671 $ 671
Tax-exempt......................................... 31 (68) 99 (114) $ 21 (135)
Investments:
Taxable............................................ 818 (77) 895 239 230 9
Tax-exempt......................................... (226) (41) (185) (27) (66) 39
Federal funds sold................................... (394) (49) (345) 265 (3) 268
----- ----- ------ ------ ----- -----
Total interest income............................ 521 (647) 1,168 1,034 182 852
----- ----- ------ ------ ----- -----
Interest expense:
Money market accounts................................ 56 (2) 58 19 (5) 24
NOW accounts......................................... 138 60 78 64 2 62
Savings accounts..................................... (36) (154) 118 (245) (217) (28)
Time deposits less than $100......................... (42) (334) 292 439 (146) 585
Time deposits $100 or more........................... (116) (46) (70) (387) (79) (308)
Short-term borrowings................................ 62 (1) 63 3 1 2
Long-term debt....................................... 1 (1) (1) (1)
----- ----- ------ ------ ----- -----
Total interest expense........................... 62 (476) 538 (108) (445) 337
----- ----- ------ ------ ----- -----
Net interest income.............................. $ 459 $(171) $ 630 $1,142 $ 627 $ 515
===== ===== ====== ====== ===== =====
</TABLE>
Tax-equivalent net interest income totaled $14,979 in 1999, an increase
of $459 or 3.2 percent from $14,520 in 1998. Growth in average volumes
of earning assets over average volumes of interest-bearing liabilities,
coupled with an 18 basis point improvement in the cost of funds, caused
the increase. A 21 basis point decline in the tax-equivalent yield on
earning assets partially offset the above factors. Our average volume of
taxable investments grew $15.4 million or 25.2 percent to $76.5 million
in 1999 from $61.1 million in 1998. In addition, our average loans grew
$10.3 million or 4.1 percent to $258.2 million for the year ended
December 31, 1999, from $247.9 million for the same period last year.
Specifically, the growth in average taxable investments and average loans
favorably affected net interest income by $895 and $803. A reduction in
the average volumes of tax-exempt investments and federal funds sold
partially offset the effects of the growth in average taxable investments
and loans. The average volume of tax-exempt investments and federal
funds sold declined $2.3 million and $6.9 million and reduced net
interest income by $185 and $345. Overall, the growth in average earning
assets caused a positive effect on net interest income of $1,168. Average
interest-bearing liabilities increased $14.1 million and partially offset
the positive effect of growth in average earning assets with a reduction
to net interest income of $538. Growth in average time deposits less
than $100 of $5.2 million and average savings accounts of $3.8 million
were primarily responsible for the unfavorable volume variance with
respect to interest-bearing liabilities. The variances in time deposits
and savings accounts increased interest expense $292 and $118 in 1999.
A 21 basis point decline in the average yield on earning assets to 7.76
percent in 1999 from 7.97 percent in 1998 caused a reduction to net
interest income of $647. Due to the competitive environment, the average
tax-equivalent yield on the loan portfolio declined 22 basis points to
8.33 percent in 1999 from 8.55 percent in 1998. In addition, the tax-
equivalent yield on the investment portfolio was 6.51 percent in 1999, a
26 basis point decline compared to 6.77 percent in 1998. These declines
in average tax-equivalent yields on the loan and investment portfolios
equated to a $480 and $118 reduction in net interest income. Almost
entirely offsetting the effect of the lower average yield on earning
assets was an 18 basis point reduction in the cost of funds to 4.42
percent in 1999 from 4.60 percent in 1998. The lower cost of funds
favorably affected net interest income by $476. We experienced
reductions in the average rate paid for all major categories of interest-
bearing deposits except for NOW accounts. As a result of our continued
prudent pricing strategies, average interest rates for time deposits less
that $100 fell 19 basis points, while average interest rates for savings
accounts and time deposits $100 or more each fell 20 basis points. These
average rate reductions favorably impacted net interest income by $334,
$154 and $46.
The average balances of assets and liabilities, corresponding interest
income and expense and resulting average yields or rates paid are
summarized as follows. Earning assets averages include nonaccrual loans.
Investment averages include available-for-sale securities at amortized
cost. Income on investment securities and loans are adjusted to a tax-
equivalent basis using a statutory tax rate of 34.0 percent.
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
1999 1998
---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $249,789 $20,879 8.36% $240,658 $20,587 8.55%
Tax-exempt.................................. 8,381 634 7.56 7,267 603 8.30
Investments:
Taxable..................................... 76,500 4,463 5.83 61,138 3,645 5.96
Tax-exempt.................................. 35,956 2,863 7.96 38,276 3,089 8.07
Federal funds sold............................ 3,282 162 4.94 10,164 556 5.47
-------- ------- -------- -------
Total earning assets...................... 373,908 29,001 7.76% 357,503 28,480 7.97%
Less: allowance for loan losses............... 3,997 3,881
Other assets.................................. 26,293 23,797
-------- --------
Total assets.............................. $396,204 $377,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 19,466 608 3.12% $ 17,643 552 3.13%
NOW accounts.................................. 24,671 605 2.45 21,366 467 2.19
Savings accounts.............................. 67,920 1,618 2.38 64,113 1,654 2.58
Time deposits less than $100.................. 181,164 9,822 5.42 175,954 9,864 5.61
Time deposits $100 or more.................... 22,710 1,293 5.69 23,936 1,409 5.89
Short-term borrowings......................... 1,393 73 5.24 185 11 5.95
Long-term debt................................ 40 3 7.50 43 3 6.98
-------- ------- -------- -------
Total interest-bearing liabilities........ 317,364 14,022 4.42% 303,240 13,960 4.60%
Noninterest-bearing deposits.................. 36,757 32,550
Other liabilities............................. 3,810 3,213
Stockholders' equity.......................... 38,273 38,416
-------- --------
Total liabilities and stockholders' equity $396,204 $377,419
======== ------- ======== -------
Net interest/income spread................ $14,979 3.34% $14,520 3.37%
======= =======
Net interest margin....................... 4.01% 4.06%
Tax-equivalent adjustments:
Loans......................................... $ 215 $ 206
Investments................................... 974 1,050
------- -------
Total adjustments......................... $ 1,189 $ 1,256
======= =======
Note: Average balances were calculated using average daily balances. Average balances for loans include
nonaccrual loans. Available-for-sale securities, included in investment securities, are stated at amortized
cost with the related average unrealized holding gain of $689 in 1999, $2,829 in 1998, $1,193 in 1997 and
$337 in 1996, and an average unrealized holding loss of $1,272 in 1995 included in other assets. Tax-
equivalent adjustments were calculated using the prevailing statutory tax rate of 34.0 percent.
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME (CONTINUED)
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$233,001 $19,916 8.55% $213,071 $18,444 8.66% $195,047 $17,238 8.84%
8,876 717 8.08 5,724 470 8.21 4,649 364 7.83
60,975 3,406 5.59 74,233 4,022 5.42 113,675 6,789 5.97
37,818 3,116 8.24 35,923 3,005 8.37 20,775 1,818 8.75
5,265 291 5.53 5,508 300 5.45 17,070 1,000 5.86
-------- ------- -------- ------- -------- -------
345,935 27,446 7.93% 334,459 26,241 7.85% 351,216 27,209 7.75%
3,919 4,014 3,816
17,334 16,834 11,770
-------- -------- --------
$359,350 $347,279 $359,170
======== ======== ========
$ 16,854 533 3.16% $ 18,144 529 2.92% $ 21,869 758 3.47%
18,464 403 2.18 16,661 337 2.02 15,550 305 1.96
65,081 1,899 2.92 67,144 2,016 3.00 71,911 2,336 3.25
165,487 9,425 5.70 157,271 8,925 5.67 155,183 8,923 5.75
29,092 1,796 6.17 27,755 1,647 5.93 29,336 1,771 6.04
138 8 5.80 51 3 5.88 9,935 677 6.81
45 4 8.89 2,122 93 4.38 4,715 224 4.75
-------- ------- -------- ------- -------- -------
295,161 14,068 4.77% 289,148 13,550 4.69% 308,499 14,994 4.86%
27,448 26,329 24,090
3,913 2,968 547
32,828 28,834 26,034
-------- -------- --------
$359,350 $347,279 $359,170
======== ------- ======== ------- ======== -------
$13,378 3.16% $12,691 3.16% $12,215 2.89%
======= ======= =======
3.87% 3.79% 3.48%
$ 244 $ 160 $ 124
1,060 1,022 618
------- ------- -------
$ 1,304 $ 1,182 $ 742
======= ======= =======
</TABLE>
PROVISION FOR LOAN LOSSES:
The dissipation of the late 1998 global economic crisis and overall
strength in the domestic economy caused a reduction in the provision for
loan losses for large commercial banks in 1999. Large financial
institutions, as represented by the Nation's top 30 banks, reduced their
provisions from $10.3 billion in 1998 to $8.9 billion in 1999, a 16.0
percent decline. The nonperforming asset ratio increased from 0.47
percent in 1998 to 0.51 percent in 1999, whereas, the net charge-off
ratio declined 7 basis points from 0.50 percent in 1998 to 0.43 percent
in 1999. For the Northeast Regional banks, the loan loss provision
declined from $250.7 million in 1998 to $235.3 million in 1999, a decline
of 6.4 percent. Nonperforming assets as a percentage of loans, net of
unearned income, and foreclosed assets decreased 16 basis points to 0.52
percent in 1999. Net loans charged-off as a percentage of average loans
outstanding declined 1 basis point to 0.35 percent in 1999. For local
community banks, the loan loss provision was relatively unchanged from
1998 to 1999. Reductions in the level of nonperforming assets and net
charge-offs were attributable to the stability in the provision. The
nonperforming assets ratio declined from 0.65 percent in 1998 to 0.64
percent in 1999. The net charge-off ratio decreased from 0.24 percent in
1998 to 0.18 percent in 1999.
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 taken into consideration when
determining the provision. Based on our most current valuation,
management believes that the allowance is adequate to absorb any known
and potential losses in the portfolio.
The provision for loan losses equaled $535 in 1999 and $855 in 1998. The
1999 and 1998 provisions included replenishments to the reserve totaling
$410 and $435 for loans charged-off in response to changes in the
regulatory classifications of certain loans. Based on the results of our
latest regulatory examination, we know of no other charge-offs or changes
in classifications of loans that should have occurred in 1999. We
believe that maintaining a standard monthly charge to operations in the
form of a provision is warranted given the recent levels of nonperforming
loans and charge-offs and a greater concentration of commercial loans.
Accordingly, we will continue to make monthly provisions to the allowance
for loan loss account in 2000.
NONINTEREST INCOME:
For the second consecutive year, noninterest income grew at a double
digit pace in 1999. As a result of declining net interest margins and
reductions in traditional service revenue, financial institutions,
especially large ones, began supporting earnings through the introduction
of new bank and nonbank financial products and services. In 1999,
noninterest revenue for the top 30 banks improved $9.0 billion or 14.4
percent from $62.3 billion in 1998. As a percentage of average total
assets, noninterest revenue accounted for 2.6 percent in 1998 and 2.7
percent in 1999. Regional banks in the Northeast portion of the nation
reported a 13.5 percent increase in noninterest income from $1.3 billion
in 1998 to $1.5 billion in 1999. For local community banks, noninterest
income increased 9.7 percent from $25.9 million in 1998 to $28.5 million
in 1999. Revenues from noninterest sources are expected to account for a
greater proportion of overall revenues as competitive pressures tighten
margins and recent legislative actions allow banks to offer additional
fee-based products and services.
We reported noninterest income of $2,112 in 1999 and $2,673 in 1998.
Included in noninterest income were gains on the sale of investment
securities of $408 in 1999 and $1,128 in 1998. Adjusting for these
gains, recurring noninterest income improved $159 or 10.3 percent.
Increases in service charges, fees and commissions of $145 and net gains
on the sale of loans of $14 factored into the improvement. As a
percentage of average total assets, noninterest income equaled 0.53
percent in 1999. In comparison, this ratio for our peer group equaled
1.00 percent. We anticipate increases in fee income for 2000, as a result
of continued growth of the recently opened branch offices, new product
and service offerings and possible changes to our service charge fee
structure. As previously mentioned, noninterest income included net gains
on the sale of investment securities of $408 in 1999 and $1.1 million in
1998. The $408 gain in 1999 arose from the replacement of municipal
obligations having shorter maturities and call dates with those having
longer maturities and call features. During 1998, we chose to sell
certain equity securities of local financial institutions as a result of
the investments being overvalued relative to comparable stocks and an
overall weakness in bank stocks.
NONINTEREST EXPENSE:
In 1999, noninterest expense of the top 30 banks increased $2.7 billion
or 3.0 percent as compared to 1998. The average efficiency ratio for this
group improved from 57.9 percent in 1998 to 56.7 percent in 1999. Margin
compression caused management to more closely monitor expenditures during
1999. Regional banks in the northeast also enjoyed added efficiencies
evidenced by an improvement in their ratio from 54.5 percent in 1998 to
49.8 percent in 1999. The improvement in the efficiency ratio was
directly attributable to holding operating expenses to a 2.9 percent
growth rate in 1999.
In general, noninterest expense is categorized 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.
Noninterest expense totaled $9,429 in 1999, an increase of $65 compared
to $9,364 in 1998. Increases in salaries and employee benefits expense
and net occupancy and equipment expense, offset almost entirely by a
decline in other expenses contributed to the slight overall increase. A
key industry ratio used to measure productivity is the operating
efficiency ratio, noninterest expenses less other real estate expenses to
net interest income and noninterest income less any nonrecurring gains.
Another productivity measure is the overhead ratio, noninterest expense
as a percentage of average total assets. Our operating efficiency ratio
improved to 60.8 percent in 1999 compared to 61.6 percent in 1998.
Similarly, the overhead ratio also improved to 2.4 percent in 1999 from
2.5 percent in 1998. With regard to these ratios, we outperformed our
peer group. The peer group's operating efficiency ratio equaled 63.9
percent and 63.1 percent in 1999 and 1998, while the overhead ratio
equaled 3.3 for both 1999 and 1998.
The major components of noninterest expense for the past five years are
summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes....................................... $4,169 $3,767 $3,420 $3,251 $3,429
Employee benefits................................................ 655 678 678 557 599
------ ------ ------ ------ ------
Salaries and employee benefits expense......................... 4,824 4,445 4,098 3,808 4,028
------ ------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense............................................ 610 532 579 602 684
Equipment expense................................................ 735 761 620 611 538
------ ------ ------ ------ ------
Net occupancy and equipment expense............................ 1,345 1,293 1,199 1,213 1,222
------ ------ ------ ------ ------
Other expenses:
Marketing expense................................................ 322 401 269 242 281
Other taxes...................................................... 320 273 255 218 200
Stationery and supplies.......................................... 431 437 375 226 250
Contractual services............................................. 916 1,006 864 871 879
Insurance, including FDIC assessment............................. 124 93 74 84 480
Other............................................................ 1,147 1,416 822 721 854
------ ------ ------ ------ ------
Other expenses................................................. 3,260 3,626 2,659 2,362 2,944
------ ------ ------ ------ ------
Total noninterest expense.................................... $9,429 $9,364 $7,956 $7,383 $8,194
====== ====== ====== ====== ======
</TABLE>
Salaries and employee benefits expense constitutes the majority of our
noninterest expense. For the year ended December 31, 1999, personnel
related expenses totaled $4,824 or 51.2 percent of noninterest expense,
an increase of $379 or 8.5 percent compared to last year. Additional
staffing requirements for our Clarks Summit and Dickson City branch
offices, together with annual merit increases based on employee
performance evaluations, contributed to the increase. Although we
experienced an increase in compensation costs, we have been successful in
managing these costs in comparison to our peer group. Total compensation
costs per full-time equivalents were $29 in 1999 and $28 in 1998. In
comparison, the peer group's total compensation costs per full-time
equivalents equaled $34 and $32 in 1999 and 1998. We anticipate salaries
and employee benefits expense to increase slightly in 2000 due to annual
merit increases relative to performance evaluations and normal rate
increases in employee health care.
Net occupancy and equipment expense increased $52 or 4.0 percent to
$1,345 in 1999, compared to $1,293 in 1998. An increase of $78 in net
occupancy expense, partially offset by a $26 reduction in equipment
expense caused the overall increase. The increase in net occupancy
expense is directly attributable to additional expenses, such as
depreciation, maintenance, real estate taxes and utility costs,
associated with the operation of the new corporate center and branch
offices. The reduction in equipment expense resulted from a decline in
contracted and periodic maintenance costs. As aforementioned, we are
planning capital outlays for the replacement of existing teller machines
and the implementation of new technology, such as internet and voice
response banking and document imaging. As a result, net occupancy and
equipment expense should increase slightly in 2000.
Other expenses declined $366 or 10.1 percent for the year ended December
31, 1999, to $3,260 from $3,626 for the same period of 1998. Cost control
efforts in 1999 and nonrecurring charges in 1998 contributed to the
decline. Other expenses in 1998 included write-downs of properties
included in other real estate of $111 and dispositions of equipment
determined to be Y2K noncompliant of $87. We incurred no such charges in
1999. We expect other expenses to increase in 2000 as a result of the
recent delivery system expansion, proposed new technology implementation
and normal business growth.
Recently, the 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 first semiannual
assessment period of 2000. According to FDIC statistics:
- 95.0 percent of all BIF-member institutions and 92.4 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 institutions and 0.2 percent of
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 12 cents
per 100 dollars and 25 cents per 100 dollars for BIF-member and
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 June 30, 2000,
- At June 30, 1999, the BIF reserve ratio was 1.40 percent and the
SAIF reserve ratio was 1.29 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. The
1996 law required the FICO rate on BIF-assessable deposits to be
one-fifth the rate for SAIF-assessable deposits until January 1,
2000.
We were included in the 95.0 percent of all BIF-member institutions
classified in the well capitalized supervisory risk subgroup at December
31, 1999. Accordingly, we will be exempt from paying a BIF assessment
for the first 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 assessment was $40 for the years-ended December 31, 1999 and
1998.
INCOME TAXES:
We reported income tax expense of $1,338 in 1999 and $1,218 in 1998. A
higher level of earnings, coupled with lower amounts of tax-exempt
income, resulted in an increase in the effective tax rate from 21.3
percent in 1998 to 22.5 percent in 1999. Tax-exempt interest income as a
percentage of total interest income declined slightly from 8.9 percent in
1998 to 8.3 percent in 1999. We continue to maintain an advantageous tax
position as compared to our peer group. The peer group's effective tax
rate was 26.0 percent in 1998 and 23.0 percent in 1999. We expect income
tax expense to remain constant for 2000 as higher levels of pre-tax
income are offset through greater amounts of tax-exempt income. In
addition to income on tax-exempt loans and investments, we utilize
investment tax credits available through our investment in an elderly and
low- to moderate-income residential housing program to mitigate our tax
burden. By utilizing these credits, we reduced our income tax expense by
$80 in 1999 and 1998. The aggregate amount of tax credits available from
this project that will be recognized over ten years ending 2003 is $895.
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 likely that
these assets will be 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.
INDEPENDENT AUDITORS' REPORT
------------------------------------------------
Board of Directors
and Stockholders
Comm Bancorp, Inc.
Forest City, Pennsylvania
We have audited the accompanying consolidated balance sheets of Comm
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comm
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
January 28, 2000
/s/ Kronick Kalada Berdy & Co.
- --------------------------------
KRONICK KALADA BERDY & CO., P.C.
