UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number
0-17455
Comm Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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23-2242292
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification Number)
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125 North State Street, Clarks Summit, PA
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18411
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(Address of principal executive offices)
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(Zip Code)
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(570) 586-0377
(Registrants 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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the
Exchange Act. Yes
o
No
þ
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 1,721,007 at October 31, 2009
COMM BANCORP, INC.
FORM 10-Q
September 30, 2009
INDEX
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CONTENTS
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Page No.
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Part I. FINANCIAL INFORMATION:
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Item 1. Financial Statements.
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3
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4
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5
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6
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7
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19
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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*
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60
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Item 4T. Controls and Procedures
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*
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61
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Item 1A. Risk Factors
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*
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61
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61
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61
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61
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61
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62
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63
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EX-31(i)
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EX-32
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2
Comm Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
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Three Months Ended Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Interest income:
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Interest and fees on loans:
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Taxable
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$
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6,194
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$
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7,137
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$
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19,078
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$
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21,979
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Tax-exempt
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598
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559
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1,883
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1,694
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Interest and dividends on investment securities available-for-sale:
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Taxable
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205
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52
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869
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133
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Tax-exempt
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407
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351
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1,417
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1,072
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Dividends
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9
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12
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29
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39
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Interest on federal funds sold
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4
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133
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5
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145
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Total interest income
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7,417
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8,244
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23,281
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25,062
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Interest expense:
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Interest on deposits
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2,433
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3,017
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7,492
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9,269
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Interest on short-term borrowings
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5
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97
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178
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Total interest expense
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2,438
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3,017
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7,589
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9,447
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Net interest income
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4,979
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5,227
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15,692
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15,615
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Provision for loan losses
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8,670
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400
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9,760
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1,013
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Net interest income (loss) after provision for loan losses
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(3,691
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)
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4,827
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5,932
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14,602
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Noninterest income:
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Service charges, fees and commissions
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848
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810
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2,444
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2,489
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Mortgage banking income
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287
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120
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1,179
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444
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Net gains on sale of premises and equipment
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294
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Net gains on sale of investment securities available-for-sale
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1,385
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1,499
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Total noninterest income
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2,520
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930
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5,416
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2,933
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Noninterest expense:
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Salaries and employee benefits expense
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2,025
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2,169
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6,329
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6,414
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Net occupancy and equipment expense
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591
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583
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1,849
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1,866
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Other expenses
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1,942
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1,331
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5,735
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3,834
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Total noninterest expense
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4,558
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4,083
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13,913
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12,114
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Income (loss) before income taxes
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(5,729
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)
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1,674
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(2,565
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)
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5,421
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Provision for income tax expense (benefit)
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(2,354
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)
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|
199
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(2,180
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)
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721
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Net income (loss)
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(3,375
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)
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1,475
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(385
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)
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4,700
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Other comprehensive (loss):
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Unrealized gains (losses) on investment securities available-for-sale
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1,118
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(686
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)
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1,473
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(1,024
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)
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Reclassification adjustment for gains included in net income
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(1,385
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)
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(1,499
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)
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Income tax benefit related to other comprehensive loss
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(91
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)
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(233
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)
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|
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(9
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)
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(348
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)
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|
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Other comprehensive loss, net of income taxes
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(176
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)
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(453
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)
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(17
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)
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(676
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)
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Comprehensive income (loss)
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$
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(3,551
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)
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|
$
|
1,022
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$
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(402
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)
|
|
$
|
4,024
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|
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Per share data:
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|
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|
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Net income (loss)
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$
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(1.95
|
)
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|
$
|
0.84
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|
$
|
(0.22
|
)
|
|
$
|
2.68
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|
Cash dividends declared
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|
$
|
0.28
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|
$
|
0.27
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$
|
0.84
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$
|
0.81
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|
Average common shares outstanding
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|
1,718,439
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|
|
|
1,747,438
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1,722,994
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1,750,872
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See Notes to Consolidated Financial Statements.
3
Comm Bancorp, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
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|
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|
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|
September 30,
|
|
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December 31,
|
|
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|
2009
|
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|
2008
|
|
Assets:
|
|
|
|
|
|
|
|
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Cash and due from banks
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$
|
8,728
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|
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$
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8,017
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Federal funds sold
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|
46,100
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|
|
|
12,700
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Investment securities available-for-sale
|
|
|
38,302
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|
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|
80,574
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Loans held for sale, net
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|
|
|
|
|
1,390
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Loans, net of unearned income
|
|
|
507,094
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|
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485,882
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Less: allowance for loan losses
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11,566
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|
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5,255
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Net loans
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|
495,528
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480,627
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Premises and equipment, net
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|
11,631
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|
|
|
11,753
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Accrued interest receivable
|
|
|
2,597
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|
|
|
2,143
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Other assets
|
|
|
11,386
|
|
|
|
6,837
|
|
|
|
|
|
|
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Total assets
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|
$
|
614,272
|
|
|
$
|
604,041
|
|
|
|
|
|
|
|
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|
|
|
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|
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Liabilities:
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|
|
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Deposits:
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|
|
|
|
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Noninterest-bearing
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$
|
79,591
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|
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$
|
79,674
|
|
Interest-bearing
|
|
|
475,509
|
|
|
|
462,617
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
555,100
|
|
|
|
542,291
|
|
Accrued interest payable
|
|
|
1,185
|
|
|
|
1,815
|
|
Other liabilities
|
|
|
2,478
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
558,763
|
|
|
|
546,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
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Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
|
|
|
|
|
|
|
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September 30, 2009, 1,718,439 shares; December 31, 2008, 1,730,062 shares
|
|
|
567
|
|
|
|
571
|
|
Capital surplus
|
|
|
7,881
|
|
|
|
7,694
|
|
Retained earnings
|
|
|
45,407
|
|
|
|
47,862
|
|
Accumulated other comprehensive income
|
|
|
1,654
|
|
|
|
1,671
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,509
|
|
|
|
57,798
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
614,272
|
|
|
$
|
604,041
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Comm Bancorp, Inc.
CONSOLIDATED STATEMENTS 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, 2008
|
|
$
|
571
|
|
|
$
|
7,694
|
|
|
$
|
47,862
|
|
|
$
|
1,671
|
|
|
$
|
57,798
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
(385
|
)
|
Dividends declared: $0.84 per share
|
|
|
|
|
|
|
|
|
|
|
(1,446
|
)
|
|
|
|
|
|
|
(1,446
|
)
|
Dividend reinvestment plan: 6,494 shares issued
|
|
|
2
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
Repurchase and retirement: 18,117 shares
|
|
|
(6
|
)
|
|
|
(54
|
)
|
|
|
(624
|
)
|
|
|
|
|
|
|
(684
|
)
|
Other comprehensive loss, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
567
|
|
|
$
|
7,881
|
|
|
$
|
45,407
|
|
|
$
|
1,654
|
|
|
$
|
55,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
579
|
|
|
$
|
7,326
|
|
|
$
|
45,353
|
|
|
$
|
1,115
|
|
|
$
|
54,373
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
4,700
|
|
|
|
|
|
|
|
4,700
|
|
Dividends declared: $0.81 per share
|
|
|
|
|
|
|
|
|
|
|
(1,416
|
)
|
|
|
|
|
|
|
(1,416
|
)
|
Dividend reinvestment plan: 8,644 shares issued
|
|
|
3
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
389
|
|
Repurchase and retirement: 17,046 shares
|
|
|
(6
|
)
|
|
|
(51
|
)
|
|
|
(688
|
)
|
|
|
|
|
|
|
(745
|
)
|
Other comprehensive loss, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
576
|
|
|
$
|
7,661
|
|
|
$
|
47,949
|
|
|
$
|
439
|
|
|
$
|
56,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(385
|
)
|
|
$
|
4,700
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
9,760
|
|
|
|
1,013
|
|
Depreciation and amortization of premises and equipment
|
|
|
678
|
|
|
|
696
|
|
Net amortization of investment securities
|
|
|
236
|
|
|
|
76
|
|
Amortization of net loan costs
|
|
|
286
|
|
|
|
270
|
|
Amortization of mortgage servicing rights
|
|
|
310
|
|
|
|
165
|
|
Deferred income tax benefit
|
|
|
(2,044
|
)
|
|
|
(335
|
)
|
Net gains on sale of investment securities available-for-sale
|
|
|
(1,499
|
)
|
|
|
|
|
Net gains on sale of loans
|
|
|
(1,210
|
)
|
|
|
(345
|
)
|
Net gains on sale of premises and equipment
|
|
|
(294
|
)
|
|
|
|
|
Net losses (gains) on foreclosed assets
|
|
|
159
|
|
|
|
(12
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Loans held for sale, net
|
|
|
2,600
|
|
|
|
350
|
|
Accrued interest receivable
|
|
|
(454
|
)
|
|
|
(438
|
)
|
Other assets
|
|
|
(1,219
|
)
|
|
|
(390
|
)
|
Accrued interest payable
|
|
|
(630
|
)
|
|
|
138
|
|
Other liabilities
|
|
|
339
|
|
|
|
163
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,633
|
|
|
|
6,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from repayments of investment securities available-for-sale
|
|
|
7,700
|
|
|
|
9,446
|
|
Proceeds from sales of investment securities available-for-sale
|
|
|
40,460
|
|
|
|
|
|
Purchases of investment securities available-for-sale
|
|
|
(4,651
|
)
|
|
|
(47,845
|
)
|
Proceeds from sale of foreclosed assets
|
|
|
268
|
|
|
|
137
|
|
Net increase in lending activities
|
|
|
(26,970
|
)
|
|
|
(23,820
|
)
|
Proceeds from sale of premises and equipment
|
|
|
509
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(771
|
)
|
|
|
(1,150
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
16,545
|
|
|
|
(63,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net changes in:
|
|
|
|
|
|
|
|
|
Money market, NOW, savings and noninterest-bearing accounts
|
|
|
7,436
|
|
|
|
8,102
|
|
Time deposits
|
|
|
5,373
|
|
|
|
48,134
|
|
Proceeds from issuance of common shares
|
|
|
243
|
|
|
|
389
|
|
Repurchase and retirement of common shares
|
|
|
(684
|
)
|
|
|
(745
|
)
|
Cash dividends paid
|
|
|
(1,435
|
)
|
|
|
(1,401
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,933
|
|
|
|
54,479
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
34,111
|
|
|
|
(2,702
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
20,717
|
|
|
|
21,876
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
54,828
|
|
|
$
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
8,219
|
|
|
$
|
9,309
|
|
Income taxes
|
|
|
691
|
|
|
|
1,320
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
Transfers of loans to foreclosed assets
|
|
|
2,023
|
|
|
|
|
|
Unrealized losses on investment securities available-for-sale, net
|
|
$
|
17
|
|
|
$
|
676
|
|
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 consolidation. Prior-period amounts are reclassified when necessary to conform
with the current years presentation. These reclassifications did not have a material effect on
the operating results or financial position of the Company. The operating results and financial
position of the Company for the three months and nine months ended and as of September 30, 2009,
are not necessarily indicative of the results of operations that may be expected in the future.
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 Companys Annual Report on Form 10-K for the period ended December 31, 2008.
2. Earnings (loss) per common share:
The Company had no dilutive potential common shares outstanding during the three-month and
nine-month periods ended September 30, 2009 and 2008, therefore, the per share data presented on
the face of the Consolidated Statements of Income and Comprehensive Income (Loss) relates to basic
per share amounts.
3. Subsequent events:
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of
September 30, 2009, for items that should potentially be recognized or disclosed in these financial
statements. The evaluation was conducted through November 16, 2009, the date these financial
statements were issued.
7
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
4. Hierarchy of GAAP:
In July 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a Replacement of Statement of Financial
Accounting Standards (SFAS) No. 162. SFAS No. 162 is not yet reflected in FASB ASC. FASB ASC
105 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to
establish the FASB ASC as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in presentation of financial statements in conformity
with GAAP in the United States. The ASC does not change GAAP. Instead, it takes all of the
individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90
accounting Topics, and displays all Topics using a consistent structure. FASB requires that all
citations begin with FASB ASC. Changes to the ASC subsequent to June 30, 2009, are referred to as
Accounting Standards Updates (ASU).
In conjunction with the issuance of FASB ASC 105, the FASB also issued ASU No. 2009-1, FASB ASC
105 Generally Accepted Accounting Principles, which includes FASB ASC 105 in its entirety as a
transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after
September 15, 2009. The adoption of ASU 2009-1 did not have an impact on the operating results or
financial position of the Company.
5. Transfers of financial assets:
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an
Amendment of FASB ASC 860. SFAS No. 166 is not yet reflected in FASB ASC. This Statement
prescribes the information that a reporting company must provide in its financial reports about a
transfer of financial assets; the effects of a transfer on its financial position, financial
performance and cash flows; and a transferors continuing involvement in transferred financial
assets. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. The adoption
of this Statement on January 1, 2010, is not expected to have a material effect on the operating
results or financial position of the Company.
8
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
6. Variable interest entities:
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No.
167 is not yet reflected in the FASB ASC. This Statement amends FASB Interpretation No. (FIN)
46(R), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, to require
an enterprise to determine whether its variable interest or interests give it a controlling
financial interest in a variable interest entity. SFAS No. 167 also amends FIN 46(R) to require
ongoing reassessments
of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is
effective for fiscal years beginning after November 15, 2009. The adoption of this Statement on
January 1, 2010, is not expected to have a material affect on the operating results or financial
position of the Company.
7. Fair value measurements:
In August 2009, the FASB issued ASU 2009-5, Fair Value Measurements and Disclosures FASB ASC 820-
Measuring Liabilities at Fair Value. ASU 2009-5 provides guidance when estimating the fair value
of a liability. When a quoted price in an active market for the identical liability is not
available, fair value should be measured using: (i) the quoted market price of an identical
liability when traded as an asset; (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets; or (iii) another valuation technique consistent with the
principles of FASB ASC 820 such as an income approach or a market approach. ASU 2009-5 is effective
for the first reporting period, including interim periods, beginning after issuance. The adoption
of this ASU on October 1, 2009, is not expected to have a material affect on the operating results
or financial position of the Company.
