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 June 30, 2010

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: 1,722,923 at July 31, 2010.

Page 1 of 63
Exhibit Index on Page 59

 

 

COMM BANCORP, INC.
FORM 10-Q
June 30, 2010

INDEX

CONTENTS		Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited).
Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended June 30, 2010 and 2009			3
Consolidated Balance Sheets — June 30, 2010 and December 31, 2009			4
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009			5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			*
Item 4. Controls and Procedures			56
Item 4T. Controls and Procedures			*
Part II. Other Information:
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			*
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Removed and Reserved			57
Item 5. Other Information			57
Item 6. Exhibits			57
Signatures			58
Exhibit Index			59
Exhibit 31(i)
Exhibit 32

Comm Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Interest income:
Interest and fees on loans:
Taxable		$	5,942			$	6,436			$	11,883			$	12,884
Tax-exempt			318				619				640				1,285
Interest and dividends on investment securities available-for-sale:
Taxable			523				315				1,252				664
Tax-exempt			238				473				540				1,010
Dividends			2				9				4				20
Interest on federal funds sold			9								17				1
Total interest income			7,032				7,852				14,336				15,864
Interest expense:
Interest on deposits			2,315				2,426				4,748				5,059
Interest on short-term borrowings							36								92
Interest on long-term debt			160								320
Total interest expense			2,475				2,462				5,068				5,151
Net interest income			4,557				5,390				9,268				10,713
Provision for loan losses			300				520				1,300				1,090
Net interest income after provision for loan losses			4,257				4,870				7,968				9,623
Noninterest income:
Service charges, fees and commissions			730				832				1,471				1,596
Mortgage banking income			214				490				495				892
Net gain on sale of premises and equipment															294
Net gain on sale of investment securities available-for-sale											361				114
Total noninterest income			944				1,322				2,327				2,896
Noninterest expense:
Salaries and employee benefits expense			2,183				2,164				4,370				4,304
Net occupancy and equipment expense			547				583				1,150				1,258
Other expenses			1,636				2,260				3,200				3,793
Total noninterest expense			4,366				5,007				8,720				9,355
Income before income taxes			835				1,185				1,575				3,164
Provision for income tax expense (benefit)			(355	)			(30	)			(765	)			174
Net income			1,190				1,215				2,340				2,990
Other comprehensive income:
Unrealized gains on investment securities available-for-sale			2,030				13				1,755				355
Reclassification adjustment for gains included in net income											(361	)			(114	)
Income tax expense related to other comprehensive income			690				4				474				82
Other comprehensive income, net of income taxes			1,340				9				920				159
Comprehensive income		$	2,530			$	1,224			$	3,260			$	3,149
Per share data:
Net income		$	0.69			$	0.70			$	1.36			$	1.73
Cash dividends declared						$	0.28							$	0.56
Average common shares outstanding			1,722,923				1,722,282				1,722,923				1,725,310

See Notes to Consolidated Financial Statements.

Comm Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)				(Unaudited)
Assets:
Cash and due from banks		$	10,050			$	23,978
Federal funds sold			31,700				25,300
Investment securities available-for-sale			112,851				108,005
Loans held for sale, net			110				2,016
Loans, net of unearned income			465,143				476,944
Less: allowance for loan losses			14,928				17,462
Net loans			450,215				459,482
Premises and equipment, net			11,425				11,616
Accrued interest receivable			1,962				2,122
Other assets			23,452				19,634
Total assets		$	641,765			$	652,153
Liabilities:
Deposits:
Noninterest-bearing		$	87,348			$	88,335
Interest-bearing			489,370				502,448
Total deposits			576,718				590,783
Long-term debt			8,000				8,000
Accrued interest payable			1,284				1,296
Other liabilities			2,124				1,740
Total liabilities			588,126				601,819
Stockholders’ equity:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding: June 30, 2010, 1,722,923 shares; December 31, 2009, 1,721,007 shares			569				568
Capital surplus			8,010				7,966
Retained earnings			43,321				40,981
Accumulated other comprehensive income			1,739				819
Total stockholders’ equity			53,639				50,334
Total liabilities and stockholders’ equity		$	641,765			$	652,153

