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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 SEPTEMBER 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)
- --------------------------------------------------------------------------------
(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: 1,877,491 at October 31, 2004.
Page 1 of 57
Exhibit Index on Page 51
COMM BANCORP, INC.
FORM 10-Q
SEPTEMBER 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 Nine Months Ended September 30,
2004 and 2003.................................................... 3
Consolidated Balance Sheets - September 30, 2004 and
December 31, 2003................................................ 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2004..................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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...................................... 47
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings............................................ 48
Item 2: Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities....................... ...... 48
Item 3: Defaults Upon Senior Securities.............................. 48
Item 4: Submission of Matters to a Vote of Security Holders.......... 48
Item 5: Other Information............................................ 48
Item 6: Exhibits and Reports on Form 8-K............................. 49
Signatures........................................................... 50
Exhibit Index........................................................ 51
* Not Applicable
2
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- --------- --------- ---------
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................................ $ 5,405 $ 5,617 $ 16,125 $ 16,781
Tax-exempt............................................................. 191 199 604 577
Interest and dividends on investment securities available-for-sale:
Taxable................................................................ 495 397 1,529 1,485
Tax-exempt............................................................. 392 394 1,180 1,193
Dividends.............................................................. 7 9 28 34
Interest on federal funds sold........................................... 68 49 106 163
---------- ---------- ---------- ----------
Total interest income................................................ 6,558 6,665 19,572 20,233
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits..................................................... 2,323 2,392 6,801 7,646
---------- ---------- ---------- ----------
Total interest expense............................................... 2,323 2,392 6,801 7,646
---------- ---------- ---------- ----------
Net interest income.................................................. 4,235 4,273 12,771 12,587
Provision for loan losses................................................ 150 120 450 360
---------- ---------- ---------- ----------
Net interest income after provision for loan losses.................. 4,085 4,153 12,321 12,227
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges, fees and commissions.................................... 780 702 2,258 2,093
Net gains on sale of loans............................................... 84 328 408 1,013
---------- ---------- ---------- ----------
Total noninterest income............................................. 864 1,030 2,666 3,106
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits expense................................... 1,772 1,859 5,252 5,328
Net occupancy and equipment expense...................................... 566 558 1,829 1,646
Other expenses........................................................... 1,426 1,322 3,905 3,768
---------- ---------- ---------- ----------
Total noninterest expense............................................ 3,764 3,739 10,986 10,742
---------- ---------- ---------- ----------
Income before income taxes............................................... 1,185 1,444 4,001 4,591
Provision for income tax expense......................................... 120 289 501 961
---------- ---------- ---------- ----------
Net income........................................................... 1,065 1,155 3,500 3,630
---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on investment securities available-for-sale.... 1,203 (408) (238) (432)
Income tax expense (benefit) related to other comprehensive income (loss) 409 (139) (81) (147)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of income taxes............... 794 (269) (157) (285)
---------- ---------- ---------- ----------
Comprehensive income................................................. $ 1,859 $ 886 $ 3,343 $ 3,345
========== ========== ========== ==========
PER SHARE DATA:
Net income............................................................... $ 0.56 $ 0.61 $ 1.84 $ 1.89
Cash dividends declared.................................................. $ 0.22 $ 0.22 $ 0.66 $ 0.66
Average common shares outstanding........................................ 1,886,534 1,908,995 1,898,101 1,925,962
See Notes to Consolidated Financial Statements.
3
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------- --------
ASSETS:
Cash and due from banks............................................................ $ 10,960 $ 17,099
Federal funds sold................................................................. 15,900 11,500
Investment securities available-for-sale........................................... 111,522 105,248
Loans held for sale, net........................................................... 3,302 3,205
Loans, net of unearned income...................................................... 374,986 357,940
Less: allowance for loan losses.................................................. 3,809 3,584
-------- --------
Net loans.......................................................................... 371,177 354,356
Premises and equipment, net........................................................ 11,843 12,484
Accrued interest receivable........................................................ 2,253 2,229
Other assets....................................................................... 2,989 3,331
-------- --------
Total assets................................................................... $529,946 $509,452
======== ========
LIABILITIES:
Deposits:
Noninterest-bearing.............................................................. $ 65,199 $ 59,119
Interest-bearing................................................................. 414,104 400,347
-------- --------
Total deposits................................................................. 479,303 459,466
Accrued interest payable........................................................... 1,103 1,143
Other liabilities.................................................................. 2,101 2,302
-------- --------
Total liabilities.............................................................. 482,507 462,911
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and
outstanding:
September 30, 2004, 1,877,000 shares; December 31, 2003, 1,906,528 shares......... 619 629
Capital surplus.................................................................... 6,658 6,576
Retained earnings.................................................................. 38,206 37,223
Accumulated other comprehensive income............................................. 1,956 2,113
-------- --------
Total stockholders' equity..................................................... 47,439 46,541
-------- --------
Total liabilities and stockholders' equity..................................... $529,946 $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....................................... 3,500 3,500
Dividends declared: $0.66 per share.............. (1,248) (1,248)
Dividend reinvestment plan: 4,737 shares issued.. 1 185 186
Repurchase and retirement: 34,265 shares......... (11) (103) (1,269) (1,383)
Net change in other comprehensive income......... (157) (157)
---- ------ ------- ------ -------
BALANCE, SEPTEMBER 30, 2004...................... $619 $6,658 $38,206 $1,956 $47,439
==== ====== ======= ====== =======
See Notes to Consolidated Financial Statements.
5
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
- ----------------------------------------------------------------------------------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 3,500 $ 3,630
Adjustments:
Provision for loan losses.............................................................. 450 360
Depreciation, amortization and accretion............................................... 1,777 2,703
Amortization of loan fees.............................................................. (15) (135)
Deferred income tax expense (benefit).................................................. (84) 19
Loss on disposition of equipment....................................................... 17
Losses (gains) on the sale of foreclosed assets........................................ 30 (8)
Changes in:
Loans held for sale, net............................................................. (97) (1,761)
Accrued interest receivable.......................................................... (24) (171)
Other assets......................................................................... 200 105
Accrued interest payable............................................................. (40) (44)
Other liabilities.................................................................... (95) (17)
-------- --------
Net cash provided by operating activities.......................................... 5,602 4,698
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of investment securities available-for-sale..................... 12,628 53,044
Purchases of investment securities available-for-sale.................................... (19,799) (47,040)
Proceeds from sale of foreclosed assets.................................................. 161 206
Net increase in lending activities....................................................... (17,443) (29,549)
Purchases of premises and equipment...................................................... (274) (1,138)
-------- --------
Net cash used in investing activities.............................................. (24,727) (24,477)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts............................ 16,947 27,742
Time deposits.......................................................................... 2,890 8,515
Proceeds from issuance of common shares.................................................. 186 170
Repurchase and retirement of common shares............................................... (1,383) (1,563)
Cash dividends paid...................................................................... (1,254) (1,257)
-------- --------
Net cash provided by financing activities.......................................... 17,386 33,607
-------- --------
Net increase (decrease) in cash and cash equivalents............................... (1,739) 13,828
Cash and cash equivalents at beginning of year..................................... 28,599 21,383
-------- --------
Cash and cash equivalents at end of period......................................... $ 26,860 $ 35,211
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest............................................................................... $ 6,841 $ 7,690
Income taxes........................................................................... 483 1,012
Noncash items:
Transfer of loans to foreclosed assets................................................. 187 284
Unrealized losses on investment securities available-for-sale.......................... $ 157 $ 285
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
8
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
products and services not offered by us. We are constantly striving to meet the
convenience and needs of our customers and to enlarge our customer base,
however, we cannot assure that these efforts will be successful.