In September 2009, the FASB issued ASU 2009-12, Fair Value Measurements and Disclosures FASB ASC
820 Investment in Certain Entities That Calculate Net Asset Value per Share or Its Equivalent.
ASU 2009-12 allows an entity to measure the fair value of an investment that has no readily
determinable fair value on the basis of the investees net asset value per
share as provided by the investee. This allowance assumes that the investee
has calculated net asset value in accordance with the GAAP measurement principles of FASB ASC 946
as of the entitys measurement date. Examples of such investments include investments in hedge
funds, private equity funds, real estate funds and venture capital funds. This Update also provides
guidance on how the investment should be classified within the fair value hierarchy based on the
value for which the investment can be redeemed. ASU 2009-12 is effective for interim and annual
periods ending after December 15, 2009, with early adoption permitted. The adoption of this ASU on
October 1, 2009, is not expected to have a material effect on the operating results or financial
position of the Company, as the Company does not have investments in such entities.
9
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
8. Own-share lending arrangements:
In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. This ASU amends FASB ASC 470 and
provides guidance for accounting and reporting for own-share lending arrangements issued in
contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement
entered into on an entitys own shares should be measured at fair value in accordance with FASB ASC
820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares
are excluded from basic and diluted earnings per share unless default of the share-lending
arrangement occurs. This ASU also requires several
disclosures including a description and the terms of the arrangement and the reason for entering
into the arrangement. The effective date of ASU 2009-15 is dependent upon the date the
share-lending arrangement was entered into and includes retrospective application to arrangements
outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The
adoption of this ASU is not expected to have a material effect on the operating results or
financial position of the Company.
9. Change in accounting estimate:
In the third quarter of 2009, we reevaluated our methodology for determining the adequacy of the
allowance for loan losses. This reevaluation was performed as a result of the rapidly changing
economic conditions in our market area. As part of this reevaluation, we reduced the number of
periods utilized to determine loss factors for homogeneous pools of loans collectively evaluated
and measured for impairment under FASB ASC 450, Contingencies, from the most recent rolling 20
quarters to the most recent rolling eight quarters to better reflect the current credit
environment. This change in accounting estimate was applied prospectively in accordance with FASB
ASC 250, Accounting Changes and Error
Corrections. The impact of this change resulted in an increase in the provision for loan losses
charged to operations of $3.6 million in the third quarter of 2009.
10
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
10. Investment securities:
All investment securities were classified as available-for-sale at September 30, 2009 and December
31, 2008. The amortized cost and fair value of available-for-sale securities aggregated by
investment category at September 30, 2009 and December 31, 2008, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
September 30, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
State and municipals
|
|
$
|
27,751
|
|
|
$
|
2,385
|
|
|
|
|
|
|
$
|
30,136
|
|
Mortgage-backed securities
|
|
|
5,369
|
|
|
|
51
|
|
|
$
|
16
|
|
|
|
5,404
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
2,537
|
|
Other
|
|
|
139
|
|
|
|
88
|
|
|
|
2
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,796
|
|
|
$
|
2,524
|
|
|
$
|
18
|
|
|
$
|
38,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
State and municipals
|
|
$
|
44,873
|
|
|
$
|
2,288
|
|
|
$
|
154
|
|
|
$
|
47,007
|
|
Mortgage-backed securities
|
|
|
31,916
|
|
|
|
366
|
|
|
|
56
|
|
|
|
32,226
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
1,116
|
|
Other
|
|
|
137
|
|
|
|
90
|
|
|
|
2
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,042
|
|
|
$
|
2,744
|
|
|
$
|
212
|
|
|
$
|
80,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains and losses on available-for-sale securities are included as a
separate component in stockholders equity. The Company had net unrealized holding gains of $1,654,
net of deferred income taxes of $852, at September 30, 2009, and $1,671, net of deferred income
taxes of $861, at December 31, 2008.
11
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
The fair value and gross unrealized losses of available-for-sale securities with unrealized losses
for which an other-than-temporary impairment has not been recognized at September 30, 2009 and
December 31, 2008, aggregated by investment category and length of time that the individual
securities have been in a continuous unrealized loss position, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
September 30, 2009
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
State and municipals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
3,212
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
$
|
3,212
|
|
|
$
|
16
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
|
7
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,212
|
|
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
3,219
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
December 31, 2008
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
State and municipals
|
|
$
|
4,102
|
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
$
|
4,102
|
|
|
$
|
154
|
|
Mortgage-backed securities
|
|
|
6,071
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
6,071
|
|
|
|
56
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
7
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,180
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
$
|
10,180
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009, the Company had 116 investment securities, consisting of 100 tax-exempt
state and municipal obligations, seven mortgage-backed securities, including collateralized
mortgage obligations, and two restricted and seven marketable equity securities. There were two
investment securities in an unrealized loss position at September 30, 2009, including one
mortgage-backed security and one marketable equity security. The one marketable equity security has
been in a continuous unrealized loss position for 12 months or more.
Community Bank holds all of the Companys debt securities and is a state member bank of the Federal
Reserve System which imposes strict limitations and restrictions on the types of securities that
may be acquired. As a result, securities held are Bank Quality Investment grade, defined as
bearing a credit quality rating of Baa or higher from Moodys or BBB or higher from Standard
and Poors rating services, and are readily marketable, but are still subject to price fluctuations
because of changes in interest rates. Management does not consider the unrealized losses, as
a result of changes in interest rates, to be other-than-temporary based on historical evidence that
indicates the cost of these securities is recoverable within a reasonable period of time in
relation to normal cyclical changes in the market rates of interest.
12
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
Mortgage-backed securities consisted of obligations of Government National Mortgage Association
(GNMA) federal agency bonds which are direct obligations of the U.S. Government. The one GNMA
mortgage-backed security that was in an unrealized loss position at September 30, 2009, was backed
by the full faith and credit of the U.S. Government and thus considered to have no risk of default.
The unrealized loss position for this security was less than 12 months. The unrealized loss was not
considered to be other-than-temporary because it was a direct result of interest rate fluctuations.
Management did not have the intent to sell the security at September 30, 2009, and it is more
likely than not that it will not be required to sell the security before the anticipated recovery
of its entire amortized cost basis.
Marketable equity securities are held at the Parent Company consisting of common stocks of
commercial banks. At September 30, 2009, the market value of common stock held in Wachovia
Corporation was below its amortized cost basis of $9. Wells Fargo and Company acquired Wachovia
Corporation after the close of business on December 31, 2008. Wells Fargo and Company had a credit
rating of AA and was categorized as well capitalized under regulatory capital guidelines at
year-end 2008. As a result, the Company does not consider the unrealized loss to be
other-than-temporary because it was directly related to the financial weakness of the former
issuer. At the current time we do not intend to sell, and it is more likely than not that we will
not have to sell, any of our temporarily impaired securities as we expect to recover the
entire amortized cost basis of these securities.
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pgh), the Company is required to
purchase and hold stock in the FHLB-Pgh to satisfy membership and borrowing requirements. This
stock is restricted in that it can only be sold to the FHLB-Pgh or to another member institution,
and all sales of FHLB-Pgh stock must be at par. As a result of these restrictions, FHLB-Pgh stock
is unlike other investment securities as there is no trading market for FHLB-Pgh stock and the
transfer price is determined by FHLB-Pgh membership rules and not by market participants. As of
September 30, 2009 and December 31, 2008, our FHLB-Pgh stock totaled $2.4 million and $1.0 million
and is included in investment securities available-for-sale on the Consolidated Balance Sheets.
In December 2008, the FHLB-Pgh voluntarily suspended dividend payments on its stock, as well as the
repurchase of excess stock from members. The FHLB-Pgh cited a significant reduction in the level of
core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and
constrained access to the debt markets at attractive rates and maturities as the main reasons for
the decision to suspend dividends and the repurchase of excess capital stock. The FHLB-Pgh last
paid a dividend in the third quarter of 2008.
13
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
FHLB-Pgh stock is held as a long-term investment and its value is determined based on the ultimate
recoverability of the par value. The Company evaluates impairment quarterly. The decision of
whether impairment exists is a matter of judgement that reflects our view of the FHLB-Pghs
long-term performance, which includes factors such as the following:
|
|
|
Its operating performance;
|
|
|
|
The severity and duration of declines in the fair value of its net assets related
to its capital stock amount;
|
|
|
|
Its commitment to make payments required by law or regulation and the level of such
payments in relation to its operating performance;
|
|
|
|
The impact of legislative and regulatory changes on the FHLB-Pgh, and accordingly,
on the members of the FHLB-Pgh; and
|
|
|
|
Its liquidity and funding position.
|
After evaluating all of these considerations the Company concluded that the par value of its
investment in FHLB-Pgh stock will be recovered. Accordingly, no impairment charge was recorded on
these securities for the nine months ended September 30, 2009. Our evaluation of the factors
described above in future periods could result in the recognition of impairment charges on FHLB-Pgh
stock.
The maturity distribution of the fair value, which is the net carrying amount, of the debt
securities classified as available-for-sale at September 30, 2009, is summarized in the table that
follows. The distributions are based on contractual maturity with the exception of mortgage-backed
securities. Mortgage-backed securities have been presented based upon estimated cash flows,
assuming no change in the current interest rate environment. Actual maturities may differ from
contractual maturities, or estimated maturities for mortgage-backed securities, because borrowers
have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one
|
|
|
After five
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but within
|
|
|
but within
|
|
|
After
|
|
|
|
|
September 30, 2009
|
|
one year
|
|
|
five years
|
|
|
ten years
|
|
|
ten years
|
|
|
Total
|
|
State and municipals
|
|
$
|
1,944
|
|
|
$
|
3,429
|
|
|
$
|
14,641
|
|
|
$
|
10,122
|
|
|
$
|
30,136
|
|
Mortgage-backed securities
|
|
|
1,943
|
|
|
|
3,461
|
|
|
|
|
|
|
|
|
|
|
|
5,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,887
|
|
|
$
|
6,890
|
|
|
$
|
14,641
|
|
|
$
|
10,122
|
|
|
$
|
35,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
11. Fair values of financial instruments:
GAAP establishes a fair value hierarchy that prioritizes the inputs to the valuation methods used
to measure fair value into three levels which include the following:
|
|
|
Level 1: Unadjusted quoted prices of identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement date.
|
|
|
|
Level 2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market
data.
|
|
|
|
Level 3: Significant unobservable inputs that reflect a reporting entitys own
assumptions about the assumptions that market participants would use in pricing an
asset or liability.
|
An assets or liabilitys level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2009 and
December 31, 2008, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
September 30, 2009
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
$
|
35,765
|
|
|
$
|
225
|
|
|
$
|
35,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
December 31, 2008
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
$
|
79,458
|
|
|
$
|
225
|
|
|
$
|
79,233
|
|
|
|
|
|
Investment securities available-for-sale reported at fair value using Level 1 inputs include
marketable equity securities trading in active exchange markets. The fair value of investment
securities available-for-sale utilizing Level 2 inputs include debt securities with quoted market
prices based on a matrix pricing model. This method for determining fair value is a mathematical
technique widely used in the industry to value debt securities without relying exclusively on
quoted prices for the specific
securities, but rather by relying on the securities relationship to other benchmark quoted
securities.
15
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
Assets measured at fair value on a non-recurring basis at September 30, 2009 and December 31, 2008,
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
September 30, 2009
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
10,828
|
|
|
|
|
|
|
|
|
|
|
$
|
10,828
|
|
Foreclosed assets
|
|
$
|
1,932
|
|
|
|
|
|
|
|
|
|
|
$
|
1,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
December 31, 2008
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
16,135
|
|
|
|
|
|
|
|
|
|
|
$
|
16,135
|
|
Foreclosed assets
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
$
|
336
|
|
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans or discounted cash flows for noncollateral dependent loans, had a
recorded investment of $16,087 and a related allowance of $5,259 at September 30, 2009. Impaired
loans had a recorded investment of $19,707 and a related allowance of $3,572 at December 31, 2008.
The fair value of foreclosed assets is based upon estimates derived through independent appraisals.
Real estate acquired in connection with foreclosures is adjusted to fair value less cost to sell.
Disclosure of fair value information about financial instruments, whether or not recognized on the
balance sheet, for which it is practical to estimate that value is required by GAAP. The Companys
assets that were considered financial instruments approximated 96.4 percent of total assets at
September 30, 2009, and 97.0 percent of total assets at December 31, 2008. Liabilities that were
considered financial instruments approximated 99.6 percent of total liabilities at September 30,
2009, and December 31, 2008. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets. In many cases, these values cannot be realized
in immediate settlement of the instrument. This disclosure does not and is not intended to
represent the fair value of the Company.
16
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
Fair value estimates are based on existing financial instruments without attempting to estimate the
value of anticipated future business and the value of certain assets and liabilities that are not
considered financial.
Accordingly, such assets and liabilities are excluded from disclosure requirements. For example, no
benefit is recorded for the value of low- cost funding subsequently discussed. In addition,
Community Banks Trust and Wealth Management Division contributes fee income annually. Trust assets
and liabilities are not considered financial instruments for this disclosure, and their values have
not been incorporated into the fair value estimates.
The following methods and assumptions were used by the Company to construct the accompanying table
containing the fair values and related carrying amounts of financial instruments:
Cash and cash equivalents:
The carrying values of cash and cash equivalents as reported on the
balance sheet approximate fair value.
Investment securities available-for-sale:
The fair value of investment securities
available-for-sale is based on quoted market prices. The carrying values of restricted equity
securities approximate fair value.
Loans held for sale, net:
The fair value of loans held for sale, net, are based on quoted market
prices.
Net loans:
For adjustable-rate loans that reprice frequently and with no significant credit risk,
fair values are based on carrying values. The fair
values of other nonimpaired loans are estimated using discounted cash flow analysis, using interest
rates currently offered in the market for loans with similar terms to borrowers of similar credit
risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined
by the loan review function or underlying collateral values, where applicable.
Mortgage servicing rights:
The fair value of mortgage servicing rights is based on observable
market prices when available or the present value of future cash flows when not available.
Accrued interest receivable:
The carrying value of accrued interest receivable as reported on the
balance sheet approximates fair value.
Deposits without stated maturities:
The fair value of noninterest-bearing deposits and savings, NOW
and money market accounts is the amount payable on demand at the reporting date. The fair value
estimates do not include
the benefit that results from such low-cost funding provided by the deposit liabilities compared to
the cost of borrowing funds in the market.
17
Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
Deposits with stated maturities:
The carrying value of adjustable-rate, fixed-term time deposits
approximates their fair value at the reporting date. For fixed-rate time deposits, the present
value of future cash flows is used to estimate fair value. The discount rates used are the current
rates offered in the market for time deposits with similar maturities.
Accrued interest payable:
The carrying value of accrued interest payable as reported on the balance
sheet approximates fair value.
Off-balance sheet financial instruments:
The majority of commitments to extend credit, unused
portions of lines of credit and letters of credit carry current market interest rates if converted
to loans. Because such commitments are generally unassignable by either the Company or the
borrower, they only have value to the Company and the borrower. None of the commitments are subject
to undue credit risk. The estimated fair values of off-balance sheet financial instruments are
based on fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties credit
standing. The fair value of off-balance sheet financial instruments was not material at September
30, 2009 and December 31, 2008.
The estimated fair value of financial instruments at September 30, 2009 and December 31, 2008, is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31,2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,828
|
|
|
$
|
54,828
|
|
|
$
|
20,717
|
|
|
$
|
20,717
|
|
Investment securities available-for-sale
|
|
|
38,302
|
|
|
|
38,302
|
|
|
|
80,574
|
|
|
|
80,574
|
|
Loans held for sale, net
|
|
|
|
|
|
|
|
|
|
|
1,390
|
|
|
|
1,390
|
|
Net loans
|
|
|
495,528
|
|
|
|
498,797
|
|
|
|
480,627
|
|
|
|
487,917
|
|
Mortgage servicing rights
|
|
|
901
|
|
|
|
901
|
|
|
|
578
|
|
|
|
578
|
|
Accrued interest receivable
|
|
|
2,597
|
|
|
|
2,597
|
|
|
|
2,143
|
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
592,156
|
|
|
$
|
595,425
|
|
|
$
|
586,029
|
|
|
$
|
593,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without stated maturities
|
|
$
|
297,977
|
|
|
$
|
297,977
|
|
|
$
|
290,541
|
|
|
$
|
290,541
|
|
Deposits with stated maturities
|
|
|
257,123
|
|
|
|
262,441
|
|
|
|
251,750
|
|
|
|
260,019
|
|
Accrued interest payable
|
|
|
1,185
|
|
|
|
1,185
|
|
|
|
1,815
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
556,285
|
|
|
$
|
561,603
|
|
|
$
|
544,106
|
|
|
$
|
552,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
Forward-Looking Discussion:
Certain statements in this Form 10-Q are forward-looking statements that involve numerous risks
and uncertainties. The following factors, among others, may cause actual results to differ
materially from projected results:
Local, domestic and international economic and political conditions, and government monetary and
fiscal policies affect banking both directly and indirectly. Inflation, recession, unemployment,
volatile interest rates, tight money supply, real estate values, international conflicts, and
other factors beyond our control may also adversely affect our future results of operations. Our
management team, consisting of the Board of Directors and executive officers, expects that no
particular factor will further affect the results of operations. The continuation of downward
trends in areas such as real estate, construction and consumer spending, may continue to adversely
impact our ability to return to profitability.
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. Further adverse changes to economic conditions would likely disrupt loan
collections and may continue to adversely effect our 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 some
specialized 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.
19
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Critical Accounting Policies:
Our financial statements are prepared in accordance with GAAP. The preparation of financial
statements in conformity with GAAP requires us 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 values of financial instruments and the valuations of real estate
acquired through foreclosure, deferred tax assets and liabilities 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 our impairment evaluation
methodology due to limitations in the process.
We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the
allowance as necessary through normal operations. This self-correcting mechanism reduces potential
differences between estimates and actual observed losses. In addition, the unallocated portion of
the allowance is examined quarterly to ensure that it is consistent with changes in the related
criteria that would indicate a need to either increase or decrease it. The determination of the
level of the allowance for loan losses is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. Accordingly, we cannot
ensure that charge-offs in future periods will not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required resulting in an adverse
impact on operating results.
20
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
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
fair value based upon current estimates derived through independent appraisals less cost to sell.
However, proceeds realized from sales may ultimately be higher or lower than those estimates.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of
temporary differences by applying enacted statutory tax rates to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. The amount of
deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will
more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Intangible assets consist of goodwill. The valuation of goodwill is analyzed at least annually for
impairment.
For a further discussion of our significant accounting 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, 2008. This note lists the
significant accounting policies used by management in the development and presentation of our
financial statements. This Managements 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
evaluation of our financial position, results of operations and cash flows.
21
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Operating Environment:
Fueled by Federal Government-supported spending initiatives, the United States economy grew
at the strongest pace in two years. The gross domestic product (GDP), the value of all goods and
services produced in the United States increased at a seasonally-adjusted annual rate of 3.5
percent. Much of the growth was spurred by government-supported spending on automobiles and homes.
Consumer spending advanced at an annual rate of 3.4 percent. Specifically, spending on durable
goods jumped at an annual rate of 22.3 percent, which reflected a significant increase in
automobile purchases due to the Federal Governments Cash for Clunkers program. The program
offered a rebate of up to $4,500 dollars to consumers to purchase new automobiles and trade in old
gas guzzlers. In addition, the Federal Governments $8,000 dollar tax credit for first-time home
buyers sparked a 23.4 percent annualized increase in residential investment, the first quarter
since 2006 that spending on housing was positive. Despite these positive influences, continued
increases in unemployment indicate that the recession is far from over. The national unemployment
rate rose to a seasonally adjusted rate of 9.8 percent in September 2009, up from 9.5 percent in
June 2009 and from 6.2 percent one year ago. In addition, partially mitigating the effects of
consumer and residential spending was a decrease in business spending. Business investment
declined at an annual rate of 2.5 percent. Spending on commercial structures decreased 9.0 percent,
which was partially offset by an increase of 1.1 percent in spending for equipment and software.
The continued economic weakness has placed great stress on the banking industry. According to the
most recent data provided by the Federal Deposit Insurance Corporation (FDIC), FDIC-insured
financial institutions reported an aggregate net loss of $3.7 billion in the second quarter of
2009. In addition, 64.4 percent of insured institutions reported lower quarterly earnings than a
year ago and 28.3 percent reported a net loss for the quarter. Significant increases in loan loss
provisions, due to rising net charge-off and nonperforming asset levels, was the primary factor
leading to the overall industry loss. In addition, by the end of the third quarter of 2009
approximately 95 insured financial institutions had failed.
Due to the continued weakness in economic conditions, the Federal Open Market Committee (FOMC)
kept the target range for the federal funds rate unchanged at 0.00 percent to 0.25 percent during
the third quarter of 2009. In addition, the FOMC has indicated that it expects economic activity
to remain weak for some time, thereby it plans to keep interest rates low indefinitely.
22
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Review of Financial Position:
Dues to the strain on the banking industry and the recent escalation in the number of bank
failures, regulatory oversight of banks has intensified in 2009. Regulators are extremely critical
in their evaluations of capital adequacy, and in particular, the reserves banks set aside for
potential loan losses. As a result of this emphasis, coupled with the recent deterioration
evidenced in the commercial and construction sectors of our loan portfolio and the continuation of
the downturn in economic conditions, we recorded additional reserves through an $8.7 million
provision for loan losses in the third quarter of 2009. The rapid devaluation of collateral values
used to measure impairment on specifically identified loans, coupled with a shortening of the loss
experience period utilized to estimate losses in the remainder of the portfolio, necessitated the
large provision. With this provision, we believe the allowance for loan losses is 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 September 30, 2009.
As a result of the $8.7 million provision in the third quarter, we reported a net losses of $3,375
or $1.95 per share and $385 or $0.22 per share for the three months and nine months ended September
30, 2009. Our Companys challenges appear to be specifically limited to certain sectors of the loan
portfolio, accounting for less than 5.0 percent of the overall balance sheet. Moreover, while many
financial institutions
experienced major losses in their investment portfolios due to impaired securities, we had none of
these assets, and at September 30, 2009, had a $2.5 million unrealized gain in our investment
portfolio. Furthermore, our regulatory capital ratios continued to exceed the levels required to
be considered well capitalized under applicable regulatory standards at the end of the third
quarter of 2009.
Going forward, we are focusing our efforts on improving the status of our nonperforming assets and
profitability and have initiated several cost cutting initiatives including:
|
|
|
The cancellation of all Board of Directors and Management bonuses;
|
|
|
|
The elimination of paid expenses for Board of Director seminars and
conventions;
|
|
|
|
The suspension of annual employee salary increases; and
|
|
|
|
Curtailment of marketing-related expenses.
|
We believe these initiatives will facilitate our foremost goal of returning to profitability.
With regard to our financial position, total assets were $614.3 million at September 30,
2009, an increase of $10.3 million from $604.0 million at December 31, 2008. The growth resulted
primarily from an increase of $21.2 million in loans, net of unearned income, to $507.1 million at
the close of the third quarter from $485.9 million at year-end 2008. The increase in loans
reflected strong demand for financing from municipalities within our market area. Total deposits
increased $12.8 million to $555.1 million at September 30, 2009, from $542.3 million at December
31, 2008. The growth was concentrated in interest-bearing deposits, which increased $12.9 million.
Available-for-sale investment securities declined $42.3 million to $38.3 million at September 30,
2009, from $80.6 million at the end of 2008. We had $46.1 million in federal funds sold outstanding
at the end of the third quarter compared to $12.7 million at the end of 2008.
23
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
In comparison to the previous quarter end, total assets increased $3.5 million from $610.8 million
at June 30, 2009. Loans, net of unearned income, decreased $3.8 million from $510.9 million from
the end of the second quarter, while investment securities decreased $34.9 million from $73.2
million. Total deposits rose $16.3 million from $538.8 million at June 30, 2009. We repaid the $8.0
million in short-term borrowings outstanding at the previous quarter-end during the third quarter
of 2009.
Investment Portfolio:
At September 30, 2009, our investment portfolio consisted primarily of intermediate-term tax-exempt
state and municipal obligations. The carrying values of the major classifications of securities as
they relate to the total investment portfolio at September 30, 2009, and December 31, 2008, are
summarized as follows:
Distribution of investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
State and municipals
|
|
$
|
30,136
|
|
|
|
78.68
|
%
|
|
$
|
47,007
|
|
|
|
58.34
|
%
|
Mortgage-backed securities
|
|
|
5,404
|
|
|
|
14.11
|
|
|
|
32,226
|
|
|
|
40.00
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
2,537
|
|
|
|
6.62
|
|
|
|
1,116
|
|
|
|
1.38
|
|
Other
|
|
|
225
|
|
|
|
0.59
|
|
|
|
225
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,302
|
|
|
|
100.00
|
%
|
|
$
|
80,574
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities decreased $42.3 million to $38.3 million at September
30, 2009, from $80.6 million at December 31, 2008. The unrealized holding gain, which equaled
$1,671, net of income taxes of $861, at the end of 2008 decreased $17 to $1,654, net of income
taxes of $852, at September 30, 2009.
During the nine months ended September 30, 2009, we received proceeds from the sale of
available-for-sale investment securities of $40.5 million. We sold a portion of our tax-exempt
obligations of state and municipalities to avoid being subject to alternative minimum tax in the
future as we will be making a significant investment in an elderly, low-income housing project
during the fourth quarter of 2009. This investment will provide us with significant investment tax
credits. In addition to tax-exempt securities, we sold certain U.S. Government agency
mortgage-backed securities that were valued off of the yield on the 3-year U.S. Treasury note and
based on the relationship in the interest rate spread between the two investments. Recent economic
conditions have caused an unprecedented run up in the price of U.S. Treasuries and a tightening of
spreads between comparable U.S. Treasury and U.S. Agency securities. As a result of the significant
increase in the fair market value of these securities and in line with implementing asset/liability
strategies, we sold approximately $26.7 million of U.S. Government agency mortgage-backed
securities during the third quarter of 2009. Net gains recognized on the sale of available-for-sale
investment securities totaled $1.5 million for the nine months ended September 30,
2009. No securities were sold during the nine months ended September 30, 2008.
24
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
For the nine months ended September 30, 2009, the investment portfolio averaged $70.6 million, an
increase of $35.8 million compared to $34.8 million for the same period of last year. The
tax-equivalent yield on the investment portfolio decreased 114 basis points to 5.76 percent for the
nine months ended September 30, 2009, from 6.90 percent for the same period of 2008. In addition,
the tax-equivalent yield fell 49 basis points to 5.32 percent for the third quarter from 5.81
percent for the second quarter.
The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent
yield of the available-for-sale portfolio at September 30, 2009, 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 federal statutory tax rate of 34.0 percent. The
distributions are based on contractual maturity with the exception of mortgage-backed securities
and equity securities. Mortgage-backed securities 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. Actual
maturities may differ from contractual maturities, or estimated maturities for mortgage-backed
securities, because borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
25
Comm Bancorp, Inc.
MANAGEMENTS 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, 2009
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
1,908
|
|
|
|
7.87
|
%
|
|
$
|
3,277
|
|
|
|
7.70
|
%
|
|
$
|
13,365
|
|
|
|
7.43
|
%
|
|
$
|
9,201
|
|
|
|
7.08
|
%
|
|
$
|
27,751
|
|
|
|
7.38
|
%
|
Mortgage-backed securities
|
|
|
1,908
|
|
|
|
4.51
|
|
|
|
3,461
|
|
|
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,369
|
|
|
|
4.00
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,537
|
|
|
|
1.44
|
|
|
|
2,537
|
|
|
|
1.44
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
1.77
|
|
|
|
139
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,816
|
|
|
|
6.19
|
%
|
|
$
|
6,738
|
|
|
|
5.66
|
%
|
|
$
|
13,365
|
|
|
|
7.43
|
%
|
|
$
|
11,877
|
|
|
|
5.81
|
%
|
|
$
|
35,796
|
|
|
|
6.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipals
|
|
$
|
1,944
|
|
|
|
|
|
|
$
|
3,429
|
|
|
|
|
|
|
$
|
14,641
|
|
|
|
|
|
|
$
|
10,122
|
|
|
|
|
|
|
$
|
30,136
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
1,943
|
|
|
|
|
|
|
|
3,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,404
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,537
|
|
|
|
|
|
|
|
2,537
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,887
|
|
|
|
|
|
|
$
|
6,890
|
|
|
|
|
|
|
$
|
14,641
|
|
|
|
|
|
|
$
|
12,884
|
|
|
|
|
|
|
$
|
38,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio:
Business spending contracted at an annual rate of 2.5 percent in the third quarter of 2009. This
marked the fifth consecutive quarter of decline in spending by the business sector. Specifically,
spending on nonresidential structures fell 9.0 percent, partially offset by a 1.1 percent increase
in spending for equipment and software. The further decline in business spending, coupled with
tight credit conditions, led to a $93.2 billion decrease in commercial and industrial loans at all
commercial banks throughout the United States from the end of the second quarter of 2009. With
regard to our loan portfolio, business loans, including commercial loans, commercial real estate
construction, commercial mortgages and lease financing, decreased $4.8 million to $367.6 million at
September 30, 2009, from $372.4 million at June 30, 2009.
Mortgage rates remained favorable in the third quarter. The rate for a 30-year, fixed-rate
mortgage in the United States was 5.06 percent at September 30, 2009, 36 basis points lower than
5.42 percent at the end of the previous quarter, and 98 basis points below 6.04 percent one year
earlier. Favorable mortgage rates and incentives for first-time home buyers boosted the ailing
housing market, as sales of existing homes surged 9.4 percent in September 2009. However, the
downturn in this industry is far from over. Sales of new residential homes fell 3.6 percent in
September. In addition, the number of foreclosures continued to escalate. In spite of the
continued weakness, residential mortgage lending in the banking industry increased in the third
quarter, as evidenced by a $91.9 billion or 9.4 percent annualized increase in real estate loans
for all commercial banks from the end of the second quarter of 2009. We experienced an increase in
residential mortgage loans, including residential construction loans, of $1.4 million to $108.8
million at September 30, 2009, from $107.4 million at June 30, 2009.
26
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Due to favorable mortgage rates, activity in our secondary mortgage department was strong during
the nine months ended September 30, 2009. Residential mortgage loans serviced for the Federal
National Mortgage Association (FNMA) increased $25.6 million or at an annual rate of 27.5 percent
to $150.2 million at the end of the third quarter of 2009 from $124.6 million at the end of 2008.
In comparison, for the same period of 2008, residential mortgage loans serviced for the FNMA
increased at an annualized rate of 6.5 percent. For the three months and nine months ended
September 30, residential mortgages sold to the FNMA totaled $14.2 million and $63.4 million in
2009 compared to $5.3 million and $19.3 million in 2008. Net gains realized on the sale of
residential mortgages totaled $268 for the third quarter and $1,210 year-to-date 2009, compared to
$86 and $345 for the same periods of 2008.
As previously mentioned, consumer spending, specifically for automobiles, advanced significantly in
the third quarter. However, the banking industry did not, in turn, experience increased demand for
consumer loans. For all commercial banks, consumer loans declined $10.9 billion or 5.0 percent from
the end of the second quarter. Similarly our consumer loans decreased $422 or at an annualized rate
of 5.4 percent from the end of the second quarter of 2009.
Average loans grew $19.2 million or 3.9 percent to $513.3 million for the nine months ended
September 30, 2009, from $494.1 million for the same nine months of 2008. Due to the sustained low
interest rate environment and recording a higher volume of nonaccrual loans, the tax-equivalent
yield on our loan portfolio decreased 93 basis points to 5.71 percent for the nine months ended
September 30, 2009, compared to 6.64 percent for the same period of 2008. The FOMC has indicated
that interest rates will remain at extremely low levels for some time due to the severity of the
current recession. As a result, the yield on the loan portfolio may decline further.
27
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The composition of the loan portfolio at September 30, 2009, and December 31, 2008, is
summarized as follows:
Distribution of loan portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Commercial, financial and others
|
|
$
|
189,370
|
|
|
|
37.34
|
%
|
|
$
|
170,305
|
|
|
|
35.05
|
%
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
22,139
|
|
|
|
4.37
|
|
|
|
25,332
|
|
|
|
5.21
|
|
Residential
|
|
|
105,694
|
|
|
|
20.84
|
|
|
|
112,053
|
|
|
|
23.06
|
|
Commercial
|
|
|
156,252
|
|
|
|
30.81
|
|
|
|
142,641
|
|
|
|
29.36
|
|
Consumer, net
|
|
|
30,713
|
|
|
|
6.06
|
|
|
|
32,812
|
|
|
|
6.76
|
|
Lease financing, net
|
|
|
2,926
|
|
|
|
0.58
|
|
|
|
2,739
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income
|
|
|
507,094
|
|
|
|
100.00
|
%
|
|
|
485,882
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
11,566
|
|
|
|
|
|
|
|
5,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
495,528
|
|
|
|
|
|
|
$
|
480,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are numerous risks inherent in the loan portfolio. We attempt to manage risk by
employing credit policies and utilizing various modeling techniques in order to limit
the effects of such risks. In addition, we utilize private mortgage insurance and guaranteed
Small Business Administration and FHLB-Pgh loan programs to mitigate credit risk in the loan
portfolio.
Federal regulators are specifically concerned about certain high-risk loan products offered
by the banking industry. Our loan portfolio does not contain option adjustable-rate mortgage
products, high loan-to-value ratio mortgages, subprime loans or loans with initial teaser rates. At
September 30, 2009, we had $28.7 million in junior-lien mortgages and $104.1 million in
interest-only loans. We mitigate credit risk associated with loans having junior-lien positions by
limiting the loan-to-value ratios to supervisory limits set forth in the Federal Financial
Institutions Examination Council (FFIEC) Interagency Guidelines for Real Estate Lending Policies.
Risk associated with interest-only loans is reduced through ensuring adequate collateralization
within our policy guidelines. Generally, collateral for interest-only loans includes deposits, real
estate and marketable equity securities. The loan-to-value ratios for junior-lien mortgage and
interest-only loans is 80.0 percent. The amount of refinanced or modified interest-only loans was
$388 for the nine months ended September 30, 2009. There were no junior-lien mortgages refinanced
or modified during this same period. Nonperforming junior-lien mortgages totaled $706 and
nonperforming interest-only loans amounted to $6.5 million at September 30, 2009. There were $78 of
junior-lien mortgages and $5.3 million of interest-only loans considered as troubled debt
restructurings at the end of the third quarter of 2009.
28
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
A decline in the value of assets serving as collateral for our real estate loans may impact our
ability to collect on those loans. Accordingly, we do not have residential mortgage loans with
loan-to-value ratios exceeding 100.0 percent. We utilize independent state-licensed appraisers to
determine the fair market value of the underlying collateral for real estate loans. In addition, we
require an appraisal at origination and whenever a loan becomes 90 days or more past due. The
impairment measurement for real estate loans individually evaluated includes consideration for
changes in local and national economic conditions and cost to sell.
In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution
and interest rate sensitivity of the loan portfolio. For the nine months ended September 30, 2009,
market interest rates remained at historically low levels. Accordingly, we continued to place
emphasis on originating loans with interest rates that reprice after one but within five years.
Upon the threat of rising interest rates, we will shift to promoting floating-rate loans that
reprice immediately with changes in the prime rate. Adjustable-rate loans represented 52.7 percent
of the loan portfolio at September 30, 2009, compared to 50.2 percent at the end of 2008.
The maturity and repricing information of the loan portfolio by major classification at September
30, 2009, is summarized as follows:
Maturity distribution and interest sensitivity of loan portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
but within
|
|
|
After
|
|
|
|
|
September 30, 2009
|
|
one year
|
|
|
five years
|
|
|
five years
|
|
|
Total
|
|
Maturity schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
$
|
95,043
|
|
|
$
|
43,620
|
|
|
$
|
50,707
|
|
|
$
|
189,370
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
16,926
|
|
|
|
1,448
|
|
|
|
3,765
|
|
|
|
22,139
|
|
Residential
|
|
|
16,345
|
|
|
|
48,360
|
|
|
|
40,989
|
|
|
|
105,694
|
|
Commercial
|
|
|
21,610
|
|
|
|
59,071
|
|
|
|
75,571
|
|
|
|
156,252
|
|
Consumer, net
|
|
|
4,176
|
|
|
|
21,754
|
|
|
|
4,783
|
|
|
|
30,713
|
|
Lease financing, net
|
|
|
586
|
|
|
|
2,340
|
|
|
|
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,686
|
|
|
$
|
176,593
|
|
|
$
|
175,815
|
|
|
$
|
507,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predetermined interest rates
|
|
$
|
75,297
|
|
|
$
|
98,388
|
|
|
$
|
66,217
|
|
|
$
|
239,902
|
|
Floating- or adjustable-interest rates
|
|
|
79,389
|
|
|
|
78,205
|
|
|
|
109,598
|
|
|
|
267,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,686
|
|
|
$
|
176,593
|
|
|
$
|
175,815
|
|
|
$
|
507,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
In addition to the risks inherent in our loan portfolio, 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 lines of credit and commercial letters of credit, and may 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. The commitments for lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The amount of the collateral obtained, if deemed necessary by
us, is based on our credit evaluation of the customer.
Unused portions of lines of credit, including home equity and credit card lines and overdraft
protection agreements, are commitments for possible future extensions of credit to existing
customers. Unused portions of home equity lines are collateralized and generally have fixed
expiration dates. Credit card lines and overdraft protection agreements are uncollateralized and
usually do not carry specific maturity dates. Unused portions of lines of credit ultimately may not
be drawn upon to the total extent to which we are committed.
Commercial letters of credit are conditional commitments issued by us to guarantee the performance
of a customer to a third party. Commercial letters of credit are primarily issued to support public
and private borrowing arrangements. Essentially, all commercial letters of credit have expiration
dates within one year and often expire unused in whole or in part by the customer. The carrying
value of the liability for our obligations under guarantees was not material at September 30, 2009,
and December 31, 2008.
Credit risk is the principal risk associated with these instruments. Our involvement and exposure
to credit loss in the event that the instruments are fully drawn upon and the customer defaults is
represented by the contractual amounts of these instruments. In order to control credit risk
associated with entering into commitments and issuing letters of credit, we employ the same credit
quality and collateral policies in making commitments that we use in other lending activities. We
evaluate each customers creditworthiness on a case-by-case basis, and if deemed necessary, obtain
collateral. The amount and nature of the collateral obtained is based on our credit evaluation.
30
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The contractual amounts of off-balance sheet commitments at September 30, 2009 and December
31, 2008, are summarized as follows:
Distribution of off-balance sheet commitments
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Commitments to extend credit
|
|
$
|
82,693
|
|
|
$
|
69,235
|
|
Unused portions of lines of credit
|
|
|
24,538
|
|
|
|
19,855
|
|
Commercial letters of credit
|
|
|
20,395
|
|
|
|
15,447
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
127,626
|
|
|
$
|
104,537
|
|
|
|
|
|
|
|
|
We record an allowance for credit losses associated with off-balance sheet commitments, if
deemed necessary, separately as a liability. The allowance was deemed immaterial at September 30,
2009 and December 31, 2008. 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.
Asset Quality:
National, Pennsylvania and market area unemployment rates at September 30, 2009 and 2008, are
summarized as follows:
|
|
|
|
|
|
|
|
|
September 30,
|
|
2009
|
|
|
2008
|
|
United States
|
|
|
9.8
|
%
|
|
|
6.2
|
%
|
Pennsylvania
|
|
|
8.8
|
|
|
|
5.6
|
|
Lackawanna county
|
|
|
9.0
|
|
|
|
6.2
|
|
Luzerne county
|
|
|
9.9
|
|
|
|
6.6
|
|
Monroe county
|
|
|
9.4
|
|
|
|
6.7
|
|
Susquehanna county
|
|
|
8.7
|
|
|
|
5.6
|
|
Wayne county
|
|
|
7.5
|
|
|
|
5.5
|
|
Wyoming county
|
|
|
7.7
|
%
|
|
|
6.1
|
%
|
Employment conditions deteriorated significantly for the Nation, the Commonwealth of
Pennsylvania and all counties in our market area from one year ago. The demand for labor contracted
over the past 12 months, with significant job losses experienced in all major industries during the
early months of the year. In addition, employment declines, which appeared to have eased somewhat
towards the end of the second quarter, accelerated in September 2009. Continued job losses and
rising unemployment may hinder the economic recovery.
31
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The economic malaise continued to weigh heavily on our asset quality during 2009. Nonperforming
assets were relatively unchanged during the third quarter of 2009 totaling $27.9 million at June
30, 2009, and $28.4 million at September 30, 2009. In comparison to year-end 2008, nonperforming
assets increased $4.2 million from $24.2 million. The nonperforming assets ratio, nonperforming
assets as a percent of loans, net of unearned income, and foreclosed assets, was 5.59 percent at
the end of the third quarter of 2009 compared to 5.45 percent at June 30, 2009, and 4.99 percent at
December 31, 2008. The increase in nonperforming loans resulted from an increase in loans with
terms modified under troubled debt restructurings. Changes in the level of nonperforming assets are
an integral part of determining total loss factors for measuring impairment for loans collectively
evaluated under FASB ASC 450 Contingencies.