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’
(Unaudited)		Stock				Surplus				Earnings				Income				Equity
Balance, December 31, 2009		$	568			$	7,966			$	40,981			$	819			$	50,334
Net income											2,340								2,340
Dividend reinvestment plan: 1,916 shares issued			1				44												45
Other comprehensive income, net of income taxes															920				920
Balance, June 30, 2010		$	569			$	8,010			$	43,321			$	1,739			$	53,639
Balance, December 31, 2008		$	571			$	7,694			$	47,862			$	1,671			$	57,798
Net income											2,990								2,990
Dividends declared: $0.56 per share											(965	)							(965	)
Dividend reinvestment plan: 4,318 shares issued			1				159												160
Repurchase and retirement: 18,117 shares			(6	)			(54	)			(624	)							(684	)
Other comprehensive income, net of income taxes															159				159
Balance, June 30, 2009		$	566			$	7,799			$	49,263			$	1,830			$	59,458

See Notes to Consolidated Financial Statements.

Comm Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)

Six Months Ended June 30,		2010				2009
		(Unaudited)
Cash flows from operating activities:
Net income		$	2,340			$	2,990
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,300				1,090
Depreciation and amortization of premises and equipment			379				459
Net amortization of investment securities			1,048				181
Amortization of net loan costs			168				191
Amortization of mortgage servicing rights			131				231
Deferred income tax expense (benefit)			1,195				(214	)
Net gain on sale of investment securities available-for-sale			(361	)			(114	)
Net gain on sale of loans			(424	)			(942	)
Net gain on sale of premises and equipment							(294	)
Net loss (gain) on sale of foreclosed assets			8				(17	)
Changes in:
Loans held for sale, net			2,330				1,545
Accrued interest receivable			160				(383	)
Other assets			(2,031	)			(1,246	)
Accrued interest payable			(12	)			(119	)
Other liabilities			151				681
Net cash provided by operating activities			6,382				4,039
Cash flows from investing activities:
Proceeds from repayments of investment securities available-for-sale			9,546				4,661
Proceeds from sales of investment securities available-for-sale			6,154				4,341
Purchases of investment securities available-for-sale			(19,839	)			(1,423	)
Proceeds from sale of foreclosed assets			336				145
Net decrease (increase) in lending activities			4,342				(27,023	)
Proceeds from sale of premises and equipment							509
Purchases of premises and equipment			(188	)			(630	)
Net cash provided by (used in) investing activities			351				(19,420	)
Cash flows from financing activities:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts			(678	)			(358	)
Time deposits			(13,387	)			(3,136	)
Short-term borrowings							7,950
Proceeds from issuance of common shares			45				160
Repurchase and retirement of common shares							(684	)
Cash dividends paid			(241	)			(953	)
Net cash provided by (used in) financing activities			(14,261	)			2,979
Net decrease in cash and cash equivalents			(7,528	)			(12,402	)
Cash and cash equivalents at beginning of year			49,278				20,717
Cash and cash equivalents at end of period		$	41,750			$	8,315
Supplemental disclosures:
Cash paid during the period for:
Interest		$	5,080			$	5,270
Income taxes							691
Noncash items:
Transfers of loans to foreclosed assets			3,457				1,518
Unrealized gains on investment securities available-for-sale, net		$	(920	)		$	(159	)

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 (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 six months ended and as of June 30, 2010, 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 Restated Annual Report on Form 10-K/A for the period ended December 31, 2009.

The consolidated financial statements as of December 31, 2009, and related disclosures, herein, conform to the presentation as included in the Company’s 2009 Amended Annual Report on Form 10-K/A, filed on May 17, 2010.

2. Earnings per common share:

The Company had no dilutive potential common shares outstanding during the three-month and six-month periods ended June 30, 2010 and 2009, therefore, the per share data presented on the face of the Consolidated Statements of Income and Comprehensive Income relates to basic per share amounts.