Kingston, Pennsylvania
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
--------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................... $20,879 $20,587 $19,916
Tax-exempt................................................................ 419 397 473
Interest and dividends on investment securities available-for-sale:
Taxable................................................................... 4,341 3,493 3,274
Tax-exempt................................................................ 1,889 2,039 2,056
Dividends................................................................. 122 152 132
Interest on federal funds sold.............................................. 162 556 291
------- ------- -------
Total interest income................................................... 27,812 27,224 26,142
------- ------- -------
INTEREST EXPENSE:
Interest on deposits........................................................ 13,946 13,946 14,056
Interest on short-term borrowings........................................... 73 11 8
Interest on long-term debt.................................................. 3 3 4
------- ------- -------
Total interest expense.................................................. 14,022 13,960 14,068
------- ------- -------
Net interest income..................................................... 13,790 13,264 12,074
Provision for loan losses................................................... 535 855 360
------- ------- -------
Net interest income after provision for loan losses..................... 13,255 12,409 11,714
------- ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions....................................... 1,647 1,502 1,526
Litigation recovery......................................................... 250
Net gains on sale of loans.................................................. 57 43
Net gains on sale of investment securities.................................. 408 1,128
------- ------- -------
Total noninterest income................................................ 2,112 2,673 1,776
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense...................................... 4,824 4,445 4,098
Net occupancy and equipment expense......................................... 1,345 1,293 1,199
Other expenses.............................................................. 3,260 3,626 2,659
------- ------- -------
Total noninterest expense............................................... 9,429 9,364 7,956
------- ------- -------
Income before income taxes.................................................. 5,938 5,718 5,534
Provision for income tax expense............................................ 1,338 1,218 1,134
------- ------- -------
Net income.............................................................. 4,600 4,500 4,400
------- ------- -------
OTHER COMPREHENSIVE INCOME:
Unrealized gains (losses) on investment securities available-for-sale....... (2,891) 816 1,570
Reclassification adjustment for gains included in net income................ (408) (1,128)
Income tax expense (benefit) related to other comprehensive income.......... (1,122) (106) 534
------- ------- -------
Other comprehensive income (loss), net of income taxes.................. (2,177) (206) 1,036
------- ------- -------
Comprehensive income.................................................... $ 2,423 $ 4,294 $ 5,436
======= ======= =======
PER SHARE DATA:
Net income.................................................................. $ 2.17 $ 2.04 $ 2.00
Cash dividends declared..................................................... $ 0.57 $ 0.37 $ 0.30
Average common shares outstanding........................................... 2,125,164 2,205,545 2,200,960
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks................................................................. $ 10,991 $ 11,464
Federal funds sold...................................................................... 7,700
Investment securities available-for-sale................................................ 105,630 109,626
Loans held for sale, net................................................................ 503
Loans, net of unearned income........................................................... 276,850 248,140
Less: allowance for loan losses....................................................... 3,799 4,050
-------- --------
Net loans............................................................................... 273,051 244,090
Premises and equipment, net............................................................. 9,537 7,016
Accrued interest receivable............................................................. 2,166 2,297
Other assets............................................................................ 5,737 5,555
-------- --------
Total assets........................................................................ $407,112 $388,251
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing................................................................... $ 36,061 $ 36,024
Interest-bearing...................................................................... 326,422 308,229
-------- --------
Total deposits...................................................................... 362,483 344,253
Short-term borrowings................................................................... 5,500
Long-term debt.......................................................................... 39 41
Accrued interest payable................................................................ 1,976 1,740
Other liabilities....................................................................... 1,639 2,483
-------- --------
Total liabilities................................................................... 371,637 348,517
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
1999, 2,035,784 shares; 1998, 2,207,022 shares......................................... 672 729
Capital surplus......................................................................... 6,199 6,537
Retained earnings....................................................................... 29,387 31,074
Accumulated other comprehensive income (loss)........................................... (783) 1,394
-------- --------
Total stockholders' equity.......................................................... 35,475 39,734
-------- --------
Total liabilities and stockholders' equity.......................................... $407,112 $388,251
======== ========
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)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 STOCK SURPLUS EARNINGS INCOME(LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996............................ $726 $6,317 $23,649 $ 564 $31,256
Net income............................................ 4,400 4,400
Dividends declared: $0.30 per share................... (659) (659)
Dividend reinvestment plan: 2,325 shares issued....... 1 68 69
Net changes in other comprehensive income (loss)...... 1,036 1,036
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1997............................ 727 6,385 27,390 1,600 36,102
Net income............................................ 4,500 4,500
Dividends declared: $0.37 per share................... (816) (816)
Dividend reinvestment plan: 4,617 shares issued....... 2 152 154
Net changes in other comprehensive income (loss)...... (206) (206)
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1998............................ 729 6,537 31,074 1,394 39,734
Net income............................................ 4,600 4,600
Dividends declared: $0.57 per share................... (1,196) (1,196)
Dividend reinvestment plan: 6,409 shares issued....... 2 195 197
Repurchase and retirement: 177,647 shares............. (59) (533) (5,091) (5,683)
Net changes in other comprehensive income (loss)...... (2,177) (2,177)
---- ------ ------- ------- -------
BALANCE, DECEMBER 31, 1999............................ $672 $6,199 $29,387 $ (783) $35,475
==== ====== ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 4,600 $ 4,500 $ 4,400
Adjustments:
Provision for loan losses.................................................... 535 855 360
Depreciation, amortization and accretion..................................... 1,787 1,317 947
Amortization of loan fees.................................................... (161) (186) (195)
Deferred income tax expense (benefit)........................................ 60 (95) 41
Gains on sale of investment securities available-for-sale.................... (408) (1,128)
Losses (gains) on other real estate.......................................... (20) 139 (49)
Losses on disposition of equipment........................................... 87
Changes in:
Loans held for sale, net................................................... 503 (503)
Accrued interest receivable................................................ 131 278 96
Other assets............................................................... 511 (9) (81)
Accrued interest payable................................................... 236 26 (146)
Other liabilities.......................................................... (883) 571 170
-------- -------- --------
Net cash provided by operating activities................................ 6,891 5,852 5,543
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale investment securities................. 11,128 1,659
Proceeds from repayments of available-for-sale investment securities........... 39,061 45,175 31,150
Purchases of available-for-sale investment securities.......................... (49,707) (50,198) (33,392)
Proceeds from sale of loans.................................................... 3,439
Proceeds from sale of other real estate........................................ 280 275 400
Net decreases (increases) in lending activities................................ (29,714) 1,421 (17,974)
Purchases of premises and equipment............................................ (3,197) (3,940) (1,057)
Proceeds from acquisition of branches, net..................................... 16,268
-------- -------- --------
Net cash used in investing activities.................................... (32,149) (5,608) (1,166)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts.................. 23,846 3,901 (56)
Time deposits................................................................ (5,616) 7,971 (7,093)
Short-term borrowings........................................................ 5,500 (9,575) 9,575
Payments on long-term debt..................................................... (2) (3) (2)
Proceeds from the issuance of common shares.................................... 197 154 69
Repurchase and retirement of common shares..................................... (5,683)
Cash dividends paid............................................................ (1,157) (793) (637)
-------- -------- --------
Net cash provided by financing activities................................ 17,085 1,655 1,856
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..................... (8,173) 1,899 6,233
Cash and cash equivalents at beginning of year........................... 19,164 17,265 11,032
-------- -------- --------
Cash and cash equivalents at end of year................................. $ 10,991 $ 19,164 $ 17,265
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest..................................................................... $ 13,786 $ 13,934 $ 14,112
Income taxes................................................................. 1,379 1,066 1,022
Noncash items:
Transfers of loans to other real estate...................................... 379 249 336
Unrealized losses (gains) on available-for-sale securities................... $ 2,177 $ 206 $ (1,036)
Fair value of assets acquired and liabilities assumed:
Loans, premises and equipment.............................................. $ 730
Core deposit intangible.................................................... 2,178
Cash received.............................................................. 16,268
Accrued interest payable................................................... (102)
--------
Deposit liabilities assumed................................................ $ 19,074
========
See notes to consolidated financial statements.
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Comm Bancorp, Inc., a bank holding company incorporated under the laws of
Pennsylvania, provides a full range of financial services through its one
wholly-owned subsidiary, Community Bank and Trust Company ("Community
Bank"), and Community Bank's wholly-owned subsidiary, Community Leasing
Corporation (collectively, the "Company"). The Company services its
individual and commercial customers through fourteen full-service
branches located within the Lackawanna, Susquehanna, Wayne and Wyoming
counties of Pennsylvania.
Community Bank's primary product is loans to finance one-to-four family
residential properties. Other lending products include loans to small-
and medium-sized businesses and individuals. Community Bank primarily
funds its loans by offering certificates of deposit to commercial
enterprises and individuals. Other deposit product offerings include
various demand and savings accounts. In addition, Community Bank provides
fiduciary services through its Trust and Financial Services Division.
Community Leasing Corporation provides equipment lease financing to
customers, who are predominantly small- and middle-market businesses.
The Company faces competition primarily from commercial banks, thrift
institutions and credit unions within the Northeastern Pennsylvania
market, many of which are substantially larger in terms of assets and
liabilities. In addition, mutual fund and security brokers compete for
various types of deposits, and consumer, mortgage, leasing and insurance
companies compete for various types of loans and leases. Principal
methods of competing for banking and permitted nonbanking services
include price, nature of product, quality of service and convenience of
location.
The Company is subject to regulations of certain federal and state
regulatory agencies and undergoes periodic examinations.
SEGMENT DISCLOSURE:
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise
and Related Information." This Statement establishes standards for the
way public companies report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
stockholders. A public business enterprise must report financial and
descriptive information about its reportable operating segments.
Operatingsegments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers.
SFAS No. 131 states that two or more operating segments may be aggregated
into a single segment if the segments have similar: (i) economic
characteristics; (ii) products and services; (iii) operating processes;
(iv) customer bases; (v) delivery system; and (vi) regulatory oversight.
The Company's fourteen branch banking offices, all similar with respect
to these characteristics, have exhibited similar long-term financial
performance. Therefore, they were aggregated into a single operating
segment. The Company did not have any other reportable operating
segments during the three years ended December 31, 1999.
BASIS OF PRESENTATION:
The consolidated financial statements of the Company have been prepared
in conformity with generally accepted accounting principles ("GAAP"),
Regulation S-X, Item 302 of Regulation S-K and reporting practices
applied in the banking industry. All significant intercompany balances
and transactions have been eliminated in the consolidation. The Company
also presents herein condensed parent company only financial information
regarding Comm Bancorp, Inc. ("Parent Company").
Prior period amounts are reclassified when necessary to conform with the
current year's presentation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and
expenses during the reporting periods. Significant estimates that are
particularly susceptible to material change in the next year relate to
the allowance for loan losses, fair value of financial instruments, real
estate
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
acquired through foreclosure and intangible assets. Actual results
could differ from those estimates.
Management maintains the allowance for loan losses at a level it believes
adequate to absorb estimated potential credit losses. The Company employs
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.
The Company utilizes 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 result ultimately in loss based
on historical experience. Commercial loans and commercial real estate
loans are classified and have historical percentages applied on an asset
by asset basis. Residential mortgage 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 is only a starting point for
estimating the allowance for loan losses. Management adds to these
historical loss percentages a qualitative percentage representing a
number of other relevant factors that may cause estimated credit losses
associated with the Company's current portfolio to differ from historical
loss. These risk factors include: (i) changes in lending policies and
procedures; (ii) economic conditions; (iii) nature and volume of the
portfolio; (iv) loan review system; (v) volumes of past due and impaired
loans; (vi) concentrations; (vii) borrowers' financial status; (viii)
collateral value; (ix) experience, ability and depth of lending
management; and (x) other factors deemed relevant.
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 the Company's current portfolio to differ from historical loss
experience resulting in an allowance that is higher or lower than the
appropriate level. Management establishes the unallocated element of the
allowance judgmentally by considering a number of the risk factors
similar to the ones used for determining the allocated element.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Management monitors the adequacy of the allocated portion of the
allowance quarterly and adjusts 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, management cannot ensure that charge-offs in the
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.
Additionally, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses and
foreclosed real estate. These agencies may require the Company to
recognize additions to the allowance based on information available to
them at the time of their examination. Management is unaware of any such
requirements based on the results of the Company's latest regulatory
examination at September 30, 1999.
As subsequently discussed in this note, in cases where quoted market
prices are not available, fair values of financial instruments are based
on estimates using present value or other valuation techniques which are
subject to change.
Real estate acquired in connection with foreclosures or in satisfaction
of loans is written-down to the lower of the related loan balance or 80.0
percent of fair market value based upon estimates derived through
independent appraisals. However, proceeds realized from sales may
ultimately be higher or lower than those estimates.
Intangible assets include goodwill that resulted from the 1993
acquisition of The First National Bank of Nicholson and a core deposit
intangible that resulted from the assumption of the deposit liabilities
of two branches of First Union National Bank ("First Union") in 1997.
However, if the future benefits are not derived, estimated amortization
may increase and/or a charge for impairment may be recognized.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVESTMENT SECURITIES:
Investment securities are classified and accounted for as either held-to-
maturity, available-for-sale or trading based on management's intent at
the time of acquisition. Management is required to reassess the
appropriateness of the classifications at each reporting date. The
Company does not buy or hold securities principally for the purpose of
selling them in the near term in order to generate profits from market
appreciation. Accordingly, there were no investment securities
classified as trading at December 31, 1999 and 1998.
The Company classifies debt securities as held-to-maturity when
management has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount. The Company did not
have any investment securities classified as held-to-maturity at December
31, 1999 and 1998.
Investment securities are designated as available-for-sale when they are
to be held for indefinite periods of time for the purpose of implementing
management's asset/liability strategies. The Company may also sell these
securities in response to changes in interest rates, prepayment risk,
liquidity requirements or other circumstances identified by management.
Available-for-sale securities are carried at estimated fair value with
unrealized gains and losses and their related income tax effect included
in other comprehensive income, which is reported as a separate component
of stockholders' equity, net of income tax, except for restricted equity
investment securities of the Federal Home Loan Bank of Pittsburgh ("FHLB-
Pgh") and Federal Reserve Bank of Philadelphia ("FRB") which are carried
at cost. Estimated fair values for investment securities are based on
quoted market prices from a national electronic pricing service. Except
for restricted equity investment securities, all of the Company's
investments trade actively in a liquid market.
Realized gains and losses are computed using the specific identification
method and are included in noninterest income. Premiums are amortized
and discounts are accreted over the contractual lives of investment
securities using the interest method, except for mortgage-backed
securities, where amortization and accretion are based on principal
repayments.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Management periodically evaluates each investment security to determine
if a decline in fair value below its amortized cost is other than
temporary. If a decline is judged to be other than temporary, the
individual security is written-down to fair value with the amount of the
write-down included in earnings.
Transfers of securities between categories are recorded at fair value at
the date of the transfer. The accounting for the resulting unrealized
gains or losses is determined by the category into which the security is
transferred.
On July 7, 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133."
This Statement delayed the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," for one year. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheets and measure those
instruments at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the
resulting designation. If certain conditions are met, a derivative may
be specifically designated as: (i) a hedge of certain exposure to changes
in the fair value of a recognized asset or liability or an unrecognized
firm commitment; (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction; or (iii) a hedge of foreign currency exposures.
SFAS No. 133 was originally scheduled to be effective for fiscal years
beginning after June 15, 1999. SFAS No. 137 amended SFAS No. 133 making
the Statement effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier adoption encouraged. The
anticipated adoption of SFAS No. 133 on January 1, 2001, is not expected
to have a material effect on operating results or financial position as
the Company has no instruments that qualify as derivatives or hedges nor
does it expect to be affected by the provisions for potential
reclassification of investment securities.
The Company adopted SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise," on January 1, 1999. This
Statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities,"
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
to require that after securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests as held-to-
maturity, available-for-sale or trading, based on its ability and intent
to sell or hold those investments, in accordance with the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Statement also requires a mortgage banking enterprise to
classify as trading any retained mortgage-backed securities that it
commits to sell before or during the securitization process. The adoption
of SFAS No. 134 did not have a material effect on the Company's operating
results or financial position as it has no retained mortgage-backed securities
or other interests from the securitization of mortgage loans held for sale.
LOANS HELD FOR SALE, NET:
Loans held for sale consist of one-to-four family residential mortgages
originated and intended for sale in the secondary market. The loans are
carried in aggregate at the lower of cost or estimated market value,
based upon current delivery prices in the secondary mortgage market. Net
unrealized losses are recognized through a valuation allowance by
corresponding charges to income. Gains or losses on the sale of these
loans are recognized in noninterest income at the time of sale using the
specific identification method. Loan origination fees, net of certain
direct loan origination costs, are included in net gains or losses upon
the sale of the related mortgage loan. All loans are sold without
recourse.
LOANS:
Loans, including direct financing leases, are stated at outstanding
principal balances, net of unearned interest and net deferred loan fees.
Interest income is accrued on the principal amount outstanding, except
for certain scheduled payment loans for which interest is accrued based
on a predetermined amortization schedule. Unearned interest on leases and
installment loans is recognized over the respective loan terms using the
effective interest method. Loan origination fees, net of certain direct
loan origination costs, are deferred and recognized over the contractual
life of the related loan as an adjustment to yield. Other credit related
fees, such as commercial letters of credit fees and fees on unused,
available lines of credit are recorded as service charges, fees and
commissions in noninterest income when earned. For direct financing
leases, any gain or loss realized upon disposal of equipment returned at
the end of the lease term is included in other income or expense.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NONPERFORMING ASSETS:
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Impairment is measured based on the present value of expected future cash
flows discounted at a loan's effective interest rate, the loan's
observable market price or the fair value of the collateral if the loan
is collateral-dependent. When the value of an impaired loan is less than
the recorded investment in the loan, the impairment is recognized by
adjusting the allowance for loan losses with a corresponding charge to
the provision for loan losses. The Company utilizes the specific
identification method in considering each loan for impairment disclosure.
Nonperforming assets consist of nonperforming loans and foreclosed
assets. Nonperforming loans include accruing loans past due 90 days or
more and impaired loans. Impaired loans consist of nonaccrual and
restructured loans. Factors considered by management in determining
impairment include
payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Generally, a loan is
classified as nonaccrual when it is determined that the collection of all
or a portion of interest or principal is doubtful or when a default of
interest or principal has existed for 90 days or more, unless the loan is
well secured and in the process of collection. When a loan is placed on
nonaccrual, interest accruals discontinue and uncollected accrued
interest is reversed against income in the current period. Interest
collections after a loan has been placed on nonaccrual status are
credited to income when received unless the collectibility of principal
is in doubt, causing all collections to be applied as principal
reductions.
A nonaccrual loan is returned to performing status when the loan is
current as to principal and interest and has performed according to the
contractual terms for a minimum of six months. Restructured loans are
loans with original terms, interest rate, or both, that have been
modified as a result of a deterioration in the borrower's financial
condition. Interest income on restructured loans is recognized when
earned, using the interest method. The Company had the same one
restructured loan during 1999 and 1998.
Foreclosed assets are comprised of properties acquired through
foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosures. The Company includes
such properties in other assets. A loan is classified as in-substance
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLOCIES (CONTINUED):
foreclosure when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place.
Foreclosed assets are recorded at the lower of the related loan balance
or 80.0 percent of its appraised fair value at the time of acquisition.
Any excess of the loan balance over the recorded value is charged to the
allowance for loan losses. Subsequent declines in the recorded value of
the property prior to its disposal and costs to maintain the assets are
included in other expenses. In addition, any gain or loss realized upon
disposal is included in other income or expense. The historical average
holding period for such properties is less than twelve months.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses account is established through charges to
earnings as a provision for loan losses. Loans, or portions of loans,
determined to be uncollectible are charged against the allowance account
and subsequent recoveries, if any, are credited to the account.
Nonaccrual, restructured and large delinquent commercial and real estate
loans are reviewed monthly to determine if carrying value reductions are
warranted or classifications should be changed. Consumer loans are
considered losses when they are 120 days past due, except those expected
to be recovered through insurance or collateral disposition proceeds.
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.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to
extend credit, commitments under home equity and credit card arrangements
and commercial letters of credit. These financial instruments are
recorded in the financial statements when they are exercised.
PREMISES AND EQUIPMENT, NET:
Land is stated at cost. Premises, equipment and leasehold improvements
are stated at cost less accumulated depreciation. The cost of routine
maintenance and repairs is expensed as incurred. The costs of major
replacements, renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the cost and related accumulated
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
depreciation are eliminated and any resulting gain or loss is reflected
in noninterest income or noninterest expense. Depreciation is computed
principally using the straight-line method based on the following useful
lives:
Premises...................................................... 15-45 years
Equipment..................................................... 5-10 years
Leasehold improvements........................................ 15 years
MORTGAGE SERVICING RIGHTS:
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," on
January 1, 1997. This Statement superseded SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which was effective January 1, 1996. SFAS
No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. SFAS
No. 125 also provides implementation guidance for: (i) assessing
isolation of transferred assets
and for accounting for transfers of partial interests; (ii) servicing of
financial assets; (iii) securitizations; (iv) transfers of sales-type and
direct financing lease receivables; (v) securities lending transactions;
(vi) repurchase agreements; (vii) dollar-roll transactions; (viii) wash
sales; (ix) loan syndications and participations; (x) risk participations
in bankers' acceptances; (xi) factoring arrangements; (xii) transfers of
receivables with recourse; and (xiii) extinguishment of liabilities. The
accounting and reporting standards in SFAS No. 125 are based on
consistent application of a financial-components approach that focuses on
control. Under this approach, after a transfer of financial assets, an
enterprise recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when
extinguished. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, except as amended in SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." Specifically, the provisions identified as being
deferred under SFAS No. 127 include secured borrowings,
collateralizations and transfers of financial assets that are part of
repurchase agreements, dollar-rolls, securities lending and similar
transactions. The Company adopted SFAS No. 127 on January 1, 1998.
During 1999 and 1998, the Company had no transfers of financial assets
nor
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
extinguishment of liabilities that fell under the scope of SFAS No. 127,
therefore, the adoption of the Statement had no material effect on
operating results or financial position.
A mortgage servicing right is determined by allocating the total costs
incurred between the loan sold and the servicing right, based on their
relative fair values at the date of the sale. The servicing right is
amortized in proportion to, and over the period of, estimated net
servicing income. In addition, a servicing right is assessed for
impairment at each reporting date based on the fair value of the right.