With regard to foreclosed assets, there were ten properties with an aggregate fair value less cost
to sell of $2,023 transferred to foreclosed assets during the nine months ended September 30, 2009.
Four properties with an aggregate carrying value of $227 were sold for $268, resulting in a net
realized gain of $41. In addition, the carrying value of one property was written down $200 during
the nine months ended September 30, 2009. At September 30, 2009, there were nine properties with an
aggregate fair value less cost to sell of $1,932 in foreclosed assets.
Information concerning nonperforming assets at September 30, 2009, and December 31, 2008, 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.
32
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Distribution of nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
$
|
8,532
|
|
|
$
|
7,608
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
6,680
|
|
|
|
8,775
|
|
Residential
|
|
|
1,587
|
|
|
|
1,070
|
|
Commercial
|
|
|
3,742
|
|
|
|
5,498
|
|
Consumer, net
|
|
|
26
|
|
|
|
117
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
20,567
|
|
|
|
23,068
|
|
|
|
|
|
|
|
|
|
Restructured loans:
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
|
2,197
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,576
|
|
|
|
|
|
Consumer, net
|
|
|
|
|
|
|
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructured loans
|
|
|
4,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
|
360
|
|
|
|
170
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
Residential
|
|
|
498
|
|
|
|
75
|
|
Commercial
|
|
|
|
|
|
|
417
|
|
Consumer, net
|
|
|
174
|
|
|
|
104
|
|
Lease financing, net
|
|
|
145
|
|
|
|
69
|
|
|
|
|
|
|
|
|
Total accruing loans past due 90 days or more
|
|
|
1,177
|
|
|
|
835
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
26,517
|
|
|
|
23,903
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
1,932
|
|
|
|
336
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
28,449
|
|
|
$
|
24,239
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percentage of loans, net
|
|
|
5.23
|
%
|
|
|
4.92
|
%
|
Nonperforming assets as a percentage of loans, net and
and foreclosed assets
|
|
|
5.59
|
%
|
|
|
4.99
|
%
|
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 FFIEC Interagency Policy Statement, as
amended, 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 FASB ASC 310, Receivables, for
loans specifically identified to be individually evaluated for impairment and the requirements of
FASB ASC 450, for large groups of smaller-balance homogeneous loans to be collectively evaluated
for impairment.
33
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
We follow our systematic methodology in accordance with procedural discipline by applying it,
generally, 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 loans grade may differ from period to period
based on current conditions and events, however, we consistently utilize the same grading system
each quarter.
In the third quarter of 2009, we reevaluated our methodology for determining the adequacy of the
allowance for loan losses account. This reevaluation was performed as a result of the rapidly
changing economic conditions in our market area. As part of this reevaluation, we reduced the
number of periods utilized to determine loss factors for homogeneous pools of loans collectively
evaluated and measured for impairment under FASB ASC 450 from the most recent rolling 20 quarters
to the most recent rolling eight quarters to better reflect the rapid deterioration in local
economic conditions. Moreover, we placed a higher weight on the latest four quarters to place
greater emphasis on the current periods compared to the previous four quarters in arriving at
historical loss factors. Total loss factors, which include historical loss factors and qualitative
factors, during the third quarter were also affected by changes in the impairment status of certain
credits evaluated and measured for impairment under FASB ASC 310. Based on current information and
events during the third quarter, these credits migrated from unconfirmed losses, having an
allocation included in the allowance for loan losses to confirmed losses with realization of those
losses being charged-off through the allowance for loan losses, which totaled $2.9 million.
Information concerning impaired loans at September 30, 2009, and December 31, 2008, 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 borrowers ability to comply with present
loan repayment terms.
34
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Distribution of impaired loans
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
$
|
8,532
|
|
|
$
|
7,608
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
6,680
|
|
|
|
8,775
|
|
Residential
|
|
|
1,587
|
|
|
|
1,070
|
|
Commercial
|
|
|
3,742
|
|
|
|
5,498
|
|
Consumer, net
|
|
|
26
|
|
|
|
117
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
20,567
|
|
|
|
23,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans:
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
|
3,945
|
|
|
|
1,920
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
1,512
|
|
Residential
|
|
|
|
|
|
|
486
|
|
Commercial
|
|
|
5,282
|
|
|
|
6,904
|
|
Consumer, net
|
|
|
6
|
|
|
|
9
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans
|
|
|
9,233
|
|
|
|
10,831
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
29,800
|
|
|
$
|
33,899
|
|
|
|
|
|
|
|
|
|
Ratio:
|
|
|
|
|
|
|
|
|
Impaired loans as a percentage of loans, net
|
|
|
5.88
|
%
|
|
|
6.98
|
%
|
Impaired loans decreased $4,099 or 12.1 percent to $29,800 at September 30, 2009, from $33,899 at
December 31, 2008. The improvement in impaired loans resulted from a $2,501 decrease in nonaccrual
loans, coupled with a $1,598 decrease in impaired loans still accruing, from year-end 2008.
However, in comparison to the previous quarter end, impaired loans increased $3,951.
Notwithstanding the slight improvement from year end, we continue to closely monitor all impaired
loans and the supporting collateral to
mitigate any potential losses associated with these credits. As a result of the recent
deterioration in local market conditions, we required updated appraisals on all credits
individually evaluated and measured for impairment under FASB ASC 310 in the third quarter of 2009.
The updated information increased the allocated element in the allowance for loan losses for
unconfirmed losses for FASB ASC 310 loans, and also caused us to charge off several of these loans
by reconsidering whether the impairment of these credits was actually a confirmed loss as of the
end of the third quarter of 2009.
35
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
At September 30, 2009, all criticized loans including regulatory classifications of
specially mentioned, substandard, doubtful and loss were considered for evaluation and, if
appropriate, impairment measurement under FASB ASC 310.
Information related to the recorded investment in impaired loans, including troubled debt
restructurings, for which there is a related allowance and the amount of that allowance and the
recorded investment in impaired loans for which there is no allowance at September 30, 2009 and
December 31, 2008, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Recorded
|
|
|
Related
|
|
|
Recorded
|
|
|
Related
|
|
|
|
Investment
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance
|
|
$
|
16,087
|
|
|
$
|
5,259
|
|
|
$
|
19,707
|
|
|
$
|
3,572
|
|
With no related allowance
|
|
|
13,713
|
|
|
|
|
|
|
|
14,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,800
|
|
|
$
|
5,259
|
|
|
$
|
33,899
|
|
|
$
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on impaired loans, including troubled debt restructurings, 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, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Gross interest due under terms
|
|
$
|
440
|
|
|
$
|
654
|
|
|
$
|
1,362
|
|
|
$
|
1,729
|
|
Interest income recognized
|
|
|
211
|
|
|
|
428
|
|
|
|
696
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income not recognized
|
|
$
|
229
|
|
|
$
|
226
|
|
|
$
|
666
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized (cash-basis)
|
|
$
|
181
|
|
|
$
|
227
|
|
|
$
|
528
|
|
|
$
|
1,009
|
|
Average recorded investment in impaired loans
|
|
$
|
32,125
|
|
|
$
|
33,603
|
|
|
$
|
31,677
|
|
|
$
|
31,610
|
|
Cash received on impaired loans, including troubled debt restructurings, applied as a reduction of
principal totaled $382 and $3,149 for the three and nine months ended September 30, 2009. For the
respective periods of 2008 cash receipts on impaired loans totaled $465 and $1,880. At September
30, 2009, we had a commitment to one commercial customer with impaired loans for which no allowance
was deemed necessary.
36
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The allocation of the allowance for loan losses at September 30, 2009 and December 31, 2008,
is summarized as follows:
Allocation of the allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
as a
|
|
|
|
|
|
|
as a
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
loans
|
|
|
Amount
|
|
|
loans
|
|
Allocated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
$
|
3,649
|
|
|
|
2.46
|
%
|
|
$
|
1,533
|
|
|
|
1.96
|
%
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
520
|
|
|
|
1.32
|
|
|
|
1,516
|
|
|
|
2.12
|
|
Residential
|
|
|
267
|
|
|
|
0.31
|
|
|
|
169
|
|
|
|
0.32
|
|
Commercial
|
|
|
817
|
|
|
|
1.78
|
|
|
|
253
|
|
|
|
2.55
|
|
Consumer, net
|
|
|
6
|
|
|
|
0.01
|
|
|
|
101
|
|
|
|
0.03
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specific
|
|
|
5,259
|
|
|
|
5.88
|
|
|
|
3,572
|
|
|
|
6.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formula:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and others
|
|
|
1,003
|
|
|
|
34.88
|
|
|
|
253
|
|
|
|
33.09
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
2,224
|
|
|
|
3.05
|
|
|
|
37
|
|
|
|
3.09
|
|
Residential
|
|
|
130
|
|
|
|
20.53
|
|
|
|
246
|
|
|
|
22.74
|
|
Commercial
|
|
|
2,370
|
|
|
|
29.03
|
|
|
|
522
|
|
|
|
26.81
|
|
Consumer, net
|
|
|
212
|
|
|
|
6.05
|
|
|
|
511
|
|
|
|
6.73
|
|
Lease financing, net
|
|
|
11
|
|
|
|
0.58
|
|
|
|
7
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total formula
|
|
|
5,950
|
|
|
|
94.12
|
|
|
|
1,576
|
|
|
|
93.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated allowance
|
|
|
11,209
|
|
|
|
100.00
|
%
|
|
|
5,148
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated allowance
|
|
|
357
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
11,566
|
|
|
|
|
|
|
$
|
5,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allocated allowance for loan losses account increased $6,061 to $11,209 at September 30,
2009, from $5,148 at December 31, 2008. Both the specific and formula portions of the allowance for
loans losses increased from the end of 2008. The specific portion of the allowance for impairment of loans
individually evaluated under FASB ASC 310, rose $1,687 to $5,259 at the end of the third quarter of
2009 from $3,572 at year-end 2008 due primarily to a reduction in the fair values of the underlying
collateral supporting certain impaired loans according to the updated appraisals received during
the third quarter. In addition, the formula portion of the allowance for loans collectively
evaluated for impairment under FASB ASC 450, increased $4,374 to $5,950 at September 30, 2009, from
$1,576 at December 31, 2008. The total loss factors for collectively evaluated loans increased from
year-end 2008 due to the shortening in the number of periods used to calculate loss history and a
higher amount of average net charge-offs resulting from the previously mentioned discussion of
confirmed losses. In comparison to the previous quarter end, the allocated allowance increased
$5,192 consisting of a $970 increase in the specific portion and a $4,222 increase in the formula
portion.
37
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The unallocated portion of the allowance for loan losses increased $250 to $357 at the end of the
third quarter of 2009 from $107 at year-end 2008. We believe the unallocated portion of the
allowance for loan losses account is sufficient to cover any inherent losses in the loan portfolio
that have not been identified as part of the allocated allowance using our impairment methodology.
During the third quarter of 2009, we hired an independent consulting firm to validate our
methodology for determining the adequacy of the allowance for loan losses. The scope of the
validation included:
|
|
|
A review of the methodology for compliance with Bank policies and accounting and
regulatory guidance;
|
|
|
|
An evaluation to determine that qualitative and environmental factors were
supported in accordance with FASB ASC 450;
|
|
|
|
An assessment that loans analyzed in accordance with FASB ASC 310 were
appropriately documented and were within the intentions of the accounting guidance; and
|
|
|
|
A determination to provide reasonable assurance that our internal loan review had
identified those loans which should have been considered for evaluation and measurement
under FASB ASC 310 and the resulting impairment measurement was generally complete and
reasonable in the current environment.
|
On October 29, 2009, the independent consulting firm provided us with an opinion that our
methodology and the level of the allowance for loan losses at the end of the third quarter of 2009
was reasonable given the current market conditions and considering the risk profile of our institution. Beginning in the
fourth quarter of 2009, the consultant will be conducting a comprehensive assessment of our
internal loan review function and overall credit risk assessment in addition to this quarterly
validation of the allowance for loan losses.
38
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
A reconciliation of the allowance for loan losses and illustration of charge-offs and
recoveries by major loan category for the nine months ended September 30, 2009, is summarized as
follows:
Reconciliation of allowance for loan losses
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
Allowance for loan losses at beginning of period
|
|
$
|
5,255
|
|
Loans charged-off:
|
|
|
|
|
Commercial, financial and others
|
|
|
618
|
|
Real estate:
|
|
|
|
|
Construction
|
|
|
2,083
|
|
Residential
|
|
|
42
|
|
Commercial
|
|
|
745
|
|
Consumer, net
|
|
|
116
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,604
|
|
|
|
|
|
|
|
|
|
|
Loans recovered:
|
|
|
|
|
Commercial, financial and others
|
|
|
104
|
|
Real estate:
|
|
|
|
|
Construction
|
|
|
|
|
Residential
|
|
|
4
|
|
Commercial
|
|
|
|
|
Consumer, net
|
|
|
47
|
|
Lease financing, net
|
|
|
|
|
|
|
|
|
Total
|
|
|
155
|
|
|
|
|
|
Net loans charged-off
|
|
|
3,449
|
|
|
|
|
|
Provision charged to operating expense
|
|
|
9,760
|
|
|
|
|
|
Allowance for loan losses at end of period
|
|
$
|
11,566
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
Net loans charged-off as a percentage of average loans outstanding
|
|
|
0.90
|
%
|
Allowance for loan losses as a percentage of period end loans
|
|
|
2.28
|
%
|
The allowance for loan losses increased $6,311 to $11,566 at September 30, 2009, from $5,255 at the
end of 2008. For the nine months ended September 30, 2009, the provision for loan losses equaled
$9,760, which exceeded net charge-offs of $3,449. In comparison to June 30, 2009, the allowance for loan losses
increased $5,547 from $6,019.
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. For the nine months ended September 30, net charge-offs were $3,449 or 0.90
percent of average loans outstanding in 2009, a $2,503 increase compared to $946 or 0.26 percent of
average loans outstanding in 2008.
