UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17455
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COMM BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
521 MAIN STREET, FOREST CITY, PA 18421
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(Address of principal executive offices) (Zip Code)
(570) 785-3181
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,987,399 at October 31, 2000.
Page 1 of 46
Exhibit Index on Page 44
COMM BANCORP, INC.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
CONTENTS PAGE NO.
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PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements.
Consolidated Statements of Income and Comprehensive Income -
for the Nine Months Ended September 30, 2000 and 1999...... 3
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999.......................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000............... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999.......................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
Item 3: Quantitative and Qualitative Disclosures About Market
Risk.................................................. *
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings...................................... 42
Item 2: Changes in Securities and Use of Proceeds.............. 42
Item 3: Defaults Upon Senior Securities........................ 42
Item 4: Submission of Matters to a Vote of Security Holders.... 42
Item 5: Other Information...................................... 42
Item 6: Exhibits and Reports on Form 8-K....................... 42
SIGNATURES..................................................... 43
Exhibit Index.................................................. 44
* Not Applicable
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................ $5,934 $5,340 $17,374 $15,422
Tax-exempt............................................................. 279 112 526 302
Interest and dividends on investment securities available-for-sale:
Taxable................................................................ 821 1,149 2,678 3,291
Tax-exempt............................................................. 392 477 1,275 1,470
Dividends.............................................................. 32 32 96 92
Interest on federal funds sold........................................... 12 6 41 104
------ ------ ------- -------
Total interest income................................................ 7,470 7,116 21,990 20,681
------ ------ ------- -------
INTEREST EXPENSE:
Interest on deposits..................................................... 3,690 3,504 11,129 10,304
Interest on short-term borrowings........................................ 53 44 150 60
Interest on long-term debt............................................... 2 2
------ ------ ------- -------
Total interest expense............................................... 3,743 3,548 11,281 10,366
------ ------ ------- -------
Net interest income.................................................. 3,727 3,568 10,709 10,315
Provision for loan losses................................................ 120 30 300 90
------ ------ ------- -------
Net interest income after provision for loan losses.................. 3,607 3,538 10,409 10,225
------ ------ ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions.................................... 579 432 1,504 1,182
Net gains on sale of loans............................................... 4 17 5 53
Net gains on sale of investment securities............................... 173
------ ------ ------- -------
Total noninterest income............................................. 583 449 1,682 1,235
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense................................... 1,337 1,253 3,916 3,611
Net occupancy and equipment expense...................................... 424 363 1,214 1,013
Other expenses........................................................... 976 816 2,935 2,402
------ ------ ------- -------
Total noninterest expense............................................ 2,737 2,432 8,065 7,026
------ ------ ------- -------
Income before income taxes............................................... 1,453 1,555 4,026 4,434
Provision for income tax expense......................................... 293 355 836 984
------ ------ ------- -------
Net income........................................................... 1,160 1,200 3,190 3,450
------ ------ ------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale.... 741 (191) 1,079 (2,094)
Reclassification adjustment for gains included in net income............. (173)
Income tax expense (benefit) related to other comprehensive income (loss) 252 (65) 308 (712)
------ ------ ------- -------
Other comprehensive income (loss), net of income taxes............... 489 (126) 598 (1,382)
------ ------ ------- -------
Comprehensive income................................................. $1,649 $1,074 $ 3,788 $ 2,068
====== ====== ======= =======
PER SHARE DATA:
Net income............................................................... $ 0.59 $ 0.58 $ 1.60 $ 1.61
Cash dividends declared.................................................. $ 0.18 $ 0.15 $ 0.52 $ 0.41
Average common shares outstanding........................................ 1,989,025 2,080,174 1,998,995 2,149,724
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 9,243 $ 10,991
Federal funds sold.................................................................. 4,000
Investment securities available-for-sale............................................ 85,727 105,630
Loans, net of unearned income....................................................... 291,779 276,850
Less: allowance for loan losses................................................... 3,386 3,799
-------- --------
Net loans........................................................................... 288,393 273,051
Premises and equipment, net......................................................... 9,791 9,537
Accrued interest receivable......................................................... 2,216 2,166
Other assets........................................................................ 5,483 5,737
-------- --------
Total assets.................................................................... $404,853 $407,112
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 38,857 $ 36,061
Interest-bearing.................................................................. 325,544 326,422
-------- --------
Total deposits.................................................................. 364,401 362,483
Short-term borrowings............................................................... 5,500
Long-term debt...................................................................... 37 39
Accrued interest payable............................................................ 2,166 1,976
Other liabilities................................................................... 1,882 1,639
-------- --------
Total liabilities............................................................... 368,486 371,637
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
September 30, 2000, 1,985,242 shares; December 31, 1999, 2,035,784 shares.......... 655 672
Capital surplus..................................................................... 6,195 6,199
Retained earnings................................................................... 29,702 29,387
Accumulated other comprehensive loss................................................ (185) (783)
-------- --------
Total stockholders' equity...................................................... 36,367 35,475
-------- --------
Total liabilities and stockholders' equity...................................... $404,853 $407,112
======== ========
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
-----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS LOSS EQUITY
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999....................... $672 $6,199 $29,387 $(783) $35,475
Net income....................................... 3,190 3,190
Dividends declared: $0.52 per share.............. (1,038) (1,038)
Dividend reinvestment plan: 4,858 shares issued.. 1 162 163
Repurchase and retirement: 55,400 shares......... (18) (166) (1,837) (2,021)
Net change in other comprehensive loss........... 598 598
---- ------ ------- ----- -------
BALANCE, SEPTEMBER 30, 2000...................... $655 $6,195 $29,702 $(185) $36,367
==== ====== ======= ===== =======
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 3,190 $ 3,450
Adjustments:
Provision for loan losses.............................................................. 300 90
Depreciation, amortization and accretion............................................... 1,355 1,325
Amortization of loan fees.............................................................. (75) (124)
Deferred income tax expense (benefit).................................................. 127 (48)
Gains on sale of investment securities available-for-sale.............................. (173)
Losses (gains) on sale of other real estate............................................ 57 (28)
Changes in:
Loan held for sale, net.............................................................. 443
Interest receivable.................................................................. (50) 48
Other assets......................................................................... (260) 510
Interest payable..................................................................... 190 188
Other liabilities.................................................................... 211 (712)
-------- --------
Net cash provided by operating activities.......................................... 4,872 5,142
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available-for-sale........................... 5,304
Proceeds from repayments of investment securities available-for-sale..................... 17,607 33,145
Purchases of investment securities available-for-sale.................................... (2,298) (38,622)
Proceeds from sale of other real estate.................................................. 251 192
Net increase in lending activities....................................................... (16,163) (19,494)
Purchases of premises and equipment...................................................... (873) (2,823)
-------- --------
Net cash provided by (used in) investing activities................................ 3,828 (27,602)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ (4,025) 22,362
Time deposits.......................................................................... 5,943 (4,591)
Short-term borrowings.................................................................. (5,500)
Payments on long-term debt............................................................... (2) (2)
Proceeds from issuance of common shares.................................................. 163 141
Repurchase and retirement of common shares............................................... (2,021) (4,056)
Cash dividends paid...................................................................... (1,006) (845)
-------- --------
Net cash provided by (used in) financing activities................................ (6,448) 13,009
-------- --------
Net increase (decrease) in cash and cash equivalents............................... 2,252 (9,451)
Cash and cash equivalents at beginning of year..................................... 10,991 19,164
-------- --------
Cash and cash equivalents at end of period......................................... $ 13,243 $ 9,713
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 11,091 $ 10,178
Income taxes........................................................................... 771 1,259
Noncash items:
Transfer of loans to other real estate................................................. 597 302
Unrealized (gains) losses on investment securities available-for-sale.................. $ (598) $ 1,382
See notes to consolidated financial statements.
</TABLE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm
Bancorp, Inc. and subsidiary, Community Bank and Trust Company
(collectively, the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. In the opinion of management, all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods have been included. All significant
intercompany balances and transactions have been eliminated in the
consolidation. Prior-period amounts are reclassified when necessary to
conform with the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual
results could differ from those estimates. For additional information and
disclosures required under GAAP, reference is made to the Company's Annual
Report on Form 10-K for the period ended December 31, 1999.
2. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES:
On September 29, 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement replaces the similarly titled SFAS No. 125.
SFAS No. 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of SFAS No. 125's provisions without
reconsideration. The standards continue to be based on a consistent
application of a "financial- components approach" that focuses on control.
Under this approach, after a transfer of financial assets, an entity
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. The
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
accounting provisions of the Statement are generally effective for
recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of the accounting provisions of SFAS No.
140 on December 31, 2000, is not expected to have a material effect on
operating results or financial position.
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD-LOOKING DISCUSSION:
Certain statements in this Form 10-Q are forward-looking statements that
involve numerous risks and uncertainties. The following factors, among
others, may cause actual results to differ materially from projected
results:
Local, domestic and international economic and political conditions, and
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates,
tight money supply, real estate values, international conflicts, and other
factors beyond our control and that of our subsidiary, Community Bank and
Trust Company, referred to as Community Bank, may also adversely affect our
future results of operations. Our management team, consisting of the Board
of Directors and executive officers, expects that no particular factor will
affect the results of operations. Downward trends in areas such as real
estate, construction and consumer spending, may adversely impact our
ability to maintain or increase profitability. Therefore, we cannot assure
the continuation of our current rates of income and growth.