To determine the fair value of the servicing right, the Company estimates
the present value of future cash flows incorporating assumptions such as
cost of servicing, discount rates, prepayment speeds and default rates.
For purposes of measuring impairment, the rights are stratified by loan
type, term and interest rate. The amount of impairment recognized,
through a valuation allowance, is the amount by which the mortgage servicing
rights for a stratum exceed their fair value. Mortgage servicing rights are
included in other assets. Amortization of the rights is included in
noninterest income as a charge against mortgage servicing fees. At
December 31, 1999 and 1998, the cost of the mortgage servicing rights
approximated their fair value.
LONG-LIVED AND INTANGIBLE ASSETS:
Goodwill, the excess cost over the net assets acquired in a business
combination accounted for as a purchase, is included in other assets and
amortized on a straight-line basis over 15 years. The core deposit
intangible that resulted from branch acquisitions is included in other
assets and amortized on a straight-line basis over eight years.
Management, on a periodic basis, reviews goodwill and the core deposit
intangible and evaluates events or changes in circumstances that may
indicate impairment in the carrying amount of these assets. Impairment,
if any, is measured on a discounted cash flow basis. As of December 31,
1999 and 1998, there were no events or changes in circumstances that
would lead management to believe that the carrying amounts of these
assets may not be recoverable.
EMPLOYEE BENEFIT PLANS:
On January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Statement: (i) revised employers' disclosures about pension and other
postretirement benefit plans. It did not change the measurement or
recognition of pensions or other postretirement benefit plans; (ii)
standardized the disclosure requirements for benefits of such plans to
the extent practicable; (iii) required additional information on changes
in the benefit obligations and fair value of plan assets that will
facilitate financial analysis; (iv) eliminated certain disclosures that
are no longer useful as they were when Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlement
and Curtailment of Defined Benefit Pension Plans and for Termination
Benefits," and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," were issued. Most of the changes in the
disclosure provisions of SFAS No. 132 address defined benefit plans. The
adoption of this Statement did not change the Company's disclosures nor
did it have any effect on operating results or financial position.
The Company has a defined contribution plan covering all employees who
have completed 1,000 hours of service, attained 21 years of age and have
been employed by the Company for at least one year. Contributions to the
plan are determined by the Board of Directors and are based on a prescribed
percentage of annual net income allocated to each participant based on
their pro rata share of annual compensation. Pension costs are accrued
monthly to salaries and benefits expense with the plan being funded
annually.
TRUST ASSETS:
Assets held in a fiduciary or agency capacity for customers are not
included in the accompanying consolidated balance sheets since they are
not the Company's assets. Trust income is recorded on a cash basis,
which is not materially different than if reported on an accrual basis.
Trust services revenue did not meet any of the quantitative thresholds
for required segment disclosure under SFAS No. 131.
STATEMENTS OF CASH FLOWS:
The Statements of Cash Flows are presented using the indirect method.
For the purpose of cash flow, cash and cash equivalents include cash on
hand, cash items in the process of collection, noninterest-bearing
deposits with other banks, balances with the FRB and FHLB-Pgh and federal
funds sold. Federal funds sold are highly-liquid investments sold for
one-day periods.
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial.
Accordingly, such assets and liabilities are excluded from disclosure
requirements. For example, no benefit is recorded for the value of low-
cost funding subsequently discussed. In addition, Community Bank's trust
department contributes fee income annually. Trust assets and liabilities
are not considered financial instruments for this disclosure, and their
values have not been incorporated into the fair value estimates. Other
significant items that are not considered financial instruments include
deferred tax assets, premises and equipment, foreclosed assets and
intangibles. Accordingly, the net aggregate fair value amounts presented
do not represent the underlying value of the Company.
Approximately 96.2 percent and 96.8 percent of the Company's assets and
99.6 percent and 99.3 percent of its liabilities were considered
financial instruments at December 31, 1999 and 1998, respectively. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets. In many cases, these values cannot be realized in immediate
settlement of the instrument.
The following methods and assumptions were used by the Company to
construct the summary table in Note 11 containing the fair values and
related carrying amounts of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying values of cash and cash
equivalents as reported on the balance sheet approximate fair value.
INVESTMENT SECURITIES: The fair value of investment securities is based
on quoted market prices. The carrying values of restricted equity
securities approximate fair value.
LOANS HELD FOR SALE, NET: The fair value of loans held for sale, net are
based on quoted market prices.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NET LOANS: For adjustable-rate loans that reprice frequently and with no
significant credit risk, fair values are based on carrying values. The
fair values of all other loans are estimated using discounted cash flow
analysis, using interest rates currently offered for loans with similar
terms to borrowers of similar credit risk. Fair values for impaired
loans are estimated using discounted cash flow analysis determined by the loan
review function or underlying collateral values, where applicable.
ACCRUED INTEREST RECEIVABLE: The carrying value of accrued interest
receivable as reported on the balance sheet approximates fair value.
DEPOSITS WITHOUT STATED MATURITIES: The fair value of demand deposits,
savings accounts and certain money market accounts is the amount payable
on demand at the reporting date. The fair value estimates do not include
the benefit that results from such low-cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in the
market.
DEPOSITS WITH STATED MATURITIES: The carrying value of adjustable-rate,
fixed-term time deposits approximates their fair value at the reporting
date. For fixed-rate time deposits, the present value of future cash
flows is used to estimate fair value. The discount rates used are the
current rates offered for time deposits with similar maturities.
SHORT-TERM BORROWINGS: The carrying value of short-term borrowings at a
variable interest rate approximates fair value.
LONG-TERM DEBT: The fair value of the fixed-rate, long-term debt is
estimated based on rates currently available to the Company for debt with
similar terms.
ACCRUED INTEREST PAYABLE: The carrying value of accrued interest payable
as reported on the balance sheet approximates fair value.
COMMITMENTS: The majority of the Company's commitments to extend credit,
unused portions of home equity and credit card lines and letters of
credit carry current market interest rates if converted to loans.
Because such commitments are generally unassignable by either the Company
or the borrower, they only have value to the Company and the borrower.
The estimated fair value approximates the recorded deferred fee amounts
and is included in net loans.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME:
Effective in the first reporting period of 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income." This Statement established
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. Items falling under the scope of
SFAS No. 130 include foreign currency items and unrealized gains and
losses on available-for-sale debt and equity securities. According to
the Statement, all items that are required to be recognized as components
of comprehensive income are to be reported in a financial statement that
is displayed with the same prominence as other financial statements. The
components of comprehensive income and their related tax effects are
reported in the Consolidated Statements of Income and Comprehensive
Income. The Company's accumulated other comprehensive income included in
the Consolidated Statements of Changes in Stockholders' Equity relates to
the unrealized gains or losses on available-for-sale securities.
ADVERTISING COSTS:
The Company expenses advertising costs as incurred. Advertising costs
totaled $279 in 1999, $281 in 1998 and $217 in 1997.
INCOME TAXES:
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using
the provisions of the enacted tax laws. Deferred tax assets and
liabilities are recognized for the estimated future tax effects of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The amount of deferred tax assets is
reduced, if necessary, to the amount that, based on available evidence,
will more likely than not be realized. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Parent Company and its subsidiary file a consolidated federal income
tax return. The subsidiary provides for income taxes on a separate
return basis, and remits amounts determined to be currently payable to
the Parent Company.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EARNINGS PER COMMON SHARE AND CAPITAL STRUCTURE:
The Company adopted SFAS No. 128, "Earnings Per Share" in 1998. The
object of SFAS No. 128 was to simplify the earnings per share ("EPS")
calculation and to make the United States standard for computation
compatible with the EPS standards of other countries and with those of
the International Accounting Standards Committee.
Under SFAS No. 128, two EPS calculations are required. Basic EPS is
computed by dividing net income by the weighted-average common shares
outstanding, and dilutive EPS is based on the weighted-average common
shares outstanding plus all dilutive potential common shares outstanding.
The Company had no dilutive potential common shares outstanding during
the three-year period ended December 31, 1999, therefore, the per share
data presented on the face of the Consolidated Statements of Income and
Comprehensive Income relates to basic per share amounts.
Simultaneously with its adoption of SFAS No. 128, the Company also
adopted SFAS No. 129, "Disclosure of Information about Capital
Structure." This Statement does not establish any new disclosure
standards but rather codifies certain previously-required disclosures.
Specifically, it requires information regarding the pertinent rights and
privileges of the various components of an entity's capital structure
such as: (i) dividend and liquidation preferences; (ii) participation
rights; (iii) call prices and dates; (iv) conversion prices and dates;
(v) unusual voting rights; and (vi) terms of contracts to issue
additional shares. Since this Statement contains no change in disclosure
requirements, the Company's adoption had no effect on financial statement
presentation.
2. CASH AND DUE FROM BANKS:
The Federal Reserve Act, as amended by the Monetary Control Act of 1980,
imposes reserve requirements on all member depository institutions. The
Company's required reserve balances were $4,077 and $2,004 at December
31, 1999 and 1998, respectively, which were satisfied through the
restriction of vault cash. These reserve requirements averaged $3,611 in
1999 and $1,862 in 1998.
Community Bank maintains compensating balances with the FRB and various
other correspondent banks, most of which are not required, to offset
specific charges for check clearing and other services. Balances
maintained for this purpose were $4,941 and $8,224 at December 31, 1999 and
1998, respectively. Compensating balances with correspondent banks averaged
$4,625 in 1999 and $5,150 in 1998.
3. INVESTMENT SECURITIES:
For the years ended December 31, 1999 and 1998, the Company classified
all investment securities as available-for-sale. The amortized cost and
fair value of available-for-sale securities at December 31, 1999 and
1998, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 3,631 $ 36 $ 3,595
U.S. Government agencies.................... 1,661 26 1,635
State and municipals........................ 34,928 $108 255 34,781
Mortgage-backed securities.................. 64,748 2 1,227 63,523
Equity securities........................... 1,848 248 2,096
-------- ---- ------ --------
Total..................................... $106,816 $358 $1,544 $105,630
======== ==== ====== ========
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 11,017 $ 43 $ 11,060
U.S. Government agencies.................... 649 $ 12 637
State and municipals........................ 37,992 2,015 40,007
Mortgage-backed securities.................. 56,051 53 270 55,834
Equity securities........................... 1,804 284 2,088
-------- ------ ---- --------
Total..................................... $107,513 $2,395 $282 $109,626
======== ====== ==== ========
</TABLE>
Proceeds from the sales of available-for-sale securities amounted to
$11,128 in 1999 and $1,659 in 1998. There were no sales of available-for-
sale securities during 1997. The Company realized gross gains from
securities sales of $408 in 1999 and $1,128 in 1998. Income tax expense
related to net realized investment security gains amounted to $139 and
$383 in 1999 and 1998, respectively.
The Company includes net unrealized holding gains and losses on
available-for-sale securities as a separate component of stockholders'
equity. The Company had a net unrealized holding loss of $783, net of
income tax benefits of $403, at December 31, 1999, and a net unrealized
holding gain of $1,394, net of income taxes of $719 at December 31, 1998.
Investment securities with an amortized cost of $35,157 at December 31,
1999, and $28,895 at December 31, 1998, were pledged to secure deposits,
to qualify for fiduciary powers and for other purposes required or
permitted by law. The fair value of these securities was $34,406 at
December 31, 1999, and $28,836 at December 31, 1998.
3. INVESTMENT SECURITIES (CONTINUED):
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at
December 31, 1999, 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 years"
maturity distribution. Expected maturities may differ from contracted
maturities or estimated maturities for mortgage-backed securities and
CMOs because borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
DECEMBER 31, 1999 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities.... $ 599 4.05% $ 3,032 5.06% $ 3,631 4.89%
U.S. Government agencies.... 650 5.74 1,011 6.20 1,661 6.02
State and municipals........ 1,320 7.28 3,975 6.67 $8,195 7.91% $21,438 7.96% 34,928 7.78
Mortgage-backed securities.. 19,226 5.97 44,555 5.95 967 6.02 64,748 5.96
Equity securities........... 1,848 6.32 1,848 6.32
------- ------- ------ ------- --------
Total..................... $21,795 5.99% $52,573 5.96% $9,162 7.71% $23,286 7.83% $106,816 6.52%
======= ======= ====== ======= ========
Fair value:
U.S. Treasury securities.... $ 599 $ 2,996 $ 3,595
U.S. Government agencies.... 650 985 1,635
State and municipals........ 1,320 3,957 $8,161 $21,343 34,781
Mortgage-backed securities.. 19,012 43,585 926 63,523
Equity securities........... 2,096 2,096
------- ------- ------ ------- --------
Total..................... $21,581 $51,523 $9,087 $23,439 $105,630
======= ======= ====== ======= ========
</TABLE>
Except for U.S. Treasury securities and U.S. Government agencies,
including mortgage-backed securities, there were no securities of any
individual issuer that exceeded 10.0 percent of the Company's
stockholders' equity at December 31, 1999 and 1998. Except for $313 of
tax-exempt obligations of local municipalities, all of the investment
securities in the Company's portfolio are considered "investment grade,"
receiving a rating of "Baa" or higher from Moody's or "BBB" or higher
from Standard and Poor's rating services at December 31, 1999.
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES:
On May 27, 1999, the Commonwealth of Pennsylvania's Department of Banking
approved the formation of Community Leasing Corporation, a wholly-owned
subsidiary of Community Bank. Community Leasing Corporation began
offering direct financing leases of commercial equipment to area
businesses during the second quarter of 1999. Revenues from direct
financing leases did not meet any of the quantitative thresholds for
required segment disclosure under SFAS No. 131.
The major classifications of loans outstanding, net of unearned interest
of $2,148 and $2,132 and loan fees of $532 and $651 at December 31, 1999
and 1998, respectively, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and others.................................. $ 43,907 $ 31,044
Real estate:
Construction.................................................... 3,164 2,108
Mortgage........................................................ 198,423 186,004
Consumer, net..................................................... 30,830 28,984
Lease financing, net.............................................. 526
-------- --------
Total......................................................... $276,850 $248,140
======== ========
</TABLE>
Fixed-rate loans totaled $214,778 at December 31, 1999, while loans with
adjustable interest rates totaled $62,072. At December 31, 1998, fixed-
rate loans totaled $199,509 and adjustable-rate loans totaled $48,631.
During 1997, the Company sold student loans with a carrying value of
$3,405 to its servicing agent. The Company recognized a gain of $34 on
the sale.
The maturity distribution of the loan portfolio by major classification
at December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
DECEMBER 31, 1999 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others.... $22,752 $14,148 $ 7,007 $ 43,907
Real estate:
Construction....................... 3,164 3,164
Mortgage........................... 25,719 59,808 112,896 198,423
Consumer, net....................... 11,983 15,324 3,523 30,830
Lease financing, net................ 156 370 526
------- ------- -------- --------
Total........................... $63,774 $89,650 $123,426 $276,850
</TABLE>
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Loans outstanding to directors, executive officers, principal
stockholders or to their affiliates totaled $4,134 at December 31, 1999,
and $3,696 at December 31, 1998. Advances and repayments during 1999
totaled $3,502 and
$3,064, respectively. These loans are made during the ordinary course of
business at the Company's normal credit terms. There were no related
party loans that were classified as nonaccrual, past due, restructured or
considered a potential credit risk at December 31, 1999 and 1998.
At December 31, 1999, substantially all of the Company's loans consisted
of loans that are at least partially secured by real estate in
Lackawanna, Susquehanna, Wayne and Wyoming counties of Northeastern
Pennsylvania. Therefore, the Company's primary concentration of credit
risk is related to
the real estate market in the Northeastern Pennsylvania area. Changes in
the general economy, local economy or in the real estate market could
affect the ultimate collectibility of this portion of the Company's loan
portfolio. Management does not believe there are any other significant
concentrations of credit risk that could affect the loan portfolio.
The analysis of changes affecting the allowance for loan losses account
for the three-years ended December 31, 1999, 1998 and 1997, is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1............................................. $4,050 $3,798 $3,944
Provision for loan losses...................................... 535 855 360
Loans charged-off.............................................. (964) (789) (657)
Loans recovered................................................ 178 186 151
------ ------ ------
Balance, December 31........................................... $3,799 $4,050 $3,798
====== ====== ======
</TABLE>
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Information concerning nonperforming assets at December 31, 1999 and
1998, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and others........................................ $ 166 $ 78
Real estate:
Construction..........................................................
Mortgage.............................................................. 2,272 2,223
Consumer, net........................................................... 33 7
Lease financing, net....................................................
------ ------
Total nonaccrual loans.............................................. 2,471 2,308
------ ------
Restructured loans...................................................... 149 174
------ ------
Total impaired loans................................................ 2,620 2,482
------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others........................................ 726 131
Real estate:
Construction..........................................................
Mortgage.............................................................. 2,768 1,035
Consumer, net........................................................... 471 387
Lease financing, net....................................................
------ ------
Total accruing loans past due 90 days or more....................... 3,965 1,553
------ ------
Total nonperforming loans........................................... 6,585 4,035
------ ------
Foreclosed assets....................................................... 359 240
------ ------
Total nonperforming assets.......................................... $6,944 $4,275
====== ======
</TABLE>
Information relating to the Company's recorded investment in impaired
loans at December 31, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance................................................ $2,471 $2,308
With no related allowance............................................... 149 174
------ ------
Total................................................................. $2,620 $2,482
====== ======
</TABLE>
The analysis of changes affecting the allowance for loan losses related
to impaired loans at December 31, 1999, 1998 and 1997, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1............................................... $ 642 $ 541 $ 650
Provision for loan losses........................................ 472 342 4
Loans charged-off................................................ (546) (286) (113)
Loans recovered.................................................. 45 45
----- ----- -----
Balance, December 31............................................. $ 613 $ 642 $ 541
===== ===== =====
</TABLE>
4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loans not been modified, the
aggregate amount of interest income recognized and the amount recognized
using the cash-basis method and the average recorded investment in
impaired loans for the three-years ended December 31, 1999, is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross interest due under terms.................................. $ 253 $ 175 $ 174
Interest income recognized...................................... 38 98 84
------ ------ ------
Interest income not recognized.................................. $ 215 $ 77 $ 90
====== ====== ======
Interest income recognized (cash-basis)......................... $ 38 $ 98 $ 84
Average recorded investment in impaired loans................... $2,721 $1,867 $2,368
</TABLE>
Cash received on impaired loans applied as a reduction of principal
totaled $267 in 1999, $650 in 1998 and $587 in 1997. There were no
commitments to extend additional funds to customers with impaired loans
at December 31, 1999 and 1998.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES:
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of
its customers. These instruments involve, to varying degrees, elements
of
credit and interest rate risk in excess of the amount recognized in the
financial statements. Management does not anticipate that losses, if
any, that may occur as a result of funding off-balance sheet commitments,
would have a material adverse effect on the Company's results of
operations or financial position.
The contractual amounts of off-balance sheet commitments at December 31,
1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit.......................................... $22,338 $15,288
Unused portions of home equity and credit card lines.................. 2,981 1,999
Commercial letters of credit.......................................... 1,057 808
------- -------
Total............................................................... $26,376 $18,095
======= =======
</TABLE>
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
The Company's involvement in, and exposure to, credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit, unused portions of home equity and credit
card lines and commercial letters of credit is represented by the
contractual amounts of those instruments. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. Commercial letters of credit are conditional
commitments issued by the Company to support customers in the purchase of
commercial goods. These letters of credit are automatically renewable
upon their anniversary date unless canceled prior to such date at the
option of the Company.
The Company employs the same credit policies and requirements in making
off-balance sheet credit commitments as it does for on-balance sheet
instruments. Provision for losses, if any, is included in the Company's
allowance for loan losses. No provision was deemed necessary at December
31, 1999 and 1998. These commitments are generally issued for one year
or less and often expire unused in whole or in part by the customer.
The Company provides deposit and loan products and other financial
services to consumer and corporate customers in its four-county market
area of Lackawanna, Susquehanna, Wayne and Wyoming. There are no
significant concentrations of credit risk from any individual
counterparty or groups of
counterparties, except for locational concentrations. The concentrations
of the credit portfolio by loan type are set forth in Note 4. The
Company requires collateral on all real estate exposure and most other
loans, including off-balance sheet commitments upon extension of credit,
and maintains loan-to-value ratios of no greater than 80.0 percent,
except in
the case of loans secured by deposits or U.S. Government securities. The
amount of collateral obtained is based on management's credit evaluation
of the customer. Collateral varies but may include property, plant and
equipment, primary residential properties, and to a lesser extent,
income-producing properties. Although the credit portfolio is
diversified, the Company and its borrowers are dependent on the continued
viability of the Northeastern Pennsylvania economy. The loan portfolio
does not include any form of credit involving highly-leveraged
transactions, defined as financing transactions that involve the buyout,
acquisition or recapitalization of an existing business, including credit
extended to highly-leveraged industries.
5. COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):
Securities and short-term investment activities are conducted with a
diverse group of government entities, corporations and depository
institutions. The Company evaluates the counterparty's creditworthiness
and type of collateral on a case-by-case basis. At December 31, 1999 and
1998, there were no significant concentrations of credit risk from any
one issuer with the exception of U.S. Treasury securities and U.S.