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
9
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
operations. This self-correcting mechanism reduces potential differences between
estimates and actual observed losses. In addition, the unallocated portion of
the allowance is examined quarterly to ensure that it remains relatively
constant in relation to the total allowance unless there are changes in the
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.
10
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING ENVIRONMENT:
The economy expanded at 3.7 percent in the third quarter, as measured by the
gross domestic product, the total value of all goods and services produced in
the United States. Although this pace was greater than the 3.3 percent
experienced in the previous quarter, it fell below forecasted expectations of
4.3 percent. The growth was fueled by a 4.6 percent increase in consumer
spending coupled with an 11.7 percent rise in business investment. Inflationary
pressures remained subdued. Consumer prices, excluding food and energy increased
0.7 percent in the third quarter, compared to 1.7 percent in the second quarter.
Energy prices have soared recently and pose a risk to an economic expansion.
Many economists believe that soaring energy prices could slow economic activity
if they cause consumers and businesses to become cautious and cut back on
spending and investment. The Federal Open Market Committee ("FOMC") increased
the target for the federal funds rate 50 basis points to 1.75 percent in two
separate 25 basis point increments over the course of the third quarter. The
FOMC has also indicated that there could be additional increases before the end
of the year, as policy-makers want to bring interest rates to more normal levels
and ensure that inflation does not become a threat to the economy in the future.
REVIEW OF FINANCIAL POSITION:
Total assets increased $20.5 million or 4.0 percent to $529.9 million at
September 30, 2004, from $509.4 million at December 31, 2003. Loans, net of
unearned income grew $17.1 million or 4.8 percent to $375.0 million at the close
of the third quarter from $357.9 million at year-end 2003. Loan growth was
funded through deposit gathering, as total deposits rose $19.8 million or 4.3
percent to $479.3 million at September 30, 2004, from $459.5 million at the end
of last year. Interest-bearing deposits grew $13.7 million and accounted for
69.2 percent of total deposit growth, while noninterest-bearing deposits
increased $6.1 million and represented 30.8 percent of total deposit growth. At
September 30, 2004, investment securities were $111.5 million, an increase of
$6.3 million from $105.2 million at December 31, 2003. At the close of the third
quarter, we had $15.9 million in federal funds sold outstanding as compared to
$11.5 million at year-end 2003. Stockholders' equity improved $0.9 million to
$47.4 million at September 30, 2004, compared to $46.5 million at December 31,
2003.
In comparison to the end of the previous quarter, total assets grew $12.7
million. Deposits grew $11.6 million or at an annual rate of 9.9 percent. Loan
demand weakened in the third quarter, which caused a $2.3 million
11
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
decline in loans, net of unearned income. The additional funds from strong
deposit growth were used to purchase short-term U.S. Government agency
securities, which resulted in an $11.9 million increase in the investment
portfolio. Stockholders' equity increased $1.0 million.
INVESTMENT PORTFOLIO:
The market value of our available-for-sale securities appreciated $1.2 million
from the end of the previous quarter. The unrealized holding gain on the
investment portfolio was $2,963 at September 30, 2004, compared to $1,761 at
June 30, 2004. Despite the rise in short-term interest rates, the bond market
rallied in the third quarter amid uncertainty about the outcome of a heated
presidential election and skepticism concerning economic conditions. As a
result, bond yields, which react inversely to prices, fell considerably over the
third quarter. Changes in U.S. Treasury yields impact the market value of our
investment portfolio. Specifically, our holdings of tax-exempt municipal
obligations have an average life that is closely related to the ten-year U.S.
Treasury. Accounting for the majority of the appreciation in market value of
investment portfolio was the change in the yield on the ten-year U.S. Treasury,
which fell 48 basis points to 4.14 percent at September 30, 2004, from 4.62
percent at June 30, 2004. The unrealized holding gain on tax-exempt municipal
obligations increased $1.1 million to $2,952 at September 30, 2004, from $1,867
at the end of the second quarter.
The carrying values of the major classifications of securities as they relate to
the total investment portfolio at September 30, 2004, and December 31, 2003, are
summarized as follows:
DISTRIBUTION OF INVESTMENT SECURITIES
SEPTEMBER 30, DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %
-------- ------ -------- ------
U.S. Government agencies............................ $ 34,302 30.76% $ 16,377 15.56%
State and municipals:
Taxable........................................... 17,021 15.26 17,051 16.20
Tax-exempt........................................ 34,918 31.31 34,788 33.05
Mortgage-backed securities.......................... 23,926 21.45 35,099 33.35
Equity securities................................... 1,355 1.22 1,933 1.84
-------- ------ -------- ------
Total........................................... $111,522 100.00% $105,248 100.00%
======== ====== ======== ======
Due to the slight decline in loan demand in the third quarter, repayments from
investment securities and excess liquidity from deposit gathering were
12
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
directed into the investment portfolio, primarily through purchases of
short-term U.S. Government agency securities. As a result, available-for- sale
investment securities increased $11.9 million or 11.9 percent to $111.5 million
at September 30, 2004, from $99.6 million at June 30, 2004. As a percentage of
earning assets, the investment portfolio equaled 22.1 percent at the end of the
third quarter, compared to 20.1 percent at the end of the previous quarter.
Year-to-date, the investment portfolio increased $6.3 million or 6.0 percent
from $105.2 million at year-end 2003.
For the nine months ended September 30, 2004, the investment portfolio averaged
$98.5 million, compared to $110.7 million the same nine months of 2003. The
tax-equivalent yield on the investment portfolio increased 52 basis points to
4.54 percent for the nine months ended September 30, 2004, from 4.02 percent for
the same nine months of last year. For the third quarter, the tax-equivalent
yield was 4.45 percent, an increase of 83 basis points in comparison to the
yield of 3.62 percent for the comparable quarter last year.
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 increased due primarily to
market value appreciation. For the 12 months ended September 30, 2004, total
return on the investment portfolio improved to 4.2 percent, compared to 1.7
percent for the 12 months ended June 30, 2004.
The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at September
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.