Our earnings depend largely upon net interest income. The relationship
between our cost of funds, deposits and borrowings, and the yield on our
interest-earning assets, loans and investments all influence net interest
income levels. This relationship, defined as the net interest spread,
fluctuates and is affected by regulatory, economic and competitive factors
that influence interest rates, the volume, rate and mix of interest-earning
assets and interest-bearing liabilities, and the level of nonperforming
assets. As part of our interest rate risk ("IRR") management strategy, we
monitor the maturity and repricing characteristics of interest-earning
assets and interest-bearing liabilities to control our exposure to interest
rate changes.
In originating loans, some credit losses are likely to occur. This risk of
loss varies with, among other things:
- General economic conditions,
- Loan type,
- Creditworthiness and debt servicing capacity of the borrower over
the term of the loan, and
- The value and marketability of the collateral securing the loan.
We maintain an allowance for loan losses based on, among other things:
- Historical loan loss experience,
- Known inherent risks in the loan portfolio,
- Adverse situations that may affect a borrower's ability to repay,
- The estimated value of any underlying collateral, and
- An evaluation of current economic conditions.
We currently believe that the allowance for loan losses is adequate, but we
cannot assure that nonperforming loans will not increase in the future.
To a certain extent, our success depends upon the general economic
conditions in the geographic market that we serve. Although we expect
economic conditions in our market area to remain favorable, we cannot
assure that these conditions will continue. Adverse changes to economic
conditions in our geographic market area would likely impair loan
collections and may have a materially adverse effect on the consolidated
results of operations and financial position.
The banking industry is highly competitive, with rapid changes in product
delivery systems and in consolidation of service providers. We compete
with many larger institutions in terms of asset size. These competitors
also have substantially greater technical, marketing and financial
resources. The larger size of these companies affords them the opportunity
to offer products and services not offered by us. We are constantly
striving to meet the convenience and needs of our customers and to enlarge
our customer base, however, we cannot assure that these efforts will be
successful.
OPERATING ENVIRONMENT:
Amid the threat of potential inflationary conditions, the Federal Open
Market Committee ("FOMC") at the end of the second quarter of 1999 adopted
a tightening stance with regard to the United States economy. After nine
years of continued economic growth, three consecutive years of growth over
4.0 percent, and escalating inflationary pressures, the FOMC, by periodic
increases in the federal funds rate, set out to bring the rapidly growing
economy to a more sustainable level. Since that time and through the first
half of 2000, the FOMC has increased the federal funds rate 175 basis
points to 6.50 percent. However, by the end of the second quarter of
2000, the FOMC changed its stance from pre-emptive to neutral. The FOMC's
neutral position continued through the close of the third quarter of 2000,
as the economy appears to be showing signs of slowing. The third quarter
gross domestic product ("GDP"), the value of all goods and services
produced in the United States, came in well below expectations. Sharp
drops in government spending and business investment brought third quarter
GDP down to an annual growth rate of 2.7 percent, the weakest level since
the second quarter of 1999. The decline in government spending subtracted
0.6 points off GDP. In addition, business investment in equipment and
software rose at an annual rate of 8.5 percent, well below the 16.0 percent
pace in the prior four quarters. With respect to consumers, although their
spending rebounded to 4.5 percent in the third quarter from 3.1 percent in
the previous quarter, it is significantly slower than the 5.0 percent to
6.0 percent growth over the past two years. With respect to the Nation's
productivity, the third quarter numbers came in significantly lower than
the previous period at 3.8 percent. The downturn in productivity coincided
with a decline of 0.8 percent in the number of hours worked, the biggest
contraction since the first quarter of 1992. In addition, unit labor
costs, a key inflation gauge, rose by a rate of 2.5 percent in the third
quarter, the strongest pace since the second quarter of 1999. Although it
appears that their recent actions are working, the FOMC remains vigilant
given the potential for inflationary pressures to escalate.
The rising rate environment over the past year, although beneficial to
controlling the pace of the economy, has lead to some serious concerns for
the banking industry. The general rise in market rates over the past year
has lead to intense competition in pricing loans and deposits. This fierce
competition, coupled with timing lags of asset and liability repricing in
a rising rate environment, has lead to compression of net interest margins.
In addition, intense competition for core deposits has led to a slowdown in
deposit growth and caused liquidity strains for financial institutions. In
order to combat these pressures, banks have diversified from traditional
banking products into fee-based businesses such as trust, asset management
and brokerage services. Large banks that have strong fee-based businesses
fared better during the current year than did smaller traditional spread-
dependent community banks.
REVIEW OF FINANCIAL POSITION:
Similar to that of the banking industry, we experienced liquidity pressures
brought on by increased loan demand coupled with slowed deposit growth. As
a result, we de-emphasized the role of the investment portfolio as a means
of mitigating liquidity strains. At September 30, 2000, total assets
equaled $404.9 million at September 30, 2000, a decline of $2.2 million
from $407.1 million reported at December 31, 1999. Loans, net of unearned
income grew $14.9 million to $291.8 million at September 30, 2000, from
$276.9 million at December 31, 1999. However, deposits grew only $1.9
million from $362.5 million at year-end 1999 to $364.4 million at the end
of the third quarter of 2000. Consequently, the investment portfolio
declined $19.9 million to $85.7 million at September 30, 2000, from $105.6
million at the end of 1999, as we utilized the proceeds from repayments and
maturities of investment securities to assist in funding loan demand. At
September 30, 2000, we had $4.0 million in federal funds sold, in
comparison to short-term borrowings outstanding of $5.5 million at December
31, 1999. Total stockholders' equity increased $892 from the end of 1999.
Net income of $3.2 million and other comprehensive income of $598 were
partially offset by common stock repurchases of $2.0 million and net cash
dividends declared of $875. Asset quality improved from year-end 1999 as
evidenced by a reduction in nonperforming assets from $6.9 million to $4.2
million at September 30, 2000.
For the third quarter of 2000, we experienced a reduction in total assets
of $2.4 million. Loans, net of unearned income, and total deposits
increased $3.9 million and $2.2 million. Short-term borrowings of $6.3
million outstanding at June 30, 2000, were repaid during the third quarter.
The investment portfolio declined in the third quarter by $5.0 million.
Total stockholders' equity improved $1.3 million to $36.4 million at
September 30, 2000, from $35.1 million at the end of the second quarter.
In striving to remain competitive and offer our customers new and value-
added products and services, we announced in the third quarter that we are
in the process of implementing an Internet-banking program and expanding
our current line of nonfinancial products. In the near future, customers
will be able to perform balance transfers, pay bills, view images of
canceled checks, shop on-line and trade securities through our Internet-
banking program. The program, via our website, will provide customers with
a customized homepage tailored to their individual needs, in which they can
view local and national news, weather and sports, obtain stock prices, and
link to other favorite sites. In addition, we expect to offer customers a
new array of insurance products through the Trust and Financial Services
Division by the first quarter of 2001. Customers will be able to purchase
various life and disability insurance products, as well as, choose from a
larger selection of retirement and annuity options. We believe that by
offering these products and services we will deliver long-term value and
solidify our customer relationships, while increasing profitability for our
stockholders.
INVESTMENT PORTFOLIO:
One of the primary concerns troubling financial institutions in 2000 has
been the lack of liquidity as a result of slow deposit growth. Similarly,
we continued to experience this same type of pressure during the third
quarter of 2000 as average deposits declined to $360.7 million in the third
quarter from $367.6 million in the second quarter of 2000. As a means to
offset deposit gathering difficulties, we continued to partially fund
normal operations through a de-emphasis of the investment portfolio.
Proceeds from repayments of investment securities totaling $5.6 million in
the third quarter were not reinvested in securities as aggregate investment
purchases remained at $2.3 million for the year. There were no sales of
investment securities during the third quarter of 2000. During the latter
part of the third quarter we began offering special promotional
certificates of deposit which has improved our liquidity position. If this
trend continues throughout the final quarter of 2000 and loan demand does
not increase significantly, investments will gain more prominence in our
overall financial position.
As was evidenced in the second quarter, the market value of the investment
portfolio improved in the third quarter bringing the net unrealized holding
adjustment nearer to its first positive carry to market position since the
third quarter of 1999. The net unrealized holding loss on our investment
portfolio improved from $1,019 at June 30, 2000, to $280 at September 30,
2000. The third quarter improvement resulted primarily from a change in the
net unrealized holding loss on mortgage-backed securities of $396 and an
increase in the net unrealized gain on state and municipal obligations of
$306. A reduction of 40 basis points in the yield on the two-year U.S.
Treasury note, which is the basis for pricing of our mortgage-backed
securities, caused the improved market value in these instruments.
Similarly, a reduction of 23 basis points in the ten-year U.S. Treasury
note, most closely related to the average life of our municipal portfolio,
caused the change in the unrealized holding gain on tax-exempt securities.
The carrying values of the major classifications of securities as they
relate to the total investment portfolio at September 30, 2000, and
December 31, 1999, are summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENT SECURITIES
SEPTEMBER 30, DECEMBER 31,
2000 1999
AMOUNT % AMOUNT %
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $ 2,996 3.49% $ 3,595 3.40%
U.S. Government agencies............................. 999 1.17 1,635 1.55
State and municipals................................. 30,795 35.92 34,781 32.93
Mortgage-backed securities........................... 49,053 57.22 63,523 60.14
Equity securities.................................... 1,884 2.20 2,096 1.98
------- ------ -------- ------
Total.............................................. $85,727 100.00% $105,630 100.00%
======= ====== ======== ======
</TABLE>
The tax-equivalent yield on the investment portfolio for the nine months
ended September 30, 2000, was 6.53 percent, a 4 basis point decrease from
6.57 percent for the same period last year. The tax-equivalent yield on
the investment portfolio declined to 6.42 percent for the third quarter of
2000, from 6.56 percent for the second quarter and 6.59 percent for the
first quarter. In addition to yield analysis, we utilize a total return
approach to measure the investment portfolio's performance. This approach
gives a more complete picture of a portfolio's overall performance since it
takes into consideration both market value and reinvestment income from
repayments. The investment portfolio's total return is the sum of all
interest income, reinvestment income on all proceeds from repayments and
capital gains or losses, whether realized or unrealized. Total return for
the investment portfolio improved to 7.2 percent for the twelve months
ended September 30, 2000, compared to 6.2 percent and 4.6 percent for the
comparable periods at June 30, 2000, and March 31, 2000. For the twelve
months ended September 30, 1999, our total return was 4.2 percent. The
annualized total return for the third quarter was 10.2 percent. Our
investment portfolio continued to be ranked in the upper 99th percentile for
all banks throughout the United States over the past twelve months
according to latest results provided by a national investment performance
ranking company.
The maturity distribution of the amortized cost, fair value and weighted-
average, tax-equivalent yield of the available-for-sale portfolio at
September 30, 2000, is summarized in the table that follows. The weighted-
average yield, based on amortized cost, has been computed for state and
municipals on a tax-equivalent basis using the statutory tax rate of 34.0
percent. The distributions are based on contractual maturity with the
exception of mortgage-backed securities, collateralized mortgage
obligations ("CMOs") and equity securities. Mortgage-backed securities and
CMOs have been presented based upon estimated cash flows, assuming no
change in the current interest rate environment. Equity securities with no
stated contractual maturities are included in the after ten year maturity
distribution. Expected maturities may differ from contracted maturities
because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
SEPTEMBER 30, 2000 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities..... $ 3,013 5.06% $ 3,013 5.06%
U.S. Government agencies..... $ 1,010 6.20% 1,010 6.20
State and municipals......... 1,260 6.46 2,795 6.82 $12,686 8.25% $13,672 8.01% 30,413 7.94
Mortgage-backed securities... 16,759 5.92 31,887 5.96 1,103 6.08 49,749 5.95
Equity securities............ 1,822 6.87 1,822 6.87
------- ------- ------- ------- -------
Total...................... $21,032 5.83% $35,692 6.03% $13,789 8.08% $15,494 7.88% $86,007 6.64%
======= ======= ======= ======= =======
Fair value:
U.S. Treasury securities..... $ 2,996 $ 2,996
U.S. Government agencies..... $ 999 999
State and municipals......... 1,259 2,788 $12,864 $13,884 30,795
Mortgage-backed securities... 16,583 31,395 1,075 49,053
Equity securities............ 1,884 1,884
------- ------- ------- ------- -------
Total...................... $20,838 $35,182 $13,939 $15,768 $85,727
======= ======= ======= ======= =======
</TABLE>
LOAN PORTFOLIO:
Loans to finance one-to-four family residential properties account for
over half of our total lending activities. Accordingly, the housing market
and the economic conditions affecting it significantly impact our lending
activities. Strong economic fundamentals, namely low unemployment, strong
income growth and high consumer confidence, have kept the housing market
strong. Although mortgage rates fell at the end of the third quarter
compared to year-end 1999 levels, the overall rise in mortgage costs over
the past nine months caused a slowdown in this market's momentum from the
record pace experienced for the prior two years. For the nine months ended
September 30, 2000, 30-year conventional mortgage rates averaged 8.20
percent, 91 basis points higher than 7.29 percent averaged for the same
nine months of 1999 and 120 basis points higher than that of 1998. Average
annual sales of existing homes fell 4.0 percent to 5.00 million for the
twelve months ended September 30, 2000, from 5.21 million for the same
period one year earlier. In addition, average annual new home sales were
down almost 2.0 percent to 900 compared to 917 last year. Furthermore, the
number of housing starts and permits issued continued their downward trend.
High productivity, personal income gains and buoyant consumer confidence
have lead to greater business investment and personal consumption. As a
result the nation's commercial banks continue to experience increased loan
demand despite the general rise in interest rates. Commercial and
industrial loans to all commercial banks increased $16.2 billion to
$1,082.2 billion at September 30, 2000, from $1,066.0 billion at June 30,
2000. Similarly, consumer loans increased $16.5 billion to $533.7 billion
at the end of the third quarter of 2000, from $517.2 billion at the end of
the previous quarter.
The composition of the loan portfolio at September 30, 2000, and December
31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
2000 1999
AMOUNT % AMOUNT %
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others............ $ 46,964 16.10% $ 43,907 15.86%
Real estate:
Construction.............................. 3,248 1.11 3,164 1.14
Mortgage.................................. 202,907 69.54 198,423 71.67
Consumer, net............................... 37,790 12.95 30,830 11.14
Lease financing, net........................ 870 0.30 526 0.19
-------- ------ -------- ------
Loans, net of unearned income............. 291,779 100.00% 276,850 100.00%
====== ======
Less: allowance for loan losses............. 3,386 3,799
-------- --------
Net loans............................... $288,393 $273,051
======== ========
</TABLE>
Similar to that of the Nation, we also experienced increased demand for all
of our loan products. Loans, net of unearned income, grew $14.9 million to
$291.8 million at September 30, 2000, from $276.9 million at year-end 1999.
Strong demand for new and used automobile loans issued through our indirect
lending division had the greatest impact on our loan portfolio. Consumer
loans grew $7.0 million or 22.6 percent to $37.8 million at September 30,
2000 and comprised 13.0 percent of our total loan portfolio, compared to
$30.8 million or 11.1 percent at year-end 1999. Commercial loans,
including commercial mortgage loans, grew $3.2 million to $96.4 million at
September 30, 2000, from $93.2 million at December 31, 1999. Residential
mortgage loans increased $4.4 million to $153.5 million at the end of the
third quarter of 2000, from $149.1 million at the end of 1999. We had $870
in commercial lease financing, net of unearned income outstanding at
September 30, 2000. Loans, net of unearned income, averaged $286.7 million
for the nine months ended September 30, 2000, an increase of $33.0 million
or 13.0 percent compared to $253.7 million averaged for the same period of
1999. The tax equivalent yield on the loan portfolio improved 10 basis
points to 8.47 percent for the nine months ended September 30, 2000, from
8.37 percent for the same period of 1999. We expect loan yields to remain
constant for the remainder of 2000, as general market rates have appeared
to stabilize. However, yields could be adversely affected by intensified
competition or a change in monetary policy. We facilitate loan demand
though growth in core deposits and repayments on loans and investment
securities.
We continually examine the maturity distribution and interest rate
sensitivity of the loan portfolio in an attempt to limit IRR and liquidity
strains. Approximately 35.8 percent of the lending portfolio is expected
to reprice within the next twelve months. Management utilizes various
strategies, which include pricing loan products in the near term to reduce
the average term of fixed-rate loans and increasing the holdings of
variable-rate loans, in an attempt to reduce IRR in the loan portfolio.
The maturity and repricing information of the loan portfolio by major
classification at September 30, 2000, is summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
SEPTEMBER 30, 2000 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity schedule:
Commercial, financial and others..... $ 24,462 $ 16,959 $ 5,543 $ 46,964
Real estate:
Construction....................... 3,248 3,248
Mortgage........................... 28,781 71,069 103,057 202,907
Consumer, net........................ 13,036 20,096 4,658 37,790
Lease financing, net................. 226 644 870
-------- -------- -------- --------
Total............................ $ 69,753 $108,768 $113,258 $291,779
======== ======== ======== ========
Repricing schedule:
Predetermined interest rates......... $ 36,085 $ 80,904 $106,554 $223,543
Floating or adjustable interest rates 68,236 68,236
-------- -------- -------- --------
Total............................ $104,321 $ 80,904 $106,554 $291,779
======== ======== ======== ========
</TABLE>
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at September 30,
2000 and 1999, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
United States........................................................... 3.9% 4.2%
Pennsylvania............................................................ 4.0 4.4
Lackawanna county....................................................... 3.7 4.6
Susquehanna county...................................................... 4.1 4.6
Wayne county............................................................ 4.3 4.9
Wyoming county.......................................................... 3.8% 4.7%
</TABLE>
The unemployment rate continued to improve for not only the Nation and the
Commonwealth of Pennsylvania, but for our local market area as well. All
four counties posted declines in their respective unemployment rates in
comparison to the previous year. Lackawanna and Wyoming counties posted
significant improvements, from 4.6 percent and 4.7 percent at September 30
1999, to 3.7 percent and 3.8 percent at September 30, 2000, and are below
the national unemployment rate of 3.9 percent.
Our asset quality improved significantly from year-end 1999. Nonperforming
assets improved to $4,182 at September 30, 2000, compared to $6,944 at
December 31, 1999. Nonperforming assets equaled 1.43 percent of loans, net
of unearned income at September 30, 2000, compared to 2.51 percent at the
end of 1999. A decline in the amount of accruing loans past due 90 days or
more predominantly lead to the improvement. In comparison to the previous
quarter, we experienced a slight improvement in asset quality, primarily
due to a reduction in other real estate owned.