Government agencies, including mortgage-backed securities.
Neither the Company or any of its property is subject to any material
legal proceedings. Management, after consultation with legal counsel,
does not anticipate that the ultimate liability, if any, arising out of
pending and threatened lawsuits will have a material effect on the
Company's results of operations or financial position.
6. PREMISES AND EQUIPMENT, NET:
Premises and equipment at December 31, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Land.................................................................. $ 2,213 $ 1,575
Premises.............................................................. 8,467 7,660
Leasehold improvements................................................ 232 232
Furniture and equipment............................................... 5,557 3,831
------- -------
Total premises and equipment........................................ 16,469 13,298
Less: accumulated depreciation........................................ 6,932 6,282
------- -------
Premises and equipment, net......................................... $ 9,537 $ 7,016
======= =======
</TABLE>
Amounts charged to noninterest expense for depreciation amounted to $676
in 1999, $609 in 1998 and $571 in 1997. Occupancy expense has been
reduced by rental income from premises leased to others in the amount of
$49 in 1999, $65 in 1998 and $64 in 1997.
Certain facilities are leased under operating lease agreements expiring
at various dates until the year 2009. Two leases contain escalation
clauses that provide for inflation adjustments, and several contain
renewal options. The realty leases require the Company to pay real
estate taxes, insurances and repair costs. Rental expense on operating
leases amounted to $114 in 1999, $153 in 1998 and $164 in 1997.
6. PREMISES AND EQUIPMENT, NET (CONTINUED):
Future minimum required annual rentals under noncancellable leases are
summarized as follows:
2000................................................................ $110
2001................................................................ 106
2002................................................................ 94
2003................................................................ 94
2004................................................................ 69
2005 and thereafter................................................. 281
----
Total............................................................. $754
====
As part of its Year 2000 ("Y2K") readiness, the Company evaluated and
tested all computer hardware and software to determine Y2K compliance.
Based on this evaluation, noncompliant assets having a net book value of
$87 were disposed of in 1998. This loss on disposition was included in
noninterest expense in 1998. There were no such Y2K remediation costs
incurred during 1999.
7. OTHER ASSETS:
The major components of other assets at December 31, 1999 and 1998, are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill................................................................ $ 785 $1,004
Core deposit intangible................................................. 1,620 1,890
Deferred income taxes................................................... 1,742 680
Foreclosed assets....................................................... 359 240
Mortgage servicing rights............................................... 49 21
Other................................................................... 1,182 1,720
------ ------
Total................................................................. $5,737 $5,555
====== ======
</TABLE>
On November 14, 1997, the Company acquired certain assets and assumed the
deposit liabilities of the Eynon and Factoryville branches of First Union
in a transaction accounted for by the purchase method. The Company
assumed the deposit liabilities in exchange for the receipt of a lesser
amount of cash, other assets and loans. The transaction was recorded
based on the fair values of the assets acquired and liabilities assumed.
The Company assumed liabilities of $19.2 million and acquired land,
building, equipment and certain loans having an aggregate value of $730
and cash of $16.3 million. The amount by which the acquisition cost
exceeded the value of assets received totaled $2.2 million and is
included in other assets as a core deposit intangible.
7. OTHER ASSETS (CONTINUED):
Amortization expense of goodwill amounted to $218 per year for 1999, 1998
and 1997. Amortization expense of the core deposit intangible amounted to
$270 in 1999 and 1998 and $18 in 1997.
During 1998, the Company began originating one-to-four family residential
mortgage loans for sale on the secondary market with servicing rights
retained. Mortgage loans serviced for others are not included in the
accompanying Consolidated Balance Sheets. The unpaid principal balances
of mortgage loans serviced for others were $5,505 at December 31, 1999,
and $2,127 at December 31, 1998. Custodial escrow balances maintained in
connection with the loan servicing and included in demand deposits, were
$7 and $3, respectively, at December 31, 1999 and 1998.
The analysis of the changes in the balances of mortgage servicing assets
for the years ended December 31, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1...................................................... $21 $ 0
Additions............................................................... 35 21
Amortization............................................................ 7
--- ---
Balance, December 31.................................................... $49 $21
=== ===
</TABLE>
At December 31, 1999 and 1998, the fair value of the mortgage servicing
assets approximated their carrying value, therefore, no valuation
allowance was deemed necessary.
8. DEPOSITS:
The major components of interest-bearing and noninterest-bearing deposits
at December 31, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing deposits:
Money market accounts............................................ $ 25,401 $ 17,869
NOW accounts..................................................... 25,408 22,261
Savings accounts................................................. 76,099 62,969
Time deposits less than $100..................................... 176,261 178,042
Time deposits $100 or more....................................... 23,253 27,088
-------- --------
Total interest-bearing deposits................................ 326,422 308,229
Noninterest-bearing deposits....................................... 36,061 36,024
-------- --------
Total deposits................................................. $362,483 $344,253
======== ========
</TABLE>
8. DEPOSITS (CONTINUED):
The Company accepts deposits of its directors, executive officers,
principal stockholders or their affiliates on the same terms and at the
prevailing interest rates offered at the time of deposit for comparable
transactions with unrelated parties. The amount of related party
deposits totaled $3,026 at December 31, 1999, and $2,741 at December 31,
1998.
The maturity distribution of time deposits $100 or more at December 31,
1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within three months................................................... $ 3,752 $ 7,956
After three months but within six months.............................. 5,240 4,939
After six months but within twelve months............................. 5,411 8,802
After twelve months................................................... 8,850 5,391
------- -------
Total............................................................... $23,253 $27,088
======= =======
</TABLE>
Interest expense on time deposits $100 or more amounted to $1,293 in
1999, $1,409 in 1998 and $1,796 in 1997.
The aggregate amounts of maturities for all time deposits at December 31,
1999, are summarized as follows:
2000............................................................. $103,745
2001............................................................. 32,047
2002............................................................. 40,905
2003............................................................. 15,475
2004............................................................. 7,195
2005 and thereafter.............................................. 147
--------
Total.......................................................... $199,514
========
The aggregate amount of deposits reclassified as loans was $160 at
December 31, 1999, and $231 at December 31, 1998. Management evaluates
transaction accounts that are overdrawn for collectibility as part of its
evaluation for credit losses. At December 31, 1999 and 1998, no
allowance was deemed necessary for these accounts. During 1999 and 1998,
the Company had no deposits that were received on terms other than those
available in the normal course of business.
9. SHORT-TERM BORROWINGS:
Short-term borrowings available to the Company consist of a line of
credit and advances with the FHLB-Pgh secured under terms of a blanket
collateral agreement by a pledge of FHLB-Pgh stock and certain other
qualifying
9. SHORT-TERM BORROWINGS (CONTINUED):
collateral, such as investment and mortgage-backed securities and
mortgage loans. The line is limited to the Company's maximum borrowing
capacity ("MBC") with the FHLB-Pgh, which is based on a percentage of
qualifying collateral assets. At December 31, 1999, the Company's MBC
was $165.2 million. Interest accrues daily on the line based on the rate
of FHLB-Pgh discount notes. This rate resets each day. The line is
renewable annually
on its anniversary date and carries no associated commitment fees. The
FHLB-Pgh has the right to reduce or terminate the line at any time
without prior notice and the Company may repay the line at any time
without incurring prepayment penalties. Short-term advances are issued
with maturities less than one year based on the FHLB-Pgh's current cost
of funds rate. Advances are limited to the Company's MBC and are not
prepayable. There are no commitment fees associated with the advances,
except for those for forward settlement that are based on FHLB-Pgh
hedging costs.
The Company had short-term borrowings of $5,500 outstanding at December
31, 1999. There were no short-term borrowings outstanding at December 31,
1998, under the line of credit agreement. The average daily balance and
weighted-
average rate on aggregate short-term borrowings was $1,393 at 5.3 percent
in 1999 and $185 at 6.0 percent in 1998. The maximum amount of all
short-term borrowings outstanding at any month-end was $7,025 during 1999
and $695 during 1998. Short-term borrowings during 1999 and 1998
consisted entirely of the FHLB-Pgh line of credit.
10. LONG-TERM DEBT:
Long-term debt at December 31, 1999 and 1998, consisted entirely of a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program. This advance matures on September 2, 2009. The
scheduled principal payments on the note for the next five years total $3
for each of the four years 2000 through 2003 and $4 for 2004. The
prepayment fee applicable to the advance is equal to the present value of
the difference between cash flows generated at the advance rate from the
date of the prepayment until the original maturity date, and the cash
flows that would result from the interest rate posted by the FHLB-Pgh on
the date of prepayment for an advance of comparable maturity. The note
is secured under terms of a blanket collateral agreement by a pledge of
qualifying investment and mortgage-backed securities, certain mortgage
loans and a lien on FHLB-Pgh stock. The average daily balance on long-
term debt in 1999 was $40 with a weighted-average rate of 7.5 percent.
For 1998, the average daily balance on long-term debt was $43 with a
weighted-average rate of 7.0 percent.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments at
December 31, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................... $ 10,991 $ 10,991 $ 19,164 $ 19,164
Investment securities........................ 105,630 105,630 109,626 109,626
Loans held for sale, net..................... 503 506
Net loans.................................... 273,051 271,774 244,090 244,075
Accrued interest receivable.................. 2,166 2,166 2,297 2,297
-------- -------- -------- --------
Total...................................... $391,838 $390,561 $375,680 $375,668
======== ======== ======== ========
Financial liabilities:
Deposits without stated maturities........... $162,969 $162,969 $139,123 $139,123
Deposits with stated maturities.............. 199,514 201,561 205,130 207,153
Short-term borrowings........................ 5,500 5,500
Long-term debt............................... 39 39 41 41
Accrued interest payable..................... 1,976 1,976 1,740 1,740
-------- -------- -------- --------
Total...................................... $369,998 $372,045 $346,034 $348,057
======== ======== ======== ========
</TABLE>
12. LITIGATION RECOVERY:
During the second quarter of 1997, Community Bank reached a settlement
with an investment securities broker. The $250 settlement was awarded
with respect to Community Bank's business relationship with this broker
prior to 1995. This one-time addition to noninterest income had a $148.5
positive impact on earnings after applicable income taxes and legal fees.
13. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution plan covering all employees who
meet the age and service requirements. Contributions to the plan,
included in salaries and employee benefits expense, were $46 in 1999, $64
in 1998 and $68 in 1997.
14. INCOME TAXES:
For the years ended December 31, 1999, 1998 and 1997, the current and
deferred amounts of the provision for income tax expense (benefit) are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current........................................................ $1,278 $1,313 $1,093
Deferred....................................................... 60 (95) 41
------ ------ ------
Total........................................................ $1,338 $1,218 $1,134
====== ====== ======
</TABLE>
A reconciliation between the effective income tax expense and the amount
of income tax expense that would have been provided at the federal
statutory tax rate of 34.0 percent for the years ended December 31, 1999,
1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate........................... $2,019 $1,944 $1,882
Differences resulting from:
Tax-exempt interest, net..................................... (675) (709) (733)
Goodwill..................................................... 74 74 74
Residential housing program tax credit....................... (80) (80) (80)
Other........................................................ (11) (9)
------ ------ ------
Federal income tax on income before income taxes........... $1,338 $1,218 $1,134
====== ====== ======
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, sources of change
in deferred income taxes and the related tax effects are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses..................................... $ 94 $ (86) $ 49
Loans, net of unearned income................................. 40 60 33
Accrued interest receivable................................... (70) 27 (17)
Premises and equipment, net................................... 38 (54) (26)
Core deposit intangible....................................... (42) (42) 2
------- ----- ----
Change in deferred income taxes affecting the statements of
income..................................................... 60 (95) 41
Deferred income taxes on investment securities recognized in
stockholders' equity......................................... (1,122) (106) 534
------- ----- ----
Total change in deferred income taxes..................... $(1,062) $(201) $575
======= ===== ====
</TABLE>
14. INCOME TAXES (CONTINUED):
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Investment securities................................................. $ 403
Allowance for loan losses............................................. 1,116 $1,210
Loans, net of unearned income......................................... 181 221
Accrued interest receivable........................................... 221 151
Core deposit intangible............................................... 86 44
------ ------
Total............................................................... 2,007 1,626
------ ------
Deferred tax liabilities:
Investment securities................................................. 719
Premises and equipment, net........................................... 265 227
------ ------
Total............................................................... 265 946
------ ------
Net deferred tax assets............................................. $1,742 $ 680
====== ======
</TABLE>
The Company has determined that it is not required to establish a
valuation reserve for the deferred tax assets since it is more likely
than not that the net deferred tax assets could be principally realized
through carryback to taxable income in prior years and by future
reversals of existing taxable temporary differences, or to a lesser
extent, through future taxable income. The Company reviews the tax
criteria related to the recognition of deferred tax assets on a quarterly
basis. Banks in Pennsylvania are not subject to state or local income
taxes, however, they pay a tax on capital. Such tax is included in other
expenses.
Income tax expense (benefit) related to unrealized gains and losses and
the reclassification adjustments included in other comprehensive income
for the three years ended December 31, 1999, 1998 and 1997, were
calculated using the prevailing statutory tax rate of 34.0 percent and
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on investment securities available-for-sale.. $ (983) $ 277 $534
Reclassification adjustment for gains included in net income........... (139) (383)
------- ----- ----
Income tax expense (benefit) related to other comprehensive income... $(1,122) $(106) $534
======= ===== ====
</TABLE>
15. PARENT COMPANY FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <S> <C> <C>
Income:
Dividends from subsidiary..................................... $ 6,744 $ 752 $ 602
Management fees from subsidiary............................... 296 340 249
Other income.................................................. 7 44 81
------- ------ ------
Total income................................................ 7,047 1,136 932
------- ------ ------
Expense:
Occupancy and equipment expenses.............................. 76 91 91
Other expenses................................................ 584 592 509
------- ------ ------
Total expenses.............................................. 660 683 600
------- ------ ------
Income before income taxes and undistributed income of
subsidiary................................................... 6,387 453 332
Income tax benefits........................................... (128) (118) (106)
------- ------ ------
Income before undistributed income of subsidiary.............. 6,515 571 438
Equity in undistributed income (loss) of subsidiary........... (1,915) 3,929 3,962
------- ------ ------
Net income.................................................. $ 4,600 $4,500 $4,400
======= ====== ======
CONDENSED BALANCE SHEETS
DECEMBER 31 1999 1998
Assets:
Cash................................................................... $ 12 $ 279
Investment in bank subsidiary.......................................... 34,082 38,368
Investment securities available-for-sale............................... 948 389
Other assets........................................................... 1,552 1,590
------- -------
Total assets......................................................... $36,594 $40,626
======= =======
Liabilities:
Dividends payable...................................................... $ 326 $ 287
Other liabilities...................................................... 793 605
------- -------
Total liabilities.................................................... 1,119 892
Stockholders' equity................................................... 35,475 39,734
------- -------
Total liabilities and stockholders' equity........................... $36,594 $40,626
======= =======
</TABLE>
15. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED):
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 4,600 $ 4,500 $ 4,400
Adjustments:
Equity in undistributed (income) loss of subsidiary........ 1,915 (3,929) (3,962)
Depreciation and amortization.............................. 294 294 294
Changes in:
Other assets............................................. (38) (401) 108
Other liabilities........................................ 201 39 (58)
------- ------- -------
Net cash provided by operating activities.............. 6,972 503 782
------- ------- -------
Cash flows from investing activities:
Proceeds from repayments of investment securities............ 3
Purchases of investment securities........................... (599) (30) (22)
------- ------- -------
Net cash used in investing activities.................. (596) (30) (22)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock..................................... 197 154 69
Repurchase and retirement of common shares................... (5,683)
Cash dividends paid.......................................... (1,157) (793) (637)
------- ------- -------
Net cash used in financing activities.................. (6,643) (639) (568)
------- ------- -------
Net increase (decrease) in cash........................ (267) (166) 192
Cash at beginning of year.............................. 279 445 253
------- ------- -------
Cash at end of year.................................... $ 12 $ 279 $ 445
======= ======= =======
</TABLE>
16. REGULATORY MATTERS:
Under the Pennsylvania Business Corporation Law of 1988, as amended, the
Company may not pay a dividend if, after giving effect thereto, either
the Company could not pay its debts as they become due in the usual
course of business, or the Company's total assets would be less than its
total liabilities. The determination of total assets and liabilities may
be based upon: (i) financial statements prepared on the basis of GAAP;
(ii) financial statements that are prepared on the basis of other
accounting practices and principles that are reasonable under the
circumstances; (iii) or a fair valuation or other method that is
reasonable under the circumstances.
In addition, the Company is subject to dividend restrictions under the
Pennsylvania Banking Code of 1965, as amended, which allows cash
dividends to be declared and paid out of accumulated net earnings. More
stringent
16. REGULATORY MATTERS (CONTINUED):
dividend restrictions apply under Federal Reserve Regulation H, which
restricts calendar year dividend payments of member banks to the total of
its net profits for that year combined with its retained net profits of
the preceding two calendar years, less any required transfer to surplus,
unless a bank has received prior approval from the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"). Accordingly,
Community Bank, without prior approval from the Federal Reserve Board,
may declare dividends to the Parent Company in 2000 totaling $2,014 plus
net profits earned for the period from January 1, 2000, through the date
of declaration, less any dividends previously paid in 2000.
Although subject to the aforementioned regulatory restrictions, the
Company's consolidated retained earnings at December 31, 1999 and 1998,
were not restricted under any borrowing agreement as to payment of
dividends or reacquisition of common stock.
The Company has paid cash dividends since its formation as a bank holding
company in 1983. It is the present intention of the Company's Board of
Directors to continue this dividend payment policy, however, further
dividends must necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the time the
Company's Board of Directors considers payment of dividends.
The amount of funds available for transfer from Community Bank to the
Parent Company in the form of loans and other extensions of credit is
also limited. Under the provisions of Section 23A of the Federal Reserve
Act, transfers to any one affiliate are limited to 10.0 percent of
capital and surplus. At December 31, 1999, the maximum amount available
for transfer from Community Bank to the Parent Company in the form of
loans amounted to $3,804. At December 31, 1999 and 1998, there were no
loans outstanding, nor were any advances made during 1999 and 1998.
The Company and Community Bank are subject to certain regulatory capital
requirements administered by the federal banking agencies, which are
defined by Section 38 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and Community Bank's financial
statements. In the event an institution is deemed to be undercapitalized
by such standards, FDICIA prescribes an increasing amount of regulatory
intervention, including the required institution of a capital restoration
16. REGULATORY MATTERS (CONTINUED):
plan and restrictions on the growth of assets, branches or lines of
business. Further restrictions are applied to the significantly or
critically undercapitalized institutions including restrictions on
interest payable on accounts, dismissal of management and appointment of
a receiver. For well capitalized institutions, FDICIA provides authority
for regulatory intervention where the institution is deemed to be
engaging in unsafe and unsound practices or receives a less than
satisfactory examination report rating. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company
and Community Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank
holding companies.
The Company and Community Bank were categorized as well capitalized under
the regulatory framework for prompt corrective action at December 31,
1999 and 1998, based on the most recent notification from the Federal
Deposit Insurance Corporation. To be categorized as well capitalized, the
Company and Community Bank must maintain minimum Tier I, total and Tier I
Leverage ratios as set forth in the following tables. The Tier I
Leverage ratio is defined as Tier I capital to total average assets less
intangible assets. There are no conditions or events since the most
recent notification that management believes have changed the Company's
or Community Bank's category.
16. REGULATORY MATTERS (CONTINUED):
The Company's and Community Bank's capital ratios at December 31, 1999
and 1998, as well as the required minimum ratios for capital adequacy
purposes and to be well capitalized under the prompt corrective action
provisions as defined by FDICIA, are summarized as follows:
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------------------------------------
DECEMBER 31, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets:
Consolidated.................................... $ 33,848 14.6% $ 9,271 4.0% $13,907 6.0%
Community Bank.................................. 32,619 14.2 9,216 4.0 13,824 6.0
Total capital to risk-adjusted assets:
Consolidated.................................... 36,757 15.9 18,543 8.0 23,179 10.0
Community Bank.................................. 35,510 15.4 18,432 8.0 23,040 10.0
Tier I capital to total average assets
less intangible assets:
Consolidated.................................... 33,848 8.6 15,752 4.0 19,690 5.0
Community Bank.................................. $ 32,619 8.3% $15,641 4.0% $19,551 5.0%
Risk-adjusted assets:
Consolidated.................................... $218,915
Community Bank.................................. 217,526
Risk-adjusted off-balance sheet items:
Consolidated.................................... 12,871
Community Bank.................................. 12,871
Average assets for Leverage ratio:
Consolidated.................................... 393,794
Community Bank.................................. $391,016
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------------------------------------
DECEMBER 31, 1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-adjusted assets:
Consolidated.................................... $ 35,444 17.7% $ 8,017 4.0% $12,025 6.0%
Community Bank.................................. 34,266 17.2 7,959 4.0 11,938 6.0
Total capital to risk-adjusted assets:
Consolidated.................................... 37,968 18.9 16,033 8.0 20,042 10.0
Community Bank.................................. 36,772 18.5 15,917 8.0 19,897 10.0
Tier I capital to total average assets
less intangible assets:
Consolidated.................................... 35,444 9.5 14,981 4.0 18,726 5.0
Community Bank.................................. $ 34,266 9.2% $14,946 4.0% $18,682 5.0%
Risk-adjusted assets:
Consolidated.................................... $191,609
Community Bank.................................. 190,162
Risk-adjusted off-balance sheet items:
Consolidated.................................... 8,806
Community Bank.................................. 8,806
Average assets for Leverage ratio:
Consolidated.................................... 374,524
Community Bank.................................. $373,644
</TABLE>
16. REGULATORY MATTERS (CONTINUED):
On April 21, 1999, the Company's Board of Directors approved a stock
repurchase program, which authorized management to purchase up to 220,000
shares or 10.0 percent of the Company's outstanding common stock. During
1999, 177,647 shares having an aggregate cost of $5,683 were purchased
and retired under the program.