3. Subsequent events:

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2010, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

3. Subsequent events (continued):

On August 9, 2010, the Company and F.N.B. Corporation entered into an Agreement and Plan of Merger, whereby the Company will be merged with and into F.N.B. Corporation and a related bank merger agreement by and between the Company’s wholly-owned subsidiary bank, Community Bank and Trust Company and F.N.B. Corporation’s wholly-owned subsidiary bank, First National Bank of Pennsylvania. The closings on these mergers are conditioned upon, among other things, approvals of applicable regulatory agencies and the stockholders of the Company.

4. Investment securities:

All investment securities were classified as available-for-sale at June 30, 2010 and December 31, 2009. The amortized cost and fair value of available-for-sale securities aggregated by investment category at June 30, 2010 and December 31, 2009, are summarized as follows:

		Amortized				Unrealized				Unrealized				Fair
June 30, 2010		Cost				Gains				Losses				Value
State and municipals		$	18,170			$	1,166							$	19,336
Mortgage-backed securities:
U.S. Government agencies			89,199				1,625			$	267				90,557
U.S. Government-sponsored enterprises			171				11								182
Equity securities:
Restricted			2,537												2,537
Other			139				101				1				239
Total		$	110,216			$	2,903			$	268			$	112,851

		Amortized				Unrealized				Unrealized				Fair
December 31, 2009		Cost				Gains				Losses				Value
State and municipals		$	25,343			$	1,520			$	1			$	26,862
Mortgage-backed securities:
U.S. Government agencies			78,537				17				399				78,155
U.S. Government-sponsored enterprises			208				12								220
Equity securities:
Restricted			2,537												2,537
Other			139				94				2				231
Total		$	106,764			$	1,643			$	402			$	108,005

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 $1,739, net of deferred income taxes of $896, at June 30, 2010, and $819, net of deferred income taxes of $422, at December 31, 2009.

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

4. Investment securities (continued):

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 June 30, 2010 and December 31, 2009, 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
June 30, 2010		Value				Losses				Value				Losses				Value				Losses
State and municipals
Mortgage-backed securities:
U.S. Government agencies		$	8,287			$	267											$	8,287			$	267
U.S. Government-sponsored enterprises
Equity securities:
Restricted
Other										$	8			$	1				8				1
Total		$	8,287			$	267			$	8			$	1			$	8,295			$	268

		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2009		Value				Losses				Value				Losses				Value				Losses
State and municipals		$	686			$	1											$	686			$	1
Mortgage-backed securities:
U.S. Government agencies			30,651				399												30,651				399
U.S. Government-sponsored enterprises
Equity securities:
Restricted
Other										$	7			$	2				7				2
Total		$	31,337			$	400			$	7			$	2			$	31,344			$	402

At June 30, 2010, the Company had 102 investment securities, consisting of 75 tax-exempt state and municipal obligations, 18 mortgage-backed securities, including collateralized mortgage obligations, and two restricted and seven marketable equity securities. There were four investment securities in an unrealized loss position at June 30, 2010, including three mortgage-backed securities 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)

4. Investment securities (continued):

Mortgage-backed securities having unrealized losses at June 30, 2010, consisted of obligations of the Government National Mortgage Association (“GNMA”) federal agency bonds which are direct obligations of the U.S. Government. The three GNMA mortgage-backed securities that were in an unrealized loss position at June 30, 2010, were backed by the full faith and credit of the U.S. Government and thus considered to have no risk of default. The unrealized loss positions for these securities were less than 12 months. The unrealized losses were not considered to be other-than-temporary because they were a direct result of interest rate fluctuations, and management does not intend to sell the securities and it is unlikely that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be at maturity.

Tax-exempt state and municipal securities consisted entirely of insured general obligation bonds at June 30, 2010. There were no tax-exempt state and municipal securities in an unrealized loss position at June 30, 2010.

Marketable equity securities are held at the Parent Company and consist of common stocks of commercial banks. At June 30, 2010, the market value of common stock held in Wells Fargo and Company was below its amortized cost basis. This stock was originally held in Wachovia Corporation, which was acquired by Wells Fargo and Company 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 June 30, 2010. 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 unlikely that the Company will be required to sell the security as the entire cost basis is expected to be recovered.