39
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Deposits:
Disposable personal income (DPI) decreased 0.7 percent in the third quarter of 2009, after
increasing 5.2 percent in the second quarter. The second quarter increase reflected recent tax cuts
and increases in social security benefit provisions of the American Recovery and Reinvestment Act
of 2009. The personal savings rate, savings as a percentage of DPI, declined to 3.3 percent in the
third quarter of 2009 compared to 4.9 percent in the second quarter, as consumer spending advanced
at an annual rate of 3.4 percent in the third quarter. Despite the strong savings rate, the banking
industry reported only a modest increase in domestic deposit growth. The growth was concentrated in
noninterest-bearing accounts, as deposits in interest-bearing accounts declined.
We experienced strong deposit growth during the third quarter. However, contrary to the banking
industry, our growth was concentrated in interest-bearing accounts. Total deposits grew $16.3
million or at an annualized rate of 12.0 percent to $555.1 million at September 30, 2009, from
$538.8 million at June 30, 2009. Interest-bearing deposits grew $18.7 million, while
noninterest-bearing deposits decreased $2.4 million. The majority of the growth in interest-bearing
accounts was concentrated in large denomination time deposits and money market accounts. Time
deposits of $100 or more increased $10.2 million and money market accounts grew $11.0 million.
Growth in both large denomination time deposits and money markets was due, for the most part, to an
increase in our deposit relationship with a local municipality.
The average amount of, and the rate paid on, the major classifications of deposits for the nine
months ended September 30, 2009 and 2008, are summarized as follows:
Deposit distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
26,059
|
|
|
|
0.88
|
%
|
|
$
|
24,593
|
|
|
|
1.97
|
%
|
NOW accounts
|
|
|
74,865
|
|
|
|
1.41
|
|
|
|
69,844
|
|
|
|
2.32
|
|
Savings accounts
|
|
|
106,680
|
|
|
|
0.53
|
|
|
|
102,604
|
|
|
|
1.09
|
|
Time deposits less than $100
|
|
|
164,390
|
|
|
|
3.33
|
|
|
|
170,728
|
|
|
|
4.04
|
|
Time deposits $100 or more
|
|
|
81,610
|
|
|
|
3.30
|
|
|
|
53,355
|
|
|
|
4.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
453,604
|
|
|
|
2.21
|
%
|
|
|
421,124
|
|
|
|
2.94
|
%
|
Noninterest-bearing
|
|
|
81,092
|
|
|
|
|
|
|
|
80,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
534,696
|
|
|
|
|
|
|
$
|
501,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
For the nine months ended September 30, 2009, average total deposits grew $33.4 million or
6.7 percent to $534.7 million compared to $501.3 million for the same period of 2008.
Noninterest-bearing deposits rose $0.9 million, while interest-bearing accounts increased $32.5
million. We experienced growth in all major deposit categories except for time deposits less than
$100. However approximately 84.7 percent of the growth was concentrated in large denomination time
deposits. Market interest rates, which fell significantly in the second half of 2008, remained at
historically low levels during the nine months ended September 30, 2009. The 3-month U.S. Treasury
rate declined 78 basis points to 0.14 percent at September 30, 2009, from 0.92 percent at September
30, 2008. In addition, given the steepness of interest rate reductions in 2009, management reduced
the standard rate paid for interest-bearing transaction accounts, including money market, NOW and
savings accounts, 25 basis points to 0.25 percent from 0.50 percent. As a result of this action,
coupled with a rate reduction in accounts tied to the 3-month U.S. Treasury rate, our cost of
deposits for the nine months ended September 30, decreased 73 basis points to 2.21 percent in 2009
from 2.94 percent in 2008. The FOMC has indicated that it will keep interest rates at these low
levels for some time. We anticipate our funding costs to remain favorable for the remainder of
2009. However, should competition within our market area intensify, our cost of funds could be
negatively impacted.
An influx of monies from a promotional gas lease certificates of deposit offering started in the
second half of 2008, coupled with the furthering of our deposit relationship with a local
municipality, resulted in an $18.2 million increase in volatile deposits, time deposits in
denominations of $100 or more, to $95.8 million at September 30, 2009, from $77.6 million at
September 30, 2008. Time deposits $100 or more averaged $81.6 million for the nine months ended
September 30, 2009, compared to $53.4 million for the same nine months of last year. For the nine
months ended September 30, the average cost of these deposits decreased 94 basis points to 3.30
percent in 2009, compared to 4.24 percent in 2008.
Maturities of time deposits of $100 or more at September 30, 2009, and December 31, 2008, are
summarized as follows:
Maturity distribution of time deposits of $100 or more
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Within three months
|
|
$
|
30,441
|
|
|
$
|
19,271
|
|
After three months but within six months
|
|
|
14,898
|
|
|
|
20,470
|
|
After six months but within twelve months
|
|
|
28,626
|
|
|
|
25,522
|
|
After twelve months
|
|
|
21,877
|
|
|
|
16,272
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,842
|
|
|
$
|
81,535
|
|
|
|
|
|
|
|
|
41
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from adverse changes in
market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our
exposure to market risk is primarily IRR associated with our lending, investing and
deposit-gathering activities. During the normal course of business, we are not exposed to foreign
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.
Given the recent financial crisis and current economic recession, IRR and effectively managing it
are very important to both bank management and regulators. 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 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 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.
42
Comm Bancorp, Inc.
MANAGEMENTS 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, 2009
|
|
three months
|
|
|
twelve months
|
|
|
five years
|
|
|
five years
|
|
|
Total
|
|
Rate-sensitive assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
858
|
|
|
$
|
3,029
|
|
|
$
|
6,890
|
|
|
$
|
27,525
|
|
|
$
|
38,302
|
|
Loans, net of unearned income
|
|
|
157,309
|
|
|
|
60,647
|
|
|
|
219,951
|
|
|
|
69,187
|
|
|
|
507,094
|
|
Federal funds sold
|
|
|
46,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204,267
|
|
|
$
|
63,676
|
|
|
$
|
226,841
|
|
|
$
|
96,712 $
|
|
|
|
591,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate-sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
26,192
|
|
|
$
|
8,037
|
|
|
|
|
|
|
|
|
|
|
$
|
34,229
|
|
NOW accounts
|
|
|
58,057
|
|
|
|
16,320
|
|
|
|
|
|
|
|
|
|
|
|
74,377
|
|
Savings accounts
|
|
|
12,129
|
|
|
|
|
|
|
$
|
97,651
|
|
|
|
|
|
|
|
109,780
|
|
Time deposits less than $100
|
|
|
27,676
|
|
|
|
48,736
|
|
|
|
75,290
|
|
|
$
|
9,579
|
|
|
|
161,281
|
|
Time deposits $100 or more
|
|
|
30,441
|
|
|
|
43,524
|
|
|
|
21,142
|
|
|
|
735
|
|
|
|
95,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,495
|
|
|
$
|
116,617
|
|
|
$
|
194,083
|
|
|
$
|
10,314 $
|
|
|
|
475,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitivity gap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
$
|
49,772
|
|
|
$
|
(52,941
|
)
|
|
$
|
32,758
|
|
|
$
|
86,398
|
|
|
|
|
|
Cumulative
|
|
$
|
49,772
|
|
|
$
|
(3,169
|
)
|
|
$
|
29,589
|
|
|
$
|
115,987 $
|
|
|
|
115,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSA/RSL ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
1.32
|
|
|
|
0.55
|
|
|
|
1.17
|
|
|
|
9.38
|
|
|
|
|
|
Cumulative
|
|
|
1.32
|
|
|
|
0.99
|
|
|
|
1.06
|
|
|
|
1.24
|
|
|
|
1.24
|
|
43
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Our cumulative one-year RSA/RSL ratio equaled 0.99 at September 30, 2009, compared to 0.91
at the end of the previous quarter. Given current economic conditions, the historically low
interest environment is expected to continue for some time. Accordingly, the focus of ALCO during
2009 is to reduce the negative gap position in order to provide equilibrium between RSA and RSL. In
order to accomplish this, we have been cautiously offering loans with interest rates that reprice
after one but within five years. Upon the threat of rising interest rates, we will shift to
promoting floating-rate loans that reprice immediately with changes in the prime rate. In addition,
we have discontinued our short-term certificate of deposit promotions and began offering
preferential rates on longer-term certificates of deposit, including 60-, 72- and 90-month
maturities. However, these forward-looking statements are qualified in the aforementioned section
entitled Forward-Looking Discussion in this Managements Discussion and Analysis.
The increase in our RSA/RSL ratio from the end of the second quarter of 2009 resulted from a $30.3
million increase in RSA maturing or repricing within the next 12 months, partially offset by a
$10.6 million increase in RSL maturing or repricing within the same time frame. The increase in RSA
resulted primarily from a $46.1 million increase in federal funds sold outstanding from the end of
the second quarter of 2009. Partially offsetting the increase in federal funds sold were decreases
of $8.9 million in available-for-sale investment securities and $6.2 million in loans, net of
unearned income, maturing or repricing within twelve months. With regard to RSL, cyclical changes
in deposit accounts of local area school districts due to an influx of monies from tax receipts
caused an $11.0 million increase in money market accounts. In addition, total time deposits
maturing or repricing within twelve months increased $8.2 million. Partially offsetting these
increases was a decrease of $8.0 million in short-term borrowings.
We also experienced an increase in our three-month ratio to 1.32 at September 30, 2009, from 0.85
at the end of the previous quarter. The increase primarily resulted from a $74.5 million increase
in the amount of RSA maturing or repricing within three months. Similar to the 12-month ratio, the
increase primarily resulted from the $46.1 million increase in federal funds sold.
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.
44
Comm Bancorp, Inc.
MANAGEMENTS 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. According to the most recent model results, instantaneous and parallel shifts in general
market rates of plus 100 basis points would cause a 4.0 percent decrease in net interest income for
the twelve months ended September 30, 2010. Model results under a minus 100 basis point scenario
were not meaningful, as the majority of short-term general market rates are already near zero.
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.
|
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 September
30, 2010. Our noncore funds at September 30, 2009, consisted entirely of time deposits in
denominations of $100 or more. At September 30, 2009, our net noncore funding dependence ratio, the
difference between noncore funds and short-term investments to long-term assets, was 9.4 percent,
while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year,
less short-term investments to long-term assets equaled 4.9 percent. These ratios indicated that we
had some reliance on noncore funds at September 30, 2009. Comparatively, our ratios improved
slightly from the end of the previous quarter indicating our reliance on noncore funds had
decreased. The decrease in noncore funding reliance resulted primarily from the increase of $46.1
million in federal funds sold. In addition, according to the most recent Bank Holding Company
Performance Report for our Federal Reserve District, we were significantly less reliant on noncore
funds than our peer group, which had noncore and short-term noncore funding dependence ratios of
27.8 percent and 17.5 percent.
45
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from
operating, investing and financing activities. Cash and cash equivalents, consisting of cash on
hand, cash items in the process of collection, noninterest-bearing deposits with other banks,
balances with the Federal Reserve Bank of Philadelphia and the FHLB-Pgh, and federal funds sold,
increased $34.1 million during the nine months ended September 30, 2009. In comparison, cash and
cash equivalents decreased $2.7 million for the same period last year. For the nine months ended
September 30, 2009, operating, investing and financing activities provided net cash of $6.6
million, $16.6 million and $10.9 million. For the same period of 2008, operating and financing
activities provided net cash of $6.0 million and $54.5 million, which was more than entirely offset
by net cash used in investing activities of $63.2 million.
Operating activities provided net cash of $6.6 million for the nine months ended September 30,
2009, compared to $6.0 million for the same nine months of 2008. Net income or net loss adjusted
for the effects of noncash transaction such as depreciation and the provision for loan losses is
the primary source of funds from operations.
Investing activities primarily include transactions related to our lending activities and
investment portfolio. Net cash provided by investing activities for the nine months ended September
30, 2009, totaled $16.6 million. Proceeds received from repayments and sales of investment
securities, net of purchases of investment securities, amounted to $43.5 million. Partially
offsetting the cash provided by investment securities was net cash used for lending activities of $27.0 million. Contrarily for the
same period of 2008, we used $63.2 million in net cash for investing activities. Cash used to
purchase investment securities exceeded proceeds received from repayments by $38.4 million. In
addition, we used net cash of $23.8 million in lending activities.
With regard to financing activities, an increase in deposit gathering, our primary financing
activity, provided us with net cash of $12.8 million for the nine months ended September 30, 2009.
However, deposit gathering in 2009 was significantly slower than in 2008. For the nine months ended
September 30, 2008, deposit gathering provided net cash of $56.2 million.
46
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Capital Adequacy:
We attempt to assure capital adequacy by monitoring our current and projected capital positions to
support future growth, while providing stockholders with an attractive long-term appreciation of
their investments. According to bank regulation, at a minimum, banks must maintain a Tier I
capital to risk-adjusted assets ratio of 4.0 percent and a total capital to risk-adjusted assets
ratio of 8.0 percent. Additionally, banks must maintain a Leverage ratio, defined as Tier I capital
to total average assets less intangibles, of 3.0 percent. The minimum Leverage ratio of 3.0 percent
only applies to institutions with a composite rating of one under the Uniform Interagency Bank
Rating System, that are not anticipating or experiencing significant growth and have
well-diversified risk. An additional 100 to 200 basis points are required for all but these most
highly-rated institutions. Our minimum Leverage ratio was 4.0 percent at September 30, 2009 and
2008. 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.