On April 2, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to register 300,000 shares of common
stock in establishing a Dividend Reinvestment Plan ("DRP"). The purpose
of the DRP is to provide stockholders with a simple and convenient method to
invest cash dividends in the Company's common stock without payment of
any brokerage commissions while also furnishing the Company with
additional funds for general corporate purposes. Main features of the
DRP include the following: (i) shares will be purchased from original
issuances; (ii) no optional cash payments; (iii) eligibility for all
registered and street name stockholders; (iv) no minimum or maximum
number of shares participation restrictions; and (v) availability of full
or partial dividend reinvestment. During the years ended December 31,
1999, 1998 and 1997, 6,409 shares, 4,617 shares and 2,325 shares,
respectively, were issued under the DRP.
17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................ $5,000 $ 5,082 $5,340 $5,457 $5,094 $5,110 $5,183 $5,200
Tax-exempt......................... 93 97 112 117 98 101 100 98
Interest and dividends on investment
securities available-for-sale:
Taxable............................ 1,009 1,133 1,149 1,050 838 782 880 993
Tax-exempt......................... 504 489 477 419 517 514 506 502
Dividends.......................... 30 30 32 30 29 45 39 39
Interest on federal funds sold....... 48 50 6 58 82 202 184 88
------ ------- ------ ------ ------ ------ ------ ------
Total interest income............ 6,684 6,881 7,116 7,131 6,658 6,754 6,892 6,920
------ ------- ------ ------ ------ ------ ------ ------
INTEREST EXPENSE:
Interest on deposits................. 3,377 3,423 3,504 3,642 3,422 3,461 3,540 3,523
Interest on short-term borrowings.... 1 15 44 13 7 4
Interest on long-term debt........... 1 1 1 1 1 1
------ ------- ------ ------ ------ ------ ------ ------
Total interest expense........... 3,379 3,439 3,548 3,656 3,430 3,462 3,541 3,527
------ ------- ------ ------ ------ ------ ------ ------
Net interest income.............. 3,305 3,442 3,568 3,475 3,228 3,292 3,351 3,393
Provision for loan losses............ 30 30 30 445 105 105 105 540
------ ------- ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses....... 3,275 3,412 3,538 3,030 3,123 3,187 3,246 2,853
------ ------- ------ ------ ------ ------ ------ ------
NONINTEREST INCOME:
Service charges, fees and
commissions......................... 380 370 432 465 353 376 380 393
Net gains on sale of loans........... 32 4 17 4 4 39
Net gains on sale of investments..... 408 235 893
------ ------- ------ ------ ------ ------ ------ ------
Total noninterest income ........ 412 374 449 877 353 376 619 1,325
NONINTEREST EXPENSE:
Salaries and employee benefits
expense............................. 1,164 1,194 1,253 1,213 1,094 1,109 1,105 1,137
Net occupancy and equipment expense.. 348 302 363 332 352 305 303 333
Other expenses....................... 716 870 816 858 684 792 989 1,161
------ ------- ------ ------ ------ ------ ------ ------
Total noninterest expense........ 2,228 2,366 2,432 2,403 2,130 2,206 2,397 2,631
------ ------- ------ ------ ------ ------ ------ ------
Income before income taxes........... 1,459 1,420 1,555 1,504 1,346 1,357 1,468 1,547
Provision for income tax expense..... 319 310 355 354 276 277 318 347
------ ------- ------ ------ ------ ------ ------ ------
Net income ...................... 1,140 1,110 1,200 1,150 1,070 1,080 1,150 1,200
------ ------- ------ ------ ------ ------ ------ ------
OTHER COMPREHENSIVE INCOME:
Unrealized gains(losses) on
investment securities available-
for-sale............................ (427) (1,476) (191) (797) 314 314 742 (554)
Reclassification adjustment for gains
included in net income.............. (408) (235) (893)
Income tax expense (benefit) related
to other comprehensive income....... (146) (501) (65) (410) 106 107 173 (492)
------ ------- ------ ------ ------ ------ ------ ------
Other comprehensive income
(loss), net of income tax....... (281) (975) (126) (795) 208 207 334 (955)
------ ------- ------ ------ ------ ------ ------ ------
Comprehensive income............. $ 859 $ 135 $1,074 $ 355 $1,278 $1,287 $1,484 $ 245
====== ======= ====== ====== ====== ====== ====== ======
PER SHARE DATA:
Net income........................... $ 0.52 $ 0.51 $ 0.58 $ 0.56 $ 0.49 $ 0.49 $ 0.52 $ 0.54
Cash dividends declared.............. $ 0.13 $ 0.13 $ 0.15 $ 0.16 $ 0.07 $ 0.07 $ 0.10 $ 0.13
</TABLE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 1998 VERSUS 1997
---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING ENVIRONMENT:
During 1998, the United States sustained exceptional economic growth as a
result of strong household and business spending brought on by greater
confidence and partially offset by a slowdown in foreign demand. The gross
domestic product ("GDP"), the total output of goods and services produced
within United States borders, increased 4.3 percent in 1998, only slightly
below the 4.5 percent posted in 1997.
Many foreign countries experienced recessionary conditions in 1998,
including high unemployment and falling consumption, which reduced the
demand for goods and services from the United States. In addition, these
countries devalued their currencies and made goods from the United States
more expensive relative to their own. As a result, the depressed demand
for American exports had an adverse effect on domestic GDP in 1998.
Imports increased 10.8 percent in 1998 while exports rose a modest 1.5
percent. Despite reducing the rate of exports, the global financial crisis
caused some beneficial effects on GDP as the Federal Open Market Committee
("FOMC") refused to raise interest rates despite the high level of
economic growth for fear of triggering further foreign currency
devaluations. Accordingly, lower interest rates became an incentive for
consumer and business confidence. In addition, the global problems helped
restrain inflation from surfacing despite the strong growth and tight
labor conditions. Recessionary conditions in foreign countries reduced
demand for commodities, which led to an overabundance of certain goods,
such as gasoline, computers and automobiles, causing prices to decline.
Moreover, the reduced price of imported goods caused domestic producers to
compete by lowering prices by either increasing productivity or improving
technology of their products.
Higher consumer and business confidence fueled greater domestic
expenditures in 1998, which more than counteracted the effects of the
slowdown in demand for goods and services from foreign countries. Ideal
employment conditions, improved wealth, slower inflation, lower interest
rates and higher credit availability were the primary causes for the
improved confidence.
Employment conditions were premier in 1998, as huge job gains in the
construction and retail sectors more than offset losses in manufacturing.
Approximately 2.9 million new jobs were created during 1998. Despite the
1.0 percent rise in the civilian work force, the unemployment rate
declined from 4.7 percent to 4.3 percent at December 31, 1997 and 1998.
The unemployment rate averaged 4.5 percent in 1998, the lowest rate since
1969. Average hourly earnings rose 4.4 percent from $12.43 at year-end
1997 to $12.98 at year-end 1998. Average weekly earnings recorded an
annualized increase of 4.1 percent to $449.11 at December 31, 1998. As a
result of increased productivity, the average workweek fell from 34.7
hours in 1997 to 34.6 hours in 1998.
United States stock market prices surged during 1998, as the FOMC eased
monetary policy in an attempt to offset the impact of reduced demand for
goods from foreign countries. The FOMC decreased its target rate for
federal funds by one-quarter of one percent on September 29, October 15
and November 17. These three cuts within seven weeks would have been
viewed as highly unusual if not for the global turmoil given the 3.9
percent economic growth and the 4.5 percent unemployment rate. Most equity
indices responded to these cuts and higher corporate profits by
experiencing strong growth in 1998. Specifically, The NASDAQ Stock Market
Composite increased nearly 40.0 percent, the Standard and Poor's 500
Composite rose 25.0 percent and the Dow Jones Industrial Average and New
York Stock Exchange Composites were both up 16.1 percent. The personal
savings rate, savings as a percentage of disposable personal income,
declined to 3.7 percent in 1998 as a result of the increases in equity
values.
Inflation was subdued in 1998 despite stronger economic growth and tighter
labor markets. An inflation measurement tied to domestic economic activity
was up only 1.0 percent in 1998, the smallest increase in over 49 years.
With respect to consumer inflation, the Consumer Price Index ("CPI")
increased by 1.6 percent, the lowest level since 1986. Slowing medical
costs and falling oil prices were primarily responsible for the reduction.
Also assisting in keeping inflation in check in 1998 was the devaluation
of foreign currencies which lowered the cost of imported goods, thus
restricting price increases on domestic goods. The slight increase of 1.6
percent in 1998 follows a similar increase of 1.7 percent in 1997. The
Producer Price Index ("PPI") was noninflationary at 0.0 percent in 1998 as
compared to deflationary at negative 1.2 percent in 1997. Low inflation
was a result of rising productivity, falling commodity and energy prices
and relatively stable labor costs.
A final factor for the rise in confidence was low-costing and readily-
available credit. The average interest rate on a 30-year mortgage declined
from 7.57 percent in 1997 to 6.94 percent in 1998. An indication of
increased availability of credit was the strong growth in aggregate
borrowings of 6.9 percent in 1998. Competition to extend credit was great
as financial institutions lowered rates, relaxed terms or softened credit
standards to counteract declining net interest margins.
The rise in confidence was the most important influence on the favorable
economic activity in 1998, as it caused exceptional strength in consumer
and business expenditures, which more than offset the adverse effects of
reductions in exports from foreign countries. During 1998, consumer
spending, as measured by personal consumption expenditures, rose 6.0
percent, the highest level in 14 years. All of the major categories of
personal consumption expenditures, durables, nondurables and services
recorded gains in 1998. Durable goods had the greatest increase of all
categories rising 12.0 percent in 1998. All sectors of the housing
industry flourished in 1998, as evidenced by increases of 10.4 percent in
new home sales, 14.3 percent in existing home sales and 10.2 percent in
housing starts. Declines in mortgage rates and mild weather helped promote
the housing market. Similar to consumer expenditures, business outlays
also experienced strong growth increasing 12.5 percent during 1998. The
strength of the economy and optimism about its long-run prospects,
efficiencies of new technologies and low-costing credit availability were
the primary reasons for the increase. As a result of the significant
increase in business investment, aggregate borrowings increased 10.7
percent from the end of 1997.
Economic activity in our four-county market area was similar to that of
the Nation and Commonwealth as indicated by unemployment reductions and
wage gains. Unemployment rates for Lackawanna and Susquehanna counties
declined to levels similar to those of the United States and Pennsylvania,
while Wayne and Wyoming counties recorded significant unemployment rate
reductions in 1998 of 1.4 percent and 2.2 percent from year-end 1997.
Construction generated the largest gains in local employment as a result
of improvements in the housing industry and unseasonably mild weather.
Service producing industries also assisted in reducing unemployment levels
during 1998.
In addition, employees within our market area recorded wage gains superior
to those of the Commonwealth. During 1998, the average hourly earnings of
a local manufacturing employee rose 16 cents as compared to 9 cents for
all Pennsylvania workers. The average hourly earnings of a United States
manufacturing worker increased 48 cents in 1998. Despite the gain,
employees in the four-county market area still lag National and
Pennsylvania employees with respect to their hourly rate. The average
hourly rates paid to a manufacturing employee at December 31, 1998,
throughout the Nation, Commonwealth and market area were $12.98, $14.07
and $12.69. Despite tight labor markets, employers were able to build
efficiencies in 1998 without harming productivity as evidenced by a
reduction in the average weekly hours worked. As aforementioned, the
average weekly hours worked for the nation declined from 34.7 to 34.6 at
year-end 1997 and 1998. Similarly, average hours worked for the
Commonwealth reduced from 42.8 to 41.9, and for the market area from 41.6
to 40.9. These efficiencies became increasingly important as the pool of
available workers has continually declined. The civilian labor force,
defined as the total number of individuals employed and those actively
seeking employment, declined by 1,500 workers from year-end 1997 to year-
end 1998 for our market area. Similar to the market area, the Commonwealth
recorded a 1.0 percent decrease in the amount of available workers. In
contrast to the labor force reductions for the market area and the
Commonwealth, the Nation reported a 1.3 percent increase as more
individuals made themselves available for employment.
With the exception of large banks, the Nation's financial institutions
continued to perform well during 1998. Banks' earnings would have
increased further if not for reductions in net interest margins, increased
levels of loan loss provisions and higher noninterest expenses. The
pressure on net interest margins was a direct reflection of lower interest
rates, flat yield curve and rapid mortgage prepayment activity with
subsequent reinvestments of the proceeds at lower yields. Although
helpful in reducing the ill effects of the foreign crisis, the FOMC's
three rate cuts placed additional pressure on net interest margins during
1998. As a result of the already low interest rates offered on deposits,
banks were unable to reduce funds costs while being pressured to lower
loan yields in order to compete. Moreover, the reductions in the federal
funds rate caused a corresponding reduction in the yield on adjustable-
rate loans tied to the prime rate. The prime rate declined from 8.50
percent to 7.75 percent at December 31, 1997 and 1998. Adding to the
dilemma of reduced earning asset yields was the flatness of the yield
curve in 1998. Banks were unable to extend maturities in order to achieve
greater compensation. Finally, rising prepayments on loans and mortgage-
backed securities as a result of declining interest rates forced banks to
reinvest repayments at lower yields, thus adding more pressure on net
interest margins. Financial institutions throughout the United States
increased their provisions for loan losses in response to higher loan
volumes and greater write-offs on foreign credits. In order to offset the
margin compressions and higher provisions, banks increased noninterest
income. During 1998, fee income accounted for a greater percentage of
banks' revenues than ever before. Fee-based revenue increased through the
expansion of product offerings and by raising prices on existing products
and services. With respect to noninterest expenses, efficiency ratios
remained weak in 1998 as a result of significant investments made to
improve competitiveness through technological improvements and product
line enhancements. Moreover, the industry incurred a significant amount
of one-time charges in 1998 including costs associated with merger and
holding company restructurings and year 2000 ("Y2K") compliance.
As aforementioned, large financial institutions did not fare as well as
regional and community banks during 1998. These institutions were harmed
by losses from foreign credit exposure, recognition of one-time expenses
for merger-related charges and establishment of cost-cutting programs.
This reduction in large bank earnings is evidenced by examining the
performance of the Nation's top 30 commercial banks in 1998. This group
posted a 3.3 percent decline in net income comparing 1998 and 1997.
During 1998, regional and community banks, which primarily deal in plain
vanilla consumer and commercial banking operations, exhibited stronger
performance than their larger competitors. This was evidenced by an
improvement in the financial performance of regional and community banks
located in the Northeast Region. Net income after tax improved from $1.4
billion in 1997 to $1.7 billion in 1998, a 21.4 percent increase.
As a result of higher stock prices of financial institutions in the first
half of the year, merger and acquisition activity in 1998 surpassed the
record pace of 1997. The increased market values of financial institutions
in the first half of 1998 played a major role in the financial viability
of such mergers. Greater stock prices allowed financial institutions to
issue fewer shares to execute mergers, which reduced the potential
dilutive effects to stockholders. While the number of deals throughout the
nation remained the same as the prior year, the aggregate deal value
increased from $259.8 billion in 1997 to $281.7 billion in 1998. The
average price to book value for financial institution mergers in 1998 was
2.5 times while the median price to earnings was 23.2 times. For the prior
year, the comparable multiples of book and earnings were 2.2 times and
20.8 times. With respect to the Northeast Region, aggregate deal values
increased from $64.4 billion in 1997 to $100.2 billion in 1998. The
average price to book for this region was constant at 2.4 in 1997 and
1998. The median price to earnings multiple was 23.0 times and 28.3 times
in 1997 and 1998.
With respect to banking legislation, the most significant effort in 1998
dealt with modernization of the laws governing permissible financial
service activities. In general, this legislation would allow banks'
affiliates to: (i) engage in securities underwriting and dealing and to
sponsor and distribute mutual funds; (ii) underwrite and broker any type
of insurance product; and (iii) underwrite municipal revenue bonds.
REVIEW OF FINANCIAL POSITION:
The declining interest rate environment during 1998 made it more difficult
for financial institutions to achieve acceptable returns on their loans
and investments. Taking on additional credit risk or lengthening the
average lives of investments were ways some financial institutions
contended with yield declines. As an alternate strategy, we became less
aggressive with respect to our deposit pricing and directed our efforts to
improving our competitive position through delivery system expansions, new
product offerings and existing service enhancements during 1998. The
acquisition of the Eynon and Factoryville branches from First Union
National Bank in the fourth quarter of 1997 aided this expansion. In
addition, we began developing plans to construct additional branch offices
in Clarks Summit and Dickson City during 1999. As a result of focusing on
these efforts rather than forcing deposit growth through imprudent pricing
practices, we experienced modest growth in 1998.
Total assets increased to $388.3 million at December 31, 1998, an increase
of $6.5 million over the $381.8 million reported at December 31, 1997.
Total assets averaged $377.4 million in 1998, an increase of $18.0 million
or 5.0 percent as compared to the $359.4 million in 1997. The composition
of our earning assets remained relatively unchanged from 1997 to 1998.
The ratio of average investments and federal funds sold to average earning
assets was 30.1 percent in 1997 and 30.7 percent in 1998. Similarly, the
ratio of loans to average earning assets also held constant at 69.9
percent in 1997 and 69.3 percent in 1998. The ratio of average earning
assets to total average assets declined to 94.7 percent in 1998 from 96.3
percent in 1997. The ratio of average earning assets to total average
assets for our peer group of 23 banks located in Northeastern Pennsylvania
also declined from 97.3 percent in 1997 to 94.5 percent in 1998.
The investment portfolio grew $3.9 million to $109.6 million at December
31, 1998, from $105.7 million at December 31, 1997. Average investments
increased slightly to $99.4 million in 1998 from $98.8 million in 1997.
The composition of the investment portfolio changed during 1998 as cash
flows from maturities of U.S. Treasury securities were reinvested into
short-term U.S. Government agency mortgage-backed securities to serve
future liquidity requirements. The mortgage-backed securities offered us
a greater total return over a given interest rate horizon with risk
characteristics similar to that of comparable U.S. Treasury securities.
The yield on taxable investments increased 37 basis points to 5.96 percent
in 1998 from 5.59 percent in 1997. Overall, the tax-equivalent yield on
the investment portfolio showed a 17 basis point increase for the year
from 6.60 percent in 1997 to 6.77 percent in 1998.
Loans, net of unearned income, at December 31, 1998, were $248.1 million
as compared to $250.2 million at December 31, 1997. Included in the year-
end 1997 total were short-term loans of $7.0 million to certain large
Pennsylvania-based commercial banks. Adjusting for these temporary credit
extensions, the loan portfolio rose $4.9 million from year-end 1997 to
year-end 1998. Average loans outstanding grew 2.5 percent from $241.9
million in 1997 to $247.9 million in 1998. Growth in commercial and
residential mortgages partially offset by declines in loans to municipal
authorities was primarily responsible for the change. The tax-equivalent
yield on the loan portfolio increased from 8.53 percent in 1997 to 8.55
percent in 1998. This slight increase was significant given the decline
in general market rates and fierce loan competition during 1998.
Asset quality improved in 1998 as evidenced by decreases in nonperforming
ratios. The ratio of nonperforming loans as a percentage of loans, net of
unearned income, declined from 2.25 percent at December 31, 1997, to 1.63
percent at December 31, 1998. Similarly, the ratio of nonperforming assets
as a percentage of loans, net of unearned income, declined from 2.41
percent at December 31, 1997, to 1.72 percent at December 31, 1998. The
allowance for loan losses as a percentage of loans, net of unearned
income, increased to 1.63 percent at December 31, 1998, from 1.52 percent
at December 31, 1997. Our ratio surpassed the peer group's ratio of 1.26
percent at year-end 1998.