13
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- --------------- --------------- ----------------
SEPTEMBER 30, 2004 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ----------------------------- ------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Amortized cost:
U.S. Government agencies..... $13,958 2.03% $20,404 2.45% $ 34,362 2.28%
State and municipals:
Taxable.................... 2,918 1.59 14,398 2.70 17,316 2.51
Tax-exempt................. 660 2.23 986 5.30 $ 9,483 7.94% $20,837 7.57% 31,966 7.50
Mortgage-backed securities... 8,893 4.57 13,772 4.49 843 5.47 176 6.38 23,684 4.57
Equity securities............ 1,231 2.89 1,231 2.89
------- ------- ------- ------- --------
Total.................... $26,429 2.84% $49,560 3.15% $10,326 7.74% $22,244 7.30% $108,559 4.36%
======= ======= ======= ======= ========
Fair value:
U.S. Government agencies..... $13,934 $20,368 $ 34,302
State and municipals:
Taxable.................... 2,905 14,116 17,021
Tax-exempt................. 661 1,042 $10,363 $22,852 34,918
Mortgage-backed securities... 8,950 13,939 857 180 23,926
Equity securities............ 1,355 1,355
------- ------- ------- ------- --------
Total.................... $26,450 $49,465 $11,220 $24,387 $111,522
======= ======= ======= ======= ========
LOAN PORTFOLIO:
The rate on a 30-year conventional mortgage, which rose 84 basis points in the
second quarter of 2004, fell 54 basis points and closed the third quarter at
5.75 percent. The drop in mortgage rates, coupled with improved employment
conditions and increased disposable income kept the sales of new and existing
homes near the record levels set in the spring of this year. Despite the
continued strength of the housing market, activity in our secondary mortgage
department moderated over the past nine months in comparison to the intense pace
experienced in the prior two years. The moderation was due, for the most part to
a decline in the demand for refinancings. With mortgages rates at historically
low levels for such an extended period of time, the majority of homeowners have
already taken advantage of refinancing. Residential mortgages serviced for the
Federal National Mortgage Association ("FNMA") grew $5.0 million or at an annual
pace of 7.4 percent to $95.0 million at September 30, 2004, from $90.0 million
at December 31, 2003. This is significantly lower than the growth of $24.3
million in serviced mortgages experienced for the same time frame of 2003. For
the three months and nine months ended September 30, 2004, residential mortgages
sold to the FNMA totaled $6.2 million and $12.9 million, compared to $18.0
million and $42.9 million for the same periods of 2003. Net gains realized on
the sale of residential mortgages totaled $84 for the third quarter and $408
year-to-date 2004, compared to $328 and $1,013 for the respective periods of
last year.
14
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Over the past several quarters, the banking industry has experienced a decline
in commercial lending. Recent information suggests however, that this trend may
be reversing in the near term. Renewed strength in the business sector has led
to an acceleration in business investment and increased inventory building.
Business investment grew 11.7 percent in the third quarter of 2004. Outlays for
equipment and software rose 14.9 percent, while structural investment increased
1.4 percent. In addition, recent data suggests that banks have begun to ease
lending standards. The April 2004 Senior Loan Officer Opinion Survey issued by
the Federal Reserve indicated that after three years of significant tightening,
the highest percentage of respondents in 15 years reported easing underwriting
standards. These factors led to a $14.4 billion increase in commercial and
industrial loans at all commercial banks from the end of the previous quarter to
the end of the current quarter. Despite the positive outlook suggested by recent
data, we experienced a decline in loan demand in the third quarter. Although our
commercial loans, including commercial mortgages and lease financing, increased
$23.8 million or 10.6 percent from year-end 2003, these loans declined $1.6
million to $247.9 million at September 30, 2004 from $249.5 million at June 30,
2004.
Consumer spending increased 4.6 percent in the third quarter of 2004. Auto
dealer incentives fueled a 16.8 percent increase in spending on durable goods.
Commercial banks experienced a 4.7 percent increase in consumer loans during
this period. The balance in our consumer loan portfolio equaled $28.0 million at
September 30, 2004, which was unchanged from the previous quarter end.
Residential mortgage loans, including construction loans, were $99.1 million at
September 30, 2004, a decrease of $0.7 million compared to $99.8 million at June
30, 2004.
For the nine months ended September 30, 2004, loans averaged $372.4 million, an
increase of $29.8 million or 8.7 percent compared to $342.6 million for the same
period of 2003. The tax-equivalent yield on the loan portfolio fell 78 basis
points to 6.11 percent for the nine months ended September 30, 2004, from 6.89
percent for the same nine months of last year. We anticipate an increase in loan
yields over the remainder of 2004, as adjustable-rate loans continue to reprice
at higher interest rates given the rising-rate environment.
15
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The composition of the loan portfolio at September 30, 2004, and December 31,
2003, is summarized as follows:
DISTRIBUTION OF LOAN PORTFOLIO
SEPTEMBER 30, DECEMBER 31,
2004 2003
AMOUNT % AMOUNT %
-------- ------ -------- ------
Commercial, financial and others............ $105,821 28.22% $100,723 28.14%
Real estate:
Construction.............................. 5,713 1.52 2,983 0.83
Mortgage.................................. 233,187 62.19 222,621 62.20
Consumer, net............................... 28,005 7.47 29,726 8.30
Lease financing, net........................ 2,260 0.60 1,887 0.53
-------- ------ -------- ------
Loans, net of unearned income............. 374,986 100.00% 357,940 100.00%
====== ======
Less: allowance for loan losses............. 3,809 3,584
-------- --------
Net loans............................... $371,177 $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 42.4 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 September 30, 2004, is summarized as follows:
MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO
AFTER ONE
WITHIN BUT WITHIN AFTER
SEPTEMBER 30, 2004 ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------- -------- ---------- ---------- --------
Maturity schedule:
Commercial, financial and others..... $ 55,222 $ 24,625 $ 25,974 $105,821
Real estate:
Construction....................... 5,713 5,713
Mortgage........................... 24,931 84,672 123,584 233,187
Consumer, net........................ 10,528 14,962 2,515 28,005
Lease financing, net................. 827 1,433 2,260
-------- -------- -------- --------
Total............................ $ 97,221 $125,692 $152,073 $374,986
======== ======== ======== ========
Repricing schedule:
Predetermined interest rates......... $ 42,122 $ 66,180 $ 52,336 $160,638
Floating or adjustable interest rates 116,714 97,574 60 214,348
-------- -------- -------- --------
Total............................ $158,836 $163,754 $ 52,396 $374,986
======== ======== ======== ========
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 September 30, 2004
and December 31, 2003, are summarized as follows:
DISTRIBUTION OF OFF-BALANCE SHEET COMMITMENTS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------- -------
Commitments to extend credit................................... $48,991 $44,025
Unused portions of home equity and credit card lines........... 12,281 9,806
Commercial letters of credit................................... 7,566 2,255
------- -------
Total........................................................ $68,838 $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 September 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 September 30, 2004
and 2003, are summarized as follows:
SEPTEMBER 30, 2004 2003
- --------------------------------------------------------------------- ---- ----
United States........................................................ 5.1% 5.8%
Pennsylvania......................................................... 5.3 5.4
Lackawanna county.................................................... 5.6 4.7
Monroe county........................................................ 5.9 6.3
Susquehanna county................................................... 4.6 5.6
Wayne county......................................................... 4.4 3.6
Wyoming county....................................................... 5.7% 4.3%
The employment conditions continued to improve for the Nation and the
Commonwealth of Pennsylvania. Job gains in the service-producing and
construction industries more than offset reductions in manufacturing industries.
Other than Monroe and Susquehanna counties, employment conditions in our local
market area weakened in comparison to one year earlier. Despite the downturn,
the outlook for our market area is optimistic. According to the recent "Economic
Outlook" survey conducted by PNC Financial Services Group, Inc., 85.0 percent of
business owners are optimistic or moderately optimistic about the economy for
the next six months, compared to 71.0 percent one year ago. In addition, of
those surveyed 89.0 percent expected sales to increase and 85.0 percent expected
a corresponding increase in profits. With regard to hiring, 25.0 percent expect
to increase staff, 69.0 percent expect to maintain current levels, while only
6.0 percent expect to cut staff. The survey is conducted biannually and focuses
on PNC Bank's primary region of Delaware, Kentucky, New Jersey, Ohio and
Pennsylvania. In addition, several large companies are building offices or
relocating operations to our market area, which should improve labor conditions.
