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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
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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.
-----------------------------------------------------
(Exact name of registran as specified in its charter)
PENNSYLVANIA 23-2242292
- --------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
125 N. STATE STREET, CLARKS SUMMIT, PA 18411
- --------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(570) 586-0377
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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: 1,958,013 at July 31, 2002.
Page 1 of 49
Exhibit Index on Page 47
COMM BANCORP, INC.
FORM 10-Q
JUNE 30, 2002
INDEX
CONTENTS PAGE NO.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements.
Consolidated Statements of Income and Comprehensive Income -
for the Three Months and Six Months Ended June 30, 2002
and 2001................................................... 3
Consolidated Balance Sheets - June 30, 2002 and December
31, 2001................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2002..................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001............................... 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...................................... 44
Item 2: Changes in Securities and Use of Proceeds.............. 44
Item 3: Defaults Upon Senior Securities........................ 44
Item 4: Submission of Matters to a Vote of Security Holders.... 44
Item 5: Other Information...................................... 45
Item 6: Exhibits and Reports on Form 8-K....................... 45
SIGNATURES..................................................... 46
Exhibit Index.................................................. 47
* Not Applicable
2
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................ $5,686 $6,056 $11,453 $12,171
Tax-exempt............................................................. 177 94 345 188
Interest and dividends on investment securities available-for-sale:
Taxable................................................................ 942 798 1,965 1,508
Tax-exempt............................................................. 504 448 1,016 764
Dividends.............................................................. 17 31 39 62
Interest on federal funds sold........................................... 68 239 91 543
------ ------ ------- -------
Total interest income................................................ 7,394 7,666 14,909 15,236
------ ------ ------- -------
INTEREST EXPENSE:
Interest on deposits..................................................... 3,111 3,912 6,291 7,825
Interest on short-term borrowings........................................
Interest on long-term debt............................................... 1
------ ------ ------- -------
Total interest expense............................................... 3,111 3,912 6,291 7,826
------ ------ ------- -------
Net interest income.................................................. 4,283 3,754 8,618 7,410
Provision for loan losses................................................ 370 180 740 360
------ ------ ------- -------
Net interest income after provision for loan losses.................. 3,913 3,574 7,878 7,050
------ ------ ------- -------
NONINTEREST INCOME:
Service charges, fees and commissions.................................... 679 718 1,453 1,280
Net gains on sale of loans............................................... 172 52 357 73
Net gains on sale of investment securities............................... 69 69
------ ------ ------- -------
Total noninterest income............................................. 920 770 1,879 1,353
------ ------ ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits expense................................... 1,690 1,367 3,271 2,656
Net occupancy and equipment expense...................................... 450 475 901 888
Other expenses........................................................... 1,176 1,135 2,416 2,053
------ ------ ------- -------
Total noninterest expense............................................ 3,316 2,977 6,588 5,597
------ ------ ------- -------
Income before income taxes............................................... 1,517 1,367 3,169 2,806
Provision for income tax expense......................................... 291 307 629 676
------ ------ ------- -------
Net income........................................................... 1,226 1,060 2,540 2,130
------ ------ ------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale.... 1,990 (246) 2,019 256
Reclassification adjustment for gains included in net income............. (69) (69)
Income tax expense (benefit) related to other comprehensive income (loss) 653 (84) 663 87
------ ------ ------- -------
Other comprehensive income (loss), net of income taxes............... 1,268 (162) 1,287 169
------ ------ ------- -------
Comprehensive income................................................. $2,494 $ 898 $ 3,827 $ 2,299
====== ====== ======= =======
PER SHARE DATA:
Net income............................................................... $ 0.62 $ 0.53 $ 1.29 $ 1.07
Cash dividends declared.................................................. $ 0.20 $ 0.18 $ 0.40 $ 0.36
Average common shares outstanding........................................ 1,961,755 1,984,334 1,967,185 1,985,660
See notes to consolidated financial statements.
3
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks............................................................. $ 12,124 $ 13,934
Federal funds sold.................................................................. 32,100
Investment securities available-for-sale............................................ 102,472 120,357
Loans held for sale, net............................................................ 724 1,885
Loans, net of unearned income....................................................... 315,473 310,322
Less: allowance for loan losses................................................... 3,531 3,220
-------- --------
Net loans........................................................................... 311,942 307,102
Premises and equipment, net......................................................... 10,483 9,702
Accrued interest receivable......................................................... 2,140 2,483
Other assets........................................................................ 4,178 4,895
-------- --------
Total assets.................................................................... $476,163 $460,358
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................... $ 48,507 $ 45,079
Interest-bearing.................................................................. 380,293 371,126
-------- --------
Total deposits.................................................................. 428,800 416,205
Accrued interest payable............................................................ 1,791 1,879
Other liabilities................................................................... 2,153 1,426
-------- --------
Total liabilities............................................................... 432,744 419,510
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and
outstanding:
June 30, 2002, 1,961,634 shares; December 31, 2001, 1,976,541 shares............... 647 652
Capital surplus..................................................................... 6,442 6,396
Retained earnings................................................................... 34,388 33,145
Accumulated other comprehensive income.............................................. 1,942 655
-------- --------
Total stockholders' equity...................................................... 43,419 40,848
-------- --------
Total liabilities and stockholders' equity...................................... $476,163 $460,358
======== ========
See notes to consolidated financial statements.
4
COMM BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001....................... $652 $6,396 $33,145 $ 655 $40,848
Net income....................................... 2,540 2,540
Dividends declared: $0.40 per share.............. (785) (785)
Dividend reinvestment plan: 3,226 shares issued.. 1 100 101
Repurchase and retirement: 18,133 shares......... (6) (54) (512) (572)
Net change in other comprehensive income......... 1,287 1,287
---- ------ ------- ------ -------
BALANCE, JUNE 30, 2002........................... $647 $6,442 $34,388 $1,942 $43,419
==== ====== ======= ====== =======
See notes to consolidated financial statements.
5
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30 2002 2001
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 2,540 $ 2,130
Adjustments:
Provision for loan losses.............................................................. 740 360
Depreciation, amortization and accretion............................................... 1,003 1,018
Amortization of loan fees.............................................................. (68) (55)
Deferred income tax expense (benefit).................................................. 52 (20)
Gains on sale of investment securities available-for-sale.............................. (69)
Gains on sale of foreclosed assets..................................................... (105) (111)
Changes in:
Loans held for sale, net............................................................. 1,161 (1,811)
Accrued interest receivable.......................................................... 343 (267)
Other assets......................................................................... (504) (298)
Accrued interest payable............................................................. (88) 343
Other liabilities.................................................................... 62 (106)
------- --------
Net cash provided by operating activities.......................................... 5,067 1,183
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available-for-sale........................... 9,993
Proceeds from repayments of investment securities available-for-sale..................... 13,236 12,684
Purchases of investment securities available-for-sale.................................... (3,731) (44,559)
Proceeds from sale of foreclosed assets.................................................. 1,406 919
Net decrease (increase) in lending activities............................................ (5,792) 3,507
Purchases of premises and equipment...................................................... (1,245) (232)
------- --------
Net cash provided by (used in) investing activities................................ 13,867 (27,681)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ 18,727 11,679
Time deposits.......................................................................... (6,132) 8,304
Payments on long-term debt............................................................... (36)
Proceeds from issuance of common shares.................................................. 101 106
Repurchase and retirement of common shares............................................... (572) (129)
Cash dividends paid...................................................................... (768) (715)
------- --------
Net cash provided by financing activities.......................................... 11,356 19,209
------- --------
Net increase (decrease) in cash and cash equivalents............................... 30,290 (7,289)
Cash and cash equivalents at beginning of year..................................... 13,934 37,419
------- --------
Cash and cash equivalents at end of period......................................... $44,224 $ 30,130
======= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest............................................................................... $ 6,379 $ 7,483
Income taxes........................................................................... 773 653
Noncash items:
Transfer of loans to foreclosed assets................................................. 280 330
Unrealized gains on investment securities available-for-sale........................... $(1,287) $ (169)
See notes to consolidated financial statements.
6
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm Bancorp,
Inc. and subsidiaries, Community Bank and Trust Company, including its
subsidiaries, Community Leasing Corporation and Comm Financial Services
Corporation, and Comm Realty Corporation (collectively, the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("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, 2001.
2. RECENT ACCOUNTING DEVELOPMENTS:
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." Furthermore, SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions related to the recission of SFAS No.
4 are effective for fiscal years beginning after May 15, 2002, and the
provisions related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. The adoption of the provisions of
SFAS No. 145 are not expected to have a material effect on the operating results
or financial position of the Company.
7
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 may also adversely affect our future results of operations.
Our management team, consisting of the Board of Directors and executive
officers, expects that no particular factor will affect the results of
operations. Downward trends in areas such as real estate, construction and
consumer spending, may adversely impact our ability to maintain or increase
profitability. Therefore, we cannot assure the continuation of our current rates
of income and growth.
Our earnings depend largely upon net interest income. The relationship between
our cost of funds, deposits and borrowings, and the yield on our
interest-earning assets, loans and investments all influence net interest income
levels. This relationship, defined as the net interest spread, fluctuates and is
affected by regulatory, economic and competitive factors that influence interest
rates, the volume, rate and mix of interest-earning assets and interest-bearing
liabilities, and the level of nonperforming assets. As part of our interest rate
risk ("IRR") strategy, we monitor the maturity and repricing characteristics of
interest-earning assets and interest-bearing liabilities to control our exposure
to interest rate changes.