Total deposits at December 31, 1998, were $344.3 million, an increase of
$11.9 million or 3.6 percent over the $332.4 million reported at December
31, 1997. Deposits averaged $335.6 million in 1998, an increase of $13.2
million or 4.1 percent over the $322.4 million in 1997. This was well
below the peer group's deposit growth of 9.9 percent, as we maintained a
less aggressive deposit pricing strategy during 1998. Noninterest-bearing
deposits experienced the most significant growth of all deposit types,
increasing 18.6 percent based on average balances from the previous year.
As a result of the less aggressive deposit pricing strategy, our cost of
funds declined 17 basis points to 4.60 percent in 1998 from 4.77 percent
in 1997.
We experienced slight declines in our interest sensitivity and liquidity
positions from year-end 1997 to year-end 1998. Interest sensitivity, as
measured by the ratio of cumulative one-year, rate sensitive assets
("RSA") to rate sensitive liabilities ("RSL"), declined from 0.86 at
December 31, 1997, to 0.70 at December 31, 1998. With respect to
liquidity, the net noncore funding dependence ratio weakened slightly from
negative 7.5 percent at December 31, 1997, to negative 4.0 percent at
December 31, 1998. A similar deterioration was evidenced in the net short-term
noncore funding dependence ratio from negative 10.2 percent at
December 31, 1997, to negative 5.7 percent at December 31, 1998.
Stockholders' equity increased $3.6 million or 10.1 percent to $39.7
million at December 31, 1998, from $36.1 million at December 31, 1997.
This improvement was attributable to net income of $4.5 million offset by
dividends declared, net of reinvestments, of $662 and a reduction in the
net unrealized holding gains of $206. Our Leverage ratio, Tier I capital
as a percentage of total average assets less intangibles, increased to 9.5
percent at December 31, 1998, as compared to 8.7 percent at December 31,
1997. We exceeded all relevant regulatory capital measurements and were
considered well capitalized at December 31, 1998.
As part of our efforts to improve and expand our delivery system while
continuing to enhance stockholder value, we accomplished a number of
significant goals in 1998. Our actions to improve the delivery system
included introducing new products and data processing enhancements to keep
pace and remain competitive in an ever-changing financial industry. The
Trust and Financial Services Division began offering mutual fund programs
during the first quarter of 1998. During the second quarter of 1998, we
implemented a program to sell one-to-four family residential mortgage
loans on the secondary market. Additionally, during the fourth quarter of
1998, we kept pace with technological advancements by installing a Wide
Area Network.
INVESTMENT PORTFOLIO:
The bond market was unpredictable and turbulent in 1998. As a result of
uncertainties in foreign countries, prices of U.S. Treasury bonds surged
for most of 1998 while other riskier forms of fixed income investments
declined, thus causing a widening spread between such issues. The yield
curve was flat during the first half of 1998. This was spurred by
continued low inflation and an increased demand for safer U.S. Treasury
securities sparked by concerns of global recession and foreign currency
devaluations. Investors, placing a greater significance on the harmful
effects of the weakness abroad as compared to the growth in domestic
demand, caused U.S. Treasury yields to decline. Long-term investment
yields, represented by the benchmark 30-year U.S. Treasury bond, declined
to 5.09 percent at year-end 1998 from 5.93 percent at the end of 1997.
Short-term yields, indicated by the two-year U.S. Treasury note, decreased
112 basis points from 5.66 percent at year-end 1997 to 4.54 percent at
year-end 1998. The spread between long-term and short-term yields was
tight for the majority of 1998 ranging from 15 to 40 basis points.
However, during the latter part of 1998, improvements in foreign market
conditions caused spreads to widen ranging from 55 to 103 basis points.
We utilize a total return approach to analyze the investment portfolio's
performance with respect to risk and reward. The risk measure quantifying
the average life of the investment portfolio improved from 1.91 years in
1997 to 0.67 years in 1998, placing our investment portfolio in the 94th
percentile with respect to risk quality. During 1998, the portfolio's
total return amounted to 7.2 percent. This return placed us in the upper
20.0 percent of all bank holding companies in 1998. In comparison, the
Lehman Brothers' aggregate-bond index, a benchmark used by most investment
managers, scored an 8.7 percent total return in 1998. For 1997, our total
return was 7.9 percent, while the Lehman Brothers' Index was 9.4 percent.
Recessionary conditions in foreign countries caused low inflation and
interest rates in the United States, which had a beneficial effect on the
market value of the investment portfolio in 1998. Adjusting for the
realization of net gains of $1,128 on the sale of certain equity
securities, the net unrealized holding gain would have increased $816
during 1998. The net unrealized holding gain on investment securities was
$1,394, net of deferred income taxes of $719, at December 31, 1998. This
gain was $1,600, net of deferred income taxes of $825, at December 31,
1997.
As a percentage of average assets, average investments declined from 27.5
percent in 1997, to 26.3 percent in 1998. This reduction was a direct
reflection of the flatness of the yield curve during most of 1998, as we
chose to invest excess funds in federal funds sold until a positive slope
returned in the latter part of the year. In comparison, the peer group
held 31.9 percent of its average assets in investment securities in 1997
and 32.3 percent in 1998.
For the years ended December 31, 1998 and 1997, we classified all
investment securities as available-for-sale. Proceeds from the sales of
available-for-sale securities amounted to $1.7 million in 1998. The 1998
investment sales consisted of certain equity securities of local financial
institutions. For 1998, we recognized net gains of $1.1 million. There
were no securities sold in 1997. Repayments from investment securities
totaled $45.2 million in 1998 and $31.2 million in 1997. Investment
purchases amounted to $50.2 million in 1998. Specifically, we purchased
$3.0 million in short-term U.S. Treasury securities, $2.4 million in
intermediate-term state and municipal obligations, $44.6 million in short-
term collateralized mortgage obligations ("CMOs") and pooled mortgage-
backed securities and $150 in equity securities, primarily common stock
of the Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh").
Contrary to the significant decline in the yields on U.S. Treasuries
during 1998, the tax-equivalent yield on the investment portfolio rose
from 6.60 percent in 1997 to 6.77 percent in 1998. Conversely, the peer
group experienced a deterioration in yield from 6.59 percent in 1997 to
6.43 percent in 1998.
At December 31, 1998, investment securities with an amortized cost of
$28,895 were pledged to secure deposits, to qualify for fiduciary powers
and for other purposes required or permitted by law. At December 31,
1997, the amortized cost of pledged securities equaled $25,971. The fair
value of such securities equaled $28,836 at December 31, 1998, and $25,979
at December 31, 1997.
At December 31, 1998 and 1997, the investment portfolio contained no high-
risk CMOs as defined in the Federal Reserve Board's Supervisory Policy
Statement on Securities Activities. In addition, we did not have any
holdings of structured notes at December 31, 1998. At December 31, 1997,
the carrying value of structured notes totaled $2.0 million.
Specifically, these securities included a dual-index floater and a
delevered floater, each having a carrying value of approximately $1.0
million at December 31, 1997. Both securities matured in 1998.
LOAN PORTFOLIO:
Loans are the most significant assets of financial institutions and
generate the largest portion of revenues. There are many factors that
affect the overall lending environment. Specifically, the housing market
and the economic conditions affecting it may significantly impact lending
activities, since loans to finance one-to-four family residential
properties account for a predominant share of lending activities in most
financial institutions. The low interest rate environment, unseasonably
mild weather and high consumer demand, fueled by a booming stock market,
low inflation and rising wages, created a record-breaking year for the
housing market and residential mortgage lending in 1998. New and existing
home sales reached record levels. There were 890 thousand new homes
purchased in 1998, the highest level since the government started tracking
these sales in 1963. This marked a 10.3 percent increase over 1997
purchases of 807 thousand. Existing home sales also hit a record rate of
5.0 million sold in 1998, a 13.6 percent increase over the 4.4 million
sales recorded in 1997. In addition to the reasons mentioned above,
another cause for the boost in the real estate market was that consumers
found housing more affordable in 1998. The median selling price for both
new and existing homes rose only 3.7 percent from 1997. On the
construction side, 1998 marked the best year for housing in over a decade.
Nationally, homebuilders started 1.62 million single-family homes and
apartment units in 1998, an increase of 10.2 percent over the 1.47 million
started in 1997. For the Northeast, housing starts in 1998 were up 8.8
percent over 1997 levels.
Overall, the housing market gains reflected favorably on real estate
lending for banks in 1998. In addition, low interest rates contributed to
an increase in mortgage lending. Interest rates on 30-year mortgages
averaged 63 basis points lower in 1998 at 6.94 percent, in comparison to
7.57 percent in 1997. As a result of these conditions, the total dollar
amount of real estate loans outstanding for all commercial banks grew to
$1.3 trillion at December 31, 1998, from $1.2 trillion at December 31,
1997.
As in the previous year, commercial and industrial lending benefitted from
the strong economy and low interest rates. The FOMC's three rate cuts in
1998 caused the prime rate to decrease 75 basis points from 8.50 percent
at December 31, 1997, to 7.75 percent at December 31, 1998. Business
spending increased 12.5 percent in 1998, as companies, optimistic about
the economy and its future prospects, took advantage of the availability
of low-costing credit. As a result, lending competition became
increasingly fierce for financial institutions. The economic conditions in
recent years forced lending institutions to ease loan pricing, credit and
underwriting standards. Total outstanding commercial and industrial loans
to U.S. commercial banks at December 31, 1998, grew $98.6 billion or 11.5
percent to $952.5 billion, from $853.9 billion at December 31, 1997.
We were ranked fourth in 1998 by the U.S. Small Business Administration's
Office of Advocacy among Pennsylvania banks with assets between $300.0
million and $500.0 million for "small business friendly" lending
activities. This marks the third consecutive year that we were ranked in
the top five of these banks.
On the consumer side, low unemployment levels, rising wages and increased
wealth from a thriving stock market all kept confidence levels high
throughout 1998. High confidence resulted in a declining savings rate as
consumers were eager to spend more and save less. However banks did not
reap any benefits from this high confidence and spending. Outstanding
consumer loans declined from $506.5 billion at December 31, 1997, to
$497.9 billion at December 31, 1998, as individuals chose to spend their
disposable income or find alternate nonbank financing sources.
Our loans, net of unearned income, totaled $248.1 million at December 31,
1998, a slight decline of $2.1 million or 0.8 percent as compared to the
$250.2 million at December 31, 1997. Included in loans, net of unearned
income at year-end 1997 were $7.0 million in short-term credit extensions
to certain large Pennsylvania-based commercial banks. Adjusting for the
commercial bank credit extensions at December 31, 1997, there would have
been a $4.9 million or 2.0 percent increase in the loan portfolio. Taking
into consideration this adjustment, the growth is entirely related to
commercial mortgage lending. Commercial mortgages grew $5.2 million or
13.8 percent from year-end 1997. One-to-four family residential mortgage
loans rose $0.7 million in 1998. Offsetting these increases, was a
decline in commercial loans of $1.0 million in 1998, adjusted for
temporary credit extensions at December 31, 1997. Outstanding consumer
loans remained relatively unchanged from year-end 1997 to year-end 1998.
Total average loan volumes increased in 1998 by $6.0 million or 2.5
percent to $247.9 million, from $241.9 million in 1997. The ratio of
average loans, net of unearned income, to total average assets declined to
65.7 percent in 1998 from 67.3 percent in 1997. Increases in average
federal funds sold and other assets contributed to the decline as a result
of the flat yield curve and capital expenditures for delivery system
expansions. In comparison, during 1998, the peer group's average loans
accounted for 62.2 percent of total average assets.
Low mortgage rates, the decline in the prime rate and the repayment of the
credit extensions to financial institutions all contributed to the change
in the composition of the loan portfolio in 1998. Favorable mortgage
lending conditions, coupled with lower interest rates in general, led to
an increase in the percentage of real estate loans to total loans
outstanding. At December 31, 1998, residential and commercial real estate
loans amounted to $186.0 million and comprised approximately 75.0 percent
of the loan portfolio. In comparison, at December 31, 1997, these loans
totaled $180.1 million, approximately 72.0 percent of total loans
outstanding. Commercial loans as a percentage of total loans decreased
from 15.6 percent at December 31, 1997, to 12.5 percent at December 31,
1998. As aforementioned, this reduction was principally due to the
repayments of outstanding credit extensions to other Pennsylvania-based
commercial banks in 1998. Consumer loans remained relatively unchanged at
year-ends 1997 and 1998.
The tax-equivalent yield on the loan portfolio increased 2 basis points
from 8.53 percent in 1997 to 8.55 percent in 1998. The loan portfolio
experienced yield declines throughout the year. The tax-equivalent yield
in the first quarter of 1998 was 8.65 percent. This dropped 15 basis
points to 8.50 percent for the fourth quarter of 1998.
Fueled by consistently low mortgage rates, the volume of refinancing
intensified as borrowers consolidated bills, credit card balances and
regular consumer loans to reduce monthly debt payments and take advantage
of the tax deductibility of interest payments. The volume of refinanced
residential mortgages increased $1.6 million in 1998 to $12.5 million from
$10.9 million in 1997.
During the third quarter of 1998, we successfully implemented a secondary
mortgage banking program. Secondary mortgage banking activities involve
originating mortgage loans for sale to secondary market investors. During
1998, we sold $2.1 million of residential mortgage loans to one investor,
the Federal National Mortgage Association ("FNMA"). Net gains on the sale
of these loans included in noninterest income in 1998 were $43. At
December 31, 1998, we had $503 of residential mortgage loans held for
sale.
In the normal course of business, we are a party to financial instruments
with off-balance sheet risk to meet the financing needs of our customers.
These instruments include commitments to extend credit, unused portions of
home equity and credit card lines and commercial letters of credit. Our
exposure related to off-balance sheet commitments was $18.1 million at
December 31, 1998, and $17.8 million at December 31, 1997.
At December 31, 1998 and 1997, we had no loan concentrations exceeding 10.0
percent of total loans or any form of credit involving highly-leveraged
transactions.
Adjustable-rate loans at December 31, 1998 were $48.6 million, an increase
of $2.7 million or 5.9 percent from December 31, 1997. Fixed-rate loans
declined $4.8 million or 2.4 percent during 1998 to $199.5 million or 80.4
percent of total loans at year-end.
ASSET QUALITY:
Nationally, large financial institutions experienced deterioration in
their asset quality during 1998. This deterioration primarily resulted
from an increase in nonperforming assets and charge-offs related to failed
loans to foreign countries. For the Nation's top 30 banks, nonperforming
assets and net charge-offs increased from year-end 1997 to year-end 1998.
Unlike large financial institutions, banks in our peer group experienced
an improvement in asset quality during 1998. Higher wages and job
growth, lower unemployment levels and a dramatic slowing in the growth of
personal bankruptcies filed aided the improvement. This improvement was
evidenced by a decline in the nonperforming asset ratio from 1.73 percent
at December 31, 1997, to 1.02 percent at December 31, 1998. The ratio of
net charge-offs to average loans also declined in 1998 from 0.29 percent
in 1997 to 0.27 percent.
Similar to the peer group, we experienced an improvement in asset quality
during 1998. Nonperforming assets, comprised of nonperforming loans and
foreclosed assets, totaled $4.3 million at December 31, 1998, compared to
$6.0 million at December 31, 1997. Foreclosed assets decreased $165 during
1998. Eight loans totaling $249 were transferred to foreclosed assets.
Six properties with an aggregate carrying value of $280 were sold for
$275, resulting in a realized net loss of $5. In addition, during 1998 we
donated a property held in other real estate to Habitat for Humanity.
This property had a carrying value of $23. Finally, all of our other real
estate properties were re-appraised during 1998 which resulted in
additional write-downs of $111. The carrying values of all properties
included in other real estate at December 31, 1998, were no more than 80.0
percent of their collateral values.
Nonperforming loans, consisting of accruing loans past due 90 days or more
and impaired loans, decreased $1.6 million during 1998 from $5.6 million
to $4.0 million. The decline in nonperforming loans was entirely from a
decrease in accruing loans past due 90 days or more. The major portion of
this decline came from a $1.5 million decrease in real estate loans past
due 90 or more days. Impaired loans as a percentage of loans, net of
unearned income, remained relatively unchanged from year-end 1997. This
ratio was 1.00 percent at December 31, 1998, compared to 0.98 percent at
December 31, 1997. The peer group's ratio was 0.63 percent at year-end
1998. The ratio of nonperforming assets to loans, net of unearned income,
improved from 2.41 percent at December 31, 1997, to 1.72 percent at
December 31, 1998. This ratio was also less favorable as compared to the
peer group's 0.99 percent recorded at December 31, 1998.
At December 31, 1998 and 1997, we had a recorded investment in impaired
loans of $2,482 and $2,461. The recorded investment in impaired loans
averaged $1,867 in 1998 and $2,368 in 1997. At December 31, 1998, the
amount of recorded investment in impaired loans for which there was a
related allowance for loan losses and the amount of the allowance was
$2,308 and $642 and $2,272 and $541 for the year-ended December 31, 1997.
The amount of recorded investment for which there was no related allowance
for loan losses was $174 and $189 at December 31, 1998 and 1997. During
1998, activity in the allowance for loan losses account related to
impaired loans included a provision charged to operations of $342, losses
charged to the allowance of $286 and recoveries of impaired loans
previously charged-off of $45. The activity in 1997 in the allowance for
loan losses account related to impaired loans included a provision charged
to operations of $4 and losses charged to the allowance of $113. There
were no recoveries of impaired loans previously charged-off in 1997.
Interest income related to impaired loans would have been $175 in 1998 and
$174 in 1997 had the loans been current and the terms of the loans not
been modified. Interest recognized on impaired loans amounted to $98 in
1998 and $84 in 1997. Included in these amounts was interest recognized
on a cash basis of $98 and $84. Cash received on impaired loans applied as
a reduction of principal totaled $650 in 1998 and $587 in 1997. There
were no commitments to extend additional funds to customers with impaired
loans at December 31, 1998 and 1997.
At December 31, 1998, the allowance for loan losses, against which loans
are charged-off, equaled $4.1 million and represented 1.63 percent of
loans, net of unearned income. The allowance was $3.8 million and
represented 1.52 percent of loans, net of unearned income, at December 31,
1997. The provision for loan losses exceeding net loans charged-off in
1998 caused the increase over the amount reported at December 31, 1997.
The peer group reported a 1.26 percent ratio at December 31, 1998, a
slight reduction from the 1.30 percent ratio recorded one year earlier.
As a percentage of nonperforming loans, the allowance account covered
100.4 percent at December 31, 1998. This coverage ratio at December 31,
1997, calculated to 67.5 percent. Relative to all nonperforming assets,
the allowance covered 94.7 percent and 62.9 percent at December 31, 1998
and 1997.
Net charge-offs were $603 or 0.24 percent of average loans outstanding in
1998 compared to $506 or 0.21 percent in 1997. Net charge-off ratios reported
by the peer group were 0.24 percent and 0.29 percent in 1998 and 1997. The
Nation's top 30 banks reported an increase in the ratio of net charge-offs
to average loans from 0.49 percent in 1997 to 0.50 percent in 1998.
DEPOSITS:
As was the case in 1997, national growth in real wages and personal
disposable income did not increase savings in 1998. Workers realized large
increases in real wages and real hourly compensation through faster gains
in nominal pay and a continuation of lower inflation. According to the
Labor Department's employment cost index, the hourly compensation of
workers in private nonfarm industries rose 3.5 percent in nominal terms
during 1998. In addition, personal disposable income increased from $5.9
trillion to $6.1 trillion at December 31, 1997 and 1998. However, this
3.4 percent increase in disposable income did not cause a corresponding
rise in the savings rate. Savings as a percentage of personal disposable
income declined from 2.1 percent in 1997 to 0.5 percent in 1998.
Accordingly, core deposits experienced limited growth at many financial
institutions. The main causes for this weakness were customers'
preferences to spend more or place their money in alternative investments
such as mutual funds and stocks. Moreover, changes in laws concerning
credit unions effected the savings rate. On August 7, 1998, legislation
was signed into law reversing a February 1998, Supreme Court ruling that
restricted credit union membership to serve individuals joined by a single
common bond.
Total deposits for all commercial banks in the Commonwealth of
Pennsylvania totaled $130.3 billion in the fourth quarter of 1998, an
increase of 2.9 percent as compared to the same period last year.
Contrary to this limited growth, deposits of the local peer group grew 9.9
percent in 1998. For the year, our deposits grew at a rate similar to the
Commonwealth at 3.6 percent. The declining interest rate environment made
it more difficult for all financial institutions to achieve acceptable
returns on their loans and investments. Many banks combated the yield
deterioration by either taking on additional credit risk or significantly
lengthening the average lives of financial instruments. As an alternative
strategy, we became less aggressive with respect to deposit pricing during
1998, sacrificing growth until interest rate spreads widened between
earning assets and interest-bearing liabilities. Except for time deposits
with maturities of greater than 36 months, our pricing was lower than its
peer group during 1998. As a result of such aggressive product pricing,
the peer group's net interest margin declined in 1998.
