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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________to________________
Commission file number 0-17455
COMM BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
- ------------------------------- --------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number)
incorporation or organization)
125 NORTH 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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,911,118 at May 2, 2003.
Page 1 of 47
Exhibit Index on Page 45
COMM BANCORP, INC.
FORM 10-Q
MARCH 31, 2003
INDEX
CONTENTS PAGE NO.
- ----------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements.
Consolidated Statements of Income and Comprehensive Income -
for the Three Months Ended March 31, 2003 and 2002......... 3
Consolidated Balance Sheets - March 31, 2003, and December
31, 2002................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 2003.................. 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002.............................. 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.................................................. *
Item 4: Controls and Procedures................................ 38
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings...................................... 39
Item 2: Changes in Securities and Use of Proceeds.............. 39
Item 3: Defaults Upon Senior Securities........................ 39
Item 4: Submission of Matters to a Vote of Security Holders.... 39
Item 5: Other Information...................................... 39
Item 6: Exhibits and Reports on Form 8-K....................... 39
Signatures..................................................... 40
Certifications................................................. 41
Exhibit Index.................................................. 45
* Not Applicable
2
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31 2003 2002
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................................ $ 5,552 $ 5,767
Tax-exempt......................................................................... 191 168
Interest and dividends on investment securities available-for-sale:
Taxable............................................................................ 658 1,023
Tax-exempt......................................................................... 400 512
Dividends.......................................................................... 14 22
Interest on federal funds sold....................................................... 28 23
--------- ---------
Total interest income............................................................ 6,843 7,515
--------- ---------
INTEREST EXPENSE:
Interest on deposits................................................................. 2,672 3,180
--------- ---------
Total interest expense........................................................... 2,672 3,180
--------- ---------
Net interest income.............................................................. 4,171 4,335
Provision for loan losses............................................................ 120 370
--------- ---------
Net interest income after provision for loan losses.............................. 4,051 3,965
--------- ---------
NONINTEREST INCOME:
Service charges, fees and commissions................................................ 696 774
Net gains on sale of loans........................................................... 390 185
--------- ---------
Total noninterest income......................................................... 1,086 959
--------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits expense............................................... 1,696 1,581
Net occupancy and equipment expense.................................................. 540 451
Other expenses....................................................................... 1,189 1,240
--------- ---------
Total noninterest expense........................................................ 3,425 3,272
--------- ---------
Income before income taxes........................................................... 1,712 1,652
Provision for income tax expense..................................................... 382 338
--------- ---------
Net income....................................................................... 1,330 1,314
--------- ---------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on investment securities available-for-sale........ (236) 29
Income tax expense (benefit) related to other comprehensive income (loss)............ (80) 10
--------- ---------
Other comprehensive income (loss), net of income taxes........................... (156) 19
--------- ---------
Comprehensive income............................................................. $1,174 $1,333
========= =========
PER SHARE DATA:
Net income........................................................................... $ 0.68 $ 0.67
Cash dividends declared.............................................................. $ 0.22 $ 0.20
Average common shares outstanding.................................................... 1,946,217 1,972,675
See Notes to Consolidated Financial Statements.
3
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS:
Cash and due from banks........................................................... $ 12,232 $ 10,883
Federal funds sold................................................................ 18,700 10,500
Investment securities available-for-sale.......................................... 114,956 124,203
Loans held-for-sale, net.......................................................... 3,763 3,916
Loans, net of unearned income..................................................... 327,956 323,575
Less: allowance for loan losses................................................. 3,722 3,745
-------- --------
Net loans......................................................................... 324,234 319,830
Premises and equipment, net....................................................... 11,878 11,861
Accrued interest receivable....................................................... 2,191 2,164
Other assets...................................................................... 3,003 3,061
-------- --------
Total assets.................................................................. $490,957 $486,418
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing............................................................. $ 52,022 $ 49,820
Interest-bearing................................................................ 389,272 387,393
-------- --------
Total deposits................................................................ 441,294 437,213
Accrued interest payable.......................................................... 1,312 1,358
Other liabilities................................................................. 2,229 2,514
-------- --------
Total liabilities............................................................. 444,835 441,085
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and
outstanding:
March 31, 2003, 1,945,977 shares; December 31, 2002, 1,944,769 shares............ 642 642
Capital surplus................................................................. 6,536 6,484
Retained earnings................................................................. 36,516 35,623
Accumulated other comprehensive income............................................ 2,428 2,584
-------- --------
Total stockholders' equity.................................................... 46,122 45,333
-------- --------
Total liabilities and stockholders' equity.................................... $490,957 $486,418
======== ========
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, 2002....................... $ 642 $6,484 $35,623 $ 2,584 $ 45,333
Net income....................................... 1,330 1,330
Dividends declared: $0.22 per share.............. (428) (428)
Dividend reinvestment plan: 1,508 shares issued.. 53 53
Repurchase and retirement: 300 shares............ (1) (9) (10)
Net change in other comprehensive income......... (156) (156)
------ ------ ------- --------- ---------
BALANCE, MARCH 31, 2003.......................... $ 642 $6,536 $36,516 $ 2,428 $ 46,122
====== ====== ======= ========= =========
See Notes to Consolidated Financial Statements.
5
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31 2003 2002
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 1,330 $ 1,314
Adjustments:
Provision for loan losses.............................................................. 120 370
Depreciation, amortization and accretion............................................... 910 510
Amortization of loan fees.............................................................. (41) (38)
Deferred income tax expense (benefit).................................................. (18) 73
Loss on disposition of equipment....................................................... 17
Losses (gains) on sale of foreclosed assets............................................ 14 (113)
Changes in:
Loans held for sale, net............................................................. 153 237
Accrued interest receivable.......................................................... (27) 126
Other assets......................................................................... 164 (233)
Accrued interest payable............................................................. (46) (98)
Other liabilities.................................................................... (219) (160)
------- -------
Net cash provided by operating activities.......................................... 2,357 1,988
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of investment securities available-for-sale..................... 14,210 7,213
Purchases of investment securities available-for-sale.................................... (5,770) (1,475)
Proceeds from sale of foreclosed assets.................................................. 26 1,177
Net increase in lending activities....................................................... (4,685) (3,874)
Purchases of premises and equipment...................................................... (305) (615)
------- -------
Net cash provided by investing activities.......................................... 3,476 2,426
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ (217) 56
Time deposits.......................................................................... 4,298 (1,720)
Payments on long-term debt...............................................................