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

4. Investment securities (continued):

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at June 30, 2010, 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
June 30, 2010		one year				five years				ten years				ten years				Total
State and municipals		$	1,176			$	2,817			$	10,414			$	4,929			$	19,336
Mortgage-backed securities:
U.S. Government			14,590				40,320				32,687				2,960				90,557
U.S. Government-sponsored			43				128				11								182
Total		$	15,809			$	43,265			$	43,112			$	7,889			$	110,075

5. 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 or 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.

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

5. Fair values of financial instruments (continued):

Assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009, are summarized below:

		Fair Value Measurements Using
						Quoted Prices in
						Active Markets for				Significant Other				Significant
						Identical Assets				Observable Inputs				Unobservable Inputs
June 30, 2010		Amount				(Level 1)				(Level 2)				(Level 3)
Assets:
Investment securities available-for-sale:
State and municipals		$	19,336							$	19,336
Mortgage-backed securities:
U.S. Government agencies			90,557								90,557
U.S. Government-sponsored enterprises			182								182
Equity securities:
Other			239			$	239
Total		$	110,314			$	239			$	110,075

		Fair Value Measurements Using
						Quoted Prices in
						Active Markets for				Significant Other				Significant
						Identical Assets				Observable Inputs				Unobservable Inputs
December 31, 2009		Amount				(Level 1)				(Level 2)				(Level 3)
Assets:
Investment securities available-for-sale:
State and municipals		$	26,862							$	26,862
Mortgage-backed securities:
U.S. Government agencies			78,155								78,155
U.S. Government-sponsored enterprises			220								220
Equity securities:
Other			231			$	231
Total		$	105,468			$	231			$	105,237

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)

5. Fair values of financial instruments (continued):

Assets measured at fair value on a non-recurring basis at June 30, 2010 and December 31, 2009, are summarized below:

Fair Value Measurements Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

June 30, 2010

Amount

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

$

4,428

$

4,428

Foreclosed assets

$

3,064

$

3,064

Fair Value Measurements Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

December 31, 2009

Amount

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

$

7,719

$

7,719

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $7,038 and a related allowance of $2,610 at June 30, 2010. Impaired loans had a recorded investment of $13,481 and a related allowance of $5,762 at December 31, 2009.

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 94.7 percent of total assets at June 30, 2010, and 95.3 percent of total assets at December 31, 2009. Liabilities that were considered financial instruments approximated 99.6 percent of total liabilities at June 30, 2010, and 99.7 percent of total liabilities at December 31, 2009. 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)

5. Fair values of financial instruments (continued):

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)

5. Fair values of financial instruments (continued):

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.

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rates offered for long-term debt.

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 June 30, 2010 and December 31, 2009.

The estimated fair value of financial instruments at June 30, 2010 and December 31, 2009, is summarized as follows:

		June 30, 2010								December 31,2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	41,750			$	41,750			$	49,278			$	49,278
Investment securities available-for-sale			112,851				112,851				108,005				108,005
Loans held for sale, net			110				110				2,016				2,016
Net loans			450,215				454,154				459,482				467,018
Mortgage servicing rights			935				935				893				893
Accrued interest receivable			1,962				1,962				2,122				2,122
Total		$	607,823			$	611,762			$	621,796			$	629,332
Financial liabilities:
Deposits without stated maturities		$	338,254			$	338,254			$	338,932			$	338,932
Deposits with stated maturities			238,464				245,998				251,851				256,749
Long-term debt			8,000				8,000				8,000				8,066
Accrued interest payable			1,284				1,284				1,296				1,296
Total		$	586,002			$	593,536			$	600,079			$	605,043

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

6. Recent accounting pronouncements:

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-18, “Receivables (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset,” which codifies the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 09-I. The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-10 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010, with early application permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of ASU 2010-18 on July 1, 2010, is not expected to have a material effect on the operating results or financial position of the Company.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. ASU 2010-20 requires more information about the credit quality of financing receivable in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. For public entities such as the Company, ASU 2010-20 is effective for periods ending on or after December 15, 2010, for amendments that require disclosures as of the end of a reporting period. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The adoption of this ASU is not expected to have a material effect on the operating results or financial position of the Company.