Deposit volumes increased from $332.4 million at December 31, 1997, to
$344.3 million at December 31, 1998. Total deposits averaged $322.4
million in 1997 compared to $335.6 million in 1998, an increase of 4.1
percent. Higher volumes of time deposits $100 or more and noninterest-
bearing deposits were primarily responsible for the 3.6 percent change in
the comparable year-end deposit volumes. Large dollar denomination time
deposits rose 30.3 percent in 1998 from $20.8 million at year-end 1997 to
$27.1 million at year-end 1998. Demand deposits increased from $30.7
million to $36.0 million at December 31, 1997 and 1998, a 17.3 percent
increase. Stronger deposit relationships with local school districts
caused the increase in large time deposits while greater involvement in
commercial lending resulted in a higher concentration of demand deposits.
The majority of the deposit growth occurred in the second quarter of 1998
increasing at an annualized rate of 11.5 percent.
We continually pursue a deposit mix that has a higher concentration of
lower-costing funds. Transaction accounts, defined as demand deposits,
money market, NOW and savings accounts, had a weighted-average cost of 2.0
percent in 1998. Comparatively, the weighted-average cost of time
deposits was 5.6 percent in 1998. As a percentage of average total
deposits, low- cost transaction accounts increased from 39.7 percent in
1997 to 40.4 percent in 1998. Conversely, our reliance on time deposits
declined from 60.3 percent to 59.6 percent. Despite the improvement, the
local peer group continued to exhibit a more advantageous deposit
composition in 1998. As a percentage of average total deposits,
transaction accounts and time deposits accounted for 53.4 percent and 46.6
percent in 1998. However, we outperformed the peer group with respect to
the most important means of lowering funds costs during 1998. We recorded
an increase in noninterest-bearing deposits as compared to a decline
experienced by the peer group. Average noninterest-bearing deposits as a
percentage of average total deposits increased from 8.5 percent in 1997 to
9.7 percent in 1998. This improvement was a result of greater commercial
customer relationships and expansions in the delivery system.
Comparatively, the peer group reported a decline in demand deposit
percentages from 16.2 percent in 1997 to 15.7 percent in 1998. For 1998,
our cost of funds declined to 4.6 percent from 4.8 percent in 1997. More
importantly, the cost of funds continued its decline throughout 1998 as
evidenced by a 7 basis point drop in the average quarterly funds cost from
the first quarter to the fourth quarter. As aforementioned, we chose to be
less aggressive in deposit product pricing in 1998 as a result of
reductions in the availability of profitable opportunities with respect to
loans and investments. This asset driven pricing strategy was the primary
cause for the improvement. The local peer group's cost of funds improved
to a lesser extent decreasing from 4.6 percent in 1997 to 4.5 percent in
1998. Conversely, the cost of funds for all United States bank holding
companies with assets of between $300 million and $500 million increased
from 4.5 percent in 1997 to 4.6 percent in 1998.
Volatile deposits, time deposits $100 or more, increased from $20.8
million at December 31, 1997, to $27.1 million at December 31, 1998. As
aforementioned, this increase resulted from improved banking relationships
with local school districts. However, we continued to be less reliant on
this type of funding as compared to the peer group in 1998. Average
volatile deposits, as a percentage of average total deposits, was 7.1
percent in 1998 as compared to 12.8 percent for the peer group. The
average cost of these funds declined 30 basis points from 6.2 percent in
1997 to 5.9 percent in 1998. Conversely, the peer group's cost for
volatile deposits rose 7 basis points during 1998.
Available short-term borrowings consist of a line of credit and advances
with the FHLB-Pgh secured under terms of a blanket collateral agreement by
a pledge of FHLB-Pgh stock and certain other qualifying collateral, such
as investment and mortgage-backed securities and mortgage loans. The line
is limited to our maximum borrowing capacity ("MBC"), which is based on a
percentage of qualifying collateral assets. At December 31, 1998, the MBC
was $141.8 million. At December 31, 1998, we had no short-term borrowings
outstanding. There were $9.6 million in short-term borrowings outstanding
at December 31, 1997, under the line of credit agreement. The average
daily balance and weighted-average rate on aggregate short-term borrowings
was $185 at 6.0 percent in 1998 and $138 at 5.8 percent in 1997. The
maximum amount of all short-term borrowings outstanding at any month-end
was $695 during 1998 and $9.6 million during 1997. Short-term borrowings
during 1998 and 1997 consisted entirely of the FHLB-Pgh line of credit.
Long-term debt at December 31, 1998 and 1997, consisted entirely of a 7.5
percent fixed-rate, amortizing advance from the FHLB-Pgh Community
Investment Program. This advance matures on September 2, 2009. The
scheduled principal payments on the note total $3 for each of the five
years 1999 through 2003. The average daily balance on long-term debt in
1998 was $43 with a weighted-average rate of 7.0 percent. For 1997, the
average daily balance on long-term debt was $45 with a weighted-average
rate of 8.9 percent.
MARKET RISK SENSITIVITY:
We utilize various computerized modeling techniques for market risk
management. One such technique utilizes a tabular presentation of fair
value information and contract terms relevant to determine the future cash
flows of market risk sensitive instruments, categorized by expected
maturity dates.
According to the results of this presentation, investments of $32.4
million with a weighted-average, tax-equivalent yield of 6.22 percent were
scheduled to mature within one year at December 31, 1998.
Correspondingly, net loans of $50.1 million with a weighted-average, tax-
equivalent yield of 8.48 percent were scheduled to mature within the same
timeframe. Overall, interest-earning assets scheduled to mature within
one year equaled $90.7 million with a weighted-average, tax-equivalent
yield of 7.34 percent. With respect to interest-bearing liabilities,
there were interest-bearing transaction accounts, defined as money market,
NOW and savings accounts, of $21.6 million with a weighted-average cost of
2.62 percent scheduled to mature within one year, based on historical
withdrawal patterns. Time deposits of $128.6 million with a weighted-
average cost of 5.25 percent were scheduled to mature in the same
timeframe. Total interest-bearing liabilities scheduled to mature within
one year equaled $150.3 million with a weighted-average rate of 4.87
percent.
In addition to monitoring market risk based on this tabular presentation,
we analyze changes in the fair value of other financial instruments
utilizing interest rate "shocks." Specifically, we analyze the effects
instantaneous parallel shifts of plus or minus 100 basis points have on
the economic values of other financial instruments. The results of the
model at December 31, 1998, indicated fair value declines of 2.4 percent
in other financial assets and 0.7 percent in other financial liabilities
given a parallel and instantaneous rise of 100 basis points in interest
rates. Conversely, a 100 basis point decline in general market rates was
expected to result in fair value appreciation of 2.5 percent in other
financial assets and 0.7 percent in other financial liabilities.
We also use models that consider repricing frequencies of RSA and RSL in
addition to maturity distributions. One such technique utilizes a static
gap report, which attempts to measure our interest rate exposure by
calculating the net amount of RSA and RSL that reprice within specific
time intervals.
At December 31, 1998, our cumulative one-year, RSA/RSL ratio was 0.70.
Although a slight deterioration from 0.86 at December 31, 1997, such ratio
falls within our asset/liability policy guidelines of 0.70 and 1.30. This
reduction was principally due to an increase in the amount of time
deposits repricing within one year, as a greater proportion of longer-term
certificates of deposit were scheduled to renew in 1999. Also causing the
decline in the ratio was a smaller amount of loans and investments
repricing within one year as compared to those amounts at year-end 1997.
At December 31, 1998, time deposits maturing or repricing within one year
totaled $128.6 million, up $28.0 million from one year earlier. At
December 31, 1998, loans, net of unearned income, and investments
repricing within one year declined by $6.6 million and $4.7 million from
the same period last year.
Similar to the results of the cumulative one-year ratio, the three-month
RSA/RSL ratio declined. The three-month ratio equaled 2.02 at December
31, 1998, compared to 1.87 at December 31, 1997. The reduction in RSA
repricing within three months over the reduction in RSL caused the change.
Specifically, loans, investments and federal funds sold repricing within
three months decreased $7.1 million, $2.5 million and $0.5 million, as
compared to the static gap position one year ago. Moreover, the repayment
of short-term borrowings of $9.6 million in 1998 partially offset by an
increase of $1.4 million in time deposits were the major factors in
reducing the amount of RSL within the three-month interval.
As a final tool to assist in managing market risk sensitivity, we enhance
our asset/liability management by using a simulation model. This model is
used to create pro forma net interest income scenarios under various
interest rate shocks. Model results at December 31, 1998, indicated an
instantaneous and parallel shift in general market rates of plus 100 basis
points will cause net interest income to increase $133.4 or 1.0 percent in
1999. Conversely, a shift of the same magnitude in the opposite direction
would cause a $130.5 or 1.0 percent decline in net interest income in
1999.
LIQUIDITY:
Although declining slightly in 1998, our liquidity position continued its
superiority in comparison to the peer group. This was exemplified by
recording stronger comparable net noncore funding dependence and net
short-term noncore funding dependence ratios. The net noncore funding
dependence ratio was negative 7.5 percent and negative 4.0 percent at
December 31, 1997 and 1998. The peer group's ratios were 7.4 percent and
10.0 percent. The net short-term noncore funding dependence ratio weakened
slightly from negative 10.2 percent at year-end 1997 to negative 5.7
percent at year-end 1998. The peer group experienced a similar
deterioration in its short-term ratio from 2.6 percent to 3.6 percent.
The consolidated statements of cash flows present the change in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents increased $1.9 million in 1998. Cash and cash
equivalents totaled $19.2 million and $17.3 million at December 31, 1998
and 1997. Net cash provided by operating activities totaled $5.9 million
and primarily resulted from net income of $4.5 million.
The net cash used in investing activities totaled $5.6 million in 1998.
Investment purchases of $50.2 million exceeded repayments of $45.2 million
in 1998, which caused the net cash outflow. The change in investing
activities was also affected by the expenditures for premises and
equipment totaling $3.9 million. The majority of these expenditures were
for land to construct the administrative center and two branch facilities.
Net cash provided by financing activities equaled $1.7 million in 1998.
Increased volumes of time deposits and, to a lesser extent, transaction
accounts offset the net outflow from the repayment of short-term
borrowings. Time deposits increased $8.0 million in 1998, as a result of
improved customer relations with local school districts. Higher volumes
of commercial loan relationships in 1998 caused the $3.9 million
improvement in transaction accounts. During 1998, short-term borrowings of
$9.6 million were repaid.
CAPITAL ADEQUACY:
During 1998, stockholders' equity improved $3.6 million or 10.1 percent
compared to 1997. This improvement was primarily due to net income of
$4.5 million offset by dividends, net of reinvestments, of $662 and a
reduction in net unrealized holding gains of $206. The actual change in
net unrealized holding gains on investment securities in 1998, was a
positive $816, net of applicable income taxes of $277, which was offset by
a $1,128 reclassification adjustment, net of applicable income taxes of
$383, for gains realized on the sale of securities. At December 31, 1998,
net unrealized holding gains were $1,394 as compared to $1,600 at December
31, 1997.
For 1998, dividends declared equaled $816 or $0.37 per share. This was a
23.8 percent increase as compared to $659 or $0.30 per share declared in
1997. The dividend payout ratio in 1998 and 1997 was 18.1 percent and
15.0 percent. In comparison, the peer group's dividend payout ratio was
38.9 percent in 1998 and 34.3 percent in 1997.
The Dividend Reinvestment Plan ("DRP") was implemented during the year-
ended December 31, 1997, to offer stockholders the opportunity to
automatically reinvest their dividends in shares of our common stock.
Three hundred thousand shares were registered with the Securities and
Exchange Commission ("SEC") under the DRP. During the years ended December
31, 1998 and 1997, 4,617 shares and 2,325 shares were issued under the
DRP.
During 1998, the capital position improved as evidenced by marked
increases in our capital adequacy ratios. The Leverage ratio was 9.5
percent at December 31, 1998, as compared to 8.7 percent at December 31,
1997. The Tier I capital to risk-adjusted assets ratio was 17.7 percent
and total capital to risk-adjusted assets ratio was 18.9 percent at
December 31, 1998. In comparison, these ratios at December 31, 1997, were
16.0 percent and 17.2 percent. Each of these ratios, at December 31, 1998
and 1997, exceeded the minimum levels required for adequately capitalized
institutions of 4.0 percent, 4.0 percent and 8.0 percent and the levels
required for well capitalized institutions of 5.0 percent, 6.0 percent and
10.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
Losses from foreign credit exposures, recognition of merger-related
charges and initial startup expenses for establishing cost-cutting
programs all hindered the earnings performance of the Nation's top 30
commercial banks in 1998. This group posted a decline of 3.3 percent in
composite net income from 1997 to 1998. Regional and community banks
faired better in 1998. Unaffected by the aforementioned factors, banks in
the Northeast Region posted earnings in 1998 of $1.7 billion, a 21.4
percent increase from 1997 earnings of $1.4 billion.
Net income was $4.5 million or $2.04 per share in 1998, an increase over
the $4.4 million or $2.00 per share reported for the previous year. The
earnings growth was attributable to higher net interest income and gains
on the sale of investment securities partially offset by increases in the
provision for loan losses and noninterest expense.
The return on average assets ratio was 1.19 percent and return on average
equity ratio was 11.71 percent in 1998. These ratios for the peer group
in 1998 were 1.22 percent and 12.26 percent. For 1997, we reported ratios
of 1.22 percent and 13.40 percent. Net interest income on a tax-
equivalent basis increased $1,142 or 8.5 percent from $13,378 in 1997 to
$14,520 in 1998. Contributing to the increase was a 4 basis point
improvement in the yield on earning assets coupled with a 17 basis point
reduction in the cost of funds. The major factor in the improved yield on
earning assets resulted from a 37 basis point increase in the yield on
taxable investment securities from 5.59 percent in 1997 to 5.96 percent in
1998. This betterment was attributed to the composition of the investment
portfolio changing as cash flows from maturing U.S. Treasury securities
were reinvested into short-term U.S. Government agency mortgage-backed
securities which offered a greater total return for essentially the same
risk exposure. The cost of funds improved from 4.77 percent in 1997 to
4.60 percent in 1998 which resulted from declines in the average rate paid
on savings accounts and time deposits. Also assisting the improvement in
net interest income was a favorable volume variance. Average earning
assets increased 43.2 percent over the growth of interest-bearing
liabilities.
The provision for loan losses increased $495 to $855 in 1998, from $360 in
1997. This increase was primarily attributable to the replenishment of
the loan loss reserve for loans charged-off in response to changes in
regulatory classifications of certain loans during 1998.
Noninterest income for the year-ended December 31, 1998, was $2,673, an
$897 increase over the $1,776 recorded for the same period last year.
Included in noninterest income in 1998 were gains of $1,128 on the sale of
investment securities and gains of $43 on the sale of one-to-four family
residential mortgage loans. Included in noninterest income in 1997 was a
$250 litigation settlement paid by a securities broker.
Noninterest expense increased $1,408 from $7,956 in 1997, to $9,364 in
1998. Salaries and employee benefits expense, net occupancy and equipment
expense and other expenses increased $347, $94 and $967 in 1998. The rise
in salaries and employee benefits expense resulted from additional
staffing for the late-1997 acquisition of the Eynon and Factoryville
branches coupled with annual merit raises. The recognition of the first
full year of occupancy expenses related to these new offices was the
primary cause of the $94 increase. The primary reasons for the increase
in other expenses were amortization of the core deposit intangible which
resulted from the acquisition of the above branches, write-downs of
properties included in other real estate and losses from dispositions of
equipment determined to be non-compliant with the century date change.
NET INTEREST INCOME:
During 1998, the FOMC's interest rate cuts, higher mortgage prepayment
levels and the flat yield curve all factored into reduced net interest
margins for large and regional banks. For the nation's top 30 banks,
average tax-equivalent net interest margins declined 19 basis points from
4.32 percent in 1997 to 4.13 percent in 1998. Similarly, banks in the
Northeast Region also showed lower average margins, to 3.88 percent in
1998 from 4.07 percent in 1997. Conversely, our tax-equivalent net
interest margin improved 19 basis points to 4.06 percent in 1998 from 3.87
percent in 1997. Similarly, our tax-equivalent net interest spread
improved from 3.16 percent in 1997 to 3.37 percent in 1998.
Tax-equivalent net interest income grew $1,142 or 8.5 percent from $13,378
in 1997 to $14,520 in 1998. Improvements in both the average yields
received on earning assets and the average cost paid on interest-bearing
liabilities, coupled with growth in average volumes of earning assets over
average volumes of interest-bearing liabilities, contributed to the
increase. The main factor for the net interest spread improvement was a
17 basis point reduction in the cost of funds from 4.77 percent in 1997 to
4.60 percent in 1998. Reductions in the average rate paid on savings
accounts of 34 basis points, time deposits less than $100 of 9 basis
points and time deposits $100 or more of 28 basis points factored into
this reduction. Specifically, these rate reductions favorably affected
net interest income by $217, $146 and $79. An increase in the average
yield on earning assets of 4 basis points also aided the improvement. The
predominant cause for the improved yield was a 37 basis point increase in
the yield on taxable investments. This change accounted for a favorable
rate variance of $230. This was a direct result of reinvesting funds
received from maturing U.S. Treasury securities into short-term U.S.
Government agency mortgage-backed securities. The yield on tax-exempt
investments declined 17 basis points in response to acquisitions of short-
term, lower-yielding obligations of local municipalities. The yield on
taxable loans was constant at 8.55 percent, while the tax-equivalent yield
on tax-exempt loans improved to 8.30 percent in 1998 from 8.08 percent in
1997.
Net interest income was also impacted by changes in the volumes of earning
assets and interest-bearing liabilities. Average loan volumes in 1998
increased $6.0 million or 2.5 percent over 1997. This increase accounted
for a $536 positive influence on interest income. An increase in federal
funds sold volumes of $4.9 million also contributed to the favorable
volume variance. Changes in the composition of time deposits partially
offset the effects the greater loan volumes had on net interest income.
For 1998, time deposits less than $100 averaged $176.0 million, a $10.5
million or 6.3 percent increase over the $165.5 million in 1997. In
contrast, average time deposits $100 or more declined $5.2 million or 17.9
percent from $29.1 million in 1997 to $23.9 million in 1998.
PROVISION FOR LOAN LOSSES:
Financial institutions' actions related to the provision for loan losses
were mixed in 1998 as large banks increased their provision while regional
and community banks kept their provision at the same levels as a year ago.
Large financial institutions, as represented by the nation's top 30 banks,
increased their provision for loan losses from $7.7 billion in 1997, to
$10.3 billion in 1998, a 34.5 percent increase. This increase was a direct
result of higher levels of net loans charged-off, nonperforming loans and
riskier commercial loans. The ratio of net charge-offs as a percentage of
average loans rose from 0.54 percent in 1997 to 0.66 percent in 1998. The
increase was primarily attributable to write-offs on loans to emerging
countries and hedge funds caused by the global economic crisis. Also
causing the increase was a rise in the amount of nonperforming loans from
$10.3 billion to $11.6 billion at December 31, 1997 and 1998. Finally, an
increase in the amount of commercial loans as a percentage of the total
loan portfolio caused financial institutions to allocate a greater amount
of earnings towards a provision. The provisions for loan losses for
regional and community banks were unchanged at approximately $290.0
million in 1998 and 1997. Net charge-offs as a percentage of average loans
continued lower at 0.25 percent in 1998. Nonperforming assets declined
from $1.3 billion at year-end 1997 to $1.0 billion at year-end 1998. As a
percentage of loans, nonperforming assets declined from 1.12 percent to
0.78 percent at December 31, 1997 and 1998.
Our provision for loan losses increased from $360 in 1997 to $855 in 1998.
As aforementioned, the majority of the increase occurred in the final
quarter of 1998 as we replenished the loan loss reserve for loans charged-
off in response to changes in regulatory classifications of certain loans.
NONINTEREST INCOME:
During 1998, noninterest income increased 17.3 percent for large banks and
29.7 percent for regional and community banks as compared to last year.
The improvement was a result of financial institutions implementing
charges on existing products and services along with introduction of new
product lines given the recent reductions in net interest margins. In
addition, the reduction in interest rates fueled activity in mortgage
lending during 1998 causing a corresponding rise in mortgage banking fees.
Fee revenue growth is expected to rise as financial institutions continue
to experience earning pressure.
We reported noninterest income of $2,673 in 1998, an $897 increase over
the $1,776 reported in 1997. Service charges, fees and commissions
remained at $1.5 million in 1998 and 1997. As aforementioned, we began
originating one-to-four family residential mortgage loans for sale on the
secondary market during 1998. Gains on the sale of such loans totaled $43.
Included in noninterest income were net gains on the sale of investment
securities of $1.1 million. We chose to sell certain equity securities of
local financial institutions in 1998 as a result of the investments being
overvalued relative to comparable stocks and an overall weakness in bank
stocks. The recognition of Y2K remediation costs and nonperforming asset
related charges primarily offset the impact of the securities gains on
1998 net income. As part of our Y2K preparedness, we evaluated all systems
and equipment during the fourth quarter of 1998 recognizing charges for
noncompliant equipment dispositions. Nonperforming asset related charges
include losses on foreclosed property devaluations, interest income
adjustments from placing certain loans on nonaccrual status and
replenishment costs for loans charged-off. For 1997, noninterest income
included a recovery of $250 from a litigation settlement paid by a
securities broker to our wholly-owned subsidiary, Community Bank. The
settlement was awarded with respect to Community Bank's business
relationship with this broker prior to 1995.