Proceeds from the issuance of common shares.............................................. 53 50
Repurchase and retirement of common shares............................................... (10) (427)
Cash dividends paid...................................................................... (408) (376)
------- -------
Net cash provided by (used in) financing activities................................ 3,716 (2,417)
------- -------
Net increase in cash and cash equivalents.......................................... 9,549 1,997
Cash and cash equivalents at beginning of year..................................... 21,383 13,934
------- -------
Cash and cash equivalents at end of period......................................... $30,932 $15,931
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest............................................................................... $ 2,718 $ 3,278
Noncash items:
Transfers of loans to foreclosed assets................................................ 202 45
Unrealized losses (gains) on investment securities available-for-sale.................. $ 156 $ (19)
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 & 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, 2002.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
On April 30, 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. Specifically, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative and clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. In addition, the
Statement amends certain other existing pronouncements, which will result in
more consistent reporting of contracts that are derivatives in their entirety or
contain embedded derivatives that warrant separate accounting. SFAS No. 149 is
effective for contracts entered into or modified, and for hedging relationships
designated after June 30, 2003. The provisions that relate to SFAS No. 133
implementation issues are required to be applied in accordance with their
respective dates. The adoption of the provisions of SFAS No. 149 did not, and
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 improve, assurance cannot be given that this improvement will
occur. Further 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:
The unfolding of the war with Iraq added more pressure to an already unstable
United States economy. Consumer spending, the one strong link in the economy,
slowed in the first quarter of 2003. In addition, businesses again cut capital
spending and inventory restocking. As a result, the United States economy grew
at an annual rate of only 1.6 percent in the first quarter. Consumer spending,
which accounts for two-thirds of the economy grew only 1.4 percent, while
business spending fell 4.2 percent. Despite the weak growth, the Federal Open
Market Committee ("FOMC") decided to leave short-term interest rates unchanged,
indicating that the war made it impossible to determine, with any certainty,
that risks were tilted toward weakness. Economists and the FOMC are optimistic
regarding growth for the second quarter now that the war is over. However, if
activity does not pick up, the FOMC may decide to once again lower rates.
REVIEW OF FINANCIAL POSITION:
At March 31, 2003, total assets were $491.0 million, an increase of $4.6 million
from $486.4 million at December 31, 2002. Total deposits grew $4.1 million to
$441.3 million at the end of the first quarter of 2003 and
9
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
primarily funded the $4.4 million growth in loans, net of unearned income.
Investment securities available-for-sale decreased $9.2 million to $115.0
million at the end of the first quarter of 2003, from $124.2 million at December
31, 2002. Repayments of mortgage-backed securities were not reinvested but held
in federal funds sold for lack of better short-term investment alternatives.
Federal funds sold outstanding at March 31, 2003, were $18.7 million, compared
to $10.5 million at year-end 2002. Stockholders' equity grew $0.8 million to
$46.1 million at the close of the first quarter, from $45.3 million at the end
of 2002. Net income of $1.3 million, partially offset by net cash dividends
declared of $0.4 million, primarily caused the equity improvement.
During the first quarter of 2003, we made several technological enhancements to
our information systems that improved both the quality of customer service and
our operational efficiency. We installed InTouch(sm), a secure, automated
customer service line. Customers can now check account balances, track recent
transactions, transfer funds and place stop payment requests at anytime via the
telephone. In addition, we began developing and enterprise-wide document imaging
system that provides archival storage of reports and the ability to scan and
store deposit, loan and other documents electronically. Our employees are able
to quickly, accurately and concurrently retrieve information throughout our
organization.
INVESTMENT PORTFOLIO:
Our investments are predominantly comprised of mortgage-backed securities
including, short-term collateralized mortgage obligations ("CMOs") of U.S.
Government-sponsored agencies, and intermediate-term obligations of states and
municipalities. Mortgage-backed securities totaled $67.4 million and represented
58.7 percent of the investment portfolio at March 31, 2003. Tax-exempt state and
municipal obligations were $35.5 million and equaled 30.9 percent of the
investment portfolio. We predominantly utilize the cash flows from repayments of
mortgage-backed securities to fund future loan demand and the tax-exempt nature
of state and municipal obligations assists us in lowering our tax burden. In
total, investment securities available- for-sale decreased $9.2 million, to
$115.0 million at March 31, 2003, from $124.2 million at December 31, 2002. The
majority of repayments and maturities received were not reinvested as of the
close of the first quarter. The investment portfolio equaled 24.7 percent of
earning assets at March 31, 2003, compared to 26.9 percent at year-end 2002.
10
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The carrying values of the major classifications of available-for-sale
securities as they relate to the total investment portfolio at March 31, 2003,
and December 31, 2002, are summarized as follows:
DISTRIBUTION OF INVESTMENT SECURITIES
MARCH 31, DECEMBER 31,
2003 2002
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------
U.S. Government agencies............................ $ 10,323 8.98% $ 10,350 8.33%
State and municipals................................ 35,520 30.90 35,003 28.18
Mortgage-backed securities.......................... 67,424 58.65 77,579 62.46
Equity securities................................... 1,689 1.47 1,271 1.03
-------- ------ -------- ------
Total............................................. $114,956 100.00% $124,203 100.00%
======== ====== ======== ======
Investment securities averaged $117.9 million for the first quarter of 2003 and
$116.8 million for the same quarter of 2002. As a result of the sustained low
interest rate environment, the tax-exempt yield on our investment portfolio fell
192 basis points comparing the first quarter of 2003 at 4.40 percent, to 6.32
percent for the same quarter one year ago. 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 an investment
portfolio's 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 and losses, whether realized or unrealized. Total
return for the investment portfolio weakened to 3.6 percent for the twelve
months ended March 31, 2003, from 8.8 percent for the twelve months ended
December 31, 2003.
We had an unrealized holding gain of $2,428, net of income taxes of $1,251 at
March 31, 2003. This was a slight decline of $156, net of income tax benefits of
$80, in comparison to year-end 2002. The decline was entirely related to
depreciation in the market value of our holdings of mortgage- backed securities.