However, no assurance can be given that employment and economic conditions will
improve, further weakening in these areas could have an adverse affect on our
asset quality. In addition, asset quality could also be adversely affected by
rising interest rates, which may lead to inabilities of borrowers to meet
increased levels of debt service.
Nonperforming assets increased $836 or 39.8 percent to $2.9 million at September
30, 2004, from $2.1 million at June 30, 2004. The majority of the increase from
the previous quarter was due to an increase in nonaccrual loans. In a pro-active
stance, management placed two loans to one commercial customer totaling $680 on
nonaccrual status due to a deteriorating cash flow and highly leveraged balance
sheet position.
18
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
However, the loans are still performing and management will, on an on-going
basis, monitor the financial condition of the borrower. In comparison to
year-end 2003, nonperforming assets increased $529 or 22.0 percent. As a
percentage of loans, net of unearned income, nonperforming assets equaled 0.78
percent at September 30, 2004, compared to 0.56 percent at June 30, 2004 and
0.67 percent at December 31, 2003.
Accruing loans past due 90 days, which increased $174 from the end of the second
quarter, were down $126 or 18.0 percent from the end of 2003. Foreclosed assets
were $257 at the end of the third quarter, $210 at June 30, 2004 and $261 at
December 31, 2003. Four loans totaling $187 were transferred to foreclosed
assets during the nine months ended September 30, 2004. One property was written
down $19 and three properties with an aggregate carrying value of $172 were sold
for $161, resulting in a net realized loss of $11.
19
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information concerning nonperforming assets at September 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
SEPTEMBER 30, DECEMBER 31,
2004 2003
------ ------
Nonaccrual loans:
Commercial, financial and others.................................. $1,090 $ 306
Real estate:
Construction....................................................
Mortgage........................................................ 986 1,077
Consumer, net..................................................... 29 63
Lease financing, net..............................................
------ ------
Total nonaccrual loans........................................ 2,105 1,446
------ ------
Accruing loans past due 90 days or more:
Commercial, financial and others.................................. 5 124
Real estate:
Construction....................................................
Mortgage........................................................ 468 352
Consumer, net..................................................... 101 151
Lease financing, net.............................................. 73
------ ------
Total accruing loans past due 90 days or more................. 574 700
------ ------
Total nonperforming loans..................................... 2,679 2,146
------ ------
Foreclosed assets................................................. 257 261
------ ------
Total nonperforming assets.................................... $2,936 $2,407
====== ======
Ratios:
Nonperforming loans as a percentage of loans, net................. 0.71% 0.60%
Nonperforming assets as a percentage of loans, net................ 0.78% 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
20
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Loan," for loans specifically identified to be individually evaluated for
impairment and the requirements of SFAS No. 5, "Accounting for Contingencies,"
for large groups of smaller-balance homogeneous loans to be collectively
evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by
applying it in the same manner regardless of whether the allowance is being
determined at a high point or a low point in the economic cycle. Each quarter,
our loan review department identifies those loans to be individually evaluated
for impairment and those loans collectively evaluated for impairment utilizing a
standard criteria. Internal loan review grades are assigned quarterly to loans
identified to be individually evaluated. A loan's grade may differ from period
to period based on current conditions and events, however, we consistently
utilize the same grading system each quarter. We consistently use loss
experience from the latest eight quarters in determining the historical loss
factor for each pool collectively evaluated for impairment. Qualitative factors
are evaluated in the same manner each quarter and are adjusted within a relevant
range of values based on current conditions.
21
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information concerning impaired loans at September 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
SEPTEMBER 30, DECEMBER 31,
2004 2003
------ ------
Nonaccrual loans:
Commercial, financial and others................................. $1,090 $ 306
Real estate:
Construction...................................................
Mortgage....................................................... 986 1,077
Consumer, net.................................................... 29 63
Lease financing, net.............................................
------ ------
Total nonaccrual loans....................................... 2,105 1,446
------ ------
Accruing loans:
Commercial, financial and others................................. 3,069
Real estate:
Construction...................................................
Mortgage....................................................... 2,131 207
Consumer, net.................................................... 74 1
Lease financing, net.............................................
------ ------
Total accruing loans......................................... 5,274 208
------ ------
Total impaired loans......................................... $7,379 $1,654
====== ======
Ratio:
Impaired loans as a percentage of loans, net..................... 1.97% 0.46%
In addition to the two loans mentioned previously, the majority of the increase
in impaired loans was primarily caused by the credits of one customer group
involved in commercial and residential real estate rentals. The internal loan
grading classifications for these credits were downgraded due to a deficiency in
the collateral values associated with these loans. Management is currently
taking steps to reduce its exposure to this relationship. As of the loan review
date, approximately 20.0 percent of the impaired credits associated with this
relationship have been repaid.
22
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Information relating to the recorded investment in impaired loans at September
30, 2004 and December 31, 2003, is summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------ ------
Impaired loans:
With a related allowance....................................... $3,942 $ 747
With no related allowance...................................... 3,437 907
------ ------
Total........................................................ $7,379 $1,654
====== ======
The analysis of changes affecting the allowance for loan losses related to
impaired loans for the nine months ended September 30, 2004, is summarized as
follows:
SEPTEMBER 30,
2004
----
Balance at January 1........................................................... $ 377
Provision for loan losses...................................................... 1,350
Loans charged-off.............................................................. 152
Loans recovered................................................................ 12
------
Balance at period-end.......................................................... $1,587
======
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 nine-month periods ended September 30, 2004 and 2003 are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------ ------ ------ ------
Gross interest due under terms................... $ 101 $ 44 $ 169 $ 144
Interest income recognized....................... 90 53 150 104
------ ------ ------ ------
Interest income not recognized (recognized in
excess of due).................................. $ 11 $ (9) $ 19 $ 40
====== ====== ====== ======
Interest income recognized (cash-basis).......... $ 90 $ 53 $ 150 $ 104
Average recorded investment in impaired loans.... $6,846 $2,354 $3,680 $2,543
Cash received on impaired loans applied as a reduction of principal totaled $851
and $607 for the nine and three months ended September 30, 2004. For the
respective periods of 2003 cash receipts on impaired loans totaled $707
23
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
and $448. There were no commitments to extend additional funds to such parties
at September 30, 2004.
The allocation of the allowance for loan losses at September 30, 2004 and
December 31, 2003, is summarized as follows:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
CATEGORY CATEGORY
AS A AS A
% OF % OF
AMOUNT LOANS AMOUNT LOANS
------ ------ ------ ------
Allocated allowance:
Specific:
Commercial, financial and others................. $ 888 1.11% $ 237 0.09%
Real estate:
Construction...................................
Mortgage....................................... 652 0.83 124 0.36
Consumer, net.................................... 47 0.03 16 0.01
Lease financing, net.............................