In originating loans, some credit losses are likely to occur. This risk of loss
varies with, among other things:
- General economic conditions;
- Loan type;
- Creditworthiness and debt servicing capacity of the borrower
over the term of the loan; and
- The value and marketability of the collateral securing the loan.
We maintain an allowance for loan losses based on, among other things:
- Historical loan loss experience;
- Known inherent risks in the loan portfolio;
- Adverse situations that may affect a borrower's ability to
repay;
8
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- The estimated value of any underlying collateral; and
- An evaluation of current economic conditions.
We currently believe that the allowance for loan losses is adequate, but we
cannot assure that nonperforming loans will not increase in the future.
To a certain extent, our success depends upon the general economic conditions in
the geographic market that we serve. Although we expect economic conditions in
our market area to remain favorable, assurance cannot be given that these
conditions will continue. Adverse changes to economic conditions 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:
Relevant data for the second quarter of 2002 indicates a weaker than anticipated
economy. In addition, revisions to 2001 data suggest that last year's recession
spanned three quarters of contraction, compared to one as previously reported.
The gross domestic product ("GDP"), the value of all goods and services produce
in the United States, grew at an annual rate of 1.1 percent in the second
quarter of 2002, down sharply from a revised 5.0 percent in the first quarter.
Personal spending and residential investment rose, while business investment
fell for the sixth consecutive quarter. Expectations for economic recovery
remain bleak as confidence slid due to consumers' worries over a troubled stock
market and gloomy employment conditions. The consumer confidence index fell 9.2
points in July 2002, the largest decline since October of 2001. With inflation
in balance, the Federal Open Market Committee ("FOMC") is weighing options to
further lower the federal funds rate, which is currently at 1.75 percent.
9
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVIEW OF FINANCIAL POSITION:
Total assets grew $15.8 million to $476.2 million at June 30, 2002, from $460.4
million at December 31, 2001. The growth in the balance sheet was primarily
attributable to an increase in total deposits. Traditional deposit products have
come back in favor due to the unwillingness of investors to assume the added
risk of an extremely volatile stock market. Total deposits reached $428.8
million at the close of the second quarter, an increase of $12.6 million from
$416.2 million at year-end 2001. Loans, net of unearned income, increased $5.2
million to $315.5 million at June 30, 2002, from $310.3 million at the close of
last year. Investment securities decreased $17.9 million to $102.5 million at
June 30, 2002, from $120.4 million at December 31, 2001. In addition, we had
$32.1 million in federal funds sold at the end of the second quarter of 2002. We
had no federal funds sold outstanding at the end of 2001. Stockholders' equity
improved $2.6 million to $43.4 million at June 30, 2002, from $40.8 million at
December 31, 2001. The improvement primarily resulted from net income of $2,540.
Also affecting capital was a positive net change in other comprehensive income
of $1,287, net cash dividends declared of $684 and common stock repurchases of
$572. Our asset quality improved from year-end 2001, as evidenced by a decrease
in the ratio of nonperforming assets to loans, net of unearned income. This
ratio equaled 0.83 percent at the end of the second quarter of 2002, compared to
1.25 percent at year-end 2001.
We experienced a $17.2 million increase in total
assets in comparison to the end of the first quarter of 2002. Deposits grew
$14.3 million and loans, net of unearned income, increased $1.4 million. The
investment portfolio decreased $11.9 million, while federal funds sold increased
$23.7 million. Stockholders' equity improved $2.0 million.
During the second quarter, we opened our fifteenth community banking office in
Carbondale, Lackawanna County, Pennsylvania. The purpose of this office is to
redirect customer traffic from the existing branch in this city, one of our
busiest locations. Strong traffic flow to the new location indicates that the
opening of this satellite branch is well received by the community.
Construction is currently underway on our sixteenth community banking office in
Scranton, Lackawanna County, Pennsylvania. This branch, located in a commercial
hub of Northeastern Pennsylvania, will allow for significant business
development. The opening of the Scranton office will take place late in the
third quarter.
10
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INVESTMENT PORTFOLIO:
The demise of the equity markets escalated at the close of the second quarter of
2002. The demand for U.S. Treasury securities increased, due to investors
worries about the stock market and the economy. As a result of this renewed
demand, the price for U.S. Treasuries rose. Treasury yields, which react
inversely to prices, have reached historic lows. Changes in the yields of U.S.
Treasuries impact the market value of our investment portfolio. Specifically,
our holdings of mortgage-backed securities and municipal obligations have
average lives that are closely related to the two-year and ten-year U.S.
Treasury securities. The two-year U.S. Treasury rate, which affects our
mortgage-backed securities, fell 57 basis points to 2.99 percent at June 30,
2002, from 3.56 percent at the end of the previous quarter. The ten-year U.S.
Treasury, related to our municipals holdings, decreased 35 basis points to 4.93
percent at the close of the second quarter, from 5.28 percent at March 31, 2002.
As a result we experienced an increase in the market value of our investment
portfolio. The unrealized holding gain on the investment portfolio increased
$1,921 to $2,942 at June 30, 2002, from $1,021 at the end of the first quarter.
The carrying values of the major classifications of securities as they relate to
the total investment portfolio at June 30, 2002, and December 31, 2001, are
summarized as follows:
DISTRIBUTION OF INVESTMENT SECURITIES
JUNE 30, DECEMBER 31,
2002 2001
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------
U.S. Government agencies............................ $ 1,064 1.04% $ 1,067 0.89%
State and municipals................................ 38,527 37.60 41,790 34.72
Mortgage-backed securities.......................... 60,850 59.38 75,558 62.78
Equity securities................................... 2,031 1.98 1,942 1.61
-------- ------ -------- ------
Total............................................... $102,472 100.00% $120,357 100.00%
======== ====== ======== ======
Our investment portfolio decreased $17.9 million or 14.9 percent to $102.5
million at June 30, 2002, from $120.4 million at December 31, 2001. In
comparison to the end of the previous quarter, investments declined $11.9
million. At June 30, 2002, investment securities equaled 22.7 percent of earning
assets, compared to 26.1 percent at March 31, 2002, and 27.8 percent at December
31, 2001. During the second quarter of 2002, we sold state and municipal
obligations having an amortized cost of $5.0 million and mortgage-backed
securities having an amortized cost of $4.9 million. We realized gains of $69 on
the sale of these securities. No securities were sold during the six months
ended June 30, 2001. For the six months ended June 30, 2002, we purchased $3.7
million of investment securities and
11
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
received $13.2 million in repayments, calls and maturities from our investment
portfolio.
For the three months and six months ended June 30, 2002, the investment
portfolio averaged $110.5 million and $113.7 million, compared to $94.8 million
and $86.8 million for the respective periods last year. The tax-equivalent yield
on the investment portfolio dropped 5 basis points to 6.29 percent for the six
months ended June 30, 2002, from 6.34 percent for the same six months of 2001.
For the second quarter of 2002, the tax-equivalent yield was 6.25 percent,
compared to 6.32 percent for the first quarter.
In addition to yield analysis, we utilize a total return approach to measure the
investment portfolio's performance. This approach gives a more complete picture
of a portfolio's overall performance since it takes into consideration both
market value and reinvestment income from repayments. The investment portfolio's
total return is the sum of all interest income, reinvestment income on all
proceeds from repayments and capital gains or losses, whether realized or
unrealized. Total return for the investment portfolio improved for the twelve
months ended June 30, 2002, to 8.3 percent, compared to 6.3 percent for the
twelve months ended March 31, 2002. Furthermore, our investment portfolio ranked
in the upper 75th percentile of all banks throughout the United States over the
past twelve months according to latest results provided by a national investment
performance ranking company.
12
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The maturity distribution of the amortized cost, fair value and weighted-average
tax-equivalent yield of the available-for-sale portfolio at June 30, 2002, is
summarized as follows. The weighted-average yield, based on amortized cost, has
been computed for state and municipals on a tax-equivalent basis using the
statutory tax rate of 34.0 percent. The distributions are based on contractual
maturity with the exception of mortgage-backed securities, CMOs and equity
securities. Mortgage-backed securities and CMOs have been presented based upon
estimated cash flows, assuming no change in the current interest rate
environment. Equity securities with no stated contractual maturities are
included in the after ten year maturity distribution. Expected maturities may
differ from contracted maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------
JUNE 30, 2002 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- --------------------------------------------------------------------------------------------------------------
Amortized cost:
U.S. Government agencies..... $ 1,005 6.20% $ 1,005 6.20%
State and municipals......... $ 1,280 4.59% 925 5.15 $ 8,198 7.82% $26,650 7.58% 37,053 7.47
Mortgage-backed securities... 17,799 6.36 34,981 6.01 6,701 5.80 47 6.41 59,528 6.09
Equity securities............ 1,944 4.01 1,944 4.01
------- ------- ------- ------- --------
Total...................... $19,079 6.24% $36,911 5.99% $14,899 6.91% $28,641 7.34% $ 99,530 6.56%
======= ======= ======= ======= ========
Fair value:
U.S. Government agencies..... $ 1,064 $ 1,064
State and municipals......... $ 1,284 944 $ 8,747 $27,552 38,527
Mortgage-backed securities... 18,125 35,818 6,860 47 60,850
Equity securities............ 2,031 2,031
------- ------- ------- ------- --------
Total...................... $19,409 $37,826 $15,607 $29,630 $102,472
======= ======= ======= ======= ========
LOAN PORTFOLIO:
Loans to finance one-to-four family residential properties account for the
majority of our lending activities. Accordingly, the housing market and the
economic conditions affecting it significantly impact our lending activities.