47
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Our and Community Banks capital ratios at September 30, 2009 and 2008, 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,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basis for ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
53,417
|
|
|
$
|
55,781
|
|
|
$
|
21,040
|
|
|
$
|
20,166
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
48,080
|
|
|
|
50,648
|
|
|
|
20,892
|
|
|
|
20,017
|
|
|
$
|
31,338
|
|
|
$
|
30,025
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
60,055
|
|
|
|
60,472
|
|
|
|
42,079
|
|
|
|
40,333
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
54,672
|
|
|
|
55,339
|
|
|
|
41,784
|
|
|
|
40,033
|
|
|
|
52,230
|
|
|
|
50,042
|
|
Tier I capital to total average assets
less goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
53,417
|
|
|
|
55,781
|
|
|
|
24,628
|
|
|
|
22,738
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
48,080
|
|
|
|
50,648
|
|
|
$
|
24,481
|
|
|
$
|
22,586
|
|
|
$
|
30,601
|
|
|
$
|
28,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
508,430
|
|
|
|
490,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
504,735
|
|
|
|
486,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted off-balance sheet items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
17,563
|
|
|
|
13,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
17,563
|
|
|
|
13,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for Leverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
615,705
|
|
|
|
568,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
$
|
612,015
|
|
|
$
|
564,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital as a percentage of risk-weighted assets and off-balance sheet
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
10.2
|
%
|
|
|
11.1
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
9.2
|
|
|
|
10.1
|
|
|
|
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
|
|
|
11.4
|
|
|
|
12.0
|
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
10.5
|
|
|
|
11.1
|
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Tier I capital as a percentage of total
average assets less intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
8.7
|
|
|
|
9.8
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
7.9
|
%
|
|
|
9.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Regulatory agencies define institutions, not under a written directive to maintain certain
capital levels, as well capitalized if they exceed the following:
|
|
|
A Tier I risk-based ratio of at least 6.0 percent;
|
|
|
|
A total risk-based ratio of at least 10.0 percent; and
|
|
|
|
A Leverage ratio of at least 5.0 percent.
|
At September 30, 2009, we reported a Tier I capital, Total capital and Leverage ratios of
10.2 percent, 11.4 percent and 8.7 percent. In addition, Community Bank reported Tier I capital,
Total capital and Leverage ratios of 9.2 percent, 10.5 percent and 7.9 percent. Community Bank
continued to exceed the requirements to be categorized as well
capitalized under the regulatory framework for prompt corrective action at the close of the third
quarter of 2009.
48
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Stockholders equity amounted to $55.5 million or $32.30 per share at September 30, 2009, compared
to $59.5 million or $34.64 per share at the end of the previous quarter and $57.8 million or $33.41
per share at December 31, 2008. Stockholders equity was affected by a net loss of $385, net cash
dividends declared of $1,203, common stock repurchases of $684 and an other comprehensive loss of
$17 for the nine months ended September 30, 2009.
We declared dividends of $0.28 per share and $0.84 per share for the three months and nine months
ended September 30, 2009, compared to $0.27 per share and $0.81 per share for the respective
periods of 2008. 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
conditions, capital and growth objectives, appropriate dividend restrictions, regulatory approvals
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,
2009, 6,494 shares were issued under this plan.
During the nine months ended September 30, 2009, 18,117 shares of common stock were repurchased
under a stock repurchase program. There were no shares repurchased during the third quarter of
2009. Management has temporarily suspended purchasing shares of our common stock under the stock
repurchase program as a result of reporting a net loss in the third quarter of 2009.
Review of Financial Performance:
We reported at net loss of $385 or $0.22 per share for the nine months ended September 30, 2009,
compared to net income of $4,700 or $2.68 per share for the same period of 2008. The net loss was
$3,375 or $1.95 per share in the third quarter of 2009 compared to net income of $1,475 or $0.84
per share for the same quarter of 2008. The net losses reported for the nine months and quarter
ended September 30, 2009, were primarily a result of recognizing a provision for loan losses of
$8.7 million in the third quarter of 2009. Return on average assets was (2.19) percent for the
third quarter and (0.08) percent for the nine months ended September 30, 2009, compared to 1.00
percent and 1.10 percent for the respective 2008 periods. Return on average stockholders equity
was (22.63) percent and (0.87) percent for the third quarter and year-to-date 2009, compared to
10.31 percent and 11.17 percent for the same periods of 2008.
49
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Net Interest Income:
Net interest income is still the fundamental source of earnings for commercial banks. Moreover,
fluctuations in the level of net interest 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 and short-term borrowings comprise interest-bearing liabilities. Net
interest income is impacted by:
|
|
|
Variations in the volume, rate and composition of earning assets and
interest-bearing liabilities;
|
|
|
|
Changes in general market rates; and
|
|
|
|
The level of nonperforming assets.
|
Changes in net interest income are measured by the net interest spread and net interest margin.
Net interest spread, the difference between the average yield earned on earning assets and the
average rate incurred on 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 the 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 federal statutory tax rate of 34.0 percent.
We analyze interest income and interest expense by segregating rate and volume components of
earning assets and interest-bearing liabilities. The impact changes in the interest rates earned
and paid on assets and liabilities, along with changes in the volume of earning assets and
interest-bearing liabilities have on net interest income are summarized in the following table.
The net change attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
50
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Net interest income changes due to rate and volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009 vs. 2008
|
|
|
2009 vs. 2008
|
|
|
|
Increase (decrease)
|
|
|
Increase (decrease)
|
|
|
|
attributable to
|
|
|
attributable to
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
(943
|
)
|
|
$
|
(1,088
|
)
|
|
$
|
145
|
|
|
$
|
(2,901
|
)
|
|
$
|
(3,193
|
)
|
|
$
|
292
|
|
Tax-exempt
|
|
|
59
|
|
|
|
(96
|
)
|
|
|
155
|
|
|
|
286
|
|
|
|
(314
|
)
|
|
|
600
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
150
|
|
|
|
(36
|
)
|
|
|
186
|
|
|
|
726
|
|
|
|
(3
|
)
|
|
|
729
|
|
Tax-exempt
|
|
|
85
|
|
|
|
(28
|
)
|
|
|
113
|
|
|
|
523
|
|
|
|
(42
|
)
|
|
|
565
|
|
Federal funds sold
|
|
|
(129
|
)
|
|
|
(82
|
)
|
|
|
(47
|
)
|
|
|
(140
|
)
|
|
|
(88
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(778
|
)
|
|
|
(1,330
|
)
|
|
|
552
|
|
|
|
(1,506
|
)
|
|
|
(3,640
|
)
|
|
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
|
(29
|
)
|
|
|
(46
|
)
|
|
|
17
|
|
|
|
(190
|
)
|
|
|
(211
|
)
|
|
|
21
|
|
NOW accounts
|
|
|
(61
|
)
|
|
|
(82
|
)
|
|
|
21
|
|
|
|
(424
|
)
|
|
|
(506
|
)
|
|
|
82
|
|
Savings accounts
|
|
|
(127
|
)
|
|
|
(139
|
)
|
|
|
12
|
|
|
|
(416
|
)
|
|
|
(448
|
)
|
|
|
32
|
|
Time deposits less than $100
|
|
|
(363
|
)
|
|
|
(237
|
)
|
|
|
(126
|
)
|
|
|
(1,067
|
)
|
|
|
(881
|
)
|
|
|
(186
|
)
|
Time deposits $100 or more
|
|
|
(4
|
)
|
|
|
(215
|
)
|
|
|
211
|
|
|
|
320
|
|
|
|
(436
|
)
|
|
|
756
|
|
Short-term borrowings
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
7
|
|
|
|
(81
|
)
|
|
|
(199
|
)
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(579
|
)
|
|
|
(721
|
)
|
|
|
142
|
|
|
|
(1,858
|
)
|
|
|
(2,681
|
)
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(199
|
)
|
|
$
|
(609
|
)
|
|
$
|
410
|
|
|
$
|
352
|
|
|
$
|
(959
|
)
|
|
$
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, tax-equivalent net interest income increased $352 or
2.1 percent to $17,392 in 2009 from $17,040 in 2008. A positive volume variance, partially offset
by a negative rate variance led to the improvement.
Changes in the volumes of earning assets and interest-bearing liabilities contributed to a $1,311
increase in net interest income. Average earning assets grew $48.6 million to $589.1 million for
the nine months ended September 30, 2009, from $540.5 million for the same nine months of 2008 and
accounted for a $2,134 increase in interest revenue. The investment portfolio averaged $35.8
million or 103.1 percent higher comparing 2009 and 2008, which resulted in additional interest
revenue of $1,294. In addition, average loans, net of unearned income, grew $19.2 million or 3.9
percent, which caused an increase in interest revenue of $892.
51
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Average interest-bearing liabilities rose $42.9 million or 10.0 percent to $472.2 million
for the nine months ended September 30, 2009, compared to $429.3 million for the same period of
2008. The growth resulted in a
net increase in interest expense of $823. Having the greatest impact was a $28.2 million increase
in large denomination time deposits, which caused interest expense to increase $756. In addition,
short-term borrowings averaged $10.4 million higher and resulted in an increase in interest expense
of $118. Interest-bearing transaction accounts, including money market, NOW and savings accounts,
grew $10.6 million, which together increased interest expense by $135. Partially offsetting these
increases was a decline of $6.3 million in average time deposits less than $100. This decrease
resulted in a corresponding reduction in interest expense of $186.
A negative rate variance resulted in a decrease of $959 in tax-equivalent net interest income.
Reductions in loan and investment yields along with an increase in the volume of nonaccrual loans
more than offset decreases in funding costs resulting from lower short-term market interest rates.
The tax-equivalent yield on earning assets decreased 88 basis points to 5.67 percent for the nine
months ended September 30, 2009, from 6.55 percent for the same period of 2008, resulting in a
reduction of interest revenue of $3,640. Specifically, the tax-equivalent yield on the loan
portfolio decreased 93 basis points to 5.71 percent for the nine months ended September 30, 2009,
from 6.64 percent for the same period of 2008. The decrease in loan yields resulted in a decline in
interest revenue of $3,507, or 96.3 percent of the entire reduction in interest revenue due to
rate.
The reduction in interest revenue was partially mitigated by a decrease of $2,681 in interest
expense, which resulted from a 79 basis point decrease in the cost of funds to 2.15 percent for the
nine months ended September 30, 2009, from 2.94 percent for the same period of 2008. We experienced
significant reductions in the rates paid for both interest-bearing transaction accounts as well as
time deposits and short-term borrowings. Specifically, the cost of money market, NOW and savings
accounts decreased 109 basis points, 91 basis points and 56 basis points comparing the nine months
ended September 30, 2009 and 2008. These decreases resulted in reductions to interest expense of
$211, $506 and $448. With regard to time deposits, the average rates paid for time deposits less
than $100 and time deposits $100 or more decreased 71 basis points and 94 basis points, which
together resulted in a $1,317 decrease in interest expense. The rates paid on short-term borrowings
decreased 220 basis points, resulting in a decrease to interest expense of $199.
52
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
For the quarter ended September 30, 2009, tax-equivalent net interest income decreased $199
in comparison to the same three months of last year. The decrease was due to a negative rate
variance of $609, which more than offset a positive volume variance of $410. The tax-equivalent
yield on earning assets decreased 86 basis points comparing the third quarters of 2009 and 2008,
which resulted in a reduction in interest
revenue of $1,330. Partially mitigating the decrease in revenue was a reduction in interest expense
of $721 due to a 67 basis point decline in our cost of funds. With regard to the positive volume
variance, earning assets averaged $588.7 million in the third quarter of 2009, an increase of $30.7
million from $558.0 million for the same quarter of 2008. The growth in average earning assets
caused an increase in interest income of $552. Partially offsetting the positive effect of the
growth of average earning assets was an increase in interest expense of $142 due to growth in
average interest-bearing liabilities of $29.8 million.
Maintenance of an adequate net interest margin is one of our primary concerns. Our net interest
margin for the nine months ended September 30, contracted 26 basis points to 3.95 percent in 2009
compared to 4.21 percent in 2008. For the third quarter, our net interest margin was 3.70 percent,
a contraction of 36 basis points compared to 4.06 percent for the third quarter of 2008. The FOMC
has indicated that general market rates would remain low for some time. However, no assurance can
be given that these conditions will continue. Net interest income could be adversely affected by
changes in general market rates or increased competition. We believe following prudent pricing
practices coupled with careful investing, will keep our net interest margin favorable.
53
Comm Bancorp, Inc.