------ ------ ------ ------
Total specific............................... 1,587 1.97 377 0.46
------ ------ ------ ------
Formula:
Commercial, financial and others................. 89 27.11 237 28.05
Real estate:
Construction................................... 1.52 0.83
Mortgage....................................... 794 61.36 974 61.84
Consumer, net.................................... 272 7.44 316 8.29
Lease financing, net............................. 1 0.60 1 0.53
------ ------ ------ ------
Total formula................................ 1,156 98.03 1,528 99.54
------ ------ ------ ------
Total allocated allowance.................... 2,743 100.00% 1,905 100.00%
====== ======
Unallocated allowance............................ 1,066 1,679
------ ------
Total allowance for loan losses.............. $3,809 $3,584
====== ======
The allocated allowance for loan losses account increased $838 to $2,743 at
September 30, 2004, from $1,905 at December 31, 2003. The increase resulted from
a $1,210 addition to the specific portion of the allowance for impairment of
loans individually evaluated under SFAS No. 114, partially offset by a $372
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 have been identified as impaired with a recorded investment in excess of
fair value.
24
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 $1,066 at the
end of the third 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 nine months ended
September 30, 2004, is summarized as follows:
RECONCILIATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30,
2004
------
Allowance for loan losses at beginning of period............................... $3,584
Loans charged-off:
Commercial, financial and others............................................... 32
Real estate:
Construction.................................................................
Mortgage..................................................................... 65
Consumer, net.................................................................. 268
Lease financing, net...........................................................
------
Total...................................................................... 365
------
Loans recovered:
Commercial, financial and others............................................... 23
Real estate:
Construction..................................................................
Mortgage....................................................................... 18
Consumer, net.................................................................. 99
Lease financing, net...........................................................
------
Total...................................................................... 140
------
Net loans charged-off.......................................................... 225
------
Provision charged to operating expense......................................... 450
------
Allowance for loan losses at end of period..................................... $3,809
======
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.................. 1.02%
The allowance for loan losses increased $66 to $3,809 at September 30, 2004,
from $3,743 at the previous quarter-end. For the third quarter of 2004, a $150
provision for loan losses exceeded $84 in net charge-offs. As a percentage of
loans, net of unearned income, the allowance equaled 1.02 percent at the end of
the third quarter of 2004, compared to 0.99 percent at June 30, 2004 and 1.00
percent at the end of 2003. The allowance account
25
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
covered 129.7 percent of nonperforming assets at September 30, 2004 and 178.2
percent at June 30, 2004.
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 $225 or 0.08 percent of average loans outstanding for the nine
months ended September 30, 2004, compared to $382 or 0.15 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:
Despite an increase in disposable personal income, the personal savings rate
fell to 0.4 percent in the third quarter of 2004, from 1.2 percent in second
quarter, as personal consumption expenditures rose to 4.6 percent from 1.6
percent for the respective quarters. As economic conditions continued to
improve, deposit gathering within the banking industry began to subside.
According to the most recent "Quarterly Banking Profile," published by the
Federal Deposit Insurance Commission ("FDIC"), industry assets funded by
deposits fell to the lowest level since the third quarter of 2001.
Contrary to the banking industry, we continued to experience strong deposit
growth. Total deposits rose $11.6 million from $467.7 million at the end of the
second quarter to $479.3 million at September 30, 2004. Interest- bearing
accounts grew $9.8 million to $414.1 million, while noninterest- bearing
accounts rose $1.8 million to $65.2 million. With regard to interest-bearing
accounts, the majority of the increase was due to growth of $8.9 million in
money market accounts, which resulted from cyclical trends in deposit
relationships with local area school districts.
26
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 nine months ended September 30, 2004 and 2003, are summarized
as follows:
DEPOSIT DISTRIBUTION
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
-------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
Interest-bearing:
Money market accounts.......................... $ 18,416 0.96% $ 15,739 1.10%
NOW accounts................................... 40,351 0.88 38,553 0.94
Savings accounts............................... 130,053 0.75 126,837 1.14
Time deposits less than $100................... 180,608 3.68 187,191 3.92
Time deposits $100 or more..................... 28,206 3.32 27,269 3.31
-------- --------
Total interest-bearing....................... 397,634 2.28% 395,589 2.58%
Noninterest-bearing............................ 62,316 55,042
-------- --------
Total deposits............................... $459,950 $450,631
======== ========
Total deposits averaged $459.9 million for the nine months ended September 30,
2004, an increase of $9.3 million or 2.1 percent compared to $450.6 million for
the same period of 2003. Noninterest-bearing accounts averaged $7.3 million
higher, while average interest-bearing accounts rose $2.0 million. Money market
accounts, NOW accounts, savings accounts and large denomination time deposits
averaged higher, while time deposits less than $100 declined. Low interest rates
sustained for an extended period of time resulted in a 30 basis point reduction
in our cost of funds to 2.28 percent for the nine months ended September 30,
2004, from 2.58 percent for the same period of 2003. Total deposits averaged
$469.2 million in the third quarter, an increase of $11.1 million from $458.1
million in the second quarter. The cost of funds rose 2 basis points to 2.29
percent for third quarter from 2.27 percent in the second quarter. Competition
for deposits began to intensify in our market area. As a result, local
competitors have recently increased deposit rates correspondingly with the rise
in short- term interest rates. In addition, the FOMC has indicated additional
upward steps in short-term interest rates are probable which would adversely
effect our cost of funds.
Volatile deposits, time deposits in denominations of $100 or more, grew $5.1
million to $31.8 million at September 30, 2004, from $26.7 million at the end of
the previous quarter. We issued two short-term certificates totaling $3.0
million to a local area school district seeking to invest monies from property
tax receipts. In addition, one certificate in the amount of $2.0 million was
issued to a local municipality investing
27
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
restricted funds on a long-term basis. These deposits averaged $28.2 million for
the nine months ended September 30, 2004, compared to $27.3 million for the same
nine months of last year. The average cost of these deposits was 3.32 percent in
2004 compared to 3.31 percent in 2003.
Maturities of time deposits of $100 or more at September 30, 2004, and December
31, 2003, are summarized as follows:
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100 OR MORE
SEPTEMBER 30, DECEMBER 31,
2004 2003
------- -------
Within three months.............................................. $ 8,479 $ 4,414
After three months but within six months......................... 2,363 4,845
After six months but within twelve months........................ 4,313 3,861
After twelve months.............................................. 16,617 15,969
------- -------
Total.......................................................... $31,772 $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.
28
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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.
29
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
SEPTEMBER 30, 2004 THREE MONTHS TWELVE MONTHS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------ ------------ ------------- ---------- ---------- --------
Rate-sensitive assets:
Investment securities............... $ 4,972 $ 21,478 $ 49,465 $35,607 $111,522
Loans held for sale, net............ 3,302 3,302
Loans, net of unearned income....... 104,507 54,329 163,754 52,396 374,986
Federal funds sold.................. 15,900 15,900
-------- -------- -------- ------- --------
Total............................. $128,681 $ 75,807 $213,219 $88,003 $505,710
======== ======== ======== ======= ========
Rate-sensitive liabilities:
Money market accounts............... $ 25,941 $ 25,941
NOW accounts........................ 48,116 48,116
Savings accounts.................... $127,122 127,122
Time deposits less than $100........ $ 24,728 53,110 84,406 $18,909 181,153
Time deposits $100 or more.......... 8,479 6,676 12,356 4,261 31,772
-------- -------- -------- ------- --------
Total............................. $ 33,207 $133,843 $223,884 $23,170 $414,104
======== ======== ======== ======= ========
Rate sensitivity gap:
Period............................ $ 95,474 $(58,036) $(10,665) $64,833
Cumulative........................ $ 95,474 $ 37,438 $ 26,773 $91,606 $ 91,606
RSA/RSL ratio:
Period............................ 3.88 0.57 0.95 3.80
Cumulative........................ 3.88 1.22 1.07 1.22 1.22
Our cumulative one-year RSA/RSL ratio equaled 1.22 at September 30, 2004,
compared to 1.35 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
30
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
The change in our cumulative one-year RSA/RSL ratio to 1.22 at the end of the
third quarter of 2004 from 1.35 at June 30, 2004 reflected a $17.0 million or
11.3 percent increase in RSL maturing or repricing within a one- year time
horizon. Specifically money market and NOW accounts rose $9.0 million and $2.9
million in comparison to three months earlier. We have several deposit
relationships with local area school districts, as a result we cyclically
experience an increase in these deposit accounts in the third quarter due to an
influx of monies from tax payments. In addition, time deposits less than $100
and time deposits $100 or more maturing or repricing within this time frame
increased $2.5 million and $2.6 million. Partially, offsetting the increase in
RSL was a $1.6 million increase in RSA maturing or repricing within 12 months.