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, regulatory and fiscal policies affect banking both directly and indirectly. Inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts, and other factors beyond our control may also adversely affect our future results of operations. Our management team, consisting of the Board of Directors and executive officers, expects that no particular factor will affect the results of operations. The continuation of downward trends in areas such as real estate, construction and consumer spending, may adversely impact our ability to maintain or increase profitability. Therefore, we cannot assure our current level of income.

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 impair loan collections and may have a materially adverse effect on the consolidated results of operations and financial position.

The banking industry is highly competitive, with rapid changes in product delivery systems and in consolidation of service providers. We compete with many larger institutions in terms of asset size. These competitors also have substantially greater technical, marketing and financial resources. The larger size of these companies affords them the opportunity to offer 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. In addition, the unallocated element includes amounts in the allowance for loan losses required as a directive from the Federal Reserve Board at December 31, 2009.

We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance as necessary through normal operations. This ongoing evaluation 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. We are regulated by the Federal Reserve Board and Pennsylvania Department of Banking and these agencies may require us to make additions to the allowance for loan losses as part of the examination process from time to time.

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

On May 6, 2010, our Joint Audit Committee concluded, based on the recommendation of management, that our wholly-owned subsidiary, Community Bank, should amend its Call Report for the year ended December 31, 2009, based on a directive of the Federal Reserve Board. The regulatory directive required Community Bank to recognize a $7.0 million increase in its allowance for loan losses at December 31, 2009. Concurrently with the decisions to amend Community Bank’s Call Report, the Joint Audit Committee determined, based on the recommendation of management, that our consolidated financial statements for the year ended December 31, 2009, should no longer be relied upon and be restated to correct errors in the recognition, measurement, presentation and disclosure of our allowance for loan losses because of the misuse of facts that existed at the time those consolidated financial statements were prepared and in order to assure that the consolidated financial statements presented in the Annual Report on Form 10-K are consistent with those presented in the Call Report. The misuse of facts causing the restatement was the result of a misunderstanding between management and the Federal Reserve Board as to the methodology, i.e., model, to be used by us in determining the estimate for the allowance for loan losses under GAAP. Management was of the opinion that its model used to determine the adequacy of the allowance for loan losses was in accordance with the applicable supervisory guidance as provided by the Federal Reserve Board in 2009 and GAAP. Management was informed on May 5, 2010, by the Federal Reserve Board that we did not comply with the supervisory guidance, and therefore, must restate our Call Report at December 31, 2009.

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.

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

Intangible assets consist of goodwill. The valuation of goodwill is analyzed at least annually for impairment.

For a further discussion of our critical accounting policies, refer to the note entitled, “Summary of significant accounting policies,” in the Notes to Consolidated Financial Statements to our Amended Annual Report on Form 10-K/A for the period ended December 31, 2009. 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.

Operating Environment:

After two years of liquidation, businesses began rebuilding their inventories in the first half of 2010, which supported moderate economic growth. The United States economy grew at an annual rate of 2.4 percent in the second quarter of 2010 after growing at an annual rate of 3.7 percent in the first quarter. In addition to rebuilding inventories, overall business spending advanced at a strong annual rate of 17.0 percent in the second quarter of 2010. Spending for equipment and software grew 21.9 percent, while investment in nonresidential structures advanced 5.2 percent, the first positive change in seven consecutive quarters. Although labor conditions improved somewhat, they still were weak in comparison to pre-recession standards. The unemployment rate, which spiked at 10.1 percent in the fourth quarter of 2009, fell back to 9.5 percent in June 2010, the same rate as experienced one year earlier. Weak labor conditions continued to hinder consumer spending, which grew only 1.6 percent in the second quarter of 2010. Inflation trended lower in the second quarter due to a decrease in energy prices. The price index for gross domestic purchases, which measures prices paid by residents of the United States, increased 0.1 percent in the second quarter, significantly lower than the price increase of 2.1 percent in the first quarter. Excluding food and energy, this index increased 0.9 percent in the second quarter of 2010 compared to 1.6 percent in the first quarter of 2010.

In addition to domestic concerns, economic pressures weighed heavily on several European countries in the second quarter, which in turn produced volatility in global equity markets. In light of domestic and global economic uncertainty, coupled with low inflationary conditions, the Federal Open Market Committee (“FOMