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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004
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 incorporation (I.R.S. Employer Identification
or organization) Number)
125 N. STATE STREET, CLARKS SUMMIT, PA 18411
- --------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(570) 586-0377
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by 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: 1,889,615 at July 31, 2004.
Page 1 of 54
Exhibit Index on Page 48
COMM BANCORP, INC.
FORM 10-Q
JUNE 30, 2004
INDEX
CONTENTS PAGE NO.
- -------- --------
PART I. FINANCIAL INFORMATION:
Item 1: Financial Statements .......................................
Consolidated Statements of Income and Comprehensive Income
for the Three Months and Six Months Ended June 30, 2004
and 2003 ....................................................... 3
Consolidated Balance Sheets - June 30, 2004 and December
31, 2003 ....................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2004 ......................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 ................................... 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 .................................... 43
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings .......................................... 44
Item 2: Changes in Securities and Use of Proceeds and Issuer
Purchases of Equity Securities .................... 44
Item 3: Defaults Upon Senior Securities ............................ 44
Item 4: Submission of Matters to a Vote of Security Holders ........ 45
Item 5: Other Information .......................................... 45
Item 6: Exhibits and Reports on Form 8-K ........................... 46
Signatures ......................................................... 47
Exhibit Index ...................................................... 48
* Not Applicable
2
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable ................................................................. $ 5,431 $ 5,612 $ 10,720 $ 11,164
Tax-exempt .............................................................. 208 187 413 378
Interest and dividends on investment securities available-for-sale:
Taxable ................................................................. 499 430 1,034 1,088
Tax-exempt .............................................................. 395 399 788 799
Dividends ............................................................... 11 11 21 25
Interest on federal funds sold ............................................ 22 86 38 114
---------- ---------- ---------- ----------
Total interest income ................................................. 6,566 6,725 13,014 13,568
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits ...................................................... 2,240 2,582 4,478 5,254
---------- ---------- ---------- ----------
Total interest expense ................................................ 2,240 2,582 4,478 5,254
---------- ---------- ---------- ----------
Net interest income ................................................... 4,326 4,143 8,536 8,314
Provision for loan losses ................................................. 150 120 300 240
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ................... 4,176 4,023 8,236 8,074
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges, fees and commissions ..................................... 752 695 1,478 1,391
Net gains on sale of loans ................................................ 128 295 324 685
---------- ---------- ---------- ----------
Total noninterest income .............................................. 880 990 1,802 2,076
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits expense .................................... 1,754 1,773 3,480 3,469
Net occupancy and equipment expense ....................................... 599 548 1,263 1,088
Other expenses ............................................................ 1,242 1,257 2,479 2,446
---------- ---------- ---------- ----------
Total noninterest expense ............................................. 3,595 3,578 7,222 7,003
---------- ---------- ---------- ----------
Income before income taxes ................................................ 1,461 1,435 2,816 3,147
Provision for income tax expense .......................................... 206 290 381 672
---------- ---------- ---------- ----------
Net income ............................................................ 1,255 1,145 2,435 2,475
---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale ..... (1,991) 212 (1,441) (24)
Income tax expense (benefit) related to other comprehensive income (loss) . (677) 72 (490) (8)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of income taxes ................ (1,314) 140 (951) (16)
---------- ---------- ---------- ----------
Comprehensive income (loss) ........................................... $ (59) $ 1,285 $ 1,484 $ 2,459
========== ========== ========== ==========
PER SHARE DATA:
Net income ................................................................ $ 0.66 $ 0.60 $ 1.28 $ 1.28
Cash dividends declared ................................................... $ 0.22 $ 0.22 $ 0.44 $ 0.44
Average common shares outstanding ......................................... 1,900,321 1,923,082 1,903,947 1,934,586
See Notes to Consolidated Financial Statements.
3
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks......................................................... $ 6,923 $ 17,099
Federal funds sold.............................................................. 17,100 11,500
Investment securities available-for-sale........................................ 99,639 105,248
Loans held for sale, net........................................................ 2,432 3,205
Loans, net of unearned income................................................... 377,268 357,940
Less: allowance for loan losses............................................... 3,743 3,584
-------- --------
Net loans....................................................................... 373,525 354,356
Premises and equipment, net..................................................... 12,078 12,484
Accrued interest receivable..................................................... 2,138 2,229
Other assets.................................................................... 3,416 3,331
-------- --------
Total assets................................................................ $517,251 $509,452
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing........................................................... $ 63,405 $ 59,119
Interest-bearing.............................................................. 404,290 400,347
-------- --------
Total deposits.............................................................. 467,695 459,466
Accrued interest payable........................................................ 1,080 1,143
Other liabilities............................................................... 2,032 2,302
-------- --------
Total liabilities........................................................... 470,807 462,911
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and
outstanding:
June 30, 2004, 1,888,151 shares; December 31, 2003, 1,906,528 shares........... 623 629
Capital surplus................................................................. 6,637 6,576
Retained earnings............................................................... 38,022 37,223
Accumulated other comprehensive income.......................................... 1,162 2,113
-------- --------
Total stockholders' equity.................................................. 46,444 46,541
-------- --------
Total liabilities and stockholders' equity.................................. $517,251 $509,452
======== ========
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, 2003....................... $629 $6,576 $37,223 $2,113 $46,541
Net income....................................... 2,435 2,435
Dividends declared: $0.44 per share.............. (835) (835)
Dividend reinvestment plan: 3,273 shares issued.. 1 126 127
Repurchase and retirement: 21,650 shares......... (7) (65) (801) (873)
Net change in other comprehensive income......... (951) (951)
---- ------ ------- ------ -------
BALANCE, JUNE 30, 2004........................... $623 $6,637 $38,022 $1,162 $46,444
==== ====== ======= ====== =======
See Notes to Consolidated Financial Statements.
5
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30 2004 2003
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 2,435 $ 2,475
Adjustments:
Provision for loan losses.............................................................. 300 240
Depreciation, amortization and accretion............................................... 1,230 1,807
Amortization of loan fees.............................................................. (29) (79)
Deferred income tax benefit............................................................ (76) (2)
Loss on disposition of equipment....................................................... 17
Losses on the sale of foreclosed assets................................................ 2 2
Changes in:
Loans held for sale, net............................................................. 773 (3,606)
Accrued interest receivable.......................................................... 91 102
Other assets......................................................................... (208) (455)
Accrued interest payable............................................................. (63) (52)
Other liabilities.................................................................... 237 (89)
-------- --------
Net cash provided by operating activities.......................................... 4,692 360
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of investment securities available-for-sale..................... 8,331 35,291
Purchases of investment securities available-for-sale.................................... (4,620) (18,415)
Proceeds from sale of foreclosed assets.................................................. 140 122
Net increase in lending activities....................................................... (19,531) (13,753)
Purchases of premises and equipment...................................................... (232) (845)
-------- --------
Net cash provided by (used in) investing activities................................ (15,912) 2,400
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ 11,226 16,901
Time deposits.......................................................................... (2,997) 9,351
Proceeds from issuance of common shares.................................................. 127 111
Repurchase and retirement of common shares............................................... (873) (1,336)
Cash dividends paid...................................................................... (839) (837)
-------- --------
Net cash provided by financing activities.......................................... 6,644 24,190
-------- --------
Net increase (decrease) in cash and cash equivalents............................... (4,576) 26,950
Cash and cash equivalents at beginning of year..................................... 28,599 21,383
-------- --------
Cash and cash equivalents at end of period......................................... $ 24,023 $ 48,333
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest............................................................................... $ 4,541 $ 5,306
Income taxes........................................................................... 128 797
Noncash items:
Transfer of loans to foreclosed assets................................................. 91 246
Unrealized losses on investment securities available-for-sale.......................... $ 951 $ 16
See Notes to Consolidated Financial Statements.
6
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Comm Bancorp,
Inc. and subsidiaries, Community Bank and Trust Company, including its
subsidiaries, Community Leasing Corporation and Comm Financial Services
Corporation, and Comm Realty Corporation (collectively, the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of the financial position and results of operations for the periods have been
included. All significant intercompany balances and transactions have been
eliminated in the consolidation. Prior-period amounts are reclassified when
necessary to conform with the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates. For additional information and disclosures required under GAAP,
reference is made to the Company's Annual Report on Form 10-K for the period
ended December 31, 2003.
7
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(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.
To a certain extent, our success depends upon the general economic conditions in
the geographic market that we serve. Although we expect economic conditions in
our market area to remain favorable, assurance cannot be given that these
conditions will continue. Adverse changes to economic conditions would likely
impair loan collections and may have a materially adverse effect on the
consolidated results of operations and financial position.
The banking industry is highly competitive, with rapid changes in product
delivery systems and in consolidation of service providers. We compete with many
larger institutions in terms of asset size. These competitors also have
substantially greater technical, marketing and financial resources. The larger
size of these companies affords them the opportunity to offer products and
services not offered by us. We are constantly striving to meet
8
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
the convenience and needs of our customers and to enlarge our customer base,
however, we cannot assure that these efforts will be successful.
CRITICAL ACCOUNTING POLICIES:
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to establish
critical accounting policies and make accounting estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and expenses
during the reporting periods.
An accounting estimate requires assumptions about uncertain matters that could
have a material effect on the financial statements if a different amount within
a range of estimates were used or if estimates changed from period to period.
Readers of this report should understand that estimates are made considering
facts and circumstances at a point in time, and changes in those facts and
circumstances could produce results that differ from when those estimates were
made. Significant estimates that are particularly susceptible to material change
in the next year relate to the allowance for loan losses, fair value of
financial instruments and the valuations of real estate acquired through
foreclosure and intangible assets. Actual amounts could differ from those
estimates.
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 losses inherent in the remainder of the loan portfolio as
of the balance sheet date. The balance in the allowance for loan losses account
is based on past events and current economic conditions.
The allowance for loan losses account consists of an allocated element and an
unallocated element. The allocated element consists of a specific portion for
the impairment of loans individually evaluated and a formula portion for the
impairment of those loans collectively evaluated. The unallocated element is
used to cover inherent losses that exist as of the evaluation date, but which
have not been identified as part of the allocated allowance using the above
impairment evaluation methodology due to limitations in the process.
Management monitors the adequacy of the allocated portion of the allowance
quarterly and adjusts the allowance for any deficiencies through normal
operations. This self-correcting mechanism reduces potential differences between
estimates and actual observed losses. In addition, the unallocated
9
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
portion of the allowance is examined quarterly to ensure that it remains
relatively constant in relation to the total allowance unless there are changes
in the related criteria that would indicate a need to either increase or
decrease it. The determination of the allowance for loan loss level is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Accordingly,
management cannot ensure that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan
losses will not be required resulting in an adverse impact on operating results.
Fair values of financial instruments, in cases where quoted market prices are
not available, are based on estimates using present value or other valuation
techniques which are subject to change.
Real estate acquired in connection with foreclosures or in satisfaction of loans
is written-down to the lower of the related loan balance or 80.0 percent of fair
market value for residential properties or 75.0 percent of fair market value for
commercial properties based upon estimates derived through independent
appraisals. However, proceeds realized from sales may ultimately be higher or
lower than those estimates.
Intangible assets include goodwill and a core deposit intangible. We evaluate
goodwill for impairment at least annually and we evaluate the useful life of the
core deposit in each reporting period in order to determine if it should be
adjusted.
For a further discussion of our significant account policies, refer to the note
entitled, "Summary of significant accounting policies," in the Notes to
Consolidated Financial Statements to our Annual Report on Form 10-K for the
period ended December 31, 2003. This note lists the significant accounting
policies used by management in the development and presentation of our financial
statements. This Management's Discussion and Analysis, The Notes to the
Consolidated Financial Statements, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative
factors that are necessary for the understanding and valuation of our financial
position, results of operations and cash flows.
OPERATING ENVIRONMENT:
During the second quarter of 2004, the United States economy continued to expand
at a solid pace. The gross domestic product, the total value of all goods and
services produced in the United States, grew at an annual rate of 3.0 percent.
Business investment grew 8.9 percent, while consumer spending rose 1.0 percent.
In addition, the future outlook for the economy looked bright, industrial
production picked up considerably and reports on the
10
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
labor market were favorable. However, recent data suggested that inflation was
higher than anticipated. Energy prices soared over the first half of 2004. In
addition, inflation in core consumer prices, personal consumption expenditures
excluding food and energy, increased from a very low rate of 1.0 percent in 2003
to an annual rate of a little over 2.0 percent for the first six months of 2004.
Given the continued economic growth and upward movement in consumer prices, the
Federal Open Market Committee ("FOMC") at its June 29, 2004, meeting increased
the target for the federal funds rate 25 basis points to 1.25 percent and
indicated there could be a cumulative 225 basis point increase over the next 12
months. Subsequent to the end of the second quarter of 2004, the FOMC raised the
federal funds target rate another 25 basis points to 1.50 percent on August 10,
2004.
REVIEW OF FINANCIAL POSITION:
At June 30, 2004, total assets were $517.2 million, an increase of $7.8 million
from $509.4 million at December 31, 2003. The balance sheet growth was driven by
strong loan demand, which was funded by moderate deposit growth and repayments
of investment securities. Loans, net of unearned income, grew $19.4 million to
$377.3 million at the close of the second quarter from $357.9 million at
year-end 2003. Total deposits increased $8.2 million to $467.7 million at June
30, 2004, from $459.5 million at the end of last year. Noninterest-bearing
deposits rose $4.3 million, while interest-bearing deposits increased $3.9
million. At June 30, 2004, investment securities were $99.6 million, a decline
of $5.6 million from $105.2 million at December 31, 2003. At the close of the
second quarter, we had $17.1 million in federal funds sold outstanding as
compared to $11.5 million at year-end 2003. Stockholders' equity was $46.4
million at June 30, 2004, and $46.5 million at December 31, 2003.
In comparison to the end of the first quarter of 2004, total assets grew $12.6
million. Deposits grew $14.3 million or at an annual rate of 12.7 percent and
loans, net of unearned income, increased $12.0 million or at an annual rate of
13.2 percent. The investment portfolio decreased $2.4 million, while federal
funds sold increased $7.3 million. Stockholders' equity decreased $1.3 million.
On October 28, 2003, President Bush signed into law The Check Clearing for the
21st Century Act ("Check 21"). The purpose of Check 21 is to improve the
efficiency and reduce the cost of the Nation's check processing system by
facilitating truncation through expanded use of electronic processing
technologies. Check 21 also legalizes a new negotiable instrument called a
substitute check, the image equivalent of the original check. This will
11
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
permit banks to truncate original checks, process check information
electronically and deliver substitute checks to banks that want to continue
receiving paper checks. The provisions of Check 21 become effective on October
28, 2004. During the second quarter, we began a series of in-house presentations
to educate our employees about the provisions of Check 21 and how to effectively
communicate those changes to our customers. We have also designed informative
brochures detailing how customers will be affected by Check 21. During the third
quarter of 2004, we will be including these brochures in each customer's monthly
bank statement.
Also during the second quarter, we started implementing a new technology that
will allow for check truncation at the branch level and check processing to be
done electronically. The approximated cost of this new technology is $650 which
will be funded through normal operations. We plan to have this new technology
fully implemented by the end of the second quarter of 2005.
INVESTMENT PORTFOLIO:
As previously mentioned, the FOMC decided at the close of the second quarter of
2004, to raise the target federal funds rate 25 basis points to 1.25 percent in
order to combat the possibility of inflation. Yields on U.S. Treasury
securities, which were relatively stable during the second quarter, increased
during the second quarter in anticipation of the FOMC's action. Changes in the
yields of U.S. Treasuries impact the market value of our investment portfolio.
Specifically, our holdings of mortgage-backed securities and municipal
obligations have average lives that are closely related to the two-year and
ten-year U.S. Treasury securities. The two-year U.S. Treasury rate, which
affects our mortgage-backed securities, increased 68 basis points to 2.54
percent at June 30, 2004, from 1.86 percent at the end of the previous quarter.
The ten-year U.S. Treasury, related to our municipals holdings, rose 33 basis
points to 4.48 percent at the close of the second quarter, from 4.15 percent at
March 31, 2004. As a result, we experienced depreciation in the market value of
our investment portfolio. The unrealized holding gain on the investment
portfolio declined $1,991 to $1,761 at June 30, 2004, from $3,752 at the end of
the first quarter.
12
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The carrying values of the major classifications of securities as they relate to
the total investment portfolio at June 30, 2004, and December 31, 2003, are
summarized as follows:
DISTRIBUTION OF INVESTMENT SECURITIES
JUNE 30, DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------
U.S. Government agencies............................ $20,163 20.24% $ 16,377 15.56%
State and municipals:
Taxable........................................... 16,884 16.95 17,051 16.20
Tax-exempt........................................ 34,040 34.16 34,788 33.05
Mortgage-backed securities.......................... 27,203 27.30 35,099 33.35
Equity securities................................... 1,349 1.35 1,933 1.84
------- ------ -------- ------
Total........................................... $99,639 100.00% $105,248 100.00%
======= ====== ======== ======
Our investment portfolio continued to play a less prominent role in our earning
asset mix. Available-for-sale investment securities totaled $99.6 million and
equaled 20.1 percent of earning assets at June 30, 2004, compared to $105.2
million or 22.0 percent at year-end 2003. Repayments from mortgage-backed
securities were redirected to our loan portfolio to fund commercial loan demand.
For the six months ended June 30, 2004, the investment portfolio averaged $98.7
million, compared to $111.1 million the same six months of last year. The
tax-equivalent yield on the investment portfolio increased 36 basis points to
4.58 percent for the six months ended June 30, 2004, from 4.22 percent for the
same six months of 2003. For the second quarter, the tax- equivalent yield was
4.57 percent, a slight decline of 2 basis points in comparison to a yield 4.59
percent in the first quarter.
In addition to yield analysis, we utilize a total return approach to measure the
investment portfolio's performance. This approach gives a more complete picture
of a portfolio's overall performance since it takes into consideration both
market value and reinvestment income from repayments. The investment portfolio's
total return is the sum of all interest income, reinvestment income on all
proceeds from repayments and capital gains or losses, whether realized or
unrealized. Total return for the investment portfolio decreased due primarily to
market value depreciation. For the 12 months ended June 30, 2004, total return
on the investment portfolio equaled 1.7 percent, compared to 6.8 percent for the
12 months ended March 31, 2004.