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at March 31,
2003, 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 prevailing 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
11
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
securities and CMOs have been presented based upon estimated cash flows,
assuming no change in the current interest rate environment. Equity securities
with no stated contractual maturities are included in the "After ten years"
maturity distribution. Expected maturities may differ from contracted maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
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
------------------------------------------------------------------------------
MARCH 31, 2003 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -----------------------------------------------------------------------------------------------------------------------
Amortized cost:
U.S. Government agencies..... $ 1,026 1.99% $ 9,195 2.15% $ 10,221 2.13%
State and municipals......... 1,110 4.17 1,000 3.19 $7,172 7.92% $23,721 7.60% 33,003 7.42
Mortgage-backed securities... 36,912 4.37 29,182 4.89 355 6.35 66,449 4.61
Equity securities............ 1,604 3.55 1,604 3.55
------- ------- ------ ------- --------
Total...................... $39,048 4.30% $39,377 4.21% $7,527 7.85% $25,325 7.34% $111,277 5.20%
======= ======= ====== ======= ========
Fair value:
U.S. Government agencies..... $ 1,033 $ 9,290 $ 10,323
State and municipals......... 1,112 1,013 $7,892 $25,503 35,520
Mortgage-backed securities... 37,126 29,929 369 67,424
Equity securities............ 1,689 1,689
------- ------- ------ ------- --------
Total...................... $39,271 $40,232 $8,261 $27,192 $114,956
======= ======= ====== ======= ========
LOAN PORTFOLIO:
The rate on a 30-year conventional mortgage hit a record low of 5.75 percent at
March 31, 2003. This was a 30 basis point decline from 6.05 percent at year-end
2002. The historically low rates kept the housing market strong for the first
quarter. Average annual sales of existing homes increased 4.8 percent, while
average new home sales rose 11.5 percent when comparing the twelve months ended
March 31, 2003 and 2002. In addition, strong demand was reflected by a 6.5
percent increase in the median price of existing homes in March 2003 compared to
one year ago. Similarly, activity in our secondary mortgage department continued
to be robust. Residential mortgage loans serviced for the Federal National
Mortgage Association ("FNMA") grew $12.2 million or at an annual rate of 88.2
percent to $68.3 million at the end of the first quarter of 2003, from $56.1
million at year-end 2002. Residential mortgages sold to the FNMA totaled $13.6
million for the three months ended March 31, 2003. Net gains realized on the
sale of residential mortgages totaled $390 for the first quarter of 2003,
compared to $185 for the same quarter last year.
12
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Despite an overall weak economy and a decline in business investment in the
first quarter, our continued focus on developing commercial business
relationships resulted in a $13.7 million or 8.2 percent increase in commercial
loans, including commercial mortgages and lease financing, to $181.0 million at
March 31, 2003, from $167.3 million at year-end 2002. Although mortgage demand
remained strong, our holdings of residential mortgages declined $8.6 million or
6.9 percent, as the majority of mortgage loans originated are subsequently sold
in the secondary market. Consumers continued to be leery about taking on more
debt due to economic uncertainty, stock market losses and weak employment
conditions. Our consumer loans decreased $0.8 million or 2.4 percent. For the
first quarter of 2003, loans averaged $332.6 million, an increase of $18.6
million or 5.9 percent compared to $314.0 million for the same period of 2002.
The tax- equivalent yield on the loan portfolio declined 66 basis points to 7.12
percent for the first quarter of 2003, from 7.78 percent for the same quarter of
2002. Interest rates are expected to remain low for the remainder of 2003, as a
result we anticipate our loan yields to further decline.
The composition of the loan portfolio at March 31, 2003, and December 31, 2002,
is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
MARCH 31, DECEMBER 31,
2003 2002
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------
Commercial, financial and others............ $ 96,342 29.38% $ 90,747 28.05%
Real estate:
Construction.............................. 4,904 1.50 5,398 1.67
Mortgage.................................. 192,913 58.82 193,012 59.65
Consumer, net............................... 31,846 9.71 32,631 10.08
Lease financing, net........................ 1,951 0.59 1,787 0.55
-------- ------ -------- ------
Loans, net of unearned income............. 327,956 100.00% 323,575 100.00%
====== ======
Less: allowance for loan losses............. 3,722 3,745
-------- --------
Net loans............................... $324,234 $319,830
======== ========
In an attempt to limit IRR and liquidity strains, we continually examine the
maturity distribution and interest rate sensitivity of the loan portfolio. As
part of our asset/liability management strategy to reduce the amount of IRR in
the loan portfolio, we price loan products to increase our holdings of
adjustable-rate loans and reduce the average term of fixed-rate loans.
Approximately 36.1 percent of the lending portfolio is expected to reprice
within the next twelve months.
13
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The maturity and repricing information of the loan portfolio by major
classification at March 31, 2003, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
MARCH 31, 2003 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------
Maturity schedule:
Commercial, financial and others..... $ 42,187 $ 25,128 $ 29,027 $ 96,342
Real estate:
Construction....................... 4,904 4,904
Mortgage........................... 17,645 63,992 111,276 192,913
Consumer, net........................ 11,342 17,223 3,281 31,846
Lease financing, net................. 714 1,237 1,951
-------- -------- -------- --------
Total............................ $ 76,792 $107,580 $143,584 $327,956
======== ======== ======== ========
Repricing schedule:
Predetermined interest rates......... $ 34,361 $ 66,324 $ 73,367 $174,052
Floating or adjustable interest rates 84,170 69,239 495 153,904
-------- -------- -------- --------
Total............................ $118,531 $135,563 $ 73,862 $327,956
======== ======== ======== ========
ASSET QUALITY:
Nonperforming assets were $2,271 or 0.69 percent of loans, net of unearned
income, at March 31, 2003, compared to $2,542 or 0.79 percent at December 31,
2002. The asset quality improvement resulted from reductions in nonaccrual loans
and accruing loans past due 90 days or more, partially offset by an increase in
foreclosed assets.
Nonaccrual loans were $1,757 at March 31, 2003, a decrease of $235 from $1,992
at December 31, 2002. The amount of commercial, real estate and consumer loans
on nonaccrual status all declined in comparison to year-end 2002. Accruing loans
past due 90 days or more decreased $198 to $312 at the end of the first quarter
from $510 at the end of 2002. The amount of commercial and real estate loans in
this category decreased while consumer loans increased. Foreclosed assets
increased $162 to $202 at March 31, 2003, from $40 at the end of 2002. Three
loans totaling $202 were transferred to foreclosed assets during the first
quarter. One property with an aggregate carrying value of $40 was sold for $26,
resulting in a realized loss of $14.
We anticipate the economic conditions in our local market area to remain
stable for the remainder of 2003. However, should economic conditions
14
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 March 31, 2003, and December 31,
2002, 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
MARCH 31, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 454 $ 541
Real estate:
Construction.................................................
Mortgage..................................................... 1,071 1,213
Consumer, net.................................................. 232 238
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,757 1,992
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 49 97
Real estate:
Construction.................................................
Mortgage..................................................... 120 281
Consumer, net.................................................. 143 132
Lease financing, net...........................................
------ ------
Total accruing loans past due 90 days or more.............. 312 510
------ ------
Total nonperforming loans.................................. 2,069 2,502
------ ------
Foreclosed assets.............................................. 202 40
------ ------
Total nonperforming assets................................. $2,271 $2,542
====== ======
Ratios:
Nonperforming loans as a percentage of loans, net.............. 0.63% 0.77%
Nonperforming assets as a percentage of loans, net............. 0.69% 0.79%
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
15
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
conditions. We employ the Federal Financial Institutions Examination Council
("FFIEC") Interagency Policy Statement and generally accepted accounting
principals ("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,
"Accounting by Creditors for Impairment of a Loan," for loans specifically
identified to be individually evaluated for impairment and the requirements of
SFAS No. 5, "Accounting for Contingencies," for large groups of smaller-balance
homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by
applying it in the same manner regardless of whether the allowance is being
determined at a high point or a low point in the economic cycle. Each quarter,
our loan review department identifies those loans to be individually evaluated
for impairment and those loans 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 relevant
range of values based on current conditions.