Accruing loans past due 90 days or more improved from $3,965 at December
31, 1999, to $990 at September 30, 2000. Real estate loans primarily
contributed to the improvement, while commercial and consumer loans
contributed to a lesser extent. Impaired loans improved slightly by $76,
while the amount of properties held in other real estate increased $289,
from year-end 1999. Due to the favorable economic conditions in our local
market area, we expect continued improvement in our asset quality for the
remainder of 2000. However, should economic conditions weaken in our market
area, borrowers' ability to make timely loan payments could be limited,
which may cause our asset quality to deteriorate.
Information concerning nonperforming assets at September 30 2000, and
December 31, 1999, is summarized as follows. The table includes loans or
other extensions of credit classified for regulatory purposes and all
material loans or other extensions of credit that cause management to have
serious doubts as to the borrowers' ability to comply with present loan
repayment terms.
<TABLE>
<CAPTION>
DISTRIBUTION OF NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 407 $ 166
Real estate:
Construction.................................................
Mortgage..................................................... 2,001 2,272
Consumer, net.................................................. 8 33
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 2,416 2,471
------ ------
Restructured loans............................................. 128 149
------ ------
Total impaired loans....................................... 2,544 2,620
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 51 726
Real estate:
Construction.................................................
Mortgage..................................................... 597 2,768
Consumer, net.................................................. 342 471
Lease financing, net...........................................
------ ------
Total accruing loans past due 90 days or more.............. 990 3,965
------ ------
Total nonperforming loans.................................. 3,534 6,585
------ ------
Foreclosed assets.............................................. 648 359
------ ------
Total nonperforming assets................................. $4,182 $6,944
====== ======
Ratios:
Impaired loans as a percentage of loans, net................... 0.87% 0.95%
Nonperforming loans as a percentage of loans, net.............. 1.21 2.38
Nonperforming assets as a percentage of loans, net............. 1.43% 2.51%
</TABLE>
Information relating to the recorded investment in impaired loans at
September 30, 2000 and December 31, 1999, is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans:
With a related allowance....................................... $2,416 $2,471
With no related allowance...................................... 128 149
------ ------
Total........................................................ $2,544 $2,620
====== ======
</TABLE>
Impaired loans include a $128 restructured loan to one commercial customer.
This loan continued to perform in accordance with its modified terms during
the nine months ended September 30, 2000.
The analysis of changes affecting the allowance for loan losses related to
impaired loans at September 30, 2000 is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
---------------------------------------------------------------------------------------
<S> <C>
Balance at January 1.............................................................. $613
Provision for loan losses......................................................... 58
Loans charged-off................................................................. 220
Loans recovered...................................................................
----
Balance at period-end............................................................. $451
====
</TABLE>
Interest income on impaired loans that would have been recognized had the
loans been current and the terms of the loan not been modified, the
aggregate amount of interest income recognized and the amount recognized
using the cash-basis method and the average recorded investment in impaired
loans for the three-month and nine-month periods ended September 30, 2000
and 1999 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross interest due under terms................. $ 78 $ 64 $ 225 $ 186
Interest income recognized..................... 53 7 77 23
------ ------ ------ ------
Interest income not recognized................. $ 25 $ 57 $ 148 $ 163
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 53 $ 7 $ 77 $ 23
Average recorded investment in impaired loans. $2,409 $2,644 $2,524 $2,537
</TABLE>
Cash received on impaired loans applied as a reduction of principal totaled
$118 and $36 for the nine months and three months ended September 30, 2000.
For the respective 1999 periods cash receipts on impaired loans amounted to
$219 and $17. There were no commitments to extend additional funds to such
parties at September 30, 2000. The ratio of impaired loans and
nonperforming loans to loans, net of unearned income equaled 0.87 percent
and 1.21 percent at September 30, 2000. In comparison, these ratios for
our peer group equaled 0.54 percent and 0.82 percent.
Our allowance for loan losses account is established through charges to
earnings as a provision for loan losses. Loans, or portions of loans,
determined to be uncollectible are charged against the allowance account
with any subsequent recoveries being credited to the account. Nonaccrual,
restructured and large delinquent commercial and real estate loans are
reviewed monthly to determine if carrying value reductions are warranted.
Consumer loans are considered losses when they are 120 days past due,
except those expected to be recovered through insurance or collateral
disposition proceeds. Under GAAP, the allowance for loan losses related to
impaired loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral-dependent loans. We maintain the allowance for loan losses at
a level believe adequate to absorb estimated potential credit losses. We
employ the federal banking regulatory agencies' Interagency Policy
Statement on the Allowance for Loan Losses as the primary analytical tool
in assessing the adequacy of the allowance account by assigning qualitative
factors to each element of the allowance. The allowance for loan losses
consists of two elements: allocated and unallocated.
We utilize the loss mitigation method for estimating the allocated portion
of the allowance for loan losses. Loss mitigation involves determining the
percentage of each classification of individual loans and loan pools that
are expected to ultimately result in loss based on historical experience.
This estimating method and assumptions used for the method have been
followed in a consistent manner. Commercial loans and commercial real
estate loans are classified and have historical percentages applied on an
asset by asset basis. Residential mortgages and consumer loans have
historical percentages applied on a pool by pool basis. The historical
loss percentages are updated quarterly and are based on the actual amount
of loans in each classification that resulted in loss over the past eight
quarters. The historical loss experience method is only the starting point
for estimating the allowance for loan losses. We add to these historical
loss percentages a qualitative percentage representing a number of other
relevant factors that may cause estimated credit losses associated with our
current portfolio to differ from historical loss. These risk factors
include:
- Changes in lending policies and procedures,
- Economic conditions,
- Nature and volume of the portfolio,
- Loan review system,
- Volumes of past due and impaired loans,
- Concentrations,
- Borrowers' financial status,
- Collateral value,
- Experience, ability and depth of lending management, and
- Other factors deemed relevant.
The volume of the allowance for loan losses and the composition of its
elements fluctuate based on changes in many of these risk factors. There
are no known trends which would lead us to believe that the current level
of the allowance for loan losses is not adequate to cover expected loan
losses.
The unallocated portion is used to cover inherent losses that exist as of
the evaluation date, but which have not been identified by the loss
mitigation method due to limitations in the process. One such limitation
is that it does not take into account deviations of current losses from
historical experience. This may cause estimated credit losses associated
with our current portfolio to differ from historical loss experience
resulting in an allowance that is higher or lower than the appropriate
level. We establish the unallocated element of the allowance based on
judgments made by considering a number of the risk factors similar to the
ones used for determining the allocated element.
We monitor the adequacy of the allocated portion of the allowance quarterly
and adjust the allowance for any deficiencies through normal operations.
This self-correcting mechanism reduces potential differences between
estimates and actual observed losses. In addition, the unallocated portion
of the allowance is examined to ensure that it remains relatively constant
in relation to the total allowance unless there are changes in the related
criteria that would indicate a need to either increase or decrease it. The
determination of the allowance for loan loss level inherently involves a
high degree of uncertainty due to the fact that knowledge of the portfolio
may be incomplete. Accordingly, we cannot ensure that charge-offs in
future periods will not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required
resulting in an adverse impact on operating results.
The allowance for loan losses can generally absorb losses throughout the
loan portfolio, although in some instances allocation is made for specific
loans or groups of loans. Accordingly, the following table attempts to
allocate this reserve among the major categories at September 30, 2000 and
December 31, 1999. However, it should not be interpreted as an indication
that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends.
<TABLE>
<CAPTION>
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and others................... $1,042 16.10% $1,292 15.86%
Real estate:
Construction..................................... 1.11 1.14
Mortgage......................................... 1,217 69.54 1,289 71.67
Consumer, net...................................... 1,122 12.95 1,213 11.14
Lease financing, net............................... 5 0.30 5 0.19
------ ------ ------ ------
Total.......................................... $3,386 100.00% $3,799 100.00%
====== ====== ====== ======
</TABLE>
A reconciliation of the allowance for loan losses and illustration of
charge-offs and recoveries by major loan category for the nine months ended
September 30, 2000, is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30,
2000
-----------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses at beginning of period............................... $3,799
Loans charged-off:
Commercial, financial and others............................................... 470
Real estate:
Construction.................................................................
Mortgage..................................................................... 126
Consumer, net.................................................................. 209
Lease financing, net...........................................................
------
Total...................................................................... 805
------
Loans recovered:
Commercial, financial and others............................................... 37
Real estate:
Construction.................................................................
Mortgage..................................................................... 3
Consumer, net.................................................................. 52
Lease financing, net...........................................................
------
Total...................................................................... 92
------
Net loans charged-off.......................................................... 713
------
Provision charged to operating expense......................................... 300
------
Allowance for loan losses at end of period..................................... $3,386
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.33%
Allowance for loan losses as a percentage of period end loans.................. 1.16%
</TABLE>
At September 30, 2000, the allowance for loan losses was $3,386, a decline
of $70 from June 30, 2000. Net charge-offs of $190 exceeded the provision
for loans losses of $120 for the third quarter of 2000. The allowance for
loan losses equaled 1.16 percent of loans, net of unearned income at
September 30, 2000. In comparison, this ratio equaled 1.19 percent for the
peer group. The allowance account covered 95.8 percent of nonperforming
loans and 81.0 percent of nonperforming assets at September 30, 2000.
Past due loans not satisfied through repossession, foreclosure or related
actions, are evaluated individually to determine if all or part of the
outstanding balance should be charged against the allowance for loan losses
account. Any subsequent recoveries are credited to the allowance account.
Net charge-offs were $713 or 0.33 percent of average loans outstanding for
the nine months ended September 30, 2000, compared to $384 or 0.20 percent
for the same period of 1999.
DEPOSITS:
The average amount of, and the rate paid on, the major classifications of
deposits for the nine months ended September 30, 2000 and 1999, are
summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT DISTRIBUTION
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing:
Money market accounts....................... $ 20,655 3.46% $ 17,835 2.93%
NOW accounts................................ 25,808 2.41 24,446 2.44
Savings accounts............................ 73,161 2.50 64,784 2.33
Time deposits less than $100................ 175,832 5.61 182,884 5.39
Time deposits $100 or more.................. 31,011 5.94 22,347 5.74
-------- --------
Total interest-bearing.................... 326,467 4.56% 312,296 4.41%
Noninterest-bearing......................... 37,604 36,743
-------- --------
Total deposits............................ $364,071 $349,039
======== ========
</TABLE>
Deposits totaled $364.4 million at September 30, 2000, a slight increase of
$1.9 million from December 31, 1999. The deposit mix changed from year-end
1999. Noninterest-bearing deposits increased $2.8 million, while interest-
bearing deposits declined $878. The decline was a result of an increase in
time deposits $100 or more, which was more than offset by declines of $4.0
million, $3.0 million and $2.1 million in savings accounts, money market
accounts and time deposits less than $100. An increase in local school
district deposits caused the growth of time deposits $100 or more.
Deposits grew $2.2 million from the $362.2 million recorded at the end of
the second quarter of 2000. Slight variations in all deposit categories
affected the overall increase.
For the nine months ended September 30, 2000, total deposits averaged
$364.1 million, an increase of $15.1 million compared to $349.0 million
averaged for the same nine months of 1999. The general rise in market
deposit rates over the past year, forced us to raise interest rates paid on
deposits in order to retain deposits. As a result, we experienced an
increase in the average rate paid on the majority of our deposit products.
Our total cost of deposits increased 15 basis points to 4.56 percent for
the nine months ended September 30, 2000, from 4.41 percent for the same
period last year. However, interest rates appear to be stabilizing within
our market area. Our total cost of deposits remained stable at 4.56 percent
for the third and second quarters of 2000. In addition to competitive
pressure, our deposit costs are also affected by changes in the FOMC's
position regarding further tightening. The FOMC continues to remain
cautious with respect to inflationary pressures. Should inflation escalate,
additional FOMC actions could occur causing greater pressure on our cost of
funds.
As aforementioned, volatile deposits, time deposits in denominations of
$100 or more, increased $8.0 million from $23.3 million at December 31,
1999, to $31.3 million at September 30, 2000. The average cost of these
deposits increased 20 basis points to 5.94 percent for the nine months
ended September 30, 2000, from 5.74 percent for the same nine months of
1999.
Maturities of time deposits of $100 or more at September 30, 2000, and
December 31, 1999, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Within three months............................................ $15,958 $ 3,752
After three months but within six months....................... 1,586 5,240
After six months but within twelve months...................... 4,827 5,411
After twelve months............................................ 8,921 8,850
------- -------
Total........................................................ $31,292 $23,253
======= =======
</TABLE>
MARKET RISK SENSITIVITY:
Market risk is the risk to a company's financial position resulting from
changes in market rates or prices, such as, interest rates, foreign
exchange rates or commodity prices. We have no exposure to foreign
currency exchange risk nor do we have any specific exposure to the
commodity price risk. Our major area of market risk exposure is IRR. Our
exposure to IRR can be explained as the potential for change in our
reported earnings and/or the market value of our net worth. Variations in
interest rates affect earnings by changing its net interest income and its
level of other interest-sensitive income and operating expenses. Interest
rate changes also affect the underlying economic value of our assets,
liabilities and off-balance sheet items. These changes arise because the
present value of future cash flows, and often the cash flows themselves,
change with interest rates. The effects of the changes in these present
values reflect the change in our underlying economic value and provide a
basis for the expected change in future earnings related to interest rates.
IRR is inherent in the role of banks as financial intermediaries, however
a bank with a high exposure to IRR may experience lower earnings, impaired
liquidity and capital positions and, most likely, a greater risk of
insolvency. Therefore, banks must carefully evaluate interest rate risk to
promote safety and soundness in their activities.
Interest rate sensitivity management attempts to limit and, to the extent
possible, control the effects interest rate fluctuations have on net
interest income and the market value of financial instruments. The
responsibility of this management has been delegated to the Asset/Liability
Management Committee ("ALCO"). Specifically, ALCO utilizes a number of
computerized modeling techniques to monitor and attempt to control the
influence that market changes have on our rate-sensitive assets and
liabilities. One such technique utilizes a static gap report, which
attempts to measure our interest rate exposure by calculating the net
amount of rate-sensitive assets ("RSA") and rate-sensitive liabilities
("RSL") that reprice within specific time intervals. A positive gap,
indicated by a RSA/RSL ratio greater than 1.0, implies that earnings will
be impacted favorably if interest rates rise and adversely if interest
rates fall during the period. A negative gap, a RSA/RSL ratio less than
1.0, tends to indicate that earnings will be affected inversely to interest
rate changes.
Our interest rate sensitivity gap position, illustrating RSA and RSL their
related carrying values, at September 30, 2000, is summarized as follows.
The distributions in the table are based on a combination of maturities,
call provisions, repricing frequencies and prepayment patterns. Variable-
rate assets and liabilities are distributed based on the repricing
frequency of the instrument. Mortgage instruments are distributed in
accordance with estimated cash flows, assuming there is no change in the
current interest rate environment.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
SEPTEMBER 30, 2000 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Investment securities............... $ 4,025 $ 16,813 $ 35,182 $ 29,707 $ 85,727
Loans, net of unearned income....... 82,869 21,452 80,904 106,554 291,779
Federal funds sold.................. 4,000 4,000
------- -------- -------- -------- --------
Total............................. $90,894 $ 38,265 $116,086 $136,261 $381,506
======= ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 22,440 $ 22,440
NOW accounts........................ 25,548 25,548
Savings accounts.................... $ 72,099 72,099
Time deposits less than $100........ $23,704 51,473 98,484 $ 504 174,165
Time deposits $100 or more.......... 15,958 6,413 8,752 169 31,292
Short-term borrowings...............
Long-term debt...................... 1 2 14 20 37
------- -------- -------- -------- --------
Total............................. $39,663 $105,876 $179,349 $ 693 $325,581
======= ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $51,231 $(67,611) $(63,263) $135,568
Cumulative........................ $51,231 $(16,380) $(79,643) $ 55,925 $ 55,925
RSA/RSL ratio:
Period............................ 2.29 0.36 0.65 196.62
Cumulative........................ 2.29 0.89 0.75 1.17 1.17
</TABLE>
Our cumulative one-year RSA/RSL ratio improved to 0.89 at September 30,
2000, from 0.84 at June 30, 2000 and falls within our asset/liability
guidelines of 0.70 and 1.30. An increase in the amount of RSA maturing or
repricing within one year was primarily responsible for the improvement.
Federal funds sold of $4.0 million coupled with an additional $2.2 million
of loans, net of unearned income, maturing or repricing within one year
caused the increase in RSA. One year RSL remained relatively stable from
the previous quarter. However, the composition changed as $6.3 million in
short-term borrowings were paid off and replaced by a $3.3 million increase
in time deposits less than $100 and a $1.7 million increase in time
deposits $100 or more.
We experienced a slight increase in our three-month ratio to 2.29 at
September 30, 2000, from 2.26 at the end of the previous quarter. An
increase in RSA, partially offset by an increase in RSL maturing or
repricing within three months contributed to the increased ratio. A $2.9
million increase in loans, net of unearned income, was responsible for the
increase in RSA. With respect to the increase in RSL, volatile time
deposits increased $12.3 million, while short-term borrowings and time
deposits less than $100 decreased $6.3 million and $3.9 million.
According to the results of the static gap report, we were liability rate-
sensitive for the cumulative one-year period. This indicates that should
general market rates increase, the likelihood exists that net interest
income would be adversely affected. Conversely, a decline in market rates
would likely have a favorable effect on net interest income. However,
these forward-looking statements are qualified in the aforementioned
section entitled "Forward-Looking Discussion" in this Management's
Discussion and Analysis.
Static gap analysis, although a credible measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First,
market rate changes normally do not equally or simultaneously affect all
categories of assets and liabilities. Second, assets and liabilities that
can contractually reprice within the same period may not do so at the same
time or to the same magnitude. Third, the interest rate sensitivity table
presents a one-day position. Variations occur daily as we adjust our rate
sensitivity throughout the year. Finally, assumptions must be made in
constructing such a table. For example, the conservative nature of our
Asset/Liability Management Policy assigns money market and NOW accounts to
the due after three but within twelve months repricing interval. In
reality, these items may reprice less frequently and in different
magnitudes than changes in general interest rate levels.
As the static gap report fails to address the dynamic changes in the
balance sheet composition or prevailing interest rates, we utilize a
simulation model to enhance our asset/liability management. This model is
used to create pro forma net interest income scenarios under various
interest rate shocks. Model results at September 30, 2000, produced
results similar to those indicated by the one-year static gap position.
Given a parallel and instantaneous rise in interest rates of 100 basis
points, net interest income should decrease 0.6 percent. Conversely, a
similar decline in interest rates would result in a 0.6 percent increase in
net interest income.
Financial institutions are affected differently by inflation than are
commercial and industrial companies that have significant investments in
fixed assets and inventories. Most of our assets are monetary in nature
and change correspondingly with variations in the inflation rate. It is
difficult to precisely measure the impact inflation has on us, however we
believe that our exposure to inflation can be mitigated through
asset/liability management.
LIQUIDITY:
Liquidity is the ability to generate cash at a reasonable cost to fulfill
lending commitments and support asset growth, while satisfying the
withdrawal demands of depositors and any borrowing requirements. Due to a
slowdown in deposit growth, liquidity has been a major concern for
financial institutions during 2000.
We utilize core deposits and loan and investment payments and prepayments
as our primary source of liquidity. 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 our
liquidity position daily, thus enabling us to effectively monitor
fluctuations to adapt the position according to market changes. We believe
our liquidity is adequate to meet both present and future financial
obligations and commitments on a timely basis. There are presently no
known trends, demands, commitments, events or uncertainties that have
resulted or are reasonably likely to result in material changes with
respect to our liquidity.
With regards to cash, our liquidity position at the end of the third
quarter of 2000 deteriorated slightly from the previous quarter-end. Cash
and cash equivalents totaled $13.2 million at September 30, 2000, compared
to $14.2 million at June 30, 2000. However, our liquidity ratios indicate
a slight improvement in our liquidity position. This is evidenced by an
improvement in the net noncore funding dependence ratio, defined as the
difference between noncore funds, time deposits $100 or more and brokered
time deposits less than $100, and short-term investments to long-term
assets, to 1.8 percent at the end of the third quarter of 2000, from 2.5
percent at June 30, 2000. In addition, the net short-term noncore funding
dependence ratio, defined as the difference between noncore funds maturing
within one year, including borrowed funds, less short-term investments to
long-term assets, also improved to negative 0.7 percent at the end of the
third quarter from negative 0.1 percent at the end of the second quarter.
We consider our liquidity position adequate to meet our present and future
financial obligations and commitments. Management believes maintaining
adequate volumes of short-term investments and remaining competitive in our
deposit pricing will ensure sufficient liquidity to support future growth.
The Consolidated Statements of Cash Flows present the changes in cash and
cash equivalents from operating, investing and financing activities. Cash
and cash equivalents consist of cash on hand, cash items in the process of
collection, noninterest-bearing deposits with other banks, balances with
the Federal Reserve Bank of Philadelphia ("FRB") and the Federal Home Loan
Bank of Pittsburgh ("FHLB-Pgh"), and federal funds sold. During the nine
months ended September 30, 2000, net cash provided by operating activities
totaled $4.9 million. Net income of $3.2 million was the primary factor
contributing to the net cash inflow.
Net cash provided by investing activities for the nine months ended
September 30, 2000, equaled $3.8 million. Contributing to the net cash
inflow were proceeds of $5.3 million from the sale of investment securities
and repayments of investment securities of $17.6 million offset in part by
a net increase in lending activities of $16.2 million and investment
purchases of $2.3 million.
Net cash used in financing activities amounted to $6.4 million. During the
nine months ended September 30, 2000, $5.5 million in short-term borrowings
were repaid. In addition, $2.0 million was used for the repurchase and
retirement of common shares and $1.0 million for the payment of cash
dividends. Partially offsetting these cash outflows was a $1.9 million net
increase in deposits.
CAPITAL ADEQUACY:
Total stockholders' equity at September 30, 2000, was $36.4 million, an
increase of $892 from December 31, 1999. The increase was primarily
attributed to net income of $3,190 partially offset by common stock
repurchases of $2,021 and net cash dividends declared of $875. A total of
55,400 shares of our common stock was repurchased and retired during the
nine months ended September 30, 2000. Also affecting stockholders' equity
was a positive change in the accumulated other comprehensive loss, which
resulted entirely from a net unrealized gain of $598 on available-for-sale
investment securities.
Dividends declared for the nine months ended September 30, 2000, were
$1,038 or $0.52 per share, compared to $870 or $0.41 per share declared for
the same period last year. The dividend payout ratio equaled 32.5 percent
compared to 25.2 percent for the nine months ended September 30, 2000 and
1999. It is the intention of the Board of Directors to continue to pay
cash dividends in the future. However, these decisions are affected by
operating results, financial and economic decisions, capital and growth
objectives, appropriate dividend restrictions and other relevant factors.
Our dividend reinvestment plan allows stockholders to automatically
reinvest their dividends in shares of our common stock. During the nine
months ended September 30, 2000, 4,858 shares were issued under this plan.
We attempt to assure capital adequacy by monitoring our current and
projected capital positions to support future growth, while providing
stockholders with an attractive long-term appreciation of their
investments. According to bank regulation, at a minimum, banks must
maintain a Tier I capital to risk-adjusted assets ratio of 4.0 percent and
a total capital to risk-adjusted assets ratio of 8.0 percent.
Additionally, banks must maintain a Leverage ratio, defined as Tier I
capital to total average assets less intangibles, of 3.0 percent. The
minimum Leverage ratio of 3.0 percent only applies to institutions with a
composite rating of one under the Uniform Interagency Bank Rating System,
that are not anticipating or experiencing significant growth and have well-
diversified risk. An additional 100 to 200 basis points are required for
all but these most highly-rated institutions. Our minimum Leverage ratio
was 4.0 percent at September 30, 2000 and 1999. If an institution is
deemed to be undercapitalized under these standards, banking law prescribes
an increasing amount of regulatory intervention, including the required
institution of a capital restoration plan and restrictions on the growth of
assets, branches or lines of business. Further restrictions are applied to
significantly or critically undercapitalized institutions, including
restrictions on interest payable on accounts, dismissal of management and
appointment of a receiver. For well capitalized institutions, banking law
provides authority for regulatory intervention where the institution is
deemed to be engaging in unsafe and unsound practices or receives a less
than satisfactory examination report rating.
Our and Community Bank's capital ratios at September 30, 2000 and 1999, as
well as the required minimum ratios for capital adequacy purposes and to be
well capitalized under the prompt corrective action provisions as defined
by the Federal Deposit Insurance Corporation Act of 1991 are summarized as
follows:
<TABLE>
<CAPTION>
RISK-ADJUSTED CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
SEPTEMBER 30, 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basis for ratios:
Tier I capital to risk-adjusted assets:
Consolidated........................... $ 34,508 $ 34,472 $ 9,840 $ 9,347 $14,760 $14,020
Community Bank......................... 33,242 33,256 9,780 9,287 14,670 13,930
Total capital to risk-adjusted assets:
Consolidated........................... 37,587 37,403 19,680 18,694 24,599 23,367
Community Bank......................... 36,302 36,169 19,560 18,574 24,450 23,217
Tier I capital to total average assets
less goodwill:
Consolidated........................... 34,508 34,472 16,161 15,631 20,201 19,539
Community Bank......................... 33,242 33,256 $16,087 $15,508 $20,109 $19,385
Risk-adjusted assets:
Consolidated........................... 229,605 218,679
Community Bank......................... 228,112 217,184
Risk-adjusted off-balance sheet items:
Consolidated........................... 16,387 14,986
Community Bank......................... 16,387 14,986
Average assets for Leverage ratio:
Consolidated........................... 404,013 390,770
Community Bank......................... $402,186 $387,697
Ratios:
Tier I capital as a percentage of risk-
adjusted assets and off-balance sheet
items:
Consolidated............................ 14.0% 14.8% 4.0% 4.0% 6.0% 6.0%
Community Bank.......................... 13.6 14.3 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............................ 15.3 16.0 8.0 8.0 10.0 10.0
Community Bank.......................... 14.8 15.6 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill:
Consolidated............................ 8.5 8.8 4.0 4.0 5.0 5.0
Community Bank.......................... 8.3% 8.6% 4.0% 4.0% 5.0% 5.0%
</TABLE>
The continuation of the common stock repurchase plan into 2000 directly
caused the decline in our risk-based capital ratios from the previous year.
Despite the decline, we exceeded all relevant regulatory capital
measurements at September 30, 2000, and were considered well capitalized.
Regulatory agencies define institutions not under a written directive to
maintain certain capital levels as well capitalized if they exceed the
following:
- a Tier I risk-based ratio of at least 6.0 percent,
- a total risk-based ratio of at least 10.0 percent, and
- a Leverage ratio of at least 5.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
The Federal Deposit Insurance Corporation's most recent earnings report
indicated that commercial banks throughout the Nation reported a 13.2
percent drop in earnings as compared to last year. As a result, the
industry's return on average assets declined to under 1.0 percent for the
first time since 1992. The main reasons for the decline were unusually
higher expenses related to a number of banks eliminating unprofitable
business lines and increasing loan loss reserves in the form of additional
provisions. We experienced results similar to that of the industry as our
earnings declined when comparing the third quarter and year-to-date results
of 2000 and 1999. Net income for the three months and nine months ended
September 30, 2000 totaled $1,160 or $0.59 per share and $3,190 or $1.60
per share. Net income for the comparable 1999 periods were $1,200 or $0.58
per share and $3,450 or $1.61 per share. Higher net interest income and
noninterest income were more than offset by a higher amount of loan loss
provision and increases in noninterest expense. Other factors which
contributed to the decline in earnings were opportunity costs associated
with the stock repurchase program and the reversal of interest earned on
loans placed on nonaccrual status during 2000. Return on average assets
for the third quarter of 2000, equaled 1.14 percent compared to 1.18
percent for the same period last year. Year-to-date, return on average
assets was 1.05 percent in 2000 compared to 1.17 percent in 1999. Return on
average equity for the three months and nine months ended September 30,
2000, were 12.82 percent and 12.03 percent compared to 12.97 percent and
11.85 percent for the comparable periods of 1999. In comparison, the peer
group's return on average assets and return on average equity were 1.05
percent and 12.42 percent for the nine months ended September 30, 2000. We
recorded other comprehensive income of $489 and $598 for the three months
and nine months ended September 30, 2000, compared to other comprehensive
losses of $126 and $1,382 for the respective periods of 1999.