Low mortgage rates and poor investment alternatives have kept the housing market
booming during the first half of 2002. The rate on a 30-year conventional
mortgage ended the second quarter of 2002 at 6.65 percent, a decline of 42 basis
points from year-end 2001 and 36 basis points from the end of the previous
quarter. Average annual sales of existing homes increased 4.6 percent to 5.43
million for the twelve months ended June 30, 2002, from 5.19 million one year
earlier. Despite a 1.4 percent decline in
13
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
average annual new home sales, new home sales in June 2002, increased for the
third consecutive month. Furthermore, the average annual number of housing
starts rose 3.3 percent for the twelve months ended June 30, 2002, compared to
the same period last year.
The prime rate remained at 4.75 percent throughout the first six months of 2002.
Despite continued low interest rates, problems plaguing the business sector
caused the demand for commercial loans to subside for all banks in the United
States. Business investment fell for the sixth consecutive quarter. As a result,
commercial banks posted a decline of $25.1 billion in commercial loans to
$1,000.9 billion at June 30, 2002, from $1,026.0 billion at March 31, 2002.
However, consumer loans for all commercial banks grew $6.6 billion to $568.3
billion at the end of the second quarter of 2002, from $561.7 billion at the
previous quarter-end.
The composition of the loan portfolio at June 30, 2002, and December 31, 2001,
is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
JUNE 30, DECEMBER 31,
2002 2001
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------
Commercial, financial and others............ $ 87,283 27.67% $ 71,512 23.05%
Real estate:
Construction.............................. 5,238 1.66 5,285 1.70
Mortgage.................................. 187,683 59.49 195,915 63.13
Consumer, net............................... 33,839 10.73 36,346 11.71
Lease financing, net........................ 1,430 0.45 1,264 0.41
-------- ------ -------- ------
Loans, net of unearned income............. 315,473 100.00% 310,322 100.00%
====== ======
Less: allowance for loan losses............. 3,531 3,220
-------- --------
Net loans............................... $311,942 $307,102
======== ========
Loans, net of unearned income increased $5.2 million to $315.5 million at June
30, 2002, from $310.3 million at the end of 2001. Significant growth in
commercial lending was mitigated by declines in consumer lending. Commercial
loans, including commercial mortgages and commercial lease financing, grew $23.5
million or 18.9 percent to $147.9 million at June 30, 2002, from $124.4 million
at December 31, 2001. Residential mortgage loans, including construction loans,
declined $15.8 million or 10.6 percent, while consumer loans decreased $2.5
million or 6.9 percent. Increased activity in our secondary mortgage division
directly caused the decline in residential mortgages, as the majority of
mortgages originated were subsequently sold on the secondary market. For the six
months ended June 30, 2002, loans, net of unearned income, averaged $315.6
million, an increase of $20.6 million
14
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
compared to $295.0 million averaged for the same six months of 2001. The
tax-equivalent yield on loans fell 86 basis points to 7.65 percent for the first
half of 2002, from 8.51 percent for the same period last year. In addition, the
tax-equivalent yield on the loan portfolio was 25 basis points lower in the
second quarter of 2002 compared to 7.78 percent in the previous quarter. We
anticipate the yield on the loan portfolio to decline further in the second half
of 2002 due to the sustained low interest rate environment.
We continually examine the maturity distribution and interest rate sensitivity
of the loan portfolio in an attempt to limit IRR and liquidity strains.
Approximately 49.0 percent of the lending portfolio is expected to reprice
within the next twelve months. Management will price loan products in the near
term in order to reduce the average term of fixed-rate loans and increase its
holdings of variable-rate loans in an attempt to reduce IRR in the loan
portfolio.
The maturity and repricing information of the loan portfolio by major
classification at June 30, 2002, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
JUNE 30, 2002 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
Maturity schedule:
Commercial, financial and others..... $ 37,820 $ 23,808 $ 25,655 $ 87,283
Real estate:
Construction....................... 5,238 5,238
Mortgage........................... 23,020 57,808 106,855 187,683
Consumer, net........................ 12,518 17,911 3,410 33,839
Lease financing, net................. 522 908 1,430
-------- -------- -------- --------
Total............................ $ 79,118 $100,435 $135,920 $315,473
======== ======== ======== ========
Repricing schedule:
Predetermined interest rates......... $ 32,583 $ 73,355 $ 87,517 $193,455
Floating or adjustable interest rates 122,018 122,018
-------- -------- -------- --------
Total............................ $154,601 $ 73,355 $ 87,517 $315,473
======== ======== ======== ========
15
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at June 30, 2002 and
2001, are summarized as follows:
JUNE 30, 2002 2001
- --------------------------------------------------------------------------------------
United States........................................................... 5.9% 4.6%
Pennsylvania............................................................ 5.3 4.7
Lackawanna county....................................................... 5.3 5.5
Susquehanna county...................................................... 7.4 6.4
Wayne county............................................................ 4.7 4.7
Wyoming county.......................................................... 4.9% 4.8%
The employment conditions in our market area held relatively steady in
comparison to the declining conditions of the Commonwealth of Pennsylvania and
the Nation. The national unemployment rate was 5.9 percent at June 30, 2002, up
from 4.6 percent one year ago. Nonfarm employment growth edged up slightly,
however the gains were concentrated in the service-producing industries.
Manufacturing payrolls declined, this indicates that companies are continuing to
focus on cost containment. Both the average workweek and factory overtime rose
in June 2002, which suggests that employers are using temporary means to fill
shortages instead of adding permanent labor costs. Although employment
conditions in our market area remain steady, further economic weakening could
cause conditions in the counties we serve to deteriorate.
Nonperforming assets were $2,634 or 0.83 percent of loans, net of unearned
income, at June 30, 2002, compared to $2,870 or 0.91 percent at the end of the
previous quarter and $3,870 or 1.25 percent at year-end 2001. A reduction in
foreclosed assets was primarily responsible for the asset quality improvement.
Nonaccrual loans increased slightly while accruing loans past due 90 days or
more declined from the end of 2001.
Nonaccrual loans increased $96 to $1,444 at June 30, 2002, from $1,348 at
December 31, 2001. The amount of real estate and consumer loans on nonaccrual
status increased, while the amount of commercial loans decreased. Accruing loans
past due 90 days or more decreased $311 to $393 at the end of the second quarter
compared to $704 at year-end 2001. Foreclosed assets decreased $1,021 to $797 at
June 30, 2002, from $1,818 at December 31, 2001. Seven loans totaling $280 were
transferred to foreclosed assets during the first half of 2002. Nine properties
with an aggregate carrying value of $1,283 were sold for $1,406, resulting in a
net realized gain of $123. Write downs on foreclosed assets, charged to
noninterest expense, amounted to $18.
16
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
We anticipate the economic conditions in our local market area to remain stable
for the remainder of 2002. However, should economic conditions weaken,
borrowers' ability to make timely loan payments could be hindered. The
possibility exists that these levels could deteriorate should this occur.
Information concerning nonperforming assets at June 30, 2002, and December 31,
2001, is summarized as follows. The table includes loans or other extensions of
credit classified for regulatory purposes and all material loans or other
extensions of credit that cause management to have serious doubts as to the
borrowers' ability to comply with present loan repayment terms.
DISTRIBUTION OF NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
2002 2001
- ---------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 79 $ 113
Real estate:
Construction.................................................
Mortgage..................................................... 1,114 1,045
Consumer, net.................................................. 251 190
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,444 1,348
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 47 107
Real estate:
Construction.................................................
Mortgage..................................................... 250 372
Consumer, net.................................................. 86 225
Lease financing, net........................................... 10
------ ------
Total accruing loans past due 90 days or more.............. 393 704
------ ------
Total nonperforming loans.................................. 1,837 2,052
------ ------
Foreclosed assets.............................................. 797 1,818
------ ------
Total nonperforming assets................................. $2,634 $3,870
====== ======
Ratios:
Nonperforming loans as a percentage of loans, net.............. 0.58% 0.66%
Nonperforming assets as a percentage of loans, net............. 0.83% 1.25%
17
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
We perform a systematic analysis of the adequacy of our allowance for loan
losses account quarterly. We follow our systematic methodology in accordance
with procedural discipline by applying it in the same manner regardless to
whether the allowance is being determined at a higher point or a lower point in
the economic cycle. Each quarter, our loan review department identifies those
loans to be individually evaluated for impairment and those to be collectively
evaluated for impairment utilizing a standard criteria. Internal loan review
grades are assigned quarterly to loans identified to be individually evaluated.
A loan's grade may differ from period to period based on current conditions and
events, however, we consistently utilize the same grading system each quarter.
We consistently use loss experience from the latest eight quarters in
determining the historical loss factor for each pool collectively evaluated for
impairment. Qualitative factors are evaluated in the same manner each quarter
and are adjusted within a relative range of values based on current conditions.
We maintain the allowance for loan losses at a level we believe adequate to
absorb probable credit losses related to specifically identified loans, as well
as probable incurred loan losses inherent in the remainder of the loan portfolio
as of the balance sheet date. The balance in the allowance for loan losses
account is based on past events and current economic conditions. We employ the
Federal Financial Institution Examination Council ("FFIEC") Interagency Policy
Statement and GAAP in assessing the adequacy of the allowance account. Under
GAAP, the adequacy of the allowance account is determined based on the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114 for
loans specifically identified to be individually evaluated for impairment and
the requirements of SFAS No. 5 for large groups of smaller-balance homogeneous
loans to be collectively evaluated for impairment.
The allowance for loan losses account consists of an allocated element and an
unallocated element. The allocated element consists of a specific portion for
the impairment of loans individually evaluated under SFAS No. 114, and a formula
portion for the impairment of those loans collectively evaluated under SFAS No.
5.
Identified loans individually evaluated for impairment under SFAS No. 114,
include:
- Loans to borrowers having an aggregate exposure of $500 or more;
- Loans that are past due 30 days or more; and
- Any loans internally classified with a loan review grade of
substandard, doubtful, loss, special mention or watch.
18
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All amounts due according to the
contractual terms means that both the contractual interest payments and the
contractual principal payments of a loan will be collected as scheduled in the
loan agreement. Factors considered by us in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
We determine the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Loans considered
impaired under SFAS No. 114 are measured for impairment based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the fair value of the collateral if the loan is collateral dependent. If
the present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, if the loan is
collateral dependent, is less than the recorded investment in the loan,
including accrued interest and net deferred loan fees, we will recognize the
impairment by adjusting the allowance for loan losses account through charges to
earnings as a provision for loan losses. For identified loans considered not
impaired, we determine if these loans share similar risk characteristics with
those grouped and collectively evaluated for impairment under SFAS No. 5.
Large groups of smaller-balance homogeneous loans and those identified loans
considered not impaired having similar characteristics as these groups are
segregated into major pools and are collectively evaluated, on a pool-by-pool
basis, for impairment under SFAS No. 5. Impairment for each of the major loan
pools is determined by applying a total loss factor to the current balance
outstanding for each individual pool. The total loss factor is comprised of a
historical loss factor using the loss migration method plus a qualitative
factor, which adjusts the historical loss factor for changes in trends,
conditions and other relevant factors that may affect repayment of the loans in
these pools as of the evaluation date. Loss migration involves determining the
percentage of each pool that is expected to ultimately result in loss based on
historical loss experience. The historical loss factor is based on the ratio of
net loans charged-off to loans, net of unearned income. These historical loss
percentages are updated quarterly and are based on the average actual amount of
loans in each pool that resulted in loss over the past eight quarters. We add to
these historical loss factors a qualitative factor that represents a number of
environmental risks that may cause estimated credit losses associated with
19
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
the current portfolio to differ from historical loss experience. These
environmental risks include:
- Changes in lending policies and procedures including
underwriting standards and collection, charge-off and recovery
policies;
- Changes in the composition and volume of the portfolio;
- Changes in national, local and industry conditions;
- Changes in the volume of classified loans, including past due,
nonaccrual, troubled debt restructuring and other loan
modifications;
- Changes in the levels of, and trends in, charge-offs and
recoveries;
- The existence and effect of any concentrations of credit and
changes in the level of such concentrations;
- Changes in the experience, ability, and depth of lending
management and other relevant staff;
- Changes in the quality of the loan review system and the degree
of oversight by the board of directors; and
- The effect of external factors such as competition and legal and
regulatory requirements.
Loans identified to be collectively evaluated for impairment are separated into
three major pools in order to determine applicable loss factors. These pools
include:
- Identified loans individually evaluated but considered not
impaired that share risk characteristics with other collectively
evaluated loans having a internal loan grading classification of
substandard, special mention or watch;
- Identified loans individually evaluated but considered not
impaired that share risk characteristics with other collectively
evaluated loans having a internal loan grading classification of
superior, satisfactory or marginal; and
- Identified loans to be collectively evaluated for impairment and
not having an internal loan grading classification.
20
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Specifically, we apply loss factors to identified loans individually evaluated
but considered not impaired that share risk characteristics with other
collectively evaluated loans having an internal loan grading classification of
substandard, special mention or watch based on actual historical loss experience
over the latest eight quarters, adjusted for current environmental risks for our
portfolio of loans having these loan grading classifications. Loss factors
applied to identified loans individually evaluated but considered not impaired
that share risk characteristics with other collectively evaluated loans having
an internal loan grading classification of superior, satisfactory or marginal
are based on actual historical loss experience and current environmental factors
for our portfolio of loans having these loan grading classifications. Loans
collectively evaluated under SFAS No. 5 and not internally classified are
applied a loss factor based on the actual historical loss experience and current
environmental conditions for the overall loan portfolio. The loss factors for
these pools are further defined for the major classifications of loans
including:
- Commercial, financial and others;
- Real estate-construction;
- Real estate-mortgage;
- Consumer; and
- Lease financing.
The unallocated element is used to cover inherent losses that exist as of the
evaluation date, but which have not been identified as part of the allocated
allowance using the above impairment evaluation methodology due to limitations
in the process. One such limitation is the imprecision of accurately estimating
the impact current economic conditions will have on historical loss rates.
Variations in the magnitude of the impact may cause estimated credit losses
associated with the current portfolio to differ from historical loss experience,
resulting in an allowance that is higher or lower than the anticipated level. We
establish the unallocated element of the allowance by considering a number of
environmental risks similar to the ones used for determining the qualitative
factors. We continuously monitor trends in historical and qualitative factors,
including trends in the volume, composition, and credit quality of the
portfolio. We utilize these trends to evaluate the reasonableness of the
unallocated 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 quarterly to ensure that it remains relatively constant in relation to
the total allowance unless there are changes in the
21
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
related criteria that would indicate a need to either increase or decrease it.
The determination of the allowance for loan loss level is inherently subjective
as it requires estimates that are susceptible to significant revision as more
information becomes available. 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.
Information concerning impaired loans at June 30, 2002, and December 31, 2001,
is summarized as follows. The table includes credits classified for regulatory
purposes and all material credits that cause management to have serious doubts
as to the borrower's ability to comply with present loan repayment terms.
DISTRIBUTION OF IMPAIRED LOANS
JUNE 30, DECEMBER 31,
2002 2001
- ---------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 79 $ 113
Real estate:
Construction.................................................
Mortgage..................................................... 1,114 1,045
Consumer, net.................................................. 251 190
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,444 1,348
------ ------
ACCRUING LOANS:
Commercial, financial and others............................... 494 407
Real estate:
Construction.................................................
Mortgage..................................................... 244 65
Consumer, net.................................................. 89 125
Lease financing, net........................................... 10
------ ------
Total accruing loans....................................... 837 597
------ ------
Total impaired loans....................................... $2,281 $1,945
====== ======
Ratio:
Impaired loans as a percentage of loans, net................... 0.72% 0.63%
22
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information relating to the recorded investment in impaired loans at June 30,
2002 and December 31, 2001, is summarized as follows:
JUNE 30, DECEMBER 31,
2002 2001
- ----------------------------------------------------------------------------------------
Impaired loans:
With a related allowance....................................... $ 823 $ 910
With no related allowance...................................... 1,458 1,035
------ ------
Total........................................................ $2,281 $1,945
====== ======
The analysis of changes affecting the allowance for loan losses related to
impaired loans for the six months ended June 30, 2002, is summarized as follows:
JUNE 30,
2002
- ---------------------------------------------------------------------------------------
Balance at January 1.............................................................. $403
Provision for loan losses......................................................... 377
Loans charged-off................................................................. 376
Loans recovered................................................................... 5
----
Balance at period-end............................................................. $409
====
Interest income on impaired loans that would have been recognized had the loans
been current and the terms of the loan not been modified, the aggregate amount
of interest income recognized and the amount recognized using the cash-basis
method and the average recorded investment in impaired loans for the three-month
and six-month periods ended June 30, 2002 and 2001 are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------
Gross interest due under terms................. $ 38 $ 41 $ 80 $ 78
Interest income recognized..................... 25 10 47 30
------ ------ ------ ------
Interest income not recognized................. $ 13 $ 31 $ 33 $ 48
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 25 $ 10 $ 47 $ 30
Average recorded investment in impaired loans.. $2,470 $1,814 $2,224 $1,747
Cash received on impaired loans applied as a reduction of principal totaled $299
and $127 for the six and three months ended June 30, 2002. For the respective
periods of 2001 cash receipts on impaired loans totaled $92 and $63. There were
no commitments to extend additional funds to such parties at June 30, 2002.
23
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The allocation of the allowance for loan losses at June 30, 2002 and December
31, 2001, is summarized as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
JUNE 30, DECEMBER 31,
2002 2001
------------------- -----------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
- -----------------------------------------------------------------------------------------
AMOUNT LOANS AMOUNT LOANS
- -----------------------------------------------------------------------------------------
Allocated allowance:
Specific:
Commercial, financial and others................. $ 77 0.18% $ 174 0.17%
Real estate:
Construction...................................
Mortgage....................................... 190 0.43 135 0.36
Consumer, net.................................... 133 0.11 94 0.10
Lease financing, net............................. 9 0.00
------ ------ ------ ------
Total specific................................. 409 0.72 403 0.63
------ ------ ------ ------
Formula:
Commercial, financial and others................. 1,199 27.49 1,433 22.88
Real estate:
Construction................................... 1.66 1.70
Mortgage....................................... 1,292 59.06 800 62.77
Consumer, net.................................... 457 10.62 452 11.61
Lease financing, net............................. 1 0.45 0.41
------ ------ ------ ------
Total formula................................ 2,949 99.28 2,685 99.37
------ ------ ------ ------
Total allocated allowance.................... 3,358 100.00% 3,088 100.00%
====== ======
Unallocated allowance............................ 173 132
------ ------
Total allowance for loan losses.............. $3,531 $3,220
====== ======
The allocated allowance was $3,358 at June 30, 2002, an increase of $270 from
$3,088 at December 31, 2001. The increase primarily resulted from an increase in
the formula portion for impairment of identified loans individually evaluated
but considered not impaired that share similar risk characteristics with other
collectively evaluated loans having an internal loan grading classification of
substandard, special mention or watch. We recently modified our methodology to
include loans having a grading classification of watch with those classified as
substandard or special mention. Previously, these loans were included in the
evaluation of loans having a grading classification of superior, satisfactory or
marginal. The unallocated portion of the allowance for loan losses increased
slightly to $173 at the end of the first half of 2002, from $132 at year-end
2001.
24
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A reconciliation of the allowance for loan losses and illustration of charge-
offs and recoveries by major loan category for the six months ended June 30,
2002, is summarized as follows:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30,
2002
- ----------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period............................... $3,220
Loans charged-off:
Commercial, financial and others............................................... 105
Real estate:
Construction.................................................................
Mortgage..................................................................... 182
Consumer, net.................................................................. 197
Lease financing, net...........................................................
------
Total...................................................................... 484
------
Loans recovered:
Commercial, financial and others............................................... 4
Real estate:
Construction.................................................................
Mortgage..................................................................... 8
Consumer, net.................................................................. 43
Lease financing, net...........................................................
------
Total...................................................................... 55
------
Net loans charged-off.......................................................... 429
------
Provision charged to operating expense......................................... 740
------
Allowance for loan losses at end of period..................................... $3,531
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.27%
Allowance for loan losses as a percentage of period end loans.................. 1.12%
The allowance for loan losses increased $74 to $3,531 at June 30, 2002, from
$3,457 at the previous quarter-end. The $370 provision for loan losses exceeded
net charge-offs of $296 for the quarter ended June 30, 2002. The allowance for
loan losses equaled 1.12 percent of loans, net of unearned income at the end of
the second quarter of 2002 and 1.10 percent at March 31, 2002. The allowance
account covered 134.1 percent of nonperforming assets at June 30, 2002 and 120.5
percent at March 31, 2002.
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 $429 or 0.27 percent of average loans outstanding for the six
months ended June 30, 2002, compared to $243 or 0.17 percent for the
25
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
same period last year. Net charge-offs as a percentage of average loans
outstanding for our peer group equaled 0.13 percent and 0.14 percent for the
respective periods.
DEPOSITS:
The average amount of, and the rate paid on, the major classifications of
deposits for the six months ended June 30, 2002 and 2001, are summarized as
follows:
DEPOSIT DISTRIBUTION
JUNE 30, JUNE 30,
2002 2001
----------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- ---------------------------------------------------------------------------------------
Interest-bearing:
Money market accounts....................... $ 20,743 2.45% $ 29,748 4.10%
NOW accounts................................ 37,534 1.47 25,185 1.93
Savings accounts............................ 97,274 2.02 74,288 2.43
Time deposits less than $100................ 185,987 4.58 183,194 5.73
Time deposits $100 or more.................. 29,798 3.82 31,763 5.58
-------- --------
Total interest-bearing.................... 371,336 3.42% 344,178 4.58%
Noninterest-bearing......................... 47,106 39,824
-------- --------
Total deposits............................ $418,442 $384,002
======== ========
Stock market volatility, which began in the latter part of 2001 with economic
uncertainty, escalated in the second quarter of 2002 due to recent corporate
accounting scandals. Investors, not willing to take on the added risk of equity
markets are using traditional bank products as their current investment choice.
In addition, consumers, leery about economic conditions, are opting to increase
their personal savings. As a result the personal savings rate, which was
negative throughout most of 2001, was 4.2 percent in June 2002.
Similarly, we experienced increased demand for our deposit products.
Specifically our transaction accounts grew, as depositors were not willing to
invest monies long-term due to extremely low interest rates. At June 30, 2002,
total deposits amounted to $428.8 million an increase of $14.3 million from
March 31, 2002, and $12.6 million from year-end 2001. The growth from the end of
the first quarter resulted from a $12.6 million increase in interest-bearing
accounts, coupled with a $1.7 million rise in noninterset- bearing accounts. The
growth in interest-bearing accounts arose primarily
26
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
from a $16.0 million increase in savings accounts, partially offset by a $3.0
million decline in time deposits less than $100. Noninterest-bearing deposits
totaled $48.5 million at June 30, 2002, compared to $46.8 million at March 31,
2002.
For the six months ended June 30, 2002, total deposits averaged $418.4 million,
an increase of $34.5 million or 9.0 percent compared to $384.0 million averaged
for the same period of 2001. We experienced significant growth in
noninterest-bearing deposits which averaged $47.1 million in the first half of
2002, an increase of $7.3 million or 18.3 percent compared to $39.8 million
averaged for the same period of 2001. Average interest-bearing deposits
increased $27.1 million or 7.9 percent to $371.3 million for the six months
ended June 30, 2002, from $344.2 million for the same six months of the previous
year. Increases of $23.0 million in savings accounts, $12.3 million in NOW
accounts and $2.8 million in time deposits less than $100, were partially offset
by declines of $9.0 million in money market accounts and $2.0 million in time
deposits $100 or more. Due to the sustained low interest rate environment, our
cost of deposits decreased dramatically. For the six months ended June 30, our
cost of deposits fell 116 basis points to 3.42 percent in 2002, from 4.58
percent in 2001. Low interest rates are expected to continue throughout the
second half of 2002. Therefore, we anticipate our deposit costs will remain low.
However, should an economic rebound occur and inflationary pressures pick up,
our cost of funds could escalate.
Volatile deposits, time deposits in denominations of $100 or more, equaled $28.2
million at June 30, 2002, a $3.6 million decline from $31.8 million at December
31, 2001. The decline was due to withdrawal requirements associated with
building projects of local area school districts. Due to the short-term
structure of volatile deposits and significantly lower market rates, the average
cost of these deposits fell 176 basis points to 3.82 percent for the six months
ended June 30, 2002, compared to 5.58 percent for the same six months of last
year.
Maturities of time deposits of $100 or more at June 30, 2002, and December 31,
2001, are summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
JUNE 30, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------------
Within three months............................................ $ 5,051 $10,720
After three months but within six months....................... 11,482 4,648
After six months but within twelve months...................... 6,564 11,619
After twelve months............................................ 5,152 4,823
------- -------
Total........................................................ $28,249 $31,810
======= =======
27
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARKET RISK SENSITIVITY:
Market risk is the risk to our earnings or financial position resulting from
adverse changes in market rates or prices, such as, interest rates, foreign
exchange rates or equity prices. Our exposure to market risk is primarily IRR
associated with our lending, investing and deposit-gathering activities. During
the normal course of business, we are not exposed to foreign currency exchange
risk or commodity price risk. Our exposure to IRR can be explained as the
potential for change in our reported earnings and/or the market value of our net
worth. Variations in interest rates affect earnings by changing net interest
income and the level of other interest-sensitive income and operating expenses.
Interest rate changes also affect the underlying economic value of our assets,
liabilities and off-balance sheet items. These changes arise because the present
value of future cash flows, and often the cash flows themselves, change with
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 degree of IRR
may experience lower earnings, impaired liquidity and capital positions, and
most likely, a greater risk of insolvency. Therefore, banks must carefully
evaluate IRR to promote safety and soundness in their activities.
Interest rate sensitivity management attempts to limit and, to the extent
possible, control the effects interest rate fluctuations have on net interest
income and the market value of financial instruments. The responsibility of this
management has been delegated to the Asset/Liability Management Committee
("ALCO"). Specifically, ALCO utilizes a number of computerized modeling
techniques to monitor and attempt to control the influence that market changes
have on our rate-sensitive assets and liabilities. One such technique utilizes a
static gap report, which attempts to measure our interest rate exposure by
calculating the net amount of rate-sensitive assets ("RSA") and rate-sensitive
liabilities ("RSL") that reprice within specific time intervals. A positive gap,
indicated by a RSA/RSL ratio greater than 1.0, implies that earnings will be
impacted favorably if interest rates rise and adversely if interest rates fall
during the period. A negative gap, a RSA/RSL ratio less than 1.0, tends to
indicate that earnings will be affected inversely to interest rate changes.
Our interest rate sensitivity gap position, illustrating RSA and RSL at their
related carrying values, is summarized as follows. The distributions in the
table are based on a combination of maturities, call provisions, repricing
frequencies and prepayment patterns. Variable-rate assets and
28
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
liabilities are distributed based on the repricing frequency of the instrument.
Mortgage instruments are distributed in accordance with estimated cash flows,
assuming there is no change in the current interest rate environment.
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
JUNE 30, 2002 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
Rate sensitive assets:
Investment securities............... $ 5,612 $ 13,797 $ 37,826 $ 45,237 $102,472
Loans held for sale, net............ 724 724
Loans, net of unearned income....... 134,302 20,299 73,355 87,517 315,473
Federal funds sold.................. 32,100 32,100
-------- --------- -------- -------- --------
Total............................. $172,738 $ 34,096 $111,181 $132,754 $450,769
======== ========= ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 14,619 $ 14,619
NOW accounts........................ 42,649 42,649
Savings accounts.................... $111,235 111,235
Time deposits less than $100........ $ 35,064 74,636 73,472 $ 369 183,541
Time deposits $100 or more.......... 5,051 18,046 5,152 28,249
-------- --------- -------- -------- --------
Total............................. $ 40,115 $ 149,950 $189,859 $ 369 $380,293
======== ========= ======== ======== ========
Rate sensitivity gap:
Period............................ $132,623 $(115,854) $(78,678) $132,385
Cumulative........................ $132,623 $ 16,769 $(61,909) $ 70,476 $ 70,476
RSA/RSL ratio:
Period............................ 4.31 0.23 0.59 359.77
Cumulative........................ 4.31 1.09 0.84 1.19 1.19
Our cumulative one-year RSA/RSL ratio equaled 1.09 at June 30 2002, compared to
0.91 at March 31, 2002. Both ratios fall within our asset/liability guidelines
of 0.70 and 1.30. The change in the ratio occurred as a result of a $29.5
million increase in RSA maturing or repricing within one year coupled with a
$3.8 million decline in RSL maturing or repricing within the same time frame.