16
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information concerning impaired loans at March 31, 2003, and December 31, 2002,
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
MARCH 31, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 454 $ 541
Real estate:
Construction.................................................
Mortgage..................................................... 1,071 1,213
Consumer, net.................................................. 232 238
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,757 1,992
------ ------
ACCRUING LOANS:
Commercial, financial and others............................... 61 889
Real estate:
Construction.................................................
Mortgage..................................................... 401 485
Consumer, net.................................................. 205 292
Lease financing, net...........................................
------ ------
Total accruing loans....................................... 667 1,666
------ ------
Total impaired loans....................................... $2,424 $3,658
====== ======
Ratio:
Impaired loans as a percentage of loans, net................... 0.74% 1.13%
Information relating to the recorded investment in impaired loans at March 31,
2003 and December 31, 2002, is summarized as follows:
MARCH 31, DECEMBER 31,
2003 2002
- --------------------------------------------------------------------------------------------------
Impaired loans:
With a related allowance....................................... $1,562 $2,500
With no related allowance...................................... 862 1,158
------ ------
Total........................................................ $2,424 $3,658
====== ======
17
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The analysis of changes affecting the allowance for loan losses related to
impaired loans for the quarter ended March 31, 2003, is summarized as follows:
MARCH 31,
2003
- -----------------------------------------------------------------------------------------------
Balance at January 1............................................................. $ 877
Provision for loan losses........................................................ (144)
Loans charged-off................................................................ 137
Loans recovered.................................................................. 2
-----
Balance at period-end............................................................ $ 598
=====
Interest income on impaired loans that would have been recognized had the loans
been current, 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 months ended March 31, 2003 and 2002, are
summarized as follows:
THREE MONTHS ENDED MARCH 31 2003 2002
- --------------------------------------------------------------------------------
Gross interest due under terms ......................... $ 45 $ 42
Interest income recognized ............................. 25 22
------ ------
Interest income not recognized ......................... $ 20 $ 20
====== ======
Interest income recognized (cash-basis) ................ $ 25 $ 22
Average recorded investment in impaired loans .......... $2,396 $1,975
Cash received on impaired loans applied as a reduction of principal totaled $140
for the quarter ended March 31, 2003, and $172 for the same period of 2002.
There were no commitments to extend additional funds to such parties at March
31, 2003.
18
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 March 31, 2003 and December
31, 2002, is summarized as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
MARCH 31, DECEMBER 31,
2003 2002
--------------- ---------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------
Allocated allowance:
Specific:
Commercial, financial and others.............. $ 197 0.16% $ 597 0.44%
Real estate:
Construction................................
Mortgage.................................... 209 0.45 173 0.53
Consumer, net................................. 192 0.13 107 0.16
Lease financing, net.......................... 0.00
------ ------ ------ ------
Total specific............................ 598 0.74 877 1.13
------ ------ ------ ------
Formula:
Commercial, financial and others.............. 486 29.22 367 27.61
Real estate:
Construction................................ 1.50 1.67
Mortgage.................................... 1,961 58.37 2,071 59.12
Consumer, net................................. 426 9.58 419 9.92
Lease financing, net.......................... 0.59 0.55
------ ------ ------ ------
Total formula............................. 2,873 99.26 2,857 98.87
------ ------ ------ ------
Total allocated allowance................. 3,471 100.00% 3,734 100.00%
====== ======
Unallocated allowance......................... 251 11
------ ------
Total allowance for loan losses........... $3,722 $3,745
====== ======
The allocated element of the allowance for loan losses account decreased $263 to
$3,471 at March 31, 2003, from $3,734 at December 31, 2002, which primarily
resulted from a decrease in the specific portion of the allowance for impairment
of loans individually evaluated under SFAS No. 114. The reduction in the
specific portion occurred as a result of a decline in the outstanding balance of
loans identified as impaired with a recorded investment in excess of fair value.
The unallocated portion of the allowance for loan losses equaled $251 at the end
of the first quarter of 2003 compared to $11 at year-end 2002. The increase in
the unallocated portion of the allowance for loan losses account is deemed
appropriate due to the significant increase in the level of commercial loans in
the portfolio, which inherently carry a higher degree of risk.
19
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 quarter ended March
31, 2003, is summarized as follows:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
MARCH 31,
2003
- ---------------------------------------------------------------------------------
Allowance for loan losses at beginning of period .................... $3,745
Loans charged-off:
Commercial, financial and others .................................... 81
Real estate:
Construction.......................................................
Mortgage .......................................................... 19
Consumer, net ....................................................... 64
Lease financing, net.................................................
------
Total ........................................................... 164
------
Loans recovered:
Commercial, financial and others .................................... 4
Real estate:
Construction.......................................................
Mortgage...........................................................
Consumer, net ....................................................... 17
Lease financing, net.................................................
------
Total ........................................................... 21
------
Net loans charged-off ............................................... 143
------
Provision charged to operating expense .............................. 120
------
Allowance for loan losses at end of period .......................... $3,722
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding .. 0.17%
Allowance for loan losses as a percentage of period end loans ....... 1.13%
Net charge-offs exceeded the provision for loan losses and resulted in a $23
decline in the allowance for loan losses account. At March 31, 2003, the
allowance for loan losses was $3,722 and equaled 1.13 percent of loans, net of
unearned income, compared to $3,745 or 1.16 percent of loans, net of unearned
income at December 31, 2002. The allowance account covered 179.9 percent of
nonperforming loans outstanding at the end of the first quarter of 2003 and
149.7 percent at year-end 2002. Relative to all nonperforming assets, the
allowance covered 163.9 percent at March 31, 2003 and 147.3 percent at December
31, 2002.
20
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 $143 and $133 for the first three months of 2003 and 2002. As a
percentage of average loans outstanding, net charge-offs equaled 0.17 percent
for the first quarter of 2003 and 2002.
DEPOSITS:
Deposits totaled $441.3 million at March 31, 2003, an increase of $4.1 million
from $437.2 million at December 31, 2002. The increase resulted from growth in
our noninterest-bearing accounts and time deposits less than $100. With regard
to time deposits less than $100, the growth in these accounts was concentrated
in longer-term certificates of deposit and individual retirement accounts
("IRAs"). During the first quarter of 2003, we continued to offer promotional
rates on our 60- and 90-month certificates of deposit in an effort to extend the
average maturity of our time deposits. In addition, we offered promotional rates
on our longer-term IRAs in order to attract investors seeking tax benefits when
filing their income tax returns.