13
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at June 30,
2004, is summarized as follows. The weighted-average yield, based on amortized
cost, has been computed for tax-exempt state and municipals on a tax-equivalent
basis using the statutory tax rate of 34.0 percent. The distributions are based
on contractual maturity with the exception of mortgage-backed securities, CMOs
and equity securities. Mortgage-backed securities and CMOs have been presented
based upon estimated cash flows, assuming no change in the current interest rate
environment. Equity securities with no stated contractual maturities are
included in the "After ten years" maturity distribution. Expected maturities may
differ from contracted maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------------------------------------------------------------------------------------
JUNE 30, 2004 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------------------------------------
Amortized cost:
U.S. Government agencies..... $ 8,035 2.02% $12,202 2.11% $20,237 2.07%
State and municipals:
Taxable.................... 1,597 1.68 15,749 2.60 17,346 2.52
Tax-exempt................. 850 3.05 987 2.82 $ 8,826 7.83% $21,510 7.58% 32,173 7.38
Mortgage-backed securities... 8,130 5.26 17,263 4.31 1,224 5.26 274 6.35 26,891 4.66
Equity securities............ 1,231 3.50 1,231 3.50
------- ------- ------- ------- -------
Total.................... $18,612 3.45% $46,201 3.11% $10,050 7.52% $23,015 7.35% $97,878 4.62%
======= ======= ======= ======= =======
Fair value:
U.S. Government agencies..... $ 8,035 $12,128 $20,163
State and municipals:
Taxable.................... 1,589 15,295 16,884
Tax-exempt................. 858 1,029 $ 9,477 $22,676 34,040
Mortgage-backed securities... 8,221 17,460 1,241 281 27,203
Equity securities............ 1,349 1,349
------- ------- ------- ------- -------
Total.................... $18,703 $45,912 $10,718 $24,306 $99,639
======= ======= ======= ======= =======
LOAN PORTFOLIO:
Although mortgage rates increased from the end of the first quarter, they still
remained at historically low levels. The rate on a 30-year conventional
mortgage, which reached a record low of 5.45 percent at the end of the first
quarter of 2004, rose 84 basis points and closed the second quarter at 6.29
percent. Rising mortgage rates had little effect on the sector, as more
favorable employment conditions and a 4.0 percent increase in disposable
personal income supported the robust housing market. Sales of new and existing
homes, as well as housing starts, remained strong and reached record highs in
May. Despite the continued strength of the housing market, activity in our
secondary mortgage department moderated over the first half of 2004 in
comparison to the intense pace experienced in the prior two years.
14
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Residential mortgages serviced for the Federal National Mortgage Association
("FNMA") grew $4.0 million or at an annual pace of 8.9 percent to $94.0 million
at June 30, 2004, from $90.0 million at December 31, 2003. In comparison with
the first half of 2003, residential mortgages serviced for the FNMA grew at an
annualized rate of 56.8 percent. For the three months and six months ended June
30, 2004, residential mortgages sold to the FNMA totaled $6.2 million and $12.9
million, compared to $11.3 million and $24.9 million for the same periods of
2003. Net gains realized on the sale of residential mortgages totaled $128 for
the second quarter and $324 year-to- date 2004, compared to $295 and $685 for
the respective periods of last year.
Business investment grew 8.9 percent in the second quarter of 2004. Outlays for
equipment and software rose 10.0 percent, while structural investment increased
5.2 percent. Despite the growth in business spending, commercial loans at banks
have declined in the current year as companies opted to finance investment
through the use of commercial paper. However, the April 2004 Senior Loan Officer
Opinion Survey issued by the Federal Reserve indicated an increase in demand for
commercial and industrial loans, as well as commercial mortgages. Contrary to
the banking industry, our continued efforts on developing commercial business
relationships lead to annualized growth of 19.8 percent in our commercial loan
portfolio in the second quarter of 2004. Commercial loans, including commercial
mortgages and lease financing totaled $249.5 million at June 30, 2004, an
increase of $11.7 million from $237.8 million at the end of the first quarter.
Consumer spending increased 1.0 percent in the second quarter of 2004. However,
spending on durable goods, including automobiles, declined 2.5 percent. As a
result, commercial banks experienced only a slight increase of 1.0 percent in
consumer loans during this period. Our consumer loans decreased $1.0 million or
3.4 percent to $28.0 million at June 30, 2004, from $29.0 million at the end of
the previous quarter. Residential mortgages, including construction loans
increased $1.3 million to $99.8 million at the close of the second quarter of
2004 from $98.5 million at March 31, 2004.
For the six months ended June 30, 2004, loans averaged $371.3 million, an
increase of $35.6 million or 10.6 percent compared to $335.7 million for the
same period of 2003. The tax-equivalent yield on the loan portfolio fell 91
basis points to 6.14 percent for the first six months of 2004, from 7.05 percent
for the same six months of last year. However, the tax-equivalent yield on the
loan portfolio increased 5 basis points in the second quarter of 2004 in
comparison to the previous quarter. Given the two recent 25 basis point
increases in the prime rate, we anticipate that loan yields will rise over the
remainder of 2004 as variable rate loans tied to prime reprice at a higher rate.
15
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The composition of the loan portfolio at June 30, 2004, and December 31, 2003,
is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
JUNE 30, DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------
Commercial, financial and others............ $107,805 28.58% $100,723 28.14%
Real estate:
Construction.............................. 4,770 1.26 2,983 0.83
Mortgage.................................. 234,435 62.14 222,621 62.20
Consumer, net............................... 27,988 7.42 29,726 8.30
Lease financing, net........................ 2,270 0.60 1,887 0.53
-------- ------ -------- ------
Loans, net of unearned income............. 377,268 100.00% 357,940 100.00%
====== ======
Less: allowance for loan losses............. 3,743 3,584
-------- --------
Net loans............................... $373,525 $354,356
======== ========
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 our loan products to increase our holdings of
adjustable-rate loans and reduce the average term of fixed-rate loans.
Approximately 43.6 percent of the lending portfolio is expected to reprice
within the next 12 months.
The maturity and repricing information of the loan portfolio by major
classification at June 30, 2004, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
JUNE 30, 2004 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------
Maturity schedule:
Commercial, financial and others..... $ 55,563 $ 25,322 $ 26,920 $107,805
Real estate:
Construction....................... 4,770 4,770
Mortgage........................... 25,268 84,404 124,763 234,435
Consumer, net........................ 10,527 14,845 2,616 27,988
Lease financing, net................. 829 1,441 2,270
-------- -------- -------- --------
Total............................ $ 96,957 $126,012 $154,299 $377,268
======== ======== ======== ========
Repricing schedule:
Predetermined interest rates......... $ 43,713 $ 66,172 $ 53,888 $163,773
Floating or adjustable interest rates 120,923 92,436 136 213,495
-------- -------- -------- --------
Total............................ $164,636 $158,608 $ 54,024 $377,268
======== ======== ======== ========
16
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In the normal course of business, we are also a party to financial instruments
with off-balance sheet risk to meet the financing needs of our customers. These
instruments include legally binding commitments to extend credit, unused
portions of home equity and credit card lines and commercial letters of credit,
and involve, to varying degrees, elements of credit risk and IRR in excess of
the amount recognized in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Commercial letters of credit are conditional
commitments issued by us to support customers in the purchase of commercial
goods. These letters of credit are automatically renewable upon their
anniversary date unless canceled by us prior to that date.
The contractual amounts of off-balance sheet commitments at June 30, 2004 and
December 31, 2003, are summarized as follows:
DISTRIBUTION OF OFF-BALANCE SHEET COMMITMENTS
JUNE 30, DECEMBER 31,
2004 2003
- ------------------------------------------------------------------------------------------------
Commitments to extend credit.................................... $46,399 $44,025
Unused portions of home equity and credit card lines............ 11,358 9,806
Commercial letters of credit.................................... 6,611 2,255
------- -------
Total......................................................... $64,368 $56,086
======= =======
These commitments are generally issued for one year or less and often expire
unused in whole or in part by the customer. We record an allowance for credit
losses, if deemed necessary, separately as a liability. No allowance was deemed
necessary at June 30, 2004 and December 31, 2003. We do not anticipate that
losses, if any, that may occur as a result of funding off balance sheet
commitments, would have a material adverse effect on our operating results or
financial position.
17
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSET QUALITY:
National, Pennsylvania and market area unemployment rates at June 30, 2004 and
2003, are summarized as follows:
JUNE 30, 2004 2003
- ------------------------------------------------------------------------------------------
United States........................................................... 5.8% 6.5%
Pennsylvania............................................................ 5.6 5.6
Lackawanna county....................................................... 6.2 5.5
Monroe county........................................................... 7.2 7.3
Susquehanna county...................................................... 5.5 6.6
Wayne county............................................................ 4.8 4.3
Wyoming county.......................................................... 6.1% 5.6%
The employment conditions improved for the Nation and remained stable for the
Commonwealth of Pennsylvania. Improved conditions for the Nation were due to job
gains in service-producing industries, primarily in the education and health
services, leisure and hospitality and business and professional services
industries. However, employment conditions for the counties in our local market
area weakened in comparison to one year ago. The higher unemployment rates in
these counties was due to increases in the civilian labor force which were not
offset by additional jobs created. We anticipate labor conditions to improve in
our market area in the second half of 2004, as several large companies are
building offices or relocating operations to this area. However, no assurance
can be given that employment conditions will improve, further weakening of
employment conditions could have an adverse affect on our asset quality.
Nonperforming assets improved $307 to $2,100 at June 30, 2004, from $2,407 at
year-end 2003. A reduction in accruing loans past due 90 days or more was
primarily responsible for the improvement. As a percentage of loans, net of
unearned income, nonperforming assets equaled 0.56 percent at June 30, 2004
compared to 0.67 percent at December 31, 2003.