The increase in RSA primarily resulted from increases of $6.5 million in loans,
net of unearned income, and $23.7 million in federal funds sold. The change in
RSL was mainly caused by a $3.7 million decline in time deposits less than $100
maturing or repricing within one year.
We experienced an increase in our three-month ratio to 4.31 at June 30, 2002,
from 3.27 at the end of the previous quarter. The increase primarily resulted
from a $30.4 million increase in the amount of RSA coupled with a $3.5 million
reduction in RSL maturing or repricing within three months. Increases in federal
funds sold and loans, net of unearned income, contributed to the increase in
RSA, while a reduction in large denomination time deposits accounted for the
decrease in RSL.
29
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
According to the results of the static gap report, we were asset 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
positively affected. Conversely, a decline in market rates would likely have an
unfavorable effect on net interest income. However, these forward-looking
statements are qualified in the aforementioned section entitled "Forward-Looking
Discussion" in this Management's Discussion and Analysis.
Static gap analysis, although a credible measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes normally do not equally or simultaneously affect all categories of
assets and liabilities. Second, assets and liabilities that can contractually
reprice within the same period may not do so at the same time or to the same
magnitude. Third, the interest rate sensitivity table presents a one-day
position. Variations occur daily as we adjust our rate sensitivity throughout
the year. Finally, assumptions must be made in constructing such a table. For
example, the conservative nature of our Asset/Liability Management Policy
assigns money market and NOW accounts to the due after three but within twelve
months repricing interval. In reality, these items may reprice less frequently
and in different magnitudes than changes in general interest rate levels.
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Model results
at June 30, 2002, produced results contrary to those indicated by the one-year
static gap position. Given parallel and instantaneous shifts in interest rates
of plus 100 basis points and 200 basis points, net interest income should
decrease by 1.5 percent and 3.1 percent. Conversely, similar declines in
interest rates would result in increases in net interest income of 0.7 percent
and 3.6 percent.
Financial institutions are affected differently by inflation than commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of our assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely measure the impact inflation has on us, however we believe that our
exposure to inflation can be mitigated through asset/liability management.
30
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LIQUIDITY:
Liquidity is defined as the ability to generate cash at a reasonable cost to
fulfill lending commitments and support asset growth, while satisfying the
withdrawal demands of customers and any borrowing requirements. Our principal
sources of liquidity are core deposits and loan and investment payments and
prepayments. Providing a secondary source of liquidity is our ability to sell
both available-for-sale securities and mortgage loans held for sale. As a final
source of liquidity, we can exercise existing credit arrangements. We manage
liquidity daily, thus enabling us to effectively monitor fluctuations in our
liquidity position and to adapt the position according to market fluctuations.
We believe our liquidity is adequate to meet both present and future financial
obligations and commitments on a timely basis. There are presently no known
trends, demands, commitments, events or uncertainties that have resulted or are
reasonably likely to result in material changes with respect to our liquidity.
Our liquidity position at June 30, 2002, improved significantly from the
previous quarter end. The improvement directly resulted from an increase in the
amount of federal funds sold outstanding at the end of the second quarter
compared to the close of the first quarter. The net noncore funding dependence
ratio and net short-term noncore funding dependence ratio best illustrate the
change in our liquidity position. The net noncore funding dependence ratio,
defined as the difference between noncore funds, time deposits $100 or more and
brokered time deposits less than $100, and short-term investments to long-term
assets, was negative 5.9 percent at June 30, 2002, compared to 0.5 percent at
March 31, 2002. In addition, the net short-term noncore funding dependence
ratio, defined as the difference between noncore funds maturing within one year,
including borrowed funds, less short-term investments to long-term assets,
equaled negative 7.2 percent at the close of the second quarter, and negative
0.8 percent at the end of the first 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 and further
illustrate the improvement in our liquidity position. Cash and cash equivalents,
consisting of cash on hand, cash items in the process of collection,
noninterest-bearing deposits with other banks, balances with the Federal Reserve
Bank of Philadelphia ("FRB") and the Federal Home Loan Bank of Pittsburgh
("FHLB-Pgh"), and federal funds sold, increased $30.3 million during the first
six months of 2002. Net cash provided by operating activities totaled $5.1
million. Net income of $2.5 million and
31
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
a $1.2 million net decrease in loans held for sale, net for the six months ended
June 30, 2002, were the primary factors contributing to the net cash inflow.
Net cash provided by investing activities totaled $13.9 million for the first
half of 2002. Repayments of investment securities of $13.2 million, proceeds
from the sale of investment securities of $10.0 million and cash received from
the sale of foreclosed assets of $1.4 million were the cash inflows from
investing activities. Partially offsetting these inflows were cash outflows of
$3.7 million for purchases of investment securities, $5.8 million for a net
increase in lending activity and $1.2 million for purchases of premises and
equipment.
For the six months ended June 30, 2002, net cash provided by financing
activities totaled $11.3 million. The net cash inflow resulted primarily from a
$12.6 million net increase in deposits.
CAPITAL ADEQUACY:
Stockholders' equity increased $2.6 million to $43.4 million at June 30, 2002,
from $40.8 million at December 31, 2001. The increase resulted principally from
net income of $2,540 for the first half of 2002. A positive change in other
comprehensive income of $1,287, net cash dividends declared of $684 and the
repurchase of 18,133 shares of common stock for $572 also affected stockholders'
equity.
Dividends declared for the six months ended June 30, 2002, totaled $785 or $0.40
per share. For the same six months of 2001, dividends declared amounted to $715
or $0.36 per share. The dividend payout ratio was 30.9 percent and 33.6 percent
for the first six months ended June 30, 2002 and 2001. 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 six months ended June
30, 2002, 3,226 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.
32
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Additionally, banks must maintain a Leverage ratio, defined as Tier I capital to
total average assets less intangibles, of 3.0 percent. The minimum Leverage
ratio of 3.0 percent only applies to institutions with a composite rating of one
under the Uniform Interagency Bank Rating System, that are not anticipating or
experiencing significant growth and have well- diversified risk. An additional
100 to 200 basis points are required for all but these most highly-rated
institutions. Our minimum Leverage ratio was 4.0 percent at June 30, 2002 and
2001. 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.
33
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Our and Community Bank's capital ratios at June 30, 2002 and 2001, 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:
REGULATORY CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------------------------------------------
JUNE 30, 2002 2001 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated........................... $ 40,149 $ 36,920 $12,938 $11,188 $19,407 $16,782
Community Bank......................... 38,421 35,129 12,896 11,136 19,344 16,704
Total capital to risk-weighted assets:
Consolidated........................... 43,680 40,322 25,875 22,376 32,344 27,971
Community Bank......................... 41,952 38,531 25,792 22,271 32,240 27,839
Tier I capital to total average assets
less goodwill:
Consolidated........................... 40,149 36,920 18,490 16,968 23,112 21,210
Community Bank......................... 38,421 35,129 $18,476 $16,912 $23,095 $21,140
Risk-weighted assets:
Consolidated........................... 300,856 265,057
Community Bank......................... 299,818 263,744
Risk-weighted off-balance sheet items:
Consolidated........................... 22,587 14,648
Community Bank......................... 22,587 14,648
Average assets for Leverage ratio:
Consolidated........................... 462,239 424,191
Community Bank......................... $461,897 $422,809
Ratios:
Tier I capital as a percentage of risk-
weighted assets and off-balance sheet
items:
Consolidated............................ 12.4% 13.2% 4.0% 4.0% 6.0% 6.0%
Community Bank.......................... 11.9 12.6 4.0 4.0 6.0 6.0
Total of Tier I and Tier II capital as a
percentage of risk-weighted assets and
off-balance sheet items:
Consolidated............................ 13.5 14.4 8.0 8.0 10.0 10.0
Community Bank.......................... 13.0 13.8 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less goodwill:
Consolidated............................ 8.7 8.7 4.0 4.0 5.0 5.0
Community Bank.......................... 8.3% 8.3% 4.0% 4.0% 5.0% 5.0%
At June 30, 2002, our risk-based capital ratios weakened slightly in
comparison to one year earlier. Despite the weakening, we exceeded all
34
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
relevant regulatory capital requirements and were considered well capitalized at
June 30, 2002 and 2001. Regulatory agencies define institutions not under a
written directive to maintain certain capital levels as well capitalized if they
exceed the following:
- A Tier I risk-based ratio of at least 6.0 percent,
- A total risk-based ratio of at least 10.0 percent, and
- A Leverage ratio of at least 5.0 percent.
REVIEW OF FINANCIAL PERFORMANCE:
Net income for the six months ended June 30, increased $410 or 19.2 percent to
$2,540 or $1.29 per share in 2002, compared to $2,130 or $1.07 per share in
2001. Higher net interest income and noninterest income, partially offset by
greater noninterest expense, contributed to the improved earnings. For the
second quarter, net income was $1,226 or $0.62 per share in 2002 compared to
$1,060 or $0.53 per share in 2001. Return on average assets was 1.05 percent and
1.10 percent for the three months and six months ended June 30, 2002, compared
to 0.98 percent and 1.01 percent for the same periods of 2001. Return on average
equity was 11.61 percent for the second quarter and 12.20 percent year-to-date
2002. For the respective periods of last year, return on average equity was
10.94 percent and 11.13 percent. We had other comprehensive income, related
entirely to unrealized gains and losses on investment securities, of $1,287 for
the six months ended June 30, 2002, compared to $169 for the same period of
2001.