The average amount of, and the rate paid on, the major classifications of
deposits for the quarters ended March 31, 2003 and 2002, are summarized as
follows:
DEPOSIT DISTRIBUTION
MARCH 31, MARCH 31,
2003 2002
----------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- -----------------------------------------------------------------------------------------
Interest-bearing:
Money market accounts....................... $ 16,882 1.27% $ 24,234 2.74%
NOW accounts................................ 38,455 1.07 36,095 1.29
Savings accounts............................ 122,293 1.49 91,409 1.97
Time deposits less than $100................ 185,154 4.07 187,203 4.69
Time deposits $100 or more.................. 24,462 3.51 30,717 3.88
-------- --------
Total interest-bearing.................... 387,246 2.80% 369,658 3.49%
Noninterest-bearing......................... 49,721 45,040
-------- --------
Total deposits............................ $436,967 $414,698
======== ========
21
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the first three months of 2003, total deposits averaged $437.0 million, an
increase of $22.3 million or 5.4 percent, from $414.7 million for the same three
months of last year. Interest-bearing deposits averaged $17.6 million or 4.7
percent higher and noninterest-bearing deposits averaged $4.7 million or 10.4
percent higher when comparing the first quarters of 2003 and 2002. Due to
customer preference for liquidity given the low interest rate environment, the
growth in our interest-bearing accounts was concentrated in savings accounts and
NOW accounts. Time deposits less than $100, time deposits $100 or more and money
market accounts declined in comparison to the first quarter of 2002. The low
interest rate environment, coupled with the shift into lower-costing deposits,
caused our cost of funds to decline 69 basis points to 2.80 percent for the
first quarter of 2003 from 3.49 percent for the same quarter last year.
Volatile deposits, time deposits in denominations of $100 or more, increased
$0.6 million to $25.1 million at March 31, 2003, from $24.5 million at December
31, 2002. The average cost of these deposits for the first three months of 2003
was 3.51 percent, a decline of 37 basis points from 3.88 percent for the same
three months of last year.
Maturities of time deposits $100 or more at March 31, 2003, and December 31,
2002, are summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
MARCH 31, DECEMBER 31,
2003 2002
- ----------------------------------------------------------------------------------------------
Within three months............................................ $ 4,174 $ 3,020
After three months but within six months....................... 2,206 3,333
After six months but within twelve months...................... 8,586 8,230
After twelve months............................................ 10,138 9,961
------- -------
Total........................................................ $25,104 $24,544
======= =======
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 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
22
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
In accordance with regulation, each bank is required to develop its own IRR
management program depending on its structure, including certain fundamental
components which are mandatory to ensure sound IRR management. These elements
include appropriate board and management oversight, as well as a comprehensive
risk management process that effectively identifies, measures, monitors and
controls risk. Should a bank have material weaknesses in its risk management
process or high exposure relative to its capital, the bank regulatory agencies
will take action to remedy these shortcomings. Moreover, the level of a bank's
IRR exposure and the quality of its risk management process is a determining
factor when evaluating a bank's capital adequacy.
The responsibility for our market risk sensitivity management has been delegated
to the Asset/Liability Committee ("ALCO"). Specifically, ALCO utilizes several
computerized modeling techniques to monitor and attempt to control the influence
that market rate changes have on rate sensitive assets ("RSA") and rate
sensitive liabilities ("RSL"). One such technique utilizes a static gap model
that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap
analysis attempts to measure our interest rate exposure by calculating the net
amount of RSA and RSL that reprice within specific time intervals. A positive
gap occurs when the amount of RSA repricing in a specific period is greater than
the amount of RSL repricing within that same time frame and is indicated by a
RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL
repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio
less than 1.0. A positive gap implies that earnings will be impacted favorably
if interest rates rise and adversely if interest rates fall during the period. A
negative gap tends to indicate that earnings will be affected inversely to
interest rate changes.
23
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Our interest rate sensitivity gap position, illustrating RSA and RSL at their
related carrying values, is summarized as follows. The distributions in the
table are based on a combination of maturities, call provisions, repricing
frequencies and prepayment patterns. Variable-rate assets and liabilities are
distributed based on the repricing frequency of the instrument. Mortgage
instruments are distributed in accordance with estimated cash flows, assuming
there is no change in the current interest rate environment.
INTEREST RATE SENSITIVITY
DUE AFTER DUE AFTER
THREE MONTHS ONE YEAR
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
MARCH 31, 2003 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
Rate sensitive assets:
Investment securities............... $ 13,580 $ 25,691 $ 40,232 $ 35,453 $114,956
Loans held for sale, net............ 3,763 3,763
Loans, net of unearned income....... 75,641 42,890 135,563 73,862 327,956
Federal funds sold.................. 18,700 18,700
-------- -------- -------- -------- --------
Total............................. $111,684 $ 68,581 $175,795 $109,315 $465,375
======== ======== ======== ======== ========
Rate sensitive liabilities:
Money market accounts............... $ 15,599 $ 15,599
NOW accounts........................ 39,407 39,407
Savings accounts.................... $121,442 121,442
Time deposits less than $100........ $ 30,868 45,402 104,438 $ 7,012 187,720
Time deposits $100 or more.......... 4,174 10,792 9,104 1,034 25,104
-------- -------- -------- -------- --------
Total............................. $ 35,042 $111,200 $234,984 $ 8,046 $389,272
======== ======== ======== ======== ========
Rate sensitivity gap:
Period............................ $ 76,642 $(42,619) $(59,189) $101,269
Cumulative........................ $ 76,642 $ 34,023 $(25,166) $ 76,103 $ 76,103
RSA/RSL ratio:
Period............................ 3.19 0.62 0.75 13.59
Cumulative........................ 3.19 1.23 0.93 1.20 1.20
Our cumulative one-year RSA/RSL ratio was 1.23 and indicated a positive gap
position at March 31, 2003. In comparison, at March 31, 2002, we had a negative
gap position, indicated by a cumulative one-year RSA/RSL ratio of 0.91. Both
ratios fell within our asset/liability guidelines of 0.70 to 1.30. However, as
previously mentioned, a negative gap position indicates that if interest rates
increase our earnings would be negatively impacted. Given the current low
interest rate environment, we took certain steps in the past twelve months in
order to mitigate our potential IRR exposure should interest rates rise.
Specifically, our goal was to increase the amount of RSA repricing within one
year and extend the repricing time frame for RSL. In order to accomplish this,
the majority of the investment securities we purchased were short-term
mortgage-backed securities. The
24
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
amount of investment securities scheduled to reprice within one year increased
$20.2 million to $39.3 million at March 31, 2003, from $19.1 million one year
ago. With regard to RSL, we began offering promotional rates on our 60- and
90-month certificates of deposit in an attempt to extend the average maturities
of these types of funds. Time deposits less than $100 and time deposits $100 or
more repricing within one year declined $37.1 million and $9.2 million.