Investment securities and loans held for sale increased $7.7 million and $0.9
million, while loans, net of unearned income and federal funds sold declined
$5.8 million and $1.2 million. Due to a slight slowing in loan demand, excess
funds were used to purchase short-term securities of U.S. Government agencies.
We experienced a decrease in our three-month ratio to 3.88 at September 30,
2004, from 5.62 at the end of the previous quarter. The decrease resulted from
an increase in RSL coupled with a decrease in RSA maturing or repricing within
three months. The increase in RSL resulted from a $9.8 million rise in the
amount of time deposits maturing or repricing within this time frame, while the
$3.6 million reduction in loans, net of unearned income, primarily caused the
overall decline in RSA.
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.
31
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Model results
at September 30, 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, 200 and 300 basis points, net interest income should
increase by 1.1 percent, 2.3 percent and 3.5 percent. Conversely, a parallel
shift of minus 100 basis points should cause a 1.7 percent reduction in net
interest income. 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 200 basis points and 300 basis
points as the results of these scenarios would not be meaningful. We will
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.
32
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 September 30, 2004, our net noncore funding dependence ratio, the difference
between noncore funds and short-term investments to long-term assets, was
negative 2.4 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 6.2 percent at the end of the third quarter of
2004. Negative ratios indicated that at September 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 June 30, 2004, were negative 2.1 percent and negative 5.3 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 $1.7 million during the nine
months ended September 30, 2004. Net cash inflows from financing and operating
activities were more than entirely offset by a net cash outflow from investing
activities. In comparison, cash and cash equivalents increased $13.8 million for
the same period last year. For the same period last year inflows from financing
and operating activities outweighed the outflow from investing activities.
Deposit gathering is our predominant financing activity. Deposits increased
$19.8 million, which was the primary source of net funds provided by financing
activities. Interest-bearing transaction accounts increased $16.9 million, while
noninterest-bearing accounts rose $2.9 million. However, deposit gathering
slowed in comparison to the same period 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 $36.3 million for the nine
months ended September 30, 2003.
33
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating activities provided net cash of $5.6 million for the nine months ended
September 30, 2004. Net income of $3.5 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 same nine months of 2003, net cash provided by operations
equaled $4.7 million.
Investing activities primarily involve transactions related to our investment
securities and lending activities. For the nine months ended September 30, cash
used in investing activities totaled $24.7 million in 2004 and $24.5 million in
2003. Cash received from repayments of investment securities decreased $40.4
million. Cash outflows to purchase investment securities, fund lending
activities and acquire fixed assets declined $27.2 million, $12.1 million and
$0.9 million.
CAPITAL ADEQUACY:
Stockholders' equity totaled $47.4 million at September 30, 2004, an improvement
of $0.9 million compared to $46.5 million at December 31, 2003. Net income of
$3.5 million, partially offset by common stock repurchased, net cash dividends
declared and a negative change in other comprehensive income, factored into the
improvement. On a per share basis, stockholders' equity equaled $25.27 per share
at the end of the third quarter of 2004, compared to $24.41 per share at
year-end 2003.
During the nine months ended September 30, 2004, 34,265 shares of our common
stock totaling $1.4 million were repurchased. Dividends declared during this
same time period totaled $1,248 or $0.66 per share. The dividend payout ratio
was 35.7 percent for the nine months ended September 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 nine months ended September 30, 2004, 4,737 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
34
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
average assets less intangibles, of 3.0 percent. The minimum Leverage ratio of
3.0 percent only applies to institutions with a composite rating of one under
the Uniform Interagency Bank Rating System, that are not anticipating or
experiencing significant growth and have well-diversified risk. An additional
100 to 200 basis points are required for all but these most highly-rated
institutions. Our minimum Leverage ratio was 4.0 percent at September 30, 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.
35
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Our and Community Bank's capital ratios at September 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
------------------ -------------------- ------------------
SEPTEMBER 30, 2004 2003 2004 2003 2004 2003
- ------------------------------------------ -------- -------- ------- ------- ------- -------
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated............................ $ 44,726 $ 42,695 $15,598 $14,511
Community Bank.......................... 43,153 41,325 15,580 14,488 $23,369 $21,731
Total capital to risk-weighted assets:
Consolidated............................ 48,535 46,418 31,196 29,022
Community Bank.......................... 46,962 45,048 31,159 28,975 38,949 36,219
Tier I capital to total average assets
less goodwill:
Consolidated............................ 44,726 42,695 20,377 19,944
Community Bank.......................... 43,153 41,325 $20,349 $19,918 $25,436 $24,898
Risk-weighted assets:
Consolidated............................ 378,925 354,974
Community Bank.......................... 378,463 354,388
Risk-weighted off-balance sheet items:
Consolidated............................ 11,025 7,802
Community Bank.......................... 11,025 7,802
Average assets for Leverage ratio:
Consolidated............................ 509,437 498,612
Community Bank.......................... $508,716 $497,956
Ratios:
Tier I capital as a percentage of risk-
weighted assets and off-balance sheet
items:
Consolidated............................ 11.5% 11.8% 4.0% 4.0% 6.0% 6.0%
Community Bank.......................... 11.1 11.4 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............................ 12.5 12.8 8.0 8.0 10.0 10.0
Community Bank.......................... 12.1 12.4 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%
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
36
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 FDIC, Community Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action at September 30, 2004. There are no conditions or events since
this notification that we believe have changed Community Bank's category.
REVIEW OF FINANCIAL PERFORMANCE:
A decline in noninterest income was responsible for the lower net income for the
quarter ended September 30, 2004 and year-to-date. A slowdown in the demand for
residential mortgages and mortgage refinancing lead to a significant decline in
net gains on the sale of loans. The decline was partially offset by an increase
in service charges, fees and commissions. Net income for the third quarter of
2004 equaled $1,065 or $0.56 per share, compared to $1,155 or $0.61 per share
for the same quarter of 2003. Year- to-date earnings totaled $3,500 or $1.84 per
share in 2004 and $3,630 or $1.89 per share in 2003. For the quarter and nine
months ended September 30, return on average stockholders' equity was 9.00
percent and 9.88 percent in 2004 compared to 10.10 percent and 10.60 percent for
2003. For the third quarter, return on average assets was 0.82 percent in 2004
and 0.89 percent in 2003, while the respective year-to-date ratios were 0.92
percent and 0.97 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:
37
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- Variations in the volume, rate and composition of earning assets and
interest-bearing liabilities;
- Changes in general market rates; and
- The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net
interest margin. Net interest spread, the difference between the average yield
earned on earning assets and the average rate incurred on 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.