MANAGEMENTS 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, 2009 and 2008, 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, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Interest
|
|
|
Average
|
|
|
Income/
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
447,962
|
|
|
$
|
19,078
|
|
|
|
5.69
|
%
|
|
$
|
442,007
|
|
|
$
|
21,979
|
|
|
|
6.64
|
%
|
Tax-exempt
|
|
|
65,328
|
|
|
|
2,853
|
|
|
|
5.84
|
|
|
|
52,106
|
|
|
|
2,567
|
|
|
|
6.58
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
31,488
|
|
|
|
898
|
|
|
|
3.81
|
|
|
|
5,939
|
|
|
|
172
|
|
|
|
3.87
|
|
Tax-exempt
|
|
|
39,079
|
|
|
|
2,147
|
|
|
|
7.35
|
|
|
|
28,812
|
|
|
|
1,624
|
|
|
|
7.53
|
|
Federal funds sold
|
|
|
5,244
|
|
|
|
5
|
|
|
|
0.13
|
|
|
|
11,618
|
|
|
|
145
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
589,101
|
|
|
|
24,981
|
|
|
|
5.67
|
%
|
|
|
540,482
|
|
|
|
26,487
|
|
|
|
6.55
|
%
|
Less: allowance for loan losses
|
|
|
5,855
|
|
|
|
|
|
|
|
|
|
|
|
5,020
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
32,897
|
|
|
|
|
|
|
|
|
|
|
|
33,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
616,143
|
|
|
|
|
|
|
|
|
|
|
$
|
568,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
26,059
|
|
|
|
172
|
|
|
|
0.88
|
%
|
|
$
|
24,593
|
|
|
|
362
|
|
|
|
1.97
|
%
|
NOW accounts
|
|
|
74,865
|
|
|
|
789
|
|
|
|
1.41
|
|
|
|
69,844
|
|
|
|
1,213
|
|
|
|
2.32
|
|
Savings accounts
|
|
|
106,680
|
|
|
|
422
|
|
|
|
0.53
|
|
|
|
102,604
|
|
|
|
838
|
|
|
|
1.09
|
|
Time deposits less than $100
|
|
|
164,390
|
|
|
|
4,095
|
|
|
|
3.33
|
|
|
|
170,728
|
|
|
|
5,162
|
|
|
|
4.04
|
|
Time deposits $100 or more
|
|
|
81,610
|
|
|
|
2,014
|
|
|
|
3.30
|
|
|
|
53,355
|
|
|
|
1,694
|
|
|
|
4.24
|
|
Short-term borrowings
|
|
|
18,595
|
|
|
|
97
|
|
|
|
0.70
|
|
|
|
8,190
|
|
|
|
178
|
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
472,199
|
|
|
|
7,589
|
|
|
|
2.15
|
%
|
|
|
429,314
|
|
|
|
9,447
|
|
|
|
2.94
|
%
|
Noninterest-bearing deposits
|
|
|
81,092
|
|
|
|
|
|
|
|
|
|
|
|
80,207
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,758
|
|
|
|
|
|
|
|
|
|
|
|
3,143
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
59,094
|
|
|
|
|
|
|
|
|
|
|
|
56,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
616,143
|
|
|
|
|
|
|
|
|
|
|
$
|
568,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
|
|
|
|
$
|
17,392
|
|
|
|
3.52
|
%
|
|
|
|
|
|
$
|
17,040
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
4.21
|
%
|
Tax equivalent adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
$
|
873
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
|
|
|
$
|
1,700
|
|
|
|
|
|
|
|
|
|
|
$
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
Average balances were calculated using average daily balances. Interest income on loans
include fees of $652 in 2009 and $321 in 2008. Available-for-sale securities, included in
investment securities, are stated at amortized cost with the related average unrealized
holding gains of $2,573 and $1,753 for the nine months ended September 30, 2009 and 2008
included in other assets. Tax-equivalent adjustments were calculated using the prevailing
statutory tax rate of 34.0 percent.
|
54
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing
our systematic analysis in accordance with procedural discipline. We take into consideration
certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes
of net charge-offs, prevailing economic conditions and other relevant factors when determining the
adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for
loan losses account in order to maintain the allowance at the appropriate level indicated by our
evaluations. Based on our most current evaluation, we believe that the allowance is adequate to
absorb any known and inherent losses in the portfolio.
The provision for loan losses equaled $8,670 for the third quarter of 2009, compared to $400 for
the same quarter of 2008. The year-to-date provision for loan losses totaled $9,760 in 2009, an
increase of $8,747 from $1,013 in 2008. The large change in the provision for loan losses in 2009
reflects the effect of obtaining revised collateral valuations on certain large commercial real
estate loans from independent appraisals which indicated significant market devaluations brought on
by the rapid deterioration in the local economy. In addition, Management revised its methodology
for estimating losses in the remainder of the loan portfolio by shortening the number of periods
considered for estimating loss factors in order to better reflect current market conditions.
Management believes that recent historical data is a more accurate basis for determining loss
factors given the rapid economic decline in our market area.
Noninterest Income:
Noninterest income for the third quarter rose $1,590 to $2,520 in 2009 from $930 in 2008. Included
in noninterest income in the third quarter of 2009 were net gains on the sale of available-for-sale
investment securities of $1,385. Adjusting for these gains, noninterest income increased $205 or
22.0 percent. Mortgage banking income increased $167, while service charges, fees and commissions
rose $38. For the nine months ended September 30, 2009, noninterest income totaled $5,416, an
increase of $2,483 or 84.7 percent from $2,933 for the same period last year. Included in
year-to-date noninterest income in 2009 was a net gain from the disposition of the former
Tunkhannock and Eaton Township, Pennsylvania branch offices. In addition, noninterest income in
2009 included $1,499 in net gains from the sale of available-for-sale investment securities. Due to
the significantly lower mortgage rates, mortgage banking income increased $735 comparing the nine
months ended September 30, 2009 and 2008. Service charges, fees and commissions decreased $45 or
1.8 percent to $2,444 in 2009 from $2,489 in 2008.
55
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
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.
Major components of noninterest expense for the three months and nine months ended September 30,
2009 and 2008, are summarized as follows:
Noninterest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Salaries and employee benefits expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and payroll taxes
|
|
$
|
1,734
|
|
|
$
|
1,700
|
|
|
$
|
5,109
|
|
|
$
|
5,048
|
|
Employee benefits
|
|
|
291
|
|
|
|
469
|
|
|
|
1,220
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits expense
|
|
|
2,025
|
|
|
|
2,169
|
|
|
|
6,329
|
|
|
|
6,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net occupancy and equipment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net occupancy expense
|
|
|
271
|
|
|
|
276
|
|
|
|
898
|
|
|
|
918
|
|
Equipment expense
|
|
|
320
|
|
|
|
307
|
|
|
|
951
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net occupancy and equipment expense
|
|
|
591
|
|
|
|
583
|
|
|
|
1,849
|
|
|
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing expense
|
|
|
167
|
|
|
|
261
|
|
|
|
528
|
|
|
|
597
|
|
Other taxes
|
|
|
151
|
|
|
|
46
|
|
|
|
497
|
|
|
|
295
|
|
Stationery and supplies
|
|
|
49
|
|
|
|
69
|
|
|
|
178
|
|
|
|
215
|
|
Contractual services
|
|
|
482
|
|
|
|
446
|
|
|
|
1,618
|
|
|
|
1,304
|
|
Insurance, including FDIC assessment
|
|
|
336
|
|
|
|
84
|
|
|
|
1,313
|
|
|
|
220
|
|
Other
|
|
|
757
|
|
|
|
425
|
|
|
|
1,601
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
1,942
|
|
|
|
1,331
|
|
|
|
5,735
|
|
|
|
3,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
4,558
|
|
|
$
|
4,083
|
|
|
$
|
13,913
|
|
|
$
|
12,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
For the third quarter, noninterest expense increased $475 or 11.6 percent to $4,558 in
2009 from $4,083 in 2008. The increase resulted primarily from a $611 or 45.9 percent increase in
other expenses. Salaries and employee benefits expense decreased $144 or 6.6 percent, while net
occupancy and equipment expense increased $8 or 1.4 percent. For the nine months ended September
30, 2009, noninterest expense
increased $1,799 or 14.9 percent to $13,913 in 2009 from $12,114 in 2008. The increased expense
equated to a weakening in our operating efficiency. We measure our efficiency using two key
industry ratios, the operating efficiency ratio and the overhead ratio. The operating efficiency
ratio is defined as noninterest expense as a percentage of net interest income and noninterest
income, and the overhead ratio is calculated by dividing noninterest expense by average total
assets. Our operating efficiency ratio was 65.9 percent for the nine months ended September 30,
2009 and 65.3 percent for the same nine months of 2008. Similarly, our overhead ratio indicated a
slight deterioration as it increased to 3.0 percent for the nine months ended September 30, 2009,
compared to 2.8 percent for the same period last year.
Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled
$2,025 for the third quarter of 2009. The $144 or 6.6 percent decrease for the third quarter of
2009 resulted primarily from a $178 decrease in employee benefits expense. Due to the challenges
brought on by the economy, during the third quarter we initiated several cost cutting initiatives
related to personnel costs. Management bonuses will not be awarded in 2009. In addition, the annual
discretionary contribution to the profit sharing plan will not be made. As a result, expense
accruals related to management bonuses and the discretionary profit sharing contribution were
reversed during the third quarter. With regard to the salaries and payroll taxes component, annual
employee pay increases were curtailed in 2009. As a result, we experienced a negligible increase of
$34 or 2.0 percent in salaries and payroll taxes comparing the third quarters of 2009 and 2008. For
the nine months ended September 30, 2009, payroll and benefit related expenses totaled $6,329, a
decrease of $85 from $6,414 for the same nine months of 2008.
Occupancy and equipment expense increased $8 or 1.4 percent comparing the third quarters of 2009
and 2008. For the nine months ended September 30, 2009, occupancy and equipment expense totaled
$1,849, a decrease of $17 from $1,866 for the same nine months of 2008.
For the third quarter, other expenses increased $611 or 45.9 percent to $1,942 in 2009 from $1,331
in 2008. Year-to-date other expenses totaled $5,735, an increase of $1,901 or 49.6 percent compared
to $3,834 for the same period one year ago. The quarterly and year-to-date increases were due
largely to an increase in the cost of FDIC insurance and a special assessment imposed by the FDIC
on all insured depository institutions to help mitigate the effects of recent bank failures on the
Deposit Insurance Fund.
57
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Our deposits are insured up to regulatory limits by the FDIC and accordingly, are subject to
deposit insurance assessments. Under the
provisions of The Federal Deposit Insurance Reform Act of 2005 (the Reform Act), the Bank
Insurance Fund and the Savings Association Insurance Fund were merged into the Deposit Insurance
Fund (DIF). Under the Reform Act, the annual DIF assessment rate is based upon statutory factors
that include the balance of insured deposits as well as the degree of risk the institution poses to
the insurance fund. Each institution is placed into one of four risk categories depending on the
institutions capital ratios and supervisory ratings. Based on our latest assignments, we were
assessed at the lowest rates of those institutions posing the least amount of risk to the DIF. On
February 27, 2009, the FDIC adopted a restoration plan designed to replenish the DIF over a period
of seven years ending December 31, 2015. Due to the recent increase in bank failures, the reserve
ratio declined from 1.19 percent of insured deposits at March 31, 2008, to an estimated 0.40
percent of insured deposits at December 31, 2008. In order to implement this restoration plan, the
FDIC changed its risk-based assessment system and its base assessment rates. For the first quarter
of 2009 only, the FDIC increased all FDIC deposit assessment rates by $0.07 per $100 dollars of
assessable deposits. These new rates range from $0.12 to $0.14 per $100 dollars of assessable
deposits for Risk Category I institutions to $0.50 per $100 dollars of assessable deposits for Risk
Category IV institutions. For the second and third quarters of 2009, the base assessment rates
ranged from $0.12 to $0.16 per $100 dollars of assessable deposits for Risk Category I institutions
to $0.45 per $100 dollars of assessable deposits for Risk Category IV institutions. In addition to
these changes, due to the severity of the decrease in the DIF, the restoration plan provided for a
special emergency assessment of $0.05 per $100 dollars of assessable deposits on June 30, 2009,
which was collected on September 30, 2009. Based on these new assessment rates, our FDIC insurance
expense was $798 for the nine months ended September 30, 2009. In addition, on September 30, 2009,
we paid $277 for the special emergency assessment.
There is a separate levy assessed on all FDIC-insured institutions to cover the cost of Finance
Corporation (FICO) funding. The FDIC established the annual FICO assessment rates effective for
the second quarter and third quarters of 2009 at $0.0104 per $100 dollars of DIF-assessable
deposits. Our FICO assessment totaled $42 for the nine months ended September 30, 2009.
58
Comm Bancorp, Inc.
MANAGEMENTS DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Income Taxes:
For the nine months ended September 30, 2009, we recorded an income tax benefit totaling $2,180. In
comparison, we had income tax expense of $721 for the same nine months of 2008. The income tax
benefit in 2009 was due primarily to the pre-tax loss of $2,565. We utilize interest
income from tax-exempt loans and investments and tax credits from our investment as a
limited partner in an elderly housing project to reduce our federal income taxes. The elderly
housing project will afford us approximately $3.7 million in investment tax credits over a 10-year
period which began in 2007. We expect to recognize a total of $372 in tax credits in 2009.
The difference between the amount of income tax currently payable and the provision for income tax
expense reflected in the income statements arise from temporary differences. Temporary differences
are differences between the tax bases of assets and liabilities and their reported amounts in the
financial statements, which result in deferred tax assets or liabilities. We perform quarterly
reviews on the tax criteria related to the recognition of deferred tax assets. We decided not to
establish a valuation reserve for the deferred tax assets since it is likely that these assets
will be realized through carry-back to taxable income in prior years and by future reversals of
existing taxable temporary differences or, to a lesser extent, through future taxable income.
59
Comm Bancorp, Inc.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of September 30, 2009, the end of the period covered by this Quarterly Report on Form 10-Q, our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of
our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the CEO and CFO
concluded that our disclosure controls and procedures, as of September 30, 2009, were effective to
provide reasonable assurance that information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and to provide reasonable assurance that information required to be
disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely
decisions regarding required disclosure.
Internal Control Over Financial Reporting:
There was no change in our internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act during the fiscal quarter ended September 30, 2009, that
materially affected, or is reasonably likely to materially effect, our internal control over
financial reporting.
60
Comm Bancorp, Inc.
OTHER INFORMATION
Part II. Other Information
Item 1. Legal Proceedings
NONE
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Results of Votes of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits
|
31(i)
|
|
CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a).
|
|
32
|
|
CEO and CFO certifications pursuant to Section 1350.
|
61
COMM BANCORP, INC.
FORM 10-Q
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto,
duly authorized.
|
|
|
|
|
|
Registrant, Comm Bancorp, Inc.
|
|
Date: November 13, 2009
|
/s/ William F. Farber, Sr.
|
|
|
William F. Farber, Sr.
|
|
|
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
|
|
|
|
|
Date: November 13, 2009
|
/s/ Scott A. Seasock
|
|
|
Scott A. Seasock
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
Date: November 13, 2009
|
/s/ Stephanie A. Westington, CPA
|
|
|
Stephanie A. Westington, CPA
|
|
|
Vice President of Finance
(Principal Accounting Officer)
|
|
62
EXHIBIT INDEX
|
|
|
|
|
|
|
Item Number
|
|
Description
|
|
Page
|
|
|
|
|
|
|
|
31(i)
|
|
CEO and CFO Certifications Pursuant to
Rule 13a-14(a)/15d-14(a).
|
|
|
64
|
|
|
|
|
|
|
|
|
32
|
|
CEO and CFO Certifications Pursuant to
Section 1350.
|
|
|
66
|
|
63