Accruing loans past due 90 days or more in all major loan categories decreased
from December 31, 2003, which resulted in a balance of $400 at June 30, 2004,
compared to $700 at the end of last year. Loans on nonaccrual status increased
$44. We experienced an increase of $123 in commercial loans, partially offset by
reductions in mortgage and consumer loans. Foreclosed assets decreased $51 to
$210 at June 30, 2004, from $261 at December 31, 2003. Two loans totaling $91
were transferred to foreclosed assets during the first half of 2004. Two
properties with an aggregate carrying value of $142 were sold for $140,
resulting in a net realized loss of $2.
18
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information concerning nonperforming assets at June 30, 2004, and December 31,
2003, is summarized as follows. The table includes loans or other extensions of
credit classified for regulatory purposes and all material loans or other
extensions of credit that cause management to have serious doubts as to the
borrowers' ability to comply with present loan repayment terms.
DISTRIBUTION OF NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 429 $ 306
Real estate:
Construction.................................................
Mortgage..................................................... 1,032 1,077
Consumer, net.................................................. 29 63
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,490 1,446
------ ------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and others............................... 124
Real estate:
Construction.................................................
Mortgage..................................................... 284 352
Consumer, net.................................................. 116 151
Lease financing, net........................................... 73
------ ------
Total accruing loans past due 90 days or more.............. 400 700
------ ------
Total nonperforming loans.................................. 1,890 2,146
------ ------
Foreclosed assets.............................................. 210 261
------ ------
Total nonperforming assets................................. $2,100 $2,407
====== ======
Ratios:
Nonperforming loans as a percentage of loans, net.............. 0.50% 0.60%
Nonperforming assets as a percentage of loans, net............. 0.56% 0.67%
We maintain the allowance for loan losses at a level we believe adequate to
absorb probable credit losses related to specifically identified loans, as well
as probable incurred loan losses inherent in the remainder of the loan portfolio
as of the balance sheet date. The balance in the allowance for loan losses
account is based on past events and current economic conditions. We employ the
Federal Financial Institution Examination Council ("FFIEC") Interagency Policy
Statement and GAAP in assessing the adequacy of the allowance account. Under
GAAP, the adequacy of the allowance account is determined based on the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
"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
19
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
Information concerning impaired loans at June 30, 2004, and December 31, 2003,
is summarized as follows. The table includes credits classified for regulatory
purposes and all material credits that cause management to have serious doubts
as to the borrower's ability to comply with present loan repayment terms.
DISTRIBUTION OF IMPAIRED LOANS
JUNE 30, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------------------
NONACCRUAL LOANS:
Commercial, financial and others............................... $ 429 $ 306
Real estate:
Construction.................................................
Mortgage..................................................... 1,032 1,077
Consumer, net.................................................. 29 63
Lease financing, net...........................................
------ ------
Total nonaccrual loans..................................... 1,490 1,446
------ ------
ACCRUING LOANS:
Commercial, financial and others............................... 3,686
Real estate:
Construction.................................................
Mortgage..................................................... 1,805 207
Consumer, net.................................................. 74 1
Lease financing, net...........................................
------ ------
Total accruing loans....................................... 5,565 208
------ ------
Total impaired loans....................................... $7,055 $1,654
====== ======
Ratio:
Impaired loans as a percentage of loans, net................... 1.87% 0.46%
20
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The majority of the increase in impaired loans was primarily caused by credits
of two commercial customers. The internal loan grading classification for one
commercial customer was downgraded as a result of a reduction in the bond rating
of the borrower. Management, on an ongoing basis, monitors the financial
condition of this borrower and no allowance for this credit was deemed necessary
as the loan was fully collateralized at June 30, 2004. The other commercial
relationship involved several loans which were downgraded due to insufficient
debt coverage. Subsequent to June 30, 2004, the customer has substantially paid
down the outstanding balance of these loans and will pay off the remaining
balance by the end of the fourth quarter of 2004.
Information relating to the recorded investment in impaired loans at June 30,
2004 and December 31, 2003, is summarized as follows:
JUNE 30, DECEMBER 31,
2004 2003
- -----------------------------------------------------------------------------------------------
Impaired loans:
With a related allowance....................................... $3,851 $ 747
With no related allowance...................................... 3,204 907
------ ------
Total........................................................ $7,055 $1,654
====== ======
The analysis of changes affecting the allowance for loan losses related to
impaired loans for the six months ended June 30, 2004, is summarized as follows:
JUNE 30,
2004
- -------------------------------------------------------------------------------------------
Balance at January 1............................................................ $ 377
Provision for loan losses....................................................... 1,428
Loans charged-off............................................................... 79
Loans recovered................................................................. 12
------
Balance at period-end........................................................... $1,738
======
Interest income on impaired loans that would have been recognized had the loans
been current and the terms of the loans not been modified, the aggregate amount
of interest income recognized and the amount recognized using the cash-basis
method and the average recorded investment in impaired loans for the three-month
and six-month periods ended June 30, 2004 and 2003 are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Gross interest due under terms................. $ 39 $ 214 $ 68 $ 259
Interest income recognized..................... 28 26 60 51
------ ------ ------ ------
Interest income not recognized................. $ 11 $ 188 $ 8 $ 208
====== ====== ====== ======
Interest income recognized (cash-basis)........ $ 28 $ 26 $ 60 $ 51
Average recorded investment in impaired loans.. $2,487 $2,879 $2,080 $2,638
21
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash received on impaired loans applied as a reduction of principal totaled $244
and $32 for the six and three months ended June 30, 2004. For the respective
periods of 2003 cash receipts on impaired loans totaled $259 and $119. There
were no commitments to extend additional funds to such parties at June 30, 2004.
The allocation of the allowance for loan losses at June 30, 2004 and December
31, 2003, is summarized as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
JUNE 30, DECEMBER 31,
2004 2003
--------------- ---------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------------
Allocated allowance:
Specific:
Commercial, financial and others................. $ 841 1.09% $ 237 0.09%
Real estate:
Construction...................................
Mortgage....................................... 850 0.75 124 0.36
Consumer, net.................................... 47 0.03 16 0.01
Lease financing, net.............................
------ ------ ------ ------
Total specific............................... 1,738 1.87 377 0.46
------ ------ ------ ------
Formula:
Commercial, financial and others................. 95 27.49 237 28.05
Real estate:
Construction................................... 1.26 0.83
Mortgage....................................... 629 61.39 974 61.84
Consumer, net.................................... 311 7.39 316 8.29
Lease financing, net............................. 1 0.60 1 0.53
------ ------ ------ ------
Total formula................................ 1,036 98.13 1,528 99.54
------ ------ ------ ------
Total allocated allowance.................... 2,774 100.00% 1,905 100.00%
====== ======
Unallocated allowance............................ 969 1,679
------ ------
Total allowance for loan losses.............. $3,743 $3,584
====== ======
The allocated allowance for loan losses account increased $869 to $2,774 at June
30, 2004, from $1,905 at December 31, 2003. The increase resulted from a $1,361
addition to the specific portion of the allowance for impairment of loans
individually evaluated under SFAS No. 114, partially offset by a $492 reduction
in the formula portion of the allowance for loans collectively evaluated for
impairment under SFAS No. 5. The increase in the specific portion primarily
resulted from increases in commercial loans and residential mortgages which are
still accruing loans but have been identified as impaired with a recorded
investment in excess of fair value.
22
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unallocated portion of the allowance for loan losses equaled $969 at the end
of the second quarter of 2004 compared to $1,679 at year-end 2003. The decrease
in the unallocated portion of the allowance for loan losses account was deemed
appropriate due to a continued improvement in net charge-offs.
A reconciliation of the allowance for loan losses and illustration of charge-
offs and recoveries by major loan category for the six months ended June 30,
2004, is summarized as follows:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30,
2004
- ------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period............................... $3,584
Loans charged-off:
Commercial, financial and others............................................... 15
Real estate:
Construction.................................................................
Mortgage..................................................................... 1
Consumer, net.................................................................. 230
Lease financing, net...........................................................
------
Total...................................................................... 246
------
Loans recovered:
Commercial, financial and others............................................... 22
Real estate:
Construction.................................................................
Mortgage..................................................................... 14
Consumer, net.................................................................. 69
Lease financing, net...........................................................
------
Total...................................................................... 105
------
Net loans charged-off.......................................................... 141
------
Provision charged to operating expense......................................... 300
------
Allowance for loan losses at end of period..................................... $3,743
======
Ratios:
Net loans charged-off as a percentage of average loans outstanding............. 0.08%
Allowance for loan losses as a percentage of period end loans.................. 0.99%
The allowance for loan losses increased $91 to $3,743 at June 30, 2004, from
$3,652 at the previous quarter-end. For the three months ended June 30, 2004, a
$150 provision for loan losses exceeded $59 in net charge-offs. As a percentage
of loans, net of unearned income, the allowance equaled 0.99 percent at the end
of the second quarter of 2004 and 1.00 percent at March 31, 2004. The allowance
account covered 178.2 percent of nonperforming assets at June 30, 2004 and 202.8
percent at March 31, 2004.
23
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 $141 or 0.08 percent of average loans outstanding for the six
months ended June 30, 2004, compared to $308 or 0.19 percent for the same period
last year. Net charge-offs as a percentage of average loans outstanding for our
peer group equaled 0.14 percent for each of the respective periods.
DEPOSITS:
The personal savings rate throughout the United States averaged approximately
1.7 percent for the second quarter of 2004, up slightly from 1.2 percent for the
first quarter and 1.4 percent for 2003. Despite the increase in the savings
rate, bank deposit gathering began to moderate as economic and employment
conditions continued to improve and volatility in the stock market subsided.
Similarly, we experienced slightly better demand for our deposit products, as
total deposits increased $14.3 million from $453.4 million at the end of the
previous quarter to $467.7 million at June 30, 2004. Interest-bearing accounts
grew $9.2 million to $404.3 million, while noninterest-bearing accounts rose
$5.1 million to $63.4 million. With regard to interest-bearing accounts, NOW
accounts increased $9.8 million and savings accounts grew $5.2 million. Pricing
competition for certificates of deposit began to intensify within our market
area and resulted in decreases of $1.0 million in time deposits less than $100
and $2.7 million in large denomination time deposits. In addition, cyclical
withdrawal patterns of local school districts and municipalities factored into a
$2.1 million decline in money market accounts.
24
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The average amount of, and the rate paid on, the major classifications of
deposits for the six months ended June 30, 2004 and 2003, are summarized as
follows:
DEPOSIT DISTRIBUTION
JUNE 30, JUNE 30,
2004 2003
----------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------------------
Interest-bearing:
Money market accounts....................... $ 18,222 0.93% $ 15,756 1.24%
NOW accounts................................ 38,062 0.78 38,413 1.03
Savings accounts............................ 129,360 0.74 124,692 1.34
Time deposits less than $100................ 180,589 3.68 187,235 3.99
Time deposits $100 or more.................. 28,713 3.28 25,830 3.36
-------- --------
Total interest-bearing.................... 394,946 2.28% 391,926 2.70%
Noninterest-bearing......................... 60,318 51,980
-------- --------
Total deposits............................ $455,264 $443,906
======== ========
For the six months ended June 30, 2004, average total deposits increased $11.4
million or 2.6 percent to $455.3 million compared to $443.9 million for the same
period of 2003. Due to our focus on building commercial deposit relationships,
deposit growth was primarily concentrated in noninterest- bearing deposits,
which averaged $8.3 million or 16.0 percent higher when comparing 2004 and 2003.
Average interest-bearing deposits grew $3.0 million or 0.8 percent. Money market
accounts, savings accounts and large denomination time deposits averaged higher,
while average NOW accounts and time deposits less than $100 declined. Low
interest rates sustained for an extended period of time resulted in a 42 basis
point reduction in our cost of funds to 2.28 percent for the first half of 2004,
from 2.70 percent for the same period of 2003. However, the FOMC began to raise
interest rates at the end of the second quarter of 2004 and announced they may
continue to gradually increase rates for the remainder of 2004. The rates paid
for deposits may increase due to this change in monetary policy, which would
directly impact our cost of funds.
Volatile deposits, time deposits in denominations of $100 or more, equaled $26.7
million at June 30, 2004, a $2.4 million decrease from $29.1 million at December
31, 2003. These deposits averaged $28.7 million for the six months ended June
30, 2004, compared to $25.8 million for the same six months of last year. The
average cost of these deposits fell 8 basis points to 3.28 percent for the first
half of 2004, compared to 3.36 percent for the same period of 2003.
25
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Maturities of time deposits of $100 or more at June 30, 2004, and December 31,
2003, are summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
JUNE 30, DECEMBER 31,
2004 2003
- -------------------------------------------------------------------------------------------
Within three months............................................ $ 3,869 $ 4,414
After three months but within six months....................... 3,614 4,845
After six months but within twelve months...................... 5,048 3,861
After twelve months............................................ 14,189 15,969
------- -------
Total........................................................ $26,720 $29,089
======= =======
MARKET RISK SENSITIVITY:
Market risk is the risk to our earnings or financial position resulting from
adverse changes in market rates or prices, such as interest rates, foreign
exchange rates or equity prices. Our exposure to market risk is primarily IRR
associated with our lending, investing and deposit-gathering activities. During
the normal course of business, we are not exposed to foreign currency exchange
risk or commodity price risk. Our exposure to IRR can be explained as the
potential for change in our reported earnings and/or the market value of our net
worth. Variations in interest rates affect earnings by changing net interest
income and the level of other interest-sensitive income and operating expenses.
Interest rate changes also affect the underlying economic value of our assets,
liabilities and off-balance sheet items. These changes arise because the present
value of future cash flows, and often the cash flows themselves, change with
interest rates. The effects of the changes in these present values reflect the
change in our underlying economic value and provide a basis for the expected
change in future earnings related to interest rates. IRR is inherent in the role
of banks as financial intermediaries. However, a bank with a high degree of IRR
may experience lower earnings, impaired liquidity and capital positions, and
most likely, a greater risk of insolvency. Therefore, banks must carefully
evaluate IRR to promote safety and soundness in their activities.
Bank regulations require us to develop and maintain an IRR management program,
overseen by the Board of Directors and senior management, that involves a
comprehensive risk management process in order to effectively identify, measure,
monitor and control risk. Should we have material weaknesses in our risk
management process or high exposure relative to our capital, bank regulatory
agencies will take action to remedy these shortcomings. Moreover, the level of
IRR exposure and the quality of our risk management process is a determining
factor when evaluating capital adequacy.
26
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Asset/Liability Management Committee ("ALCO"), comprised of members of our
Board of Directors, senior management and other appropriate officers, oversees
our IRR management program. Specifically ALCO analyzes economic data and market
interest rate trends, as well as competitive pressures, and utilizes several
computerized modeling techniques to reveal potential exposure to IRR. This
allows us to monitor and attempt to control the influence these factors may have
on our rate-sensitive assets ("RSA") and rate-sensitive liabilities ("RSL"), and
overall operating results and financial position. 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 repricing 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.
27
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
JUNE 30, 2004 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Rate-sensitive assets:
Investment securities............... $ 4,255 $ 14,448 $ 45,912 $35,024 $ 99,639
Loans held for sale, net............ 2,432 2,432
Loans, net of unearned income....... 108,119 56,517 158,608 54,024 377,268
Federal funds sold.................. 17,100 17,100
-------- -------- -------- ------- --------
Total............................. $131,906 $ 70,965 $204,520 $89,048 $496,439
======== ======== ======== ======= ========
Rate-sensitive liabilities:
Money market accounts............... $ 16,991 $ 16,991
NOW accounts........................ 45,221 45,221
Savings accounts.................... $135,040 135,040
Time deposits less than $100........ $ 19,584 55,706 87,628 $17,400 180,318
Time deposits $100 or more.......... 3,869 8,662 12,019 2,170 26,720
-------- -------- -------- ------- --------
Total............................. $ 23,453 $126,580 $234,687 $19,570 $404,290
======== ======== ======== ======= ========
Rate sensitivity gap:
Period............................ $108,453 $(55,615) $(30,167) $69,478
Cumulative........................ $108,453 $ 52,838 $ 22,671 $92,149 $ 92,149
RSA/RSL ratio:
Period............................ 5.62 0.56 0.87 4.55
Cumulative........................ 5.62 1.35 1.06 1.23 1.23
Our cumulative one-year RSA/RSL ratio equaled 1.35 at June 30, 2004, similar to
the ratio of 1.37 at the end of the previous quarter. As previously mentioned,
these ratios indicate that if interest rates increase our earnings would likely
be favorably impacted. Given the current rate environment and the announcement
by the FOMC that rates will, more than likely, increase over the next 18 months,
ALCO focused on maintaining this advantageous position by monitoring and making
certain the gap position between RSA and RSL remained positive. Specifically, we
predominantly offer commercial loans with adjustable-rate terms that either
reprice immediately or within one year. In addition, we continued to offer
promotional rates on longer-term certificates of deposit in an attempt to extend
the average maturities of these types of funds. Should interest rates increase,
a greater amount of RSA would reprice upward in the near term and at a faster
pace than RSL, thereby positively affecting net interest income. However, these
forward-looking statements are qualified in the aforementioned section entitled
"Forward-Looking Discussion" in this Management's Discussion and Analysis.
28
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In comparison to the end of the first quarter of 2004, our RSA/RSL ratio
remained relatively constant. Both RSA and RSL increased by nearly the same
magnitude from March 31, 2004. RSA increased $17.5 million, while RSL increased
$14.3 million. The increase in RSA resulted from an $11.1 million increase in
loans, net of unearned income, maturing or repricing within 12 months, coupled
with a $7.3 million increase in federal funds sold. The increase in RSL
primarily resulted from increases of $9.9 million in NOW accounts and $7.3
million in time deposits less than $100 maturing or repricing within a 12-month
time horizon.
We experienced an increase in our three-month ratio to 5.62 at June 30, 2004,
from 4.30 at the end of the previous quarter. The increase primarily resulted
from a $10.7 million increase in the amount of RSA coupled with a $4.8 million
reduction in RSL maturing or repricing within three months. The increase in
federal funds sold was primarily responsible for the increase in RSA, while
reductions of $2.5 million in time deposits less than $100 and $2.3 million in
large denomination time deposits maturing or repricing within three months
factored into the decrease in RSL.