Conversely, aggregate time deposits repricing after five years increased $7.7
million. RSA repricing within one year totaled $180.3 million at the end of the
first quarter of 2003, an increase of $3.0 million from $177.3 million at March
31, 2002. RSL repricing within one year decreased $47.7 million to $146.2
million at March 31, 2003, from $193.9 million one year earlier. As a result,
our gap position changed from liability rate sensitive to asset rate sensitive
as of March 31, 2003, which indicates should market interest rates increase, the
likelihood exists that net interest income would be favorably affected. However,
this forward-looking statement is qualified in the aforementioned section
entitled "Forward-Looking Discussion" in this Management's Discussion and
Analysis.
Our three-month ratio at March 31, 2003, remained relatively stable as compared
to one year earlier. At the end of the first quarter of 2003 this ratio equaled
3.19 as compared to 3.27 at March 31, 2002.
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 March 31, 2003, produced similar results as those indicated by the one-year
static gap position.
25
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Specifically, given instantaneous and parallel shifts in general market rates of
plus 100 basis points, net interest income should increase 3.1 percent.
Conversely, a similar decline in interest rates would result in a 3.4 percent
decrease in net interest income. We will attempt to maintain our favorable IRR
position through the administration of deposit and loan pricing strategies and
the directed reinvestment of loan and investment payments and prepayments.
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.
LIQUIDITY:
Liquidity is essential to our continuing operations as it gives us the ability
to generate cash at a reasonable cost to fulfill our lending commitments and
support our asset growth, while satisfying the withdrawal demands of our
customers and meeting our 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 with the
Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh"). We manage liquidity daily,
thus enabling us to effectively monitor fluctuations in our liquidity position
and to adapt our position according to market fluctuations. We believe our
liquidity is adequate to meet both present and future financial obligations and
commitments on a timely basis. There are presently no known trends, demands,
commitments, events or uncertainties that have resulted or are reasonably likely
to result in material changes with respect to our liquidity.
We employ a number of analytical techniques in assessing the adequacy of our
liquidity position. One such technique is the use of ratio analysis related to
our reliance on noncore funds to fund our investments and loans maturing after
2003. Our noncore funds consist of time deposits in denominations of $100 or
more. These funds are not considered to be a strong source of liquidity since
they are very interest rate sensitive and are considered to be highly volatile.
At March 31, 2003, our net noncore funding dependence ratio, the difference
between noncore funds and short-
26
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
investments to long-term assets, was negative 8.6 percent. Similarly, our net
short-term noncore funding dependence ratio, noncore funds maturing within one
year, less short-term investments to long-term assets equaled negative 11.3
percent at the end of the first quarter of 2003. Negative ratios indicated that
at March 31, 2003, we did not rely on noncore sources to fund our long-term
assets. We believe that by maintaining adequate volumes of short-term
investments and implementing competitive pricing strategies on deposits, we can
ensure adequate liquidity to support future growth.
The Consolidated Statements of Cash Flows present the changes in cash and cash
equivalents from operating, investing and financing activities. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, noninterest-bearing deposits with other banks, balances with the
Federal Reserve Bank of Philadelphia ("FRB") and the FHLB-Pgh, and federal funds
sold, increased $9.5 million in the first quarter of 2003. Net cash provided by
operating activities, investing activities and financing activities all factored
into the increased cash position. Net cash provided by operating activities for
the three months ended March 31, 2003, totaled $2.3 million, which was primarily
caused by net income of $1.3 million.
For the first quarter of 2003, net cash provided by investing activities equaled
$3.5 million. Primarily causing the increase was proceeds from repayments of
investment securities of $14.2 million, which were partially offset by purchases
of investment securities of $5.8 million and a net increase in lending
activities of $4.7 million.
Net cash provided by financing activities amounted to $3.7 million for the first
three months of 2003. A net increase of $4.1 million in deposit- gathering
activities predominantly caused the net cash inflow.
CAPITAL ADEQUACY:
Our stockholders' equity increased $0.8 million to $46.1 million at March 31,
2003, from $45.3 million at December 31, 2002. Net income of $1,330 was the
primary factor contributing to the capital improvement. Stockholders' equity on
a per share basis improved $0.39 to $23.70 at the end of the first quarter of
2003 from $23.31 at year-end 2002.
We declared dividends of $428 or $0.22 per share for the quarter ended March 31,
2003. The dividend payout ratio was 32.2 percent and 29.9 percent for the first
quarter of 2003 and 2002. It is the intention of the Board of
27
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Directors to continue to pay cash dividends in the future. However, these
decisions are affected by operating results, financial and economic conditions,
capital and growth objectives, appropriate dividend restrictions and other
relevant factors. Stockholders may automatically reinvest their dividends in
shares of our common stock through our dividend reinvestment plan. During the
first quarter of 2003, 1,508 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-weighted
assets ratio of 4.0 percent and a total capital to risk-weighted assets ratio of
8.0 percent. Additionally, banks must maintain a Leverage ratio, defined as Tier
I capital to total average assets less intangibles, of 3.0 percent. The minimum
Leverage ratio of 3.0 percent only applies to institutions with a composite
rating of one under the Uniform Interagency Bank Rating System, that are not
anticipating or experiencing significant growth and have well- diversified risk.
An additional 100 to 200 basis points are required for all but these most
highly-rated institutions. Our minimum Leverage ratio was 4.0 percent at March
31, 2003 and 2002. 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.
28
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Our and Community Bank's capital ratios at March 31, 2003 and 2002, 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
------------------------------------------------------------------
MARCH 31 2003 2002 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated........................... $ 42,548 $ 39,345 $14,125 $12,565
Community Bank......................... 40,805 37,612 14,119 12,537 $21,178 $18,806
Total capital to risk-weighted assets:
Consolidated........................... 46,270 42,802 28,250 25,131
Community Bank......................... 44,527 41,069 28,237 25,074 35,297 31,343
Tier I capital to total average assets
less intangibles assets:
Consolidated........................... 42,548 39,345 19,399 18,324
Community Bank......................... 40,805 37,612 $19,375 $18,276 $24,218 $22,846
Risk-weighted assets:
Consolidated........................... 324,213 294,950
Community Bank......................... 324,047 294,244
Risk-weighted off-balance sheet items:
Consolidated........................... 28,918 19,187
Community Bank......................... 28,918 19,187
Average assets for Leverage ratio:
Consolidated........................... 484,986 458,097
Community Bank......................... $484,366 $456,912
Ratios:
Tier I capital as a percentage of risk-
weighted assets and off-balance sheet
items:
Consolidated............................ 12.0% 12.5% 4.0% 4.0%
Community Bank.......................... 11.6 12.0 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............................ 13.1 13.6 8.0 8.0
Community Bank.......................... 12.6 13.1 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less intangibles assets:
Consolidated............................ 8.8 8.6 4.0 4.0
Community Bank.......................... 8.4% 8.2% 4.0% 4.0% 5.0% 5.0%
29
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
We and Community Bank have consistently maintain regulatory capital ratios well
above the minimum levels of 4.0 percent and 8.0 percent required for adequately
capitalized institutions. Regulatory agencies define institutions, not under a
written directive to maintain certain capital levels, as well capitalized if
they exceed the following: (i) a Tier I risk-based ratio of at least 6.0
percent; (ii) a total risk-based ratio of at least 10.0 percent; and (iii) a
Leverage ratio of at least 5.0 percent. Based on the most recent notification
from the Federal Deposit Insurance Corporation, Community Bank was categorized
as well capitalized under the regulatory framework for prompt corrective action
at March 31, 2003. There are no conditions or events since this notification
that we believe have changed Community Bank's category.