NET INTEREST INCOME:
Our major source of operating income is derived from net interest income.
Net interest income is defined as the excess amount of income, interest
and fees, from earning assets over the cost of interest-bearing liabilities
supporting those assets. The primary sources of earning assets are loans
and investment securities, while deposits, short-term borrowings and long-
term debt comprise interest-bearing liabilities. Net interest margin is
the percentage of net interest income on a tax-equivalent basis to average
earning assets. Variations in volumes and rates of earning assets and
liabilities, in response to changes in general market rates, are the
primary factors affecting net interest income. The composition of earning
assets and interest-bearing liabilities and the volume of nonperforming
assets also influence the levels of interest income.
We analyze interest income and interest expense by segregating rate and
volume components of earning assets and interest-bearing liabilities. The
impact changes in the interest rates earned and paid on assets and
liabilities, along with changes in the volume of earning assets and
interest-bearing liabilities have on net interest income are summarized in
the following table. The net change attributable to the combined impact of
rate and volume has been allocated proportionately to the change due to
rate and the change due to volume.
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
Three Months Ended Nine Months Ended
September 30, September 30,
2000 vs. 1999 2000 vs. 1999
Increase (decrease) Increase (decrease)
attributable to attributable to
--------------------- ---------------------
Total Total
Change Rate Volume Change Rate Volume
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans:
Taxable............................. $ 594 $ 68 $ 526 $1,952 $ 56 $1,896
Tax-exempt.......................... 253 227 26 339 142 197
Investments:
Taxable............................. (328) (2) (326) (609) (6) (603)
Tax-exempt.......................... (130) (48) (82) (296) (67) (229)
Federal funds sold.................... 6 (113) 119 (63) 27 (90)
----- ----- ----- ------ ----- ------
Total interest income............. 395 132 263 1,323 152 1,171
----- ----- ----- ------ ----- ------
Interest expense:
Money market accounts................. 9 12 (3) 144 77 67
NOW accounts.......................... (7) (10) 3 19 (5) 24
Savings accounts...................... 58 24 34 244 88 156
Time deposits less than $100.......... (20) 138 (158) 391 (391)
Time deposits $100 or more............ 146 33 113 418 35 383
Short-term borrowings................. 9 9 90 14 76
Long-term debt........................ 1 (1)
----- ----- ----- ------ ----- ------
Total interest expense............ 195 206 (11) 915 601 314
----- ----- ----- ------ ----- ------
Net interest income............... $ 200 $ (74) $ 274 $ 408 $(449) $ 857
===== ===== ===== ====== ===== ======
</TABLE>
Net interest income on a tax-equivalent basis for the nine months ended
September 30, 2000, improved $408 to $11,637 from $11,229 for the same
period of 1999. The $408 resulted from an increase in tax-equivalent
interest income of $1,323 partially offset by a $915 rise in interest
expense. Net interest income increased $857 due to changes in the volume of
earning assets and interest-bearing liabilities. The primary factor
contributing to the positive volume variance was an increase in the average
volume of taxable loans, net of unearned income. Tax-equivalent interest
income improved $1,896 as a result of a $30.0 million increase in the
average volume of taxable loans. Partially offsetting this improvement was
a $17.8 million reduction in the average volume of investments accounting
for a $832 decline in interest income. In addition, a proportional increase
in all major categories of interest-bearing liabilities, except time
deposits less than $100, caused interest expense to increase $314.
The positive effect of the volume variance on net interest income was
lessened by a reduction in net interest income due to changes in the yield
on earning assets and the cost of interest-bearing liabilities. A 15 basis
point increase in the cost of funds from 4.42 percent to 4.57 percent
increased fund costs $601. Partially mitigating the effect of the fund cost
increase was a increase in the yield on earning assets which caused a $152
improvement in net interest income. A 22 basis point increase in the cost
of time deposits less than $100, offset partially by a 10 basis point
improvement in the yield on loans, net of unearned income, was the major
contributor to the negative rate variance of $449.
For the three months ended September 30, 2000, tax-equivalent net interest
income increased $200 compared to the same three months of last year.
Similar to the year-to-date change, we experienced a favorable volume
variance of $274 partially offset by an unfavorable rate variance of $74.
The majority of the positive impact in net interest income due to changes
in volumes came from a $25.2 million increase in average taxable loans.
This increase contributed $526 to net interest income. Partially offsetting
the impact of increased average taxable loan balances was a decline of
$27.3 million in average investments accounting for a $408 decline in net
interest income. The unfavorable rate variance of $74 was primarily
attributable to an increased cost of time deposits partially offset by an
improvement in the yield on the loan portfolio.
Maintenance of an adequate net interest margin is one of our primary
concerns. Our net interest margin at 4.05 percent for the nine months
ended September 30, 2000, was the same as the comparable period of 1999.
Actions of the FOMC along with intense competition in pricing loans and
deposits has placed significant pressure on our attempts to maintain our
margin at its present level. Our net interest margin may suffer in the
future if the FOMC changes its posture to a tightening bias. We believe
following prudent pricing practices coupled with careful implementation of
resources, will keep our net interest margin in check. However, no
assurance can be given that net interest income will not be adversely
affected should general market rates continue to increase and competition
further intensify.
The average balances of assets and liabilities, corresponding interest
income and expense and resulting average yields or rates paid for the nine
months ended September 30, 2000 and 1999, are summarized as follows.
Earning assets averages include nonaccrual loans. Investment averages
include available-for-sale securities at amortized cost. Income on
investment securities and loans are adjusted to a tax-equivalent basis
using a statutory tax rate of 34.0 percent.
<TABLE>
<CAPTION>
SUMMARY OF NET INTEREST INCOME
September 30, 2000 September 30, 1999
--------------------------- ---------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans:
Taxable..................................... $275,757 $17,374 8.42% $245,732 $15,422 8.39%
Tax-exempt.................................. 10,897 797 9.77 7,941 458 7.71
Investments:
Taxable..................................... 63,287 2,774 5.85 77,214 3,383 5.86
Tax-exempt.................................. 33,006 1,932 7.82 36,908 2,228 8.07
Federal funds sold............................ 968 41 5.66 2,952 104 4.71
-------- ------- -------- -------
Total earning assets...................... 383,915 22,918 7.97% 370,747 21,595 7.79%
Less: allowance for loan losses............... 3,518 4,065
Other assets.................................. 25,660 26,620
-------- --------
Total assets.............................. $406,057 $393,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 20,655 535 3.46% $ 17,835 391 2.93%
NOW accounts.................................. 25,808 466 2.41 24,446 447 2.44
Savings accounts.............................. 73,161 1,371 2.50 64,784 1,127 2.33
Time deposits less than $100.................. 175,832 7,379 5.61 182,884 7,379 5.39
Time deposits $100 or more.................... 31,011 1,378 5.94 22,347 960 5.74
Short-term borrowings......................... 3,134 150 6.39 1,509 60 5.32
Long-term debt................................ 37 2 7.22 40 2 6.68
-------- ------- -------- -------
Total interest-bearing liabilities........ 329,638 11,281 4.57% 313,845 10,366 4.42%
Noninterest-bearing deposits.................. 37,604 36,743
Other liabilities............................. 3,381 3,795
Stockholders' equity.......................... 35,434 38,919
-------- --------
Total liabilities and stockholders' equity $406,057 $393,302
======== ------- ======== -------
Net interest/income spread................ $11,637 3.40% $11,229 3.37%
======= =======
Net interest margin....................... 4.05% 4.05%
Tax equivalent adjustments:
Loans......................................... $ 271 $ 156
Investments................................... 657 758
------- -------
Total adjustments......................... $ 928 $ 914
======= =======
Note: Average balances were calculated using average daily balances. Average balances for loans include
nonaccrual loans. Available-for-sale securities, included in investment securities, are stated at
amortized cost with the related average unrealized holding loss of $1,101 for the nine months ended
September 30, 2000 and an unrealized holding gain of $1,159 for the nine months ended September 30, 1999
included in other assets. Tax-equivalent adjustments were calculated using the prevailing statutory tax
rate of 34.0 percent.
</TABLE>
PROVISION FOR LOAN LOSSES:
We make provisions for loan losses based on evaluations of the adequacy of
the allowance for loan losses account. Factors such as previous loan
experience, overall loan portfolio characteristics, prevailing economic
conditions and other relevant factors are considered when determining the
provision. Based on our most recent evaluation, we believe that the
allowance is adequate to absorb any known and inherent losses in the
portfolio.