Static gap analysis, although a credible measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes normally do not equally or simultaneously affect all categories of
assets and liabilities. Second, assets and liabilities that can contractually
reprice within the same period may not do so at the same time or to the same
magnitude. Third, the interest rate sensitivity table presents a one-day
position. Variations occur daily as we adjust our rate sensitivity throughout
the year. Finally, assumptions must be made in constructing such a table. For
example, the conservative nature of our Asset/Liability Management Policy
assigns money market and NOW accounts to the "Due after three but within twelve
months" repricing interval. In reality, these items may reprice less frequently
and in different magnitudes than changes in general interest rate levels.
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Model results
at June 30, 2004, produced results similar to those indicated by the one-year
static gap position. Given parallel and instantaneous shifts in interest rates
of plus 100 basis points and 200 basis points, net interest income should
increase by 2.2 percent and 3.3 percent. Based on the current interest rate
environment, we chose not to create proforma net interest income scenarios given
an instantaneous and parallel shift in general market rates of minus 100 basis
points and 200 basis points as the results these scenarios would not be
meaningful. We will
29
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
continue to monitor our IRR for the remainder of 2004 and employ deposit and
loan pricing strategies and direct the reinvestment of loan and investment
repayments in order to maintain a positive IRR position.
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 management is essential to our continuing operations as it gives us
the ability to meet our financial obligations as they come due, as well as to
take advantage of new business opportunities as they arise. Our financial
obligations include, but are not limited to, the following:
- Funding new and existing loan commitments;
- Payment of deposits on demand or at their contractual maturity;
- Repayment of borrowings as they mature;
- Payment of lease obligations; and
- Payment of operating expenses.
Our contractual obligations did not change significantly from the amounts
reported in our Annual Report on Form 10-K for the period ended December 31,
2003. We believe our liquidity position will be adequate to support our
contractual obligations as they come due.
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
2004. 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 June 30, 2004, our net noncore funding dependence ratio, the difference
between noncore funds and short-term investments to long-term assets, was
negative 2.1 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 5.3 percent at the end of the second quarter
of 2004. Negative ratios indicated that at June 30, 2004, we did not rely on
noncore sources to fund our long-term assets. In addition, our liquidity
position improved in comparison to the end of the previous quarter. These ratios
at March 31, 2004, were 0.4
30
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
percent and negative 3.3 percent. We believe that by maintaining adequate
volumes of short-term investments and implementing competitive pricing
strategies on deposits, we can ensure adequate liquidity to support future
growth.
The Consolidated Statements of Cash Flows present the changes in cash and cash
equivalents from operating, investing and financing activities and further
illustrates the improvement in our liquidity position. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, noninterest-bearing deposits with other banks, balances with the
Federal Reserve Bank of Philadelphia and the Federal Home Loan Bank of
Pittsburgh, and federal funds sold, decreased $4.6 million during the six months
ended June 30, 2004. In comparison, cash and cash equivalents increased $27.0
million for the same period last year. For the first half of 2004, financing and
operating activities provided us with net cash, while net cash was expended in
investing activities. For the same period last year all three major activities
were sources of net cash.
Deposit gathering is our predominant financing activity. Deposits increased $8.2
million, which was the primary source of net funds provided by financing
activities. A net increase of $11.2 million in interest-bearing transaction
accounts and noninterest-bearing accounts were partially offset by a net
decrease of $3.0 million in time deposits. However, deposit gathering slowed in
comparison the first six months of last year. Deposit gathering in 2003 was
aided by a volatile stock market, as investors chose the safeness of bank
deposits. Net increases in deposits provided funds of $26.3 million for the six
months ended June 30, 2003.
Operating activities provided net cash of $4.7 million for the six months ended
June 30, 2004. Net income of $2.4 million, adjusted for the effects of noncash
transactions such as depreciation and the provision for loan losses and net
changes in current assets, was the primary source of funds from operations. In
comparison, for the first six months of 2003, net cash provided by operations
equaled $0.4 million.
Investing activities primarily involve transactions related to our investment
securities and lending activities. For the six months ended June 30, 2004, cash
used in investing activities totaled $15.9 million. In comparison, for the same
six months of last year investing activities provided funds of $2.4 million. The
change primarily resulted from a $27.0 decrease in repayments from investment
securities coupled with $5.8 million in additional funds used in lending
activities. Partially offsetting these factors, was a $13.8 million decrease in
the amount of investment securities purchased.
31
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CAPITAL ADEQUACY:
Stockholders' equity totaled $46.4 million at June 30, 2004, compared to $46.5
million at December 31, 2003. Net income of $2.4 million was entirely offset by
common stock repurchased, net cash dividends declared and a negative change in
other comprehensive income. On a per share basis, stockholders' equity equaled
$24.60 per share at the end of the second quarter of 2004, compared to $24.41
per share at year-end 2003.
During the first six months of 2004, 21,650 shares of our common stock totaling
$0.9 million were repurchased. Dividends declared during this same time period
totaled $835 or $0.44 per share in 2004. The dividend payout ratio was 34.3
percent for the six months ended June 30, 2004. It is the intention of the Board
of Directors to continue to pay cash dividends in the future. However, these
decisions are affected by operating results, financial and economic decisions,
capital and growth objectives, appropriate dividend restrictions and other
relevant factors. Stockholders may automatically reinvest their dividends in
shares of our common stock through our dividend reinvestment plan. During the
six months ended June 30, 2004, 3,273 shares were issued under this plan.
We attempt to assure capital adequacy by monitoring our current and projected
capital positions to support future growth, while providing stockholders with an
attractive long-term appreciation of their investments. According to bank
regulation, at a minimum, banks must maintain a Tier I capital to risk-adjusted
assets ratio of 4.0 percent and a total capital to risk-adjusted assets ratio of
8.0 percent. Additionally, banks must maintain a Leverage ratio, defined as Tier
I capital to total average assets less intangibles, of 3.0 percent. The minimum
Leverage ratio of 3.0 percent only applies to institutions with a composite
rating of one under the Uniform Interagency Bank Rating System, that are not
anticipating or experiencing significant growth and have well-diversified risk.
An additional 100 to 200 basis points are required for all but these most
highly-rated institutions. Our minimum Leverage ratio was 4.0 percent at June
30, 2004 and 2003. 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.
32
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Our and Community Bank's capital ratios at June 30, 2004 and 2003, 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 Improvement Act of 1991 are summarized as
follows:
REGULATORY CAPITAL
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------
JUNE 30, 2004 2003 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated........................... $ 44,456 $ 42,067 $15,486 $13,991
Community Bank......................... 42,954 40,697 15,465 13,963 $23,197 $20,945
Total capital to risk-weighted assets:
Consolidated........................... 48,199 45,744 30,972 27,981
Community Bank......................... 46,697 44,374 30,930 27,926 38,662 34,908
Tier I capital to total average assets
less goodwill:
Consolidated........................... 44,456 42,067 20,196 19,686
Community Bank......................... 42,954 40,697 $20,167 $19,662 $25,208 $24,578
Risk-weighted assets:
Consolidated........................... 378,119 341,679
Community Bank......................... 377,591 340,990
Risk-weighted off-balance sheet items:
Consolidated........................... 9,028 8,085
Community Bank......................... 9,028 8,085
Average assets for Leverage ratio:
Consolidated........................... 504,911 492,156
Community Bank......................... $504,167 $491,561
Ratios:
Tier I capital as a percentage of risk-
weighted assets and off-balance sheet
items:
Consolidated........................... 11.5% 12.0% 4.0% 4.0% 6.0% 6.0%
Community Bank......................... 11.1 11.7 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........................... 12.4 13.1 8.0 8.0 10.0 10.0
Community Bank......................... 12.1 12.7 8.0 8.0 10.0 10.0
Tier I capital as a percentage of total
average assets less intangible assets:
Consolidated........................... 8.8 8.6 4.0 4.0 5.0 5.0
Community Bank......................... 8.5% 8.3% 4.0% 4.0% 5.0% 5.0%
33
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
We and Community Bank have consistently maintained 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:
- A Tier I risk-based ratio of at least 6.0 percent;
- A total risk-based ratio of at least 10.0 percent; and
- A Leverage ratio of at least 5.0 percent.
Based on the most recent notification from the Federal Deposit Insurance
Corporation ("FDIC"), Community Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action at June 30, 2004. There
are no conditions or events since this notification that we believe have changed
Community Bank's category.
REVIEW OF FINANCIAL PERFORMANCE:
Higher net interest income was the primary factor contributing to a $110 or 9.6
percent earnings improvement for the second quarter. Net income for the second
quarter of 2004 equaled $1,255 or $0.66 per share, compared to $1,145 or $0.60
per share for the same quarter of 2003. Year-to-date earnings totaled $2,435 or
$1.28 per share in 2004 and $2,475 or $1.28 per share in 2003. For the quarter
and six months ended June 30, return on average stockholders' equity was 10.61
percent and 10.32 percent in 2004 compared to 9.96 percent and 10.85 percent for
2003. For the second quarter, return on average assets was 0.99 percent in 2004
and 0.92 percent in 2003, while the respective year-to-date ratios were 0.97
percent and 1.01 percent.
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 earning 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.
34
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
earning assets, is a more comprehensive ratio, as it reflects not only spread,
but also the change in the composition of interest-earning assets and
interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax
yields lower than their taxable counterparts. Therefore, in order to make the
analysis of net interest income more comparable, tax-exempt income and yields
are reported on a tax-equivalent basis using the prevailing statutory tax rate
of 34.0 percent.
We analyze interest income and interest expense by segregating rate and volume
components of earning assets and interest-bearing liabilities. The impact
changes in the interest rates earned and paid on assets and liabilities, along
with changes in the volume of earning assets and interest-bearing liabilities
have on net interest income are summarized in the following table. The net
change attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 VS. 2003 2004 VS. 2003
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
---------------------------------- ----------------------------------
TOTAL TOTAL
CHANGE RATE VOLUME CHANGE RATE VOLUME
-------- -------- -------- -------- -------- --------
Interest income:
Loans:
Taxable ........................ $ (181) $ (582) $ 401 $ (444) $ (1,280) $ 836
Tax-exempt ..................... 31 (107) 138 53 (204) 257
Investments:
Taxable ........................ 69 112 (43) (58) 125 (183)
Tax-exempt ..................... (7) (1) (6) (17) (2) (15)
Federal funds sold ............... (64) (13) (51) (76) (18) (58)
-------- -------- -------- -------- -------- --------
Total interest income ........ (152) (591) 439 (542) (1,379) 837
-------- -------- -------- -------- -------- --------
Interest expense:
Money market accounts ............ (1) (9) 8 (13) (26) 13
NOW accounts ..................... (23) (22) (1) (48) (46) (2)
Savings accounts ................. (131) (186) 55 (354) (424) 70
Time deposits less than $100 ..... (198) (120) (78) (400) (278) (122)
Time deposits $100 or more ....... 11 5 6 39 (8) 47
-------- -------- -------- -------- -------- --------
Total interest expense ....... (342) (332) (10) (776) (782) 6
-------- -------- -------- -------- -------- --------
Net interest income .......... $ 190 $ (259) $ 449 $ 234 $ (597) $ 831
======== ======== ======== ======== ======== ========
35
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the six months ended June 30, 2004, tax-equivalent net interest income
totaled $9,155, an increase of $234 compared to $8,921 for the same six months
of 2003. Growth in earning assets over that of interest-bearing liabilities more
than offset the effects of a negative rate variance.
For the six months ended June 30, 2004, earning assets averaged $477.7 million,
an increase of $12.0 million from $465.7 million for the same six months of
2003. The increase in the volume of earning assets resulted in additional
interest revenue of $837 for the six months ended June 30, 2004. Slightly
offsetting the additional interest revenue generated from an increase in earning
assets was $6 in additional interest expense from a $3.0 million increase in
average interest-bearing liabilities. With regard to earning assets, taxable
loans grew $24.8 million and tax-exempt loans increased $10.8 million, together
resulting in additional interest revenue of $1,093. Partially offsetting the
effects of loan growth was a $12.4 million reduction in average investments,
which reduced tax-equivalent interest revenue by $198. With regard to
interest-bearing liabilities, growth in savings accounts of $4.7 million, time
deposits $100 or more of $2.9 million and money market accounts of $2.4 million
resulted in additional interest expense of $70, $47 and $13. Almost entirely
offsetting these increases in interest expense was a $6.6 million reduction in
time deposits less than $100, which lowered interest expense by $122.
Partially offsetting the positive volume variance was a negative rate variance.
Although the net interest spread for the six months ended June 30, 2004,
improved 2 basis points to 3.46 percent from 3.44 percent for the same six
months of 2003, the net interest margin fell 1 basis point to 3.85 percent from
3.86 percent. A 42 basis point reduction in the cost of funds could not offset
the effects of a 40 basis point decline in the tax- equivalent yield on average
earning assets. The tax-equivalent yield on earning assets was 5.74 percent for
the first half of 2004, compared to 6.14 percent for the same period of 2003.
The effect of this reduction was a $1,379 decrease in tax-equivalent interest
revenue. We experienced a decline in the rate paid for all major deposits
categories, which resulted in an overall reduction in interest expense of $782.
The principal factors contributing to this overall reduction were a 60 basis
point decline in the rate paid for savings accounts, which reduced interest
expense by $424, and a 31 basis point decrease in the rate paid on time deposits
less than $100, which lowered interest expense by $278.
For the quarter ended June 30, 2004, tax-equivalent interest income improved
$190 in comparison to the same three months of last year. Similarly, the
increase was due to a positive volume variance of $449, partially offset by a
negative rate variance of $259. For the three months ended June 30, 2004,
average earning assets grew $9.0 million, while interest-bearing liabilities
decreased $0.3 million. The growth in earning assets primarily resulted from
36
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
growth in average loans of $35.8 million partially offset, by a reduction in
investments and federal funds sold of $26.8 million. This resulted in additional
interest revenue of $439. The slight decrease in average interest-bearing
liabilities resulted from growth of $3.1 million in money market accounts and
$5.1 million in savings accounts and $0.8 million in time deposits $100 or more,
more than entirely offset by reductions of $8.8 million in time deposits less
than $100 and NOW accounts of $0.5 million. These changes resulted in a slight
reduction in interest expense of $10. For the second quarter of 2004, the
tax-equivalent yield on earning assets was 5.75 percent, 22 basis points lower
than 5.97 percent for the second quarter of 2003. This resulted in a reduction
to interest revenue of $591. The tax-equivalent yield on loans fell 81 basis
points and the yield on federal funds sold dropped 22 basis points resulting in
reductions to interest revenue of $689 and $13. Partially offsetting these
reductions was a 55 basis point increase in the tax-equivalent yield on
investments, which added $111 to interest revenue. The cost of funds equaled
2.27 percent for the three months ended June 30, 2004, 34 basis points lower as
compared to 2.61 percent for the same quarter of last year. This resulted in a
$332 reduction in interest expense for the second quarter.
Maintenance of an adequate net interest margin is one of our primary concerns.
As previously mentioned, we experienced slight margin contraction during the
first six months of 2004 as a result of the sustained low interest rate
environment. However, net interest margins appear to be stabilizing, as
evidenced by a 5 basis point improvement from 3.83 percent for the first quarter
of 2004 to 3.88 percent for the second. This was the second consecutive margin
improvement. The net interest margin improved 10 basis points from the fourth
quarter of 2003 to the first quarter of 2004. Economic conditions are expected
to continue to improve for the remainder of 2004. In addition, the recent FOMC
rate increases should positively impact our margin. However, no assurance can be
given that net interest income will not be adversely affected by changes in
general market rates. We believe following prudent pricing practices, coupled
with careful investing, will keep our net interest margin from further
contraction.
37
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The average balances of assets and liabilities, corresponding interest income
and expense and resulting average yields or rates paid for the six months ended
June 30, 2004 and 2003, 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 statutory tax rate of 34.0 percent.
SUMMARY OF NET INTEREST INCOME
JUNE 30, 2004 JUNE 30, 2003
------------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- -------- -------- ------- --------
ASSETS:
Earning assets:
Loans:
Taxable..................................... $341,206 $10,720 6.32% $316,376 $11,164 7.12%
Tax-exempt.................................. 30,143 626 4.18 19,343 573 5.97
Investments:
Taxable..................................... 66,526 1,055 3.19 78,488 1,113 2.86
Tax-exempt.................................. 32,132 1,194 7.47 32,574 1,211 7.50
Federal funds sold............................ 7,729 38 0.99 18,912 114 1.22
-------- ------- -------- -------
Total earning assets...................... 477,736 13,633 5.74% 465,693 14,175 6.14%
Less: allowance for loan losses............... 3,712 3,720
Other assets.................................. 31,713 31,266
-------- --------
Total assets.............................. $505,737 $493,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 18,222 84 0.93% $ 15,756 97 1.24%
NOW accounts.................................. 38,062 148 0.78 38,413 196 1.03
Savings accounts.............................. 129,360 474 0.74 124,692 828 1.34
Time deposits less than $100.................. 180,589 3,303 3.68 187,235 3,703 3.99
Time deposits $100 or more.................... 28,713 469 3.28 25,830 430 3.36
-------- ------- -------- -------
Total interest-bearing liabilities........ 394,946 4,478 2.28% 391,926 5,254 2.70%
Noninterest-bearing deposits.................. 60,318 51,980
Other liabilities............................. 3,013 3,352
Stockholders' equity.......................... 47,460 45,981
-------- --------
Total liabilities and stockholders' equity $505,737 $493,239
======== ------- ======== -------
Net interest/income spread................ $ 9,155 3.46% $ 8,921 3.44%
======= =======
Net interest margin....................... 3.85% 3.86%
Tax equivalent adjustments:
Loans......................................... $ 213 $ 195
Investments................................... 406 412
------- -------
Total adjustments......................... $ 619 $ 607
======= =======
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 $3,299 and
$3,844 for the six months ended June 30, 2004 and 2003 included in
other assets. Tax-equivalent adjustments were calculated using the
prevailing statutory tax rate of 34.0 percent.
38
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. For the three months and six months ended June
30, the provision for loan losses totaled $150 and $300 in 2004, compared to
$120 and $240 in 2003.
NONINTEREST INCOME:
Noninterest income totaled $1,802 in the first half of 2004, a decrease of $274
or 13.2 percent compared to $2,076 for the same six months of last year. The
reduction in noninterest revenue resulted directly from a $361 or 52.7 percent
decrease in net gains on the sale of residential mortgages. Service charges,
fees and commissions rose $87 or 6.3 percent comparing the first six months of
2004 and 2003. For the second quarter, noninterest revenue totaled $880 in 2004
and $990 in 2003. Net gains on the sale of residential mortgages declined $167,
while service charges, fees and commissions rose $57.