NET INTEREST INCOME:
Our principle source of operating income is net interest income. Net interest
income is defined as the difference between income, interest and fees from
earning assets, and the cost of interest-bearing liabilities supporting those
assets. The primary sources of earning assets are loans and investment
securities, while deposits, short-term borrowings and long- term debt comprise
interest-bearing liabilities. Net interest income is impacted by:
- Variations in the volume, rate and composition of earning assets
and interest-bearing liabilities;
- Changes in general market rates; and
- The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net
interest margin. Net interest spread, the difference between the average yield
earned on earning assets and the average rate incurred on
35
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
interest-bearing liabilities, illustrates the effects changing interest rates
have on profitability. Net interest margin, net interest income as a percentage
of average earning assets, is a more comprehensive ratio, as it reflects not
only spread, but also the change in the composition of interest-earning assets
and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax
yields lower than their taxable counterparts. Therefore, in order to make the
analysis of net interest income more comparable, tax-exempt income and yields
are reported on a tax-equivalent basis using the prevailing statutory tax rate
of 34.0 percent.
We analyze interest income and interest expense by segregating rate and volume
components of earning assets and interest-bearing liabilities. The impact
changes in the interest rates earned and paid on assets and liabilities, along
with changes in the volume of earning assets and interest-bearing liabilities
have on net interest income are summarized in the following table. The net
change attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 VS. 2001 2002 VS. 2001
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
--------------------- ----------------------
TOTAL TOTAL
CHANGE RATE VOLUME CHANGE RATE VOLUME
------ ---- ------ ------ ---- ------
Interest income:
Loans:
Taxable............................. $(370) $(712) $ 342 $ (718)$(1,333) $ 615
Tax-exempt.......................... 126 (17) 143 238 (33) 271
Investments:
Taxable............................. 130 (19) 149 434 (19) 453
Tax-exempt.......................... 84 (7) 91 381 (14) 395
Federal funds sold.................... (171) (120) (51) (452) (254) (198)
----- ----- ----- ------- ------- ------
Total interest income............. (201) (875) 674 (117) (1,653) 1,536
----- ----- ----- ------- ------- ------
Interest expense:
Money market accounts................. (219) (107) (112) (353) (202) (151)
NOW accounts.......................... 49 (4) 53 33 (31) 64
Savings accounts...................... 96 (24) 120 80 (171) 251
Time deposits less than $100.......... (572) (642) 70 (980) (1,161) 181
Time deposits $100 or more............ (155) (122) (33) (314) (262) (52)
Long-term debt........................ (1) (1)
----- ----- ----- ------- ------- ------
Total interest expense............ (801) (899) 98 (1,535) (1,827) 292
----- ----- ----- ------- ------- ------
Net interest income............... $ 600 $ 24 $ 576 $ 1,418 $ 174 $1,244
===== ===== ===== ======= ======= ======
36
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Tax-equivalent net interest income improved $1,418 or 17.9 percent to $9,319 for
the six months ended June 30, 2002, from $7,901 for the same six months of last
year. The improvement resulted from an increase in the volume of average earning
assets over that of average interest-bearing liabilities. Total average earning
assets increased $36.2 million to $440.0 million for the first six months of
2002, from $403.8 million for the same period of 2001 and accounted for a $1,536
increase in total interest income. Average loans, net of unearned income, and
average investments increased $20.6 million and $26.9 million, which resulted in
positive effects to tax-equivalent interest income of $886 and $848. Partially
offsetting these increases was a decline in average federal funds sold of $11.3
million, which resulted in a reduction in interest income of $198.
Interest-bearing liabilities averaged $371.4 million for the six months ended
June 30, 2002, an increase of $27.2 million from $344.2 million for the same
period of 2001. This increase resulted in a negative impact to net interest
income as total interest expense rose $292. The growth resulted primarily from
increases of $23.0 million in savings accounts, $12.3 million in NOW accounts
and $2.8 million in time deposits less than $100, partially offset by declines
of $9.0 million in money market accounts and $2.0 million in large denomination
time deposits.
The effect on tax-equivalent net interest income due to changes in rate was
negligible, as a 117 basis point reduction in the cost of funds was more than
entirely offset by a 70 basis point decline in the tax-equivalent yield on
earning assets. For the six months ended June 30, 2002, the cost of funds fell
to 3.42 percent from 4.59 percent for the same six months of last year and
resulted in a $1,827 positive rate variance. Conversely, the tax-equivalent
yield on earning assets for the first half of 2002 was 7.15 percent compared to
7.85 percent for the same period of 2001. The reduction in the tax-equivalent
yield caused a negative rate variance of $1,653. With regard to both our cost of
funds and tax-equivalent yield on earning assets, we experienced significant
reductions in the average rate paid on all major deposit categories as well as a
reduction in the tax-equivalent yield on loans, investments and federal funds
sold.
For the quarter ended June 30, 2002, tax-equivalent interest income improved
$600 in comparison to the same three months of last year. Similarly, the
improvement was primarily due to a favorable volume variance of $576. Earning
assets averaged $32.1 million higher for the second quarter of 2002, compared to
the same quarter of 2001. Loans, net of unearned income increased $22.3 million
and average investments rose $15.7 million. Partially offsetting the increases
in loans and investments was a $5.9 million reduction in average federal funds
sold. Average interest
37
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
bearing liabilities also increased, but not to the extent of earning assets. For
the second quarter, interest-bearing liabilities averaged $373.0 million in 2002
compared to $350.8 million in 2001. With regard to rate, a decline in the cost
of funds was almost entirely offset by a reduction in the tax-equivalent yield
on earning assets. For the second quarter of 2002, the cost of funds equaled
3.35 percent, a decrease of 112 basis points from 4.47 percent for the same
quarter of 2001. This reduced interest expense for the second quarter by $899.
However, the tax- equivalent yield on earning assets declined 74 basis points to
7.00 percent for the three months ended June 30, 2002, from 7.74 percent for the
same period last year, and reduced tax-equivalent interest income by $875. The
tax-equivalent yield on loans and investments fell 90 basis points and 13 basis
points. The yield on federal funds sold decreased 266 basis points.
Maintenance of an adequate net interest margin is one of our primary concerns.
Our net interest margin improved 32 basis points to 4.27 percent for the first
half of 2002 from 3.95 percent for the same period of 2001. The low interest
rate environment is expected to continue for the remainder of 2002. However,
should economic conditions rebound and/or competition in our market area
intensify, interest rates could increase. No assurance can be given that net
interest income will not be adversely affected by changes in general market
rates or increased competition. We believe following prudent pricing practices
coupled with careful investing will keep our net interest margin favorable.
38
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The average balances of assets and liabilities, corresponding interest income
and expense and resulting average yields or rates paid for the six months ended
June 30, 2002 and 2001, are summarized as follows. Earning assets averages
include nonaccrual loans. Investment averages include available-for-sale
securities at amortized cost. Income on investment securities and loans are
adjusted to a tax-equivalent basis using a statutory tax rate of 34.0 percent.
SUMMARY OF NET INTEREST INCOME
JUNE 30, 2002 JUNE 30, 2001
--------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------- ------- ------- ---------
ASSETS:
Earning assets:
Loans:
Taxable..................................... $302,163 $11,453 7.64% $288,680 $12,171 8.50%
Tax-exempt.................................. 13,470 523 7.83 6,325 285 9.09
Investments:
Taxable..................................... 72,502 2,004 5.57 56,171 1,570 5.64
Tax-exempt.................................. 41,159 1,539 7.54 30,618 1,158 7.63
Federal funds sold............................ 10,721 91 1.71 21,974 543 4.98
-------- ------- -------- -------
Total earning assets...................... 440,015 15,610 7.15% 403,768 15,727 7.85%
Less: allowance for loan losses............... 3,343 3,389
Other assets.................................. 26,895 25,493
-------- --------
Total assets.............................. $463,567 $425,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 20,743 252 2.45% $ 29,748 605 4.10%
NOW accounts.................................. 37,534 274 1.47 25,185 241 1.93
Savings accounts.............................. 97,274 974 2.02 74,288 894 2.43
Time deposits less than $100.................. 185,987 4,226 4.58 183,194 5,206 5.73
Time deposits $100 or more.................... 29,798 565 3.82 31,763 879 5.58
Short-term borrowings......................... 17
Long-term debt................................ 11 1 7.50
-------- ------- -------- -------
Total interest-bearing liabilities........ 371,353 6,291 3.42% 344,189 7,826 4.59%
Noninterest-bearing deposits.................. 47,106 39,824
Other liabilities............................. 3,110 3,275
Stockholders' equity.......................... 41,998 38,584
-------- --------
Total liabilities and stockholders' equity $463,567 $425,872
======== ------- ======== -------
Net interest/income spread................ $ 9,319 3.73% $ 7,901 3.26%
======= =======
Net interest margin....................... 4.27% 3.95%
Tax equivalent adjustments:
Loans......................................... $ 178 $ 97
Investments................................... 523 394
------- -------
Total adjustments......................... $ 701 $ 491
======= =======
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 gains of $1,481 and
$714 for the six months ended June 30, 2002 and 2001 included in other
assets. Tax-equivalent adjustments were calculated using the prevailing
statutory tax rate of 34.0 percent.