REVIEW OF FINANCIAL PERFORMANCE:
Net income for the three months ended March 31, 2003, totaled $1,330 or $0.68
per share. Comparable earnings for the first quarter of 2002 were $1,314 or
$0.67 per share. We experienced a reduction in net interest income due to margin
contraction associated with the current interest rate environment. Higher
noninterest income and a lower provision for loan losses more than offset the
reduction in net interest income. Return on average assets and return on average
equity for the first quarter of 2003 were 1.11 percent and 11.77 percent,
compared to 1.16 percent and 12.80 percent for the same quarter last year.
NET INTEREST INCOME:
Net interest income is still the fundamental source of earnings for commercial
banks. Moreover, fluctuations in the level of noninterest income can have the
greatest impact on net profits. Net interest income is defined as the difference
between interest revenue, interest and fees earned on interest-earning assets,
and interest expense , the cost of interest- bearing liabilities supporting
those assets. The primary sources of earnings assets are loans and investment
securities, while interest-bearing 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.
30
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 as follows. The net change
attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
MARCH 31,
2003 VS. 2002
----------------------
INCREASE (DECREASE)
ATTRIBUTABLE TO
----------------------
TOTAL
CHANGE RATE VOLUME
------ ---- ------
INTEREST INCOME:
Loans:
Taxable...................................................... $(215) $ (485) $ 270
Tax-exempt................................................... 35 (33) 68
Investments:
Taxable...................................................... (373) (536) 163
Tax-exempt................................................... (170) (4) (166)
Federal funds sold............................................. 5 (3) 8
----- ------- -----
Total interest income...................................... (718) (1,061) 343
----- ------- -----
INTEREST EXPENSE:
Money market accounts.......................................... (111) (71) (40)
NOW accounts................................................... (14) (23) 9
Savings accounts............................................... 5 (118) 123
Time deposits less than $100................................... (306) (283) (23)
Time deposits $100 or more..................................... (82) (26) (56)
----- ------- -----
Total interest expense..................................... (508) (521) 13
----- ------- -----
Net interest income........................................ $(210) $ (540) $ 330
===== ======= =====
31
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the first quarter of 2003, tax-equivalent net interest income totaled
$4,475, a decrease of $210 compared to $4,685 for the same quarter of 2002. A
negative rate variance, partially mitigated by an increase in the volume of
average earning assets over that of average interest-bearing liabilities, caused
the decline.
The tax-equivalent yield on earning assets fell 100 basis points to 6.31 percent
for the three months ended March 31, 2003, from 7.31 percent for the same three
months of last year. This resulted in a reduction of $1,061 in tax-equivalent
interest revenue. The yield on taxable investment securities decreased 243 basis
points to 3.19 percent in 2003 from 5.62 percent last year and accounted for a
reduction in interest revenue of $536. The yield on taxable loans declined 58
basis points, which resulted in a reduction to interest revenue of $485.
Partially offsetting the decline in tax-equivalent interest revenue was a $521
decrease in interest expense resulting from a 69 basis point decline in our cost
of funds. Specifically, the average rate paid on money market accounts, savings
accounts and time deposits less than $100 decreased 147 basis points, 48 basis
points and 62 basis points. These rate declines resulted in decreases in
interest expense of $71, $118 and $283. In total, the negative rate variance
caused a reduction in tax-equivalent net interest income of $540.
Partially offsetting the negative rate variance was a positive volume variance.
Average earning assets increased $23.3 million to $459.4 million for the first
quarter of 2003, while average interest-bearing liabilities rose $17.5 million
to $387.2 million. This resulted in a positive volume variance of $330. The
majority of the positive variance was due to an $18.6 million increase in
average loans, which caused tax-equivalent net interest income to increase $338.
Maintenance of an adequate net interest margin is one of our primary concerns.
We experienced some margin contraction during the first quarter of 2003 as a
result of the sustained low interest rate environment. Loan and investment
yields continue to reprice downward as repayments are being reinvested at
considerably lower rates. However, deposit rates, already at historic lows, do
not have the ability to reprice downward to the same extent. As a result our net
interest margin contracted 41 basis points to 3.95 percent for the three months
ended March 31, 2003, from 4.36 percent for the same three months of 2002. Due
to the slowness of the recovery, the low interest rate environment is expected
to continue throughout the remainder of 2003. 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.
32
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 quarters ended
March 31, 2003 and 2002, 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 the prevailing statutory tax rate of
34.0 percent.
SUMMARY OF NET INTEREST INCOME
MARCH 31, 2003 MARCH 31, 2002
---------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- -------- ------- ------- --------
ASSETS:
Earning assets:
Loans:
Taxable..................................... $313,318 $5,552 7.19% $300,820 $5,767 7.77%
Tax-exempt.................................. 19,300 289 6.07 13,138 254 7.84
Investments:
Taxable..................................... 85,368 672 3.19 75,463 1,045 5.62
Tax-exempt.................................. 32,527 606 7.56 41,385 776 7.60
Federal funds sold............................ 8,869 28 1.28 5,322 23 1.75
-------- ------ -------- ------
Total earning assets...................... 459,382 7,147 6.31% 436,128 7,865 7.31%
Less: allowance for loan losses............... 3,747 3,239
Other assets.................................. 30,497 26,600
-------- --------
Total assets.............................. $486,132 $459,489
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 16,882 53 1.27% $ 24,234 164 2.74%
NOW accounts.................................. 38,455 101 1.07 36,095 115 1.29
Savings accounts.............................. 122,293 449 1.49 91,409 444 1.97
Time deposits less than $100.................. 185,154 1,857 4.07 187,203 2,163 4.69
Time deposits $100 or more.................... 24,462 212 3.51 30,717 294 3.88
Short-term borrowings......................... 34
Long-term debt................................
-------- ------ -------- ------
Total interest-bearing liabilities........ 387,246 2,672 2.80% 369,692 3,180 3.49%
Noninterest-bearing deposits.................. 49,721 45,040
Other liabilities............................. 3,320 3,116
Stockholders' equity.......................... 45,845 41,641
-------- --------
Total liabilities and stockholders' equity $486,132 $459,489
======== ------ ======== ------
Net interest/income spread................ $4,475 3.51% $4,685 3.82%
====== ======
Net interest margin....................... 3.95% 4.36%
Tax equivalent adjustments:
Loans......................................... $ 98 $ 86
Investments................................... 206 264
------ ------
Total adjustments......................... $ 304 $ 350
====== ======
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 $3,657 and
$1,359 for the first quarter of 2003 and 2002 included in other assets.