NONINTEREST EXPENSE:
In general, noninterest expense is categorized into three main groups:
employee-related expenses, occupancy and equipment expenses and other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and equipment
expenses, the costs related to the maintenance of facilities and equipment,
include depreciation, general maintenance and repairs, real estate taxes, rental
expense offset by any rental income, and utility costs. Other expenses include
general operating expenses such as advertising, contractual services, insurance,
including FDIC assessment, other taxes and supplies. Several of these costs and
expenses are variable while the remainder are fixed. We utilize budgets and
other related strategies in an effort to control the variable expenses.
39
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Major components of noninterest expense for the three months and six months
ended June 30, 2004 and 2003, are summarized as follows:
NONINTEREST EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------
SALARIES AND EMPLOYEE BENEFITS EXPENSE:
Salaries and payroll taxes..................... $1,409 $1,455 $2,804 $2,858
Employee benefits.............................. 345 318 676 611
------ ------ ------ ------
Salaries and employee benefits expense....... 1,754 1,773 3,480 3,469
------ ------ ------ ------
NET OCCUPANCY AND EQUIPMENT EXPENSE:
Net occupancy expense.......................... 257 234 575 508
Equipment expense.............................. 342 314 688 580
------ ------ ------ ------
Net occupancy and equipment expense.......... 599 548 1,263 1,088
------ ------ ------ ------
OTHER EXPENSES:
Marketing expense.............................. 145 97 279 201
Other taxes.................................... 98 114 196 227
Stationery and supplies........................ 86 89 166 179
Contractual services........................... 377 414 773 774
Insurance including FDIC assessment............ 50 54 107 97
Other.......................................... 486 489 958 968
------ ------ ------ ------
Other expenses............................... 1,242 1,257 2,479 2,446
------ ------ ------ ------
Total noninterest expense.................. $3,595 $3,578 $7,222 $7,003
====== ====== ====== ======
For the six months ended June 30, 2004, noninterest expense amounted to $7,222,
an increase of $219 or 3.1 percent from $7,003 for the same six months of 2003.
Nearly 80.0 percent of the increase was due to a $175 rise in occupancy and
equipment expense associated with the operation of our new branch located in
Tannersville, Pennsylvania and loan operations center. For the second quarter,
noninterest expense totaled $3,595 in 2004, a slight increase of $17 or 0.5
percent compared to $3,578 in 2003. The operating efficiency ratio, noninterest
expense as a percentage of net interest income and noninterest income, is a key
industry ratio used to measure productivity. Our year-to-date productivity
weakened, however for the second quarter productivity improved in comparison to
the same periods last year. Our efficiency ratio for the six months ended June
30, 2004, weakened to 69.9 percent from 67.4 percent for the same period last
year. For the second quarter, this ratio improved to 69.1 percent in 2004 from
69.7 percent in 2003. Our overhead ratio, another measure of productivity
defined as noninterest expense as a percentage of total average assets, remained
constant at 2.9 percent for the first half of 2004 and 2003.
40
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Salaries and employee benefits expense, which comprise the majority of
noninterest expense, totaled $3,480 or 48.2 percent of noninterest expense for
the six months ended June 30, 2004. In comparison, these expenses were $3,469 or
49.5 percent of noninterest expense for the same period of 2003. For the second
quarter of 2004, employee-related expenses totaled $1,754, a decrease of $19
compared to the second quarter of 2003.
Net occupancy and equipment expense rose $175 to $1,263 for the first half of
2004, from $1,088 for the same period last year. Additional expenses associated
with the operation of our new Tannersville office and loan operations center
contributed to the increase. For the three months ended June 30, 2004 and 2003,
net occupancy and equipment expenses amounted to $599 and $548, an increase of
$51.
Other expenses increased $33 to $2,479 for the six months ended June 30, 2004,
from $2,446 for the same six months of the prior year. For the quarter ended
June 30, other expenses totaled $1,242 in 2004 and $1,257 in 2003. The rise in
other expenses resulted primarily from an increase in marketing- related 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 June 30, 2004, and will be exempt from paying a BIF
assessment in the second half of 2004.
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 second quarter of 2004 at $0.0162 per
100 dollars of BIF-assessable deposits. Our assessments totaled $35 and $36 for
the six months ended June 30, 2004 and 2003.
INCOME TAXES:
For the six months ended June 30, 2004, income tax expense totaled $381 and
resulted in an effective tax rate of 13.5 percent. For the same period of
41
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2003, income tax expense was $672 with an effective tax rate of 21.4 percent.
The significant reduction in our effective rate resulted from the recognition of
$209 of a one-time Federal Historic Tax Credit of $418 for 2004. Should we not
be able to use the full tax credit in the current year due to alternative
minimum tax requirements, the remainder of the tax credit can be carried back
one year and/or carried forward 20 years. In addition, we use tax-exempt
investments and loans as a means of lowering our tax burden. Tax-exempt interest
income as a percent of total interest income increased to 9.2 percent for the
first half of 2004, compared to 8.7 percent for the same period of 2003.
The difference between the amount of income tax currently payable and the
provision for income tax expense reflected in the income statements arise from
temporary differences. Temporary differences are differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, which result in deferred tax assets or liabilities. We perform
quarterly reviews on the tax criteria related to the recognition of deferred tax
assets. We decided not to establish a valuation reserve for the deferred tax
assets since it is likely that these assets will be realized through carry-back
to taxable income in prior years and by future reversals of existing taxable
temporary differences or, to a lesser extent, through future taxable income.
42
COMM BANCORP, INC.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
The Company's management, with the participation of the Company's Chief
Executive Office and Chief Financial Officer, has evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
such term is defined in rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the, "Exchange Act")) as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of such period,
the Company's disclosure controls and procedures are effective in gathering,
analyzing and disclosing, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in rules 13a-15(f) and 15d- 15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially effect the Company's
internal control over financial reporting.
43
COMM BANCORP, INC.
OTHER INFORMATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table presents information with respect to purchases made by us of
our common stock during the six months ended June 30, 2004, as defined in Rule
10b-18(a)(3) under the Exchange Act. On March 17, 2004, the Board of Directors
ratified the purchase of an additional 3.0 percent or 57,221 shares of our
outstanding common stock.
Total Number of Maximum Number
Shares Purchased of Shares that may
Total Number Average as Part of Publicly yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Month Ending Purchased(1) Per Share or Programs or Programs
- ------------------------------------------------------------------------------------------------------------------------
January 31, 2004................................. 850 $39.54 850 2,171
February 29, 2004................................ 2,171
March 31, 2004................................... 59,392
April 30, 2004................................... 5,000 40.08 5,000 54,392
May 31, 2004..................................... 1,800 39.66 1,800 52,592
June 30, 2004.................................... 14,000 40.54 14,000 38,592
------ ------ ------
Total.......................................... 21,650 $40.32 21,650
====== ====== ======
(1) All purchases were made pursuant to resolutions given by our Board of
Directors, which authorize Management to repurchase shares of our common stock
from time to time in unsolicited open market purchases through a licensed
broker-dealer and in accordance with terms, conditions and restrictions
contained in Rule 10b-18 under the Exchange Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
44
COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS AT THE COMPANY'S ANNUAL MEETING OF
STOCKHOLDERS HELD ON JUNE 4, 2004, FOR WHICH PROXIES WERE SOLICITED
PURSUANT TO SECTION 14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, THE
FOLLOWING MATTERS WERE VOTED UPON BY THE STOCKHOLDERS.
1. To elect thirteen directors to serve for a one-year term and until
their successors are duly elected and qualified.
All nominees of the Board of Directors were elected. The number of votes
cast for or opposed to each of the nominees for election to the Board of
Directors were as follows:
Nominee For Against
- ------- ------------- -----------
David L. Baker 1,602,093.252 7,556.441
Thomas M. Chesnick 1,609,537.396 112.297
William F. Farber, Sr. 1,598,289.693 11,360.000
Judd B. Fitze 1,551,099.693 58,550.000
Dean L. Hesser 1,604,869.693 4,780.000
John P. Kameen 1,544,419.693 65,230.000
William A. Kerl 1,600,287.396 9,362.297
Erwin T. Kost 1,609,649.693 0.000
Susan F. Mancuso 1,609,649.693 0.000
Robert A. Mazzoni 1,595,719.693 13,930.000
J. Robert McDonnell 1,544,307.396 65,342.297
Joseph P. Moore, III 1,602,969.693 6,680.000
Eric G. Stephens 1,609,649.693 0.000
2. To ratify the selection of Kronick, Kalada, Berdy & Co. of Kingston,
Pennsylvania, Certified Public Accountants, as the independent
auditors for the year ending December 31, 2004. The votes cast on
this matter were as follows:
For Against
- ------------- ---------
1,653,259.501 4,833.251
ITEM 5. OTHER INFORMATION
NONE
45
COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31(i) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31(ii) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32(i) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(ii) Certification of Chief Financial Officer 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
Item 12 - On April 29, 2004, the Company filed a report on
Form 8-K, to disclose its results of operations for the three
months ended March 31, 2004.
46
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: August 13, 2004 /s/William F. Farber, Sr.
----------------------------------
William F. Farber, Sr.
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
Date: August 13, 2004 /s/ Scott A. Seasock
----------------------------------
Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2004 /s/ Stephanie A. Ganz
----------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
47
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ----------- ----
31(i) Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 49
31(ii) Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 51
32(i) Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 53
32(ii) Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 54
48