39
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PROVISION FOR LOAN LOSSES:
We evaluate the adequacy of the allowance for loan losses account on a quarterly
basis utilizing our systematic analysis in accordance with procedural
discipline. As previously mentioned, we take into consideration certain factors
such as composition of the loan portfolio, volumes of nonperforming loans,
volumes of net charge-offs, prevailing economic conditions and other relevant
factors when determining the adequacy of the allowance for loan losses account.
We make monthly provisions to the allowance for loan losses account in order to
maintain the allowance at the appropriate level indicated by our evaluations.
Based on our most current evaluation, we believe that the allowance is adequate
to absorb any known and inherent losses in the portfolio.
The provision for loan losses totaled $740 for the six months ended June 30,
2002, an increase of $380 compared to $360 for the same six months of 2001. For
the second quarter of 2002, the provision for loan losses was $370, an increase
of $190 compared to the same quarter of 2001.
NONINTEREST INCOME:
For the six months ended June 30, 2002, noninterest income totaled $1,879, an
increase of $526 from $1,353 for the same period of 2001. Service charges, fees
and commission improved $173 or 13.5 percent. Net gains on the sale of loans
increased $284 or 389.0 percent. Also included in noninterest income in 2002
were gains on the sale of investment securities of $69. For the second quarter,
noninterest income increased $150 to $920 in 2002, compared to $770 in 2001.
NONINTEREST EXPENSE:
In general, noninterest expense is categorized into three main groups:
employee-related expenses, occupancy and equipment expenses and other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and equipment
expenses, the costs related to the maintenance of facilities and equipment,
include depreciation, general maintenance and repairs, real estate taxes, rental
expense offset by any rental income, and utility costs. Other expenses include
general operating expenses such as advertising, contractual services, insurance,
including FDIC assessment, other taxes and supplies. Several of these costs and
expenses are variable while the remainder are fixed. We utilize budgets and
other related strategies in an effort to control the variable expenses.
40
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Major components of noninterest expense for the three months and six months
ended June 30, 2002 and 2001, are summarized as follows:
NONINTEREST EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------
Salaries and employee benefits expense:
Salaries and payroll taxes..................... $1,414 $1,159 $2,751 $2,264
Employee benefits.............................. 276 208 520 392
------ ------ ------ ------
Salaries and employee benefits expense....... 1,690 1,367 3,271 2,656
------ ------ ------ ------
Net occupancy and equipment expense:
Net occupancy expense.......................... 208 210 419 411
Equipment expense.............................. 242 265 482 477
------ ------ ------ ------
Net occupancy and equipment expense.......... 450 475 901 888
------ ------ ------ ------
Other noninterest expenses:
Marketing expense.............................. 116 104 211 162
Other taxes.................................... 85 100 190 196
Stationery and supplies........................ 120 106 248 197
Contractual services........................... 349 329 710 605
Insurance including FDIC assessment............ 46 42 94 83
Other.......................................... 460 454 963 810
------ ------ ------ ------
Other expenses............................... 1,176 1,135 2,416 2,053
------ ------ ------ ------
Total noninterest expense.................. $3,316 $2,977 $6,588 $5,597
====== ====== ====== ======
Noninterest expense totaled $6,588 for the six months ended June 30, 2002, and
increase of $991 or 17.7 percent from $5,597 for the same six months of 2001.
Salaries and employee benefits expense and other expenses rose, while occupancy
and equipment expense held relatively constant. Noninterest expense for the
second quarter increased $339 or 11.4 percent to $3,316 in 2002, from $2,977 in
2001. Despite the increased expenses, our efficiency ratio, noninterest expense
less nonrecurring expenses as a percentage of net interest income and
noninterest income less nonrecurring income, improved for the first six months
of 2002, compared to the same period last year. This ratio was 62.9 percent in
2002 and 63.9 percent in 2001. However, our overhead ratio, noninterest expense
as a percentage of total average assets, weakened slightly to 2.9 percent for
the first half of 2002, compared to 2.7 percent for the same period last year.
Salaries and employee benefits expense, which comprise the majority of
noninterest expense, totaled $3,271 or 49.7 percent of noninterest expense for
the six months ended June 30, 2002. In comparison, these expenses were $2,656 or
47.5 percent of noninterest expense for the same period of 2001. The addition of
corporate relationship officers, additional staff and training expenses related
to the two new branch offices, health insurance
41
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
rate increases and employer contributions to the newly formed 401(k) plan all
factored into the rise in employee costs.
Net occupancy and equipment expense rose $13 to $901 for the first half of 2002,
from $888 for the same period last year. For the three months ended June 30,
2002 and 2001, net occupancy and equipment expenses amounted to $450 and $475, a
decline of $25.
Other expenses increased $363 to $2,416 for the six months ended June 30, 2002,
from $2,053 for the same six months of the prior year. For the quarter ended
June 30, other expenses totaled $1,176 in 2002 and $1,135 in 2001. The rise in
other expenses resulted primarily from additional contractual service expenses
associated with increased activity in our secondary mortgage division.
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 2002. According to FDIC statistics:
- 92.5 percent of all BIF-member institutions and 90.4 percent of
SAIF-member institutions are estimated to be listed in the lowest
risk category, thus paying no premiums,
- Only 0.1 percent of BIF-member institutions and 0.2 percent of
SAIF-member institutions are estimated to be in the highest risk
category, paying a premium of 27 cents per 100 dollars in deposits,
- The average annual assessment rate is projected to be 20 cents per
100 dollars for BIF-member institutions and 25 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 2002,
- At December 31, 2001, the BIF reserve ratio was 1.26 percent and the
SAIF reserve ratio was 1.36 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.
42
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
We were included in the 92.5 percent of all BIF-member institutions classified
in the well capitalized supervisory risk subgroup at June 30, 2002. Accordingly,
we will be exempt from paying a BIF assessment for the second half of 2002.
However, along with all banks, we continue to be assessed quarterly for
assistance in interest payments on FICO bonds used to capitalize the SAIF. Our
assessments totaled $37 and $35 for the six months ended June 30, 2002 and 2001.
INCOME TAXES:
Income tax expense totaled $629 for the six months ended June 30, 2002, and
resulted in an effective tax rate of 19.8 percent. For the same period of 2001,
income tax expense was $676 with an effective tax rate of 24.1 percent. The
improvement in the effective tax rate resulted from a higher level of tax-exempt
income. Tax-exempt interest income as a percentage of total interest income
equaled 9.1 percent for the first six months of 2002, compared to 6.2 percent
for the same period of 2001. Our effective tax rate is more favorable in
comparison to that of our peer group. For the six months ended June 30, 2002 and
2001, the peer group posted effective tax rates of 26.2 percent and 26.6
percent. We expect our effective tax rate to remain favorable for the remainder
of 2002 through continued emphasis on income from tax-exempt investments and
loans, as well as through the utilization of 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 likely that these assets will be realized through carry-back
to taxable income in prior years and by future reversals of existing taxable
temporary differences or, to a lesser extent, through future taxable income.
43
COMM BANCORP, INC.
OTHER INFORMATION
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AT THE
COMPANY'S ANNUAL MEETING OF STOCKHOLDERS HELD ON JUNE 7, 2002, FOR
WHICH PROXIES WERE SOLICITED PURSUANT TO SECTION 14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, THE FOLLOWING MATTERS WERE VOTED
UPON BY THE STOCKHOLDERS.
1. To elect thirteen directors to serve for a one-year term and until
their successors are duly elected and qualified.
All nominees of the Board of Directors were elected. The number of votes
cast for or opposed to each of the nominees for election to the Board of
Directors were as follows:
Nominee For Against
------- ------------- -----------
David L. Baker 1,610,425.319 34,601.876
Thomas M. Chesnick 1,634,178.195 10,849.000
William F. Farber, Sr. 1,597,353.722 47,673.473
Judd B. Fitze 1,645,027.195 0.000
John P. Kameen 1,644,257.195 770.000
William A. Kerl 1,610,678.195 34,349.000
Erwin T. Kost 1,645,027.195 0.000
William B. Lopatofsky 1,625,108.195 19,919.000
Robert A. Mazzoni 1,612,457.195 32,570.000
J. Robert McDonnell 1,622,678.195 22,349.000
Joseph P. Moore, III 1,635,857.195 9,070.000
Theodore W. Porosky 1,621,527.195 23,500.000
Eric G. Stephens 1,645,027.195 0.000
2. To ratify the selection of Kronick, Kalada, Berdy & Co. of
Kingston, Pennsylvania, Certified Public Accountants, as the
independent auditors for the year ending December 31, 2002. The
votes cast on this matter were as follows:
For Against
------------- ----------
1,646,073.496 100.000
44
COMM BANCORP, INC.
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99(i) Sarbanes-Oxley Act of 2002 Section 906 Certification
of Chief Executive Officer
99(ii) Sarbanes-Oxley Act of 2002 Section 906
Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
45
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: August 12, 2002 /s/William F. Farber, Sr.
------------------------- ----------------------------------
William F. Farber, Sr.
Chief Executive Officer
Date: August 12, 2002 /s/ Scott A. Seasock
------------------------- ----------------------------------
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 2002 /s/ Stephanie A. Ganz
--------------------------- ----------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
46
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ----------- ----
99(i) Sarbanes-Oxley Act of 2002 Section 906
Certification of Chief Executive Officer 48
99(ii) Sarbanes-Oxley Act of 2002 Section 906
Certification of Chief Financial Officer 49
47