Tax-equivalent adjustments were calculated using the prevailing
statutory tax rate of 34.0 percent.
33
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. 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 $120 for the three months ended March 31,
2003, compared to $370 for the same period of 2002. Included in the provision
for the first quarter of 2002, was $250 of a one time $500 adjustment to the
allowance for loan losses account required by regulators as part of their
September 30, 2001 examination. There was no such adjustment required by
regulators as part of their most recent examination dated December 31, 2002.
NONINTEREST INCOME:
For the first quarter of 2003, noninterest income totaled $1,086, an increase of
$127 or 13.2 percent compared to $959 for the same quarter of 2002. Net gains on
the sale of residential mortgages increased $205, while service charges, fees
and commissions declined $78.
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 Federal Deposit Insurance Corporation ("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.
34
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months ended March 31, 2003, noninterest expense increased $153 or
4.7 percent to $3,425 from $3,272 for the same three months one year ago.
Salaries and employee benefits expense and net occupancy and equipment expense
increased as a result of opening two new branches in the second half of 2002.
Partially mitigating these increases was a reduction in other expenses. Our
productivity deteriorated slightly as evidenced by an increase in our operating
efficiency ratio, an industry ratio used to measure productivity. The operating
efficiency ratio, noninterest expenses divided by net interest income and
noninterest income, weakened to 65.2 percent for the first quarter of 2003
compared to 62.0 percent for the same quarter last year. Another industry ratio,
the overhead ratio, noninterest expense as a percentage of total average assets,
remained stable at 2.9 percent for the three months ended March 31, 2003.
Major components of noninterest expense for the quarters ended March 31, 2003
and March 31, 2002, are summarized as follows:
NONINTEREST EXPENSES
THREE MONTHS ENDED
MARCH 31,
2003 2002
- ------------------------------------------------------------------------------------------------
SALARIES AND EMPLOYEE BENEFITS EXPENSE:
Salaries and payroll taxes........................................ $1,403 $1,337
Employee benefits................................................. 293 244
------ ------
Salaries and employee benefits expense.......................... 1,696 1,581
------ ------
NET OCCUPANCY AND EQUIPMENT EXPENSE:
Net occupancy expense............................................. 274 211
Equipment expense................................................. 266 240
------ ------
Net occupancy and equipment expense............................. 540 451
------ ------
OTHER EXPENSES:
Marketing expense................................................. 104 95
Other taxes....................................................... 113 105
Stationery and supplies........................................... 90 128
Contractual services.............................................. 360 361
Insurance including FDIC assessment............................... 43 48
Other............................................................. 479 503
------ ------
Other expenses.................................................. 1,189 1,240
------ ------
Total noninterest expense..................................... $3,425 $3,272
====== ======
Salaries and employee benefits expense comprise the majority of our noninterest
expense. Employee related expenses rose $115 or 7.3 percent to $1,696 for the
three months ended March 31, 2003, from $1,581 for the same period of the
previous year. The rise in employee costs resulted from
35
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
staffing requirements associated with the opening of our Carbondale and Scranton
banking offices in the second half of 2002, coupled with increases in our health
insurance rates.
Net occupancy and equipment expenses totaled $540 for the first quarter of 2003,
an increase of $89 or 19.7 percent compared to $451 for first quarter of 2002.
Again the increase resulted from higher depreciation, rent and maintenance costs
associated with our two new banking offices.
For the first three months of 2003, other expenses declined $51 or 4.1 percent
to $1,189 compared to $1,240 for the same three months of last year. The
decrease in other expenses, for the most part, was caused by a reduction in
stationery and supply costs.
Our deposits are insured by the FDIC and are subject to deposit assessments to
maintain the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC
places each insured bank into one of nine risk categories based on the bank's
capitalization and supervisory evaluations provided to the FDIC by the bank's
primary federal regulator. An insured bank's assessment rate is then determined
by the risk category into which it is classified. Recently, the FDIC decided to
retain the existing BIF assessment schedules of $0.00 per 100 dollars of
deposits for banks classified in the highest capital and supervisory evaluation
category and $0.27 per 100 dollars of deposits for banks classified in the
lowest category. We were classified in the highest capital and supervisory
evaluation category at March 31, 2003, and will be exempt from paying a BIF
assessment in the second quarter of 2003.
There is a separate levy assessed on all FDIC-insured institutions to cover the
cost of Finance Corporation ("FICO") funding. The FDIC established the annual
FICO assessment rates effective for the first quarter of 2003 at $0.0168 per 100
dollars of BIF-assessable deposits. Our FICO assessments were $18 and $19 for
the first quarters of 2003 and 2002.
INCOME TAXES:
Income tax expense totaled $382 for the three months ended March 31, 2003, an
increase of $44 compared to $338 for the same three months of last year. For the
first quarter, our effective tax rate increased to 22.3 percent in 2003 from
20.5 percent in 2002. Lower amounts of tax-exempt interest income caused the
increase. Tax-exempt interest income, as a percentage of total interest income,
declined to 8.6 percent for the first quarter of 2003, compared to 9.0 percent
for the first quarter of 2002. In addition to using tax-exempt investments and
loans as a means of lowering our tax burden, we
36
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
utilize 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 arises 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.
37
COMM BANCORP, INC.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
Within the 90-day period prior to the filing date of this report, our Chief
Executive Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon their evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were adequate and
effective and designed to ensure that material information related to us and our
consolidated subsidiaries would be known to them by others within those
entities.
CHANGES IN INTERNAL CONTROLS:
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation referred to above.
38
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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99(i) CEO certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
99(ii) CFO certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
NONE
39
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: May 12, 2003 /s/ William F. Farber, Sr.
-------------------------------------
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
Date: May 12, 2003 /s/ Scott A. Seasock
-------------------------------------
Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2003 /s/ Stephanie A. Ganz
-------------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
40
CERTIFICATIONS
I, William F. Farber, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comm Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14 and 15d-14, for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the Evaluation Date; and
(c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors or persons performing the
equivalent functions:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
registrant's auditors any material weaknesses in internal controls; and
41
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ William F. Farber, Sr.
--------------------------
William F. Farber, Sr.
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
42
I, Scott A. Seasock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comm Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14 and 15d-14, for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the Evaluation Date; and
(c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors or persons performing the
equivalent functions:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
registrant's auditors any material weaknesses in internal controls; and
43
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Scott A. Seasock
--------------------------------
Scott A. Seasock,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
44
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ----------- ----
99(i) CEO certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. 46
99(ii) CFO certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. 47
45