CCBP Comm Bancorp (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-17455

Comm Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2242292
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
125 North State Street, Clarks Summit, PA		18411
(Address of principal executive offices)		(Zip Code)

(570) 586-0377

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:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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 issuer’s 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

CONTENTS		Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements.
Consolidated Statements of Income and Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2009 and 2008			3
Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			4
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			*
Item 4. Controls and Procedures			60
Item 4T. Controls and Procedures			*
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings			61
Item 1A. Risk Factors			*
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3. Defaults Upon Senior Securities			61
Item 4. Submission of Matters to a Vote of Security Holders			61
Item 5. Other Information			61
Item 6. Exhibits			61
Signatures			62
Exhibit Index			63
EX-31(i)
EX-32

Comm Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share data)

		Three Months Ended Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest income:
Interest and fees on loans:
Taxable		$	6,194			$	7,137			$	19,078			$	21,979
Tax-exempt			598				559				1,883				1,694
Interest and dividends on investment securities available-for-sale:
Taxable			205				52				869				133
Tax-exempt			407				351				1,417				1,072
Dividends			9				12				29				39
Interest on federal funds sold			4				133				5				145
Total interest income			7,417				8,244				23,281				25,062
Interest expense:
Interest on deposits			2,433				3,017				7,492				9,269
Interest on short-term borrowings			5								97				178
Total interest expense			2,438				3,017				7,589				9,447
Net interest income			4,979				5,227				15,692				15,615
Provision for loan losses			8,670				400				9,760				1,013
Net interest income (loss) after provision for loan losses			(3,691	)			4,827				5,932				14,602
Noninterest income:
Service charges, fees and commissions			848				810				2,444				2,489
Mortgage banking income			287				120				1,179				444
Net gains on sale of premises and equipment											294
Net gains on sale of investment securities available-for-sale			1,385								1,499
Total noninterest income			2,520				930				5,416				2,933
Noninterest expense:
Salaries and employee benefits expense			2,025				2,169				6,329				6,414
Net occupancy and equipment expense			591				583				1,849				1,866
Other expenses			1,942				1,331				5,735				3,834
Total noninterest expense			4,558				4,083				13,913				12,114
Income (loss) before income taxes			(5,729	)			1,674				(2,565	)			5,421
Provision for income tax expense (benefit)			(2,354	)			199				(2,180	)			721
Net income (loss)			(3,375	)			1,475				(385	)			4,700
Other comprehensive (loss):
Unrealized gains (losses) on investment securities available-for-sale			1,118				(686	)			1,473				(1,024	)
Reclassification adjustment for gains included in net income			(1,385	)							(1,499	)
Income tax benefit related to other comprehensive loss			(91	)			(233	)			(9	)			(348	)
Other comprehensive loss, net of income taxes			(176	)			(453	)			(17	)			(676	)
Comprehensive income (loss)		$	(3,551	)		$	1,022			$	(402	)		$	4,024
Per share data:
Net income (loss)		$	(1.95	)		$	0.84			$	(0.22	)		$	2.68
Cash dividends declared		$	0.28			$	0.27			$	0.84			$	0.81
Average common shares outstanding			1,718,439				1,747,438				1,722,994				1,750,872

See Notes to Consolidated Financial Statements.

Comm Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

		September 30,				December 31,
		2009				2008
Assets:
Cash and due from banks		$	8,728			$	8,017
Federal funds sold			46,100				12,700
Investment securities available-for-sale			38,302				80,574
Loans held for sale, net							1,390
Loans, net of unearned income			507,094				485,882
Less: allowance for loan losses			11,566				5,255
Net loans			495,528				480,627
Premises and equipment, net			11,631				11,753
Accrued interest receivable			2,597				2,143
Other assets			11,386				6,837
Total assets		$	614,272			$	604,041
Liabilities:
Deposits:
Noninterest-bearing		$	79,591			$	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:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
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.

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.

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.

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 year’s 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 Company’s 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.

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 transferor’s 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.

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 investee’s 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 entity’s 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.

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 entity’s 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.

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.

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 Company’s 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 Moody’s or “BBB” or higher from Standard and Poor’s 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.

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.

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-Pgh’s 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

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 entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s 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.

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 Company’s 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.

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 Bank’s 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.

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

Comm Bancorp, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Forward-Looking Discussion:

Certain statements in this Form 10-Q are forward-looking statements that involve numerous risks and uncertainties. The following factors, among others, may cause actual results to differ materially from projected results:

Local, domestic and international economic and political conditions, and government monetary and fiscal policies affect banking both directly and indirectly. Inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts, and other factors beyond our control may also adversely affect our future results of operations. Our management team, consisting of the Board of Directors and executive officers, expects that no particular factor will 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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 Management’s Discussion and Analysis, The Notes to the Consolidated Financial Statements, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our financial position, results of operations and cash flows.

Comm Bancorp, Inc.
MANAGEMENT’S 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 Government’s “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 Government’s $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.

Comm Bancorp, Inc.
MANAGEMENT’S 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 Company’s 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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.

Comm Bancorp, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)

Maturity distribution of available-for-sale portfolio

										After one								After five
		Within								but within								but within								After
		one year								five years								ten years								ten years								Total
September 30, 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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.

Comm Bancorp, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)

The composition of the loan portfolio at September 30, 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.

Comm Bancorp, Inc.
MANAGEMENT’S 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