NONINTEREST EXPENSE:
For 1998, the banking industry overall experienced higher levels of
noninterest expense. On the national and regional levels, significant
technological investments, costs associated with product line enhancements
and one-time charges related to Y2K compliance all contributed to
increases in noninterest expense and weaker efficiency ratios. For 1998,
the efficiency ratios for the Nation's top 30 banks and Northeast Region
banks were 57.9 percent and 55.4 percent. These were weaker in comparison
to the ratios of 57.4 percent and 54.2 percent in 1997.
For 1998, our noninterest expense increased $1,408 or 17.7 percent to
$9,364 from $7,956 in 1997. Similar to our peers, we showed a weaker
efficiency ratio of 61.6 percent in 1998 as compared to 58.7 percent in
1997. Another ratio used to measure efficiency is the overhead ratio,
noninterest expense as a percentage of total average assets. The overhead
ratio was 2.5 percent in 1998. This ratio was higher than the ratio of
2.2 percent recorded in 1997, however, it was still better in comparison
to the peer group's ratio of 3.3 percent in 1998.
Americans' compensation costs, wages and benefits, increased for a fifth
consecutive year. The Employment Cost Index, the best measure of changes
in wages and benefits according to the U.S. Department of Labor, rose 3.4
percent in 1998. Compensation costs are expected to continue to increase
through 1999, due to tight labor markets, caused by consistently low
unemployment rates, and increased health-care costs.
Salaries and employee benefits expense constitute nearly half of our
noninterest expense. For the year-ended December 31, 1998, these expenses
totaled $4,445 or 47.5 percent of noninterest expense. This was an
increase of $347 or 8.5 percent as compared to a year ago. Employee
additions related to the acquisition of the Eynon and Factoryville
branches caused 65.0 percent of the total increase. The remainder of the
increase was related to merit increases for employees based on their
annual performance evaluations. The compensation costs per full-time
equivalent in 1998 and 1997 were $28 and $25. These costs were well below
the peer group's compensation costs per full-time equivalent of $32 in
1998 and $31 in 1997.
Net occupancy and equipment expense totaled $1,293 in 1998, an increase of
$94 or 7.8 percent over the $1,199 reported in 1997. The increase was due
entirely to additional rental and depreciation expenses associated with
the Eynon and Factoryville offices.
For the year-ended December 31, 1998, other expenses increased $967 to
$3,626 from the $2,659 recorded for the comparable period last year. The
primary factors contributing to this increase were additional expenses
associated with the operation of the two new branches, write-downs of
properties included in other real estate and dispositions of equipment
determined to be Y2K non-compliant. We incurred additional amortization
expense of $252 from the core deposit intangible acquired in the
aforementioned branch acquisitions. In addition to the amortization, we
experienced higher levels of marketing, supply and general operating costs
associated with a full year of operation of these new branches.
Also included in other expenses in 1998 were nonrecurring charges of $198
related to write-downs of other real estate properties and the disposition
of Y2K noncompliant equipment. During 1998, we had the properties in other
real estate reappraised. The reappraisals indicated a reduction in the
fair market value of these properties. As a result, we wrote-down other
real estate by $111 in 1998. As part of our Y2K readiness, we evaluated
and tested all computer hardware and software to determine Y2K compliance.
Based on this evaluation, noncompliant assets having a net book value of
$87 were disposed.
INCOME TAXES:
Income tax expense amounted to $1,218 in 1998 compared to $1,134 in 1997.
The effective tax rate increased from 20.5 percent in 1997 to 21.3 percent
in 1998. Higher levels of earnings along with lower amounts of tax-exempt
income were primarily responsible for the increase in the effective tax
rate. Tax-exempt interest income as a percentage of total interest income
declined from 9.7 percent in 1997 to 8.9 percent in 1998. Despite this
reduction, we continued to experience an advantageous tax position as
compared to the peer group. The peer group's effective tax rate was 25.5
percent in 1997 and 26.0 percent in 1998.
COMM BANCORP, INC.
DIRECTORS AND OFFICERS
------------------------------------------------------
BOARD OF DIRECTORS
COMM BANCORP, INC.
- ------------------
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
Retired
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
JOHN P. KAMEEN
SECRETARY
Publisher, Forest City News
ERWIN T. KOST
President, Kost Tire Distributors, Inc.
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE W. POROSKY
Owner, Porosky Lumber Company
ERIC G. STEPHENS
Auto Dealer, H.L. Stephens and Son
CORPORATE OFFICERS
COMM BANCORP, INC.
- ------------------
DAVID L. BAKER
President and
Chief Executive Officer
WILLIAM F. FARBER, SR.
Chairman of the Board
JOHN P. KAMEEN
Secretary
J. ROBERT McDONNELL
Vice President
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer
BOARD OF DIRECTORS
COMMUNITY BANK AND TRUST COMPANY
- --------------------------------
DAVID L. BAKER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
Retired
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
MICHAEL T. GOSKOWSKI
SECRETARY
Owner, Kartri Sales Mfg.
JOHN P. KAMEEN
Publisher, Forest City News
WILLIAM A. KERL
President, Carbondale Concrete Company, Inc.,
Kerl Coal, Oil and Trucking Company, Inc.
ERWIN T. KOST
President, Kost Tire Distributors, Inc.
WILLIAM B. LOPATOFSKY
Retired
J. ROBERT McDONNELL
VICE PRESIDENT
Owner, McDonnell's Restaurant
JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.
THEODORE W. POROSKY
Owner, Porosky Lumber Company
ERIC G. STEPHENS
Auto Dealer, H.L. Stephens and Son
DIRECTOR EMERITUS
- -----------------
ALLAN A. HORNBECK
President, Allan Hornbeck Chevrolet
BOARD OF DIRECTORS
COMMUNITY LEASING CORPORATION
- -----------------------------
DAVID L. BAKER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD
Retired
SCOTT A. SEASOCK
Senior Vice President
COMM BANCORP, INC.
ADVISORY BOARDS
COMMUNITY BANK AND TRUST COMPANY
- --------------------------------
CARBONDALE BRANCH
- -----------------
JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home
JOHN J. CERRA
Attorney, Walsh and Cerra
ROBERT W. FARBER
R.W.F. Computer Consulting Co.
HENRY E. DEECKE
Henry E. Deecke Real Estate
CLIFFORD BRANCH
- ---------------
WILLIAM F. FARBER, JR.
Manager, Farber's Restaurants
THOMAS J. LOPATOFSKY, JR.
Lenox Propane
JOSEPH T. McGRAW
Attorney, McGraw and McGraw
ERIC G. STEPHENS
Auto Dealer, H.L. Stephens and Son
EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK BRANCHES
- --------------------
JUDD B. FITZE
Attorney, Farr, Davis & Fitze
DOUG GAY
Gay's True Value
THOMAS KUKUCHKA
Sheldon-Kukuchka Funeral Home
GLEN LAYAOU
Eaton Hills Development Corp.
Layaou Construction Co.
HOWARD TRAUGER
Trauger's, Inc.
FOREST CITY BRANCH
- ------------------
THOMAS BAILEYS
President, Fire Risk Management
and NMEB, Inc.
RICHARD CURTIS
Owner, Rich's Auto Service and
CUBE Auto Supply
JOSEPH LUCCHESI, D.D.S.
Dentist
SCOTT MISKOVSKY
Pharmacist, Red Cross Pharmacy
LINDA RICHARDS
Sparkware Associates, Inc.
STEVEN TOURJE
NEP Telephone Company
MONTROSE BRANCH
- ---------------
EDGAR B. BAKER
Consultant
DUANE JERAULD
Montrose Beverage
TOM KERR
Tom Kerr Chevrolet
ROBERT LEE
Lee's Furniture Store
DONNA WILLIAMS
Livestock Dealer/Farmer
NICHOLSON BRANCH
- ----------------
RICHARD LOCHEN
Lochen's Market
MARK NOVITCH
Sales-Leasing Manager
Pinnacle Truck Sales
DAVID SCHMIDT, JR.
Schmidt's Valley Farm Market
SIMPSON BRANCH
- --------------
FRANCIS LAPERA
Lapera Oil Company
SUSAN MANCUSO
Mancuso and Mancuso
ROBERT M. McDONNELL
McDonnell's Restaurant
GERALD SALKO, D.D.S.
Dentist
OFFICERS
COMMUNITY BANK AND TRUST COMPANY
- --------------------------------
CAROL AMES
Lake Winola Branch Manager
DAVID L. BAKER
President and
Chief Executive Officer
WILLIAM R. BOYLE
Vice President
Branch Administrator
THOMAS BYRNE
Vice President
Commercial Loan Officer
DEBRA CARR
Dickson City Branch Manager
MARK E. CATERSON
Vice President
Senior Trust Officer
KATHLEEN DELEO
Internal Loan Review
STEPHANIE A. GANZ, CPA
Vice President of Finance
DEBRA GAY
Eaton Township Branch Manager
FRAN HEDRICK
Factoryville Branch Manager
DAVID A. JONES
Vice President
Secondary Market Officer
Senior Loan Administrator
RANDOLPH LaCROIX
Clifford Branch Manager
GARY LAVELLE
Vice President
Special Assets Officer
PAMELA S. MAGNOTTI
Compliance Officer
BARBARA MARSICANO
Lakewood Branch Manager
PETER MISURA
Eynon Branch Manager
MARY ANN MUSHO
Assistant Cashier
Human Resource Officer
ROBERT O'MALLEY
Indirect Loan Officer
JANICE NESKY
Nicholson Branch Manager
M. EVELYN PANTZAR
Vice President
Internal Auditor
JOHN PASH
Comptroller
CHERYL RUPP
Simpson Branch Manager
WALTER SARAFINKO
Clarks Summit Branch Manager
SCOTT A. SEASOCK
Senior Vice President
Chief Financial Officer
THOMAS W. SHEPPARD
Vice President
Senior Loan Officer
THOMAS E. SHERIDAN
Senior Vice President
Chief Operations Officer
RONALD K. SMITH
Vice President
Montrose Branch Manager
TAMI L. SNYDER
Vice President
Information Services
HAROLD STOUT
Tunkhannock Branch Manager
BRIAN URBAS
Forest City Branch Manager
STEVEN URSICH
Carbondale Branch Manager
OFFICERS
Community Leasing Corporation
- -----------------------------
DAVID L. BAKER
President
THOMAS BYRNE
Secretary
STEPHANIE A. GANZ, CPA
Treasurer
COMM BANCORP, INC.
OTHER INFORMATION
------------------------------------------------------------
LOCATIONS
COMMUNITY BANK AND TRUST COMPANY
- --------------------------------
CARBONDALE BRANCH*
37 Dundaff Street
Carbondale, PA 18407
570-282-7500
CLARKS SUMMIT BRANCH*
125 North State Street
Clarks Summit, PA 18411
570-586-6876
CLIFFORD BRANCH*
Route 106
Clifford, PA 18413
570-222-3168
DICKSON CITY BRANCH*
1601 Main Street
Dickson City, PA 18519
570-489-8900
EATON TOWNSHIP BRANCH*
Cross County Complex
Route 29
Eaton Township, PA 18657
570-836-1008
EYNON BRANCH*
Eynon Plaza
Route 6
Eynon, PA 18403
570-876-4881
FACTORYVILLE BRANCH*
97 College Avenue
Factoryville, PA 18419
570-945-5137
FOREST CITY BRANCH*
521 Main Street
Forest City, PA 18421
570-785-3181
LAKE WINOLA BRANCH*
Winola Plaza
Lake Winola, PA 18625
570-378-3195
LAKEWOOD BRANCH
Lake Como Road
Lakewood, PA 18439
570-798-2900
MONTROSE BRANCH*
61 Church Street
Montrose, PA 18801
570-278-3824
NICHOLSON BRANCH*
57 Main Street
Nicholson, PA 18446
570-942-6135
SIMPSON BRANCH*
347 Main Street
Simpson, PA 18407
570-282-4821
TUNKHANNOCK BRANCH*
Route 6 West
Tunkhannock, PA 18657
570-836-5555
TRUST SERVICES
125 North State Street
Clarks Summit, PA 18411
800-217-3501
COMMUNITY LEASING CORPORATION
125 North State Street
Clarks Summit, PA 18411
570-586-0377
REMOTE ATM LOCATION
Keystone College
College Avenue
LaPlume, PA 18440
GLOSSARY OF TERMS
- -----------------
BASIS POINT - Unit of measure equal to one hundredth of one percent.
BOOK VALUE PER COMMON SHARE - Value of one share of common stock
calculated by dividing stockholders' equity by the total number of common
shares outstanding.
COMMON SHARES OUTSTANDING - The total number of common shares issued less
any shares held in the treasury.
CORE DEPOSITS - Total deposits excluding time deposits of $100,000 or
more.
CORE DEPOSIT INTANGIBLE - The value given to long-term deposit
relationships resulting from the assumption of liabilities in a branch
and/or bank acquisition.
EARNING ASSETS - Assets that generate interest income and/or yield-
related fee income, such as loans, securities and short-term investments.
EARNINGS PER SHARE - Net income divided by the average number of common
shares outstanding.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid for
the use of funds, including interest checking, savings, time deposit
accounts and borrowed funds.
INTEREST SENSITIVITY - A measurement of the effect on net interest income
due to changes in interest rates.
LIQUIDITY - A corporation's ability to meet cash requirements. Deposits,
borrowings, capital and/or asset conversions are all items used for the
raising of cash.
MORTGAGE-BACKED SECURITIES - Securities collateralized by pools of
residential mortgages having cash flows serviced by repayment activity on
the underlying mortgages.
NET CHARGE-OFFS - The amount of loans charged against the allowance for
loan loss account less any recoveries on loans previously charged-off.
NET INTEREST INCOME - Income earned on earning assets less interest
expense paid on interest-bearing liabilities.
NET INTEREST MARGIN - Net interest income on a fully tax-equivalent basis
divided by total average earning assets.
NET INTEREST SPREAD - Difference between the weighted-average tax-
equivalent yield received on earning assets and the weighted-average rate
paid on interest-bearing liabilities.
NONACCRUAL LOANS - Loans that have had interest accruals interrupted due
to the financial difficulties of the borrower.
NONPERFORMING ASSETS - Assets consisting of nonperforming loans and
foreclosed assets. Nonperforming loans are defined as accruing loans
past due 90 days or more, loans on which interest is currently not being
accrued or loans on which the rate or term has been altered due to the
deteriorated financial condition of the borrower.
OVERHEAD RATIO - Used as a measurement of the relationship between
operating expenses and revenues. It is total noninterest expenses
divided by the total of tax-equivalent net interest income and
noninterest income.
PAST DUE LOANS - Loans that are still accruing interest but are past due
90 days or more with respect to the collection of principal or interest.
PROVISION FOR LOAN LOSSES - A charge against income made to estimate the
expense related to management's estimated losses with respect to the loan
portfolio.
RATE-SENSITIVE ASSETS/LIABILITIES - Interest-bearing assets and
liabilities adjustable within a specified period due to maturity or
contractual agreements. These agreements typically relate stated
interest rates to the prime rate.
RESERVE FOR LOAN LOSSES - A valuation allowance charged against the loan
portfolio representing the amount considered by management to be adequate
to cover estimated losses.
RETURN ON AVERAGE TOTAL ASSETS - Net income divided by the average total
assets for the period.
RETURN ON AVERAGE TOTAL EQUITY - Net income divided by the average total
stockholders' equity for the period.
RISK-ADJUSTED ASSETS - Assets and credit-equivalent amounts of
off-balance sheet items that have been adjusted according to regulatory
guidelines into their assigned risk weights.
RISK-BASED CAPITAL RATIOS - Guidelines set forth by regulatory agencies
as to the measurement of capital and how total assets and certain
off-balance sheet items are to be risk-adjusted to reflect levels of
credit risk.
SENSITIVITY GAP - The difference between rate-sensitive assets and rate-
sensitive liabilities for a designated period. Assets exceeding
liabilities reflect a positive or net asset position. Liabilities
exceeding assets reflect a negative or a net liability position.
STOCKHOLDERS' EQUITY - Total investment by holders of common stock plus
retained earnings and net unrealized gains or losses on available-for-
sale securities.
STOCKHOLDERS' EQUITY PER COMMON SHARE - The value of a common share of
stock calculated by dividing total common stockholders' equity by the
total number of outstanding common shares at the end of the period.
TAX-EQUIVALENT BASIS - An adjustment made for tax-exempt instruments
equal to the amount of taxes that would have been paid had these
instruments been taxable at the statutory rate of 34.0 percent.
TIER I CAPITAL - Stockholders' equity less goodwill and any other
intangible items.
TOTAL RISK-BASED CAPITAL - The sum of Tier I capital and the allowance
for loan losses (restricted by certain regulatory limitations).
STOCKHOLDER INFORMATION
- -----------------------
CORPORATE HEADQUARTERS:
521 Main Street
Forest City, PA 18421
LEGAL COUNSEL:
Saul, Ewing, Remick & Saul LLP
Penn National Insurance Tower
North Second Street, 7th Floor
Harrisburg, PA 17101
INDEPENDENT AUDITORS:
Kronick Kalada Berdy & Co., P.C.
190 Lathrop Street
Kingston, PA 18704
TRANSFER AGENT:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
MARKET MAKERS:
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17604-4548
717-560-3015
M.H. Meyerson & Co., Inc.
525 Washington Blvd.
Jersey City, NJ 07303-0260
201-495-9500
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
888-231-7226
Sandler O'Neill & Partners, L.P.
Two World Trade Center
104th Floor
New York, NY 10048
212-466-7740
SEC REPORTS AND ADDITIONAL INFORMATION: Copies
of Comm Bancorp Inc.'s Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q filed with the
Securities and Exchange Commission or additional
financial information concerning Comm Bancorp, Inc.
may be obtained without charge by writing to Scott
A. Seasock, Chief Financial Officer, at corporate
headquarters.
COMMUNITY REINVESTMENT:
Copies of Community Bank and Trust Company's
community reinvestment statement may be obtained
without charge by writing to Pamela Magnotti,
Compliance Officer, at corporate headquarters.
COMMON STOCK MARKET INFORMATION:
Shares of Comm Bancorp, Inc. common stock began
listing on The NASDAQ Stock Market ("NASDAQ") as
CommBcp under the symbol "CCBP" on June 17, 1996.
Prior to June 17, 1996, the Company's common stock
was quoted on the Over-the-Counter Electronic
Bulletin Board Interdealer System. As of January
31, 2000, four firms were listed on the NASDAQ
system as market makers for the Company's common stock.
The high and low closing sale prices and dividends per
share of the Company's common stock for the four
quarters of 1999 and 1998 are summarized as follows.
CASH DIVIDENDS
1999: HIGH LOW DECLARED
------ ------- --------------
First Quarter........... $28 $25 1/2 $0.13
Second Quarter.......... 32 24 0.13
Third Quarter........... 42 30 0.15
Fourth Quarter.......... $40 1/2 $37 1/4 $0.16
1998:
First Quarter........... $38 3/4 $35 $0.07
Second Quarter.......... 36 1/2 32 1/4 0.07
Third Quarter........... 35 3/8 27 1/2 0.10
Fourth Quarter.......... $28 3/4 $25 $0.13
DIVIDEND REINVESTMENT:
Comm Bancorp, Inc. offers a Dividend Reinvestment Plan
whereby stockholders can increase their investment in
additional shares of common stock without incurring fees
or commissions. A prospectus and enrollment form may be
obtained by contacting American Stock Transfer & Trust
Company, Dividend Reinvestment Department, 40 Wall
Street, 46th Floor, New York, NY 10005, 1-800-278-4353.
DIVIDEND DIRECT DEPOSIT:
Comm Bancorp, Inc. stockholders not participating in the
Dividend Reinvestment Plan may opt to have their
dividends deposited directly into their bank account by
contacting American Stock Transfer and Trust Company at
1-800-936-5449.
WORLD WIDE WEB INFORMATION:
The Company's Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q are filed electronically through
the Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"), which performs automated collection,
validation, indexing, acceptance and forwarding of
submissions to the Securities and Exchange Commission
and is accessible by the public on the Internet at
http//www.sec.gov/edgarhp.htm.
Additional financial and nonfinancial information can be
accessed electronically using the Company's web site at
http://www.combk.com.
EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Community Bank and Trust Company, incorporated under the laws of the
Commonwealth of Pennsylvania as a state-chartered commercial banking
institution and trust company.
Community Leasing Corporation, incorporated under the laws of the
Commonwealth of Pennsylvania. A subsidiary of Community Bank and Trust
Company.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME AND CONSOLIDATED
BALANCE SHEETS FOUND ON PAGES 125 AND 126 OF THE COMPANY'S FORM 10-K FOR
THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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