38
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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............................ $(212) $(504) $292 $(656) $(1,784) $1,128
Tax-exempt......................... (12) (18) 6 41 (222) 263
Investments:
Taxable............................ 96 166 (70) 38 291 (253)
Tax-exempt......................... (2) (3) 1 (19) (5) (14)
Federal funds sold................... 19 29 (10) (57) 11 (68)
----- ----- ---- ----- ------- ------
Total interest income............ (111) (330) 219 (653) (1,709) 1,056
----- ----- ---- ----- ------- ------
Interest expense:
Money market accounts................ 15 8 7 2 (18) 20
NOW accounts......................... 43 28 15 (5) (18) 13
Savings accounts..................... 5 4 1 (349) (420) 71
Time deposits less than $100......... (120) (53) (67) (520) (331) (189)
Time deposits $100 or more........... (12) 12 (24) 27 4 23
----- ----- ---- ----- ------- ------
Total interest expense........... (69) (1) (68) (845) (783) (62)
----- ----- ---- ----- ------- ------
Net interest income.............. $ (42) $(329) $287 $ 192 $ (926) $1,118
===== ===== ==== ===== ======= ======
For the nine months ended September 30, 2004, tax-equivalent net interest income
totaled $13,691, an increase of $192 compared to $13,499 for the same nine
months of 2003. The effect to net interest income from growth in net earning
assets more than offset the effects of a negative rate variance.
For the nine months ended September 30, 2004, earning assets averaged $482.4
million, an increase of $10.0 million from $472.4 million for the same nine
months of 2003. The increase in the volume of earning assets
39
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
resulted in additional interest revenue of $1,056 for the nine months ended
September 30, 2004. Taxable loans grew $22.6 million and tax-exempt loans
increased $7.2 million, together resulting in additional tax-equivalent interest
revenue of $1,391. Partially offsetting the effects of loan growth was a $12.2
million reduction in average investments, which reduced tax- equivalent interest
revenue by $267. For the nine months ended September 30, 2004, changes in the
volumes of interest bearing liabilities had very little impact on net interest
income. Time deposits less than $100 averaged $180.6 million for the first nine
months of 2004 compared to $187.2 million for the same period last year. The
$6.6 million decline favorably effected interest expense by $189. Growth of $3.2
million in savings accounts, $2.7 million in money market accounts, $1.8 million
in NOW accounts, and $0.9 million in time deposits $100 or more resulted in
additional interest expense of $127.
Partially offsetting the positive volume variance was a negative rate variance.
The net interest spread for the nine months ended September 30, 2004, declined 1
basis point to 3.39 percent from 3.40 percent for the same nine months of 2003.
The net interest margin fell 3 basis points to 3.79 percent from 3.82 percent. A
30 basis point reduction in the cost of funds could not offset the effects of a
31 basis point decline in the tax- equivalent yield on average earning assets.
The tax-equivalent yield on earning assets was 5.67 percent for the first nine
months of 2004, compared to 5.98 percent for the same period of 2003. The effect
of this decrease was a $1,709 reduction in tax-equivalent interest revenue. The
primary factor causing the reduction was a 78 basis point drop in the tax-
equivalent yield on the loan portfolio. This reduced tax-equivalent interest
revenue by $2,006. Partially offsetting the decline in interest revenue from the
decrease in loan yields was a 52 basis point increase in the tax-equivalent
yield on investments and a 9 basis point increase in the yield on federal funds
sold. These increases positively impacted interest income by $297. We
experienced a decline in the rate paid for all major deposits categories, except
for time deposits $100 or more, which caused a reduction in interest expense of
$783. The principal factors contributing to this reduction were a 39 basis point
decline in the rate paid for savings accounts, which reduced interest expense by
$420, and a 24 basis point decrease in the rate paid on time deposits less than
$100, which lowered interest expense by $331.
For the quarter ended September 30, 2004, tax-equivalent interest income
decreased $42 in comparison to the same three months of last year. The decline
was due to a negative rate variance of $329, partially offset by a positive
volume variance of $287. The tax-equivalent yield on earning assets fell 14
basis points to 5.55 percent for the three months ended
40
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2004, from 5.69 percent for the same period of 2003 and caused a
decrease in tax-equivalent interest income of $330. The tax- equivalent yield on
loans fell 54 basis points resulting in a $522 reduction in interest revenue.
This reduction was partially offset by an 83 basis point increase in the
tax-equivalent yield on investments to 4.45 for the quarter ended September 30,
2004, from 3.62 percent for the same quarter last year. The increase in
tax-equivalent yield led to an additional $163 in interest revenue for the
quarter. We experienced a 7 basis point reduction in our cost of funds for the
three months ended September 30, to 2.29 percent in 2004 from 2.36 percent in
2003. However, the effect of the reduction on interest expense was negligible. A
12 basis point decrease in the cost of time deposits less than $100 was almost
entirely offset by increases in all other deposit categories. A positive volume
variance partially offset the reduction in net interest income caused by the
negative rate variance. Earning assets averaged $6.1 million higher for the
third quarter of 2004, compared to the same quarter of 2003. Average loans, net
of unearned income, increased $18.4 million, which resulted in a $298 increase
in interest revenue. While average investments declined by $11.9 million,
causing a decrease in interest revenue of $69. For the third quarter,
interest-bearing liabilities averaged $403.0 million in 2004, compared to $402.8
million in 2003. Additional interest expense resulting from growth in NOW
accounts of $6.1 million, money market accounts of $3.1 million and savings
accounts of $0.4 million was more than offset by declines due to decreases in
the volume of time deposit less than $100 of $6.5 million and time deposits $100
or more of $2.9 million.
Maintenance of an adequate net interest margin is one of our primary concerns.
As previously mentioned, we experienced slight margin contraction during the
first nine months of 2004 as a result of the sustained low interest rate
environment. Economic conditions are expected 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.
41
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 nine months ended
September 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
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------ ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ INTEREST AVERAGE INCOME/ INTEREST
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ---- -------- ------- ----
ASSETS:
Earning assets:
Loans:
Taxable..................................... $344,361 $16,125 6.25% $321,791 $16,781 6.97%
Tax-exempt.................................. 28,050 916 4.36 20,810 875 5.62
Investments:
Taxable..................................... 66,379 1,557 3.13 78,340 1,519 2.59
Tax-exempt.................................. 32,089 1,788 7.44 32,349 1,807 7.47
Federal funds sold............................ 11,550 106 1.23 19,120 163 1.14
-------- ------- -------- -------
Total earning assets...................... 482,429 20,492 5.67% 472,410 21,145 5.98%
Less: allowance for loan losses............... 3,745 3,720
Other assets.................................. 31,510 30,945
-------- --------
Total assets.............................. $510,194 $499,635
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts......................... $ 18,416 132 0.96% $ 15,739 130 1.10%
NOW accounts.................................. 40,351 267 0.88 38,553 272 0.94
Savings accounts.............................. 130,053 728 0.75 126,837 1,077 1.14
Time deposits less than $100.................. 180,608 4,972 3.68 187,191 5,492 3.92
Time deposits $100 or more.................... 28,206 702 3.32 27,269 675 3.31
-------- ------- -------- -------
Total interest-bearing liabilities........ 397,634 6,801 2.28% 395,589 7,646 2.58%
Noninterest-bearing deposits.................. 62,316 55,042
Other liabilities............................. 2,907 3,229
Stockholders' equity.......................... 47,337 45,775
-------- --------
Total liabilities and stockholders' equity $510,194 $499,635
======== ------- ======== -------
Net interest/income spread................ $13,691 3.39% $13,499 3.40%
======= =======
Net interest margin....................... 3.79% 3.82%
Tax equivalent adjustments:
Loans......................................... $ 312 $ 298
Investments................................... 608 614
------- -------
Total adjustments......................... $ 920 $ 912
======= =======
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 $2,882 and
$3,395 for the nine months ended September 30, 2004 and 2003 included in
other assets. Tax-equivalent adjustments were calculated using the
prevailing statutory tax rate of 34.0 percent.