For the nine months ended September 30, 2000, the provision for loan losses
totaled $300. This was an increase of $210 in comparison to $90 for the
same nine months of 1999. For the third quarter of 2000, the provision for
loan losses totaled $120, a $90 increase compared to the third quarter of
1999. The ratio of the allowance for loan losses as a percentage of loans,
net of unearned income, decreased from 1.41 percent at September 30, 1999,
to 1.16 percent at the end of the third quarter of 2000. Substantial loan
growth and an increase in net loans charged-off factored into the ratio
reduction. We believe our evaluation of the adequacy of the allowance for
loan losses account, taking into consideration the substantial loan growth
and increase in net charge-offs from the prior year, justifies the increase
in the provision for loan losses. We will consider adjusting the monthly
provision amount for the remainder of 2000, based on our continued analysis
of the allowance for loan losses account.
NONINTEREST INCOME:
For the nine months ended September 30, 2000, noninterest income totaled
$1,682. Noninterest income for the comparable 1999 period was $1,235.
Included in noninterest income in 2000 were gains on the sale of investment
securities of $173. The majority of these gains resulted from the sale of
equity securities of local financial institutions. The decision to sell
these securities was based on a decline in their total return compared to
alternative investments. Adjusting for these gains, noninterest income
increased $274 or 22.2 percent over the previous year. An increase in
service charges, fees and commissions of $322 was partially offset by a $48
decrease in gains on the sale of one-to-four family residential mortgages
on the secondary market.
For the third quarter of 2000, noninterest income totaled $583, an increase
of $134 or 29.8 percent in comparison to $449 recorded for the same quarter
last year. Furthermore, noninterest income increased $97 in comparison to
the $486 recorded for the second quarter of 2000. Changes to our service
charge and fee structure, which occurred at the beginning of the third
quarter of 2000, were directly responsible for the increased noninterest
income.
NONINTEREST EXPENSE:
We categorize noninterest expense into three main groups:
- employee-related expenses,
- occupancy and equipment expenses, and
- other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and
equipment expenses, the costs related to the maintenance of facilities and
equipment, include depreciation, general maintenance and repairs, real
estate taxes, rental expense offset by any rental income, and utility
costs. Other expenses include general operating expenses such as
advertising, contractual services, insurance including FDIC assessment,
other taxes and supplies. Several of these costs and expenses are variable
while the remainder are fixed. We utilize budgets and other related
strategies in an effort to control the variable expenses.
Major components of noninterest expense for the three months and nine
months ended September 30, 2000 and 1999, are summarized as follows:
<TABLE>
<CAPTION>
NONINTEREST EXPENSES
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $1,124 $1,073 $3,318 $3,092
Employee benefits.............................. 213 180 598 519
------ ------ ------ ------
Salaries and employee benefits expense....... 1,337 1,253 3,916 3,611
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 178 156 546 457
Equipment expense.............................. 246 207 668 556
------ ------ ------ ------
Net occupancy and equipment expense.......... 424 363 1,214 1,013
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 90 69 263 226
Other taxes.................................... 82 81 220 238
Stationery and supplies........................ 86 112 309 315
Contractual services........................... 268 265 826 729
Insurance including FDIC assessment............ 41 30 124 91
Other.......................................... 409 259 1,193 803
------ ------ ------ ------
Other noninterest expenses................... 976 816 2,935 2,402
------ ------ ------ ------
Total noninterest expense.................. $2,737 $2,432 $8,065 $7,026
====== ====== ====== ======
</TABLE>
Delivery system expansions, which occurred throughout the previous year,
impacted all three of our major categories of noninterest expense for the
nine months ended September 30, 2000. As a result, noninterest expense
recorded year-to-date amounted to $8,065, an increase of $1,039 or 14.8
percent compared to the same nine months of 1999. Our productivity and
efficiency were also negatively affected by the expansion, as evidenced by
increases in both our operating efficiency ratio and overhead ratio. For
the nine months ended September 30, 2000, the operating efficiency ratio,
defined as noninterest expenses less other real estate expenses to net
interest income and noninterest income less any nonrecurring gains, was
65.2 percent, compared to 60.9 percent for the comparable 1999 period. Our
overhead ratio, noninterest expense as a percentage of total average assets
increased to 2.65 percent from 1.97 percent for the nine months ended
September 30, 2000 and 1999. This ratio, however is in line with that of
our peer group which posted an overhead ratio of 2.62 percent for the nine
months ended September 30, 2000.
For the third quarter of 2000, noninterest in totaled $2,737, an increase
of $305 or 12.5 percent in comparison to $2,432 recorded for the same
quarter of 1999. For the third quarter of 2000, our operating efficiency
ratio was 62.9 percent, compared to 60.8 percent for the third quarter one
year ago. However, the efficiency ratio improved over that of the previous
two quarters of 2000. For the second and first quarters of 2000, this
ratio was 65.9 percent and 67.2 percent.
Salaries and employee benefit expenses, which account for the majority of
our noninterest expense, totaled $3,916 or 48.6 percent of noninterest
expense for the nine months ended September 30, 2000. In comparison, for
the same nine months of the prior year, these expenses were $3,611 or 51.4
percent of noninterest expense. Additional staffing needs relative to the
opening of the Dickson City branch office, coupled with merit increases
related to personnel performance appraisals and increased health insurance
costs were the primary reasons for the increase. Employee-related expenses
totaled $1,337 for the third quarter of 2000, an increase of $84 compared
to the same quarter of 1999.
Net occupancy and equipment expenses amounted to $1,214 for the nine months
ended September 30, 2000, an increase of $201 in comparison to $1,013
recorded for the same period of 1999. Additional expenses associated with
the operation of the Clarks Summit and Dickson City branch offices and the
corporate center, as well as, data processing enhancements contributed to
the increase. For the third quarter of 2000 and 1999, net occupancy and
equipment expenses totaled $424 and $363.
Net losses from properties held in other real estate, additional costs
relative to the operation of the two new branches and an increase in
marketing costs resulted in a higher amount of other expenses for the nine
months ended September 30, 2000. Year-to-date September 30, other expenses
totaled $2,935 in 2000, an increase of $533 compared to $2,402 in 1999.
Included in the net losses from other real estate were donations of
foreclosed properties to Habitat for Humanity. For the three months ended
September 30, other expenses were $976 in 2000 and $816 in 1999.
Recently, the Federal Deposit Insurance Corporation ("FDIC") decided to
retain the existing Bank Insurance Fund ("BIF") and Savings Association
Insurance Fund ("SAIF") assessment schedules of 0 to 27 basis points per
year for the second semiannual assessment period of 2000. According to
FDIC statistics:
- 93.7 percent of all BIF-member institutions and 91.6 percent of
SAIF-member institutions are estimated to be listed in the lowest
risk category, thus paying no premiums,
- Only 0.1 percent of BIF-member and SAIF-member institutions are
estimated to be in the highest risk category, paying a premium of
27 cents per 100 dollars in deposits,
- The average annual assessment rate is projected to be 11 cents
per 100 dollars for BIF-member institutions and 22 cents per 100
dollars for SAIF-member institutions,
- The FDIC-approved rate schedules are expected to maintain the
reserve ratios for both the BIF and SAIF above the Congressional
mandated 1.25 percent through year-end 2000,
- At December 31, 1999, the BIF reserve ratio was 1.36 percent and
the SAIF reserve ratio was 1.45 percent, and
- There will continue to be a separate levy assessed on all FDIC-
insured institutions to bear the cost of bonds sold by the
Finance Corporation ("FICO") between 1987 and 1989 in support of
the former Federal Savings and Loan Insurance Corporation. As of
January 1, 2000, all institutions are assessed the same rate by
FICO, as provided for in the Deposit Insurance Funds Act of 1996.
We were included in the 93.7 percent of all BIF-member institutions
classified in the well capitalized supervisory risk subgroup at September
30, 2000. Accordingly, we will be exempt from paying a BIF assessment for
the second half of 2000. However, along with all banks, we continue to be
assessed quarterly for assistance in interest payments on FICO bonds used
to capitalize the SAIF. Our assessments totaled $56 and $30 for the nine
months ended September 30, 2000 and 1999.
INCOME TAXES:
Income tax expense for the nine months ended September 30, 2000, totaled
$836. Our effective tax rate for this period was 20.8 percent. Income tax
expense was $984 with an effective tax rate of 22.2 percent for the
comparable nine months of 1999. Our tax position is more favorable in
comparison to our peer group, which posted effective tax rates of 21.5
percent and 23.3 percent for the nine months ended September 30, 2000 and
1999. We expect our effective tax rate to remain relatively stable for the
remainder of 2000 through emphasizing income on tax-exempt investments and
loans as well as utilizing investment tax credits available through our
investment in a residential housing program for elderly and low- to
moderate-income families.
The difference between the amount of income tax currently payable and the
provision for income tax expense reflected in the income statements arise
from temporary differences. Temporary differences are differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements, which result in deferred tax assets or liabilities.
We perform quarterly reviews on the tax criteria related to the recognition
of deferred tax assets. We decided not to establish a valuation reserve
for the deferred tax assets since it is more likely than not that these
assets could be principally realized through carry-back to taxable income
in prior years and by future reversals of existing taxable temporary
differences or, to a lesser extent, through future taxable income.
Comm Bancorp, Inc.
OTHER INFORMATION
---------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS OF SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27-Financial Data Schedule
(b) Reports on Form 8-K
None
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
--------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: November 13, 2000 /s/ David L. Baker
------------------ ------------------------------
David L. Baker
Chief Executive Officer
Date: November 13, 2000 /s/ Scott A. Seasock
------------------ ------------------------------
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 2000 /s/ Stephanie A. Ganz
------------------ ------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
EXHIBIT INDEX
Item Number Description Page
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27 Financial Data Schedule 46