42
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 nine months ended
September 30, the provision for loan losses totaled $150 and $450 in 2004,
compared to $120 and $360 in 2003.
NONINTEREST INCOME:
Noninterest income totaled $2,666 for the nine months ended September 30, 2004,
a decrease of $440 or 14.2 percent compared to $3,106 for the same nine months
of last year. The reduction in noninterest revenue resulted from a $605 or 59.7
percent decrease in net gains on the sale of residential mortgages. Service
charges, fees and commissions rose $165 or 7.9 percent comparing the first nine
months of 2004 and 2003 which partially offset the reduction in gains. For the
third quarter, noninterest revenue totaled $864 in 2004 and $1,030 in 2003. Net
gains on the sale of residential mortgages declined $244, while service charges,
fees and commissions rose $78.
NONINTEREST EXPENSE:
In general, noninterest expense is categorized into three main groups:
employee-related expenses, occupancy and equipment expenses and other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and equipment
expenses, the costs related to the maintenance of facilities and equipment,
include depreciation, general maintenance and repairs, real estate taxes, rental
expense offset by any rental income, and utility costs. Other expenses include
general operating expenses such as advertising, contractual services, insurance,
including 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.
43
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 nine months
ended September 30, 2004 and 2003, are summarized as follows:
NONINTEREST EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------ ------ ------- --------
SALARIES AND EMPLOYEE BENEFITS EXPENSE:
Salaries and payroll taxes.................... $1,424 $1,510 $ 4,228 $ 4,368
Employee benefits............................. 348 349 1,024 960
------ ------ ------- -------
Salaries and employee benefits expense...... 1,772 1,859 5,252 5,328
------ ------ ------- -------
NET OCCUPANCY AND EQUIPMENT EXPENSE:
Net occupancy expense......................... 259 227 834 735
Equipment expense............................. 307 331 995 911
------ ------ ------- -------
Net occupancy and equipment expense......... 566 558 1,829 1,646
------ ------ ------- -------
OTHER EXPENSES:
Marketing expense............................. 170 109 449 310
Other taxes................................... 99 113 295 340
Stationery and supplies....................... 106 103 272 282
Contractual services.......................... 392 434 1,165 1,208
Insurance including FDIC assessment........... 60 54 167 151
Other......................................... 599 509 1,557 1,477
------ ------ ------- -------
Other expenses.............................. 1,426 1,322 3,905 3,768
------ ------ ------- -------
Total noninterest expense................. $3,764 $3,739 $10,986 $10,742
====== ====== ======= =======
For the nine months ended September 30, 2004, noninterest expense amounted to
$10,986, an increase of $244 or 2.3 percent from $10,742 for the same nine
months of 2003. Accounting for 75.0 percent of the increase was a $183 rise in
occupancy and equipment expense associated with the operation of our new branch
located in Tannersville, Pennsylvania and loan operations center. For the third
quarter, noninterest expense totaled $3,764 in 2004, a slight increase of $25 or
0.7 percent compared to $3,739 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
and quarter-to-date productivity weakened. Our efficiency ratio for the nine
months ended September 30, 2004, weakened to 71.2 percent from 68.5 percent for
the same period last year. For the third quarter, this ratio was 73.8 percent in
2004 and 70.5 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 nine months of 2004 and
2003. We realize that operational efficiency is a key element to a company's
overall profitability. We recently formed a task force to
44
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
evaluate the decline in productivity and construct a plan to improve our
efficiency of operations in 2005.
Salaries and employee benefits expense, which comprise the majority of
noninterest expense, totaled $5,252 or 47.8 percent of noninterest expense for
the nine months ended September 30, 2004. In comparison, these expenses were
$5,328 or 49.6 percent of noninterest expense for the same period of 2003. For
the third quarter of 2004, employee-related expenses totaled $1,772, a decrease
of $87 compared to the third quarter of 2003.
Net occupancy and equipment expense rose $183 to $1,829 for the nine months
ended September 30, 2004, from $1,646 for the same period last year. Additional
expenses associated with the operation of our new Tannersville office and the
loan operations center contributed to the increase. For the three months ended
September 30, 2004 and 2003, net occupancy and equipment expenses amounted to
$566 and $558, an increase of $8.
Other expenses increased $137 to $3,905 for the nine months ended September 30,
2004, from $3,768 for the same nine months of the prior year. For the quarter
ended September 30, other expenses totaled $1,426 in 2004 and $1,322 in 2003.
The primary reason for the rise in other expenses was 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 September 30, 2004, and will be exempt from paying a BIF
assessment for the remainder of 2004.
A separate levy is 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 third quarter of 2004 at $0.0148 per 100
dollars of BIF-assessable deposits. Our assessments totaled $51 and $53 for the
nine months ended September 30, 2004 and 2003.
45
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME TAXES:
For the nine months ended September 30, 2004, income tax expense totaled $501
and resulted in an effective tax rate of 12.5 percent. For the same period of
2003, income tax expense was $961 with an effective tax rate of 20.9 percent.
The significant reduction in our effective rate resulted from the recognition of
$314 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 9.1 percent for the
nine months ended September 30, 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 arises from
temporary differences. Temporary differences are differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, which result in deferred tax assets or liabilities. We perform
quarterly reviews on the tax criteria related to the recognition of deferred tax
assets. We decided not to establish a valuation reserve for the deferred tax
assets since it is likely that these assets will be realized through carry-back
to taxable income in prior years and by future reversals of existing taxable
temporary differences or, to a lesser extent, through future taxable income.
46
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 Officer 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.
47
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 nine months ended September 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
July 31, 2004............................. 38,592
August 31, 2004........................... 500 40.16 500 38,092
September 30, 2004........................ 12,115 40.42 12,115 25,977
------ ------ ------
Total................................... 34,265 $40.35 34,265
====== ====== ======
(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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
48
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 2.02 - On October 20, 2004, the Company filed a report on Form
8-K, to disclose its results of operations for the three months
ended September 30, 2004.
49
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
Registrant, Comm Bancorp, Inc.
Date: November 12, 2004 /s/ William F. Farber, Sr.
-------------------------------------
William F. Farber, Sr.
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
Date: November 12, 2004 /s/ Scott A. Seasock
-------------------------------------
Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2004 /s/ Stephanie A. Ganz
-------------------------------------
Stephanie A. Ganz
Vice President of Finance
(Principal Accounting Officer)
50
EXHIBIT INDEX
ITEM NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------- ----
31(i) Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 52
31(ii) Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 54
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 56
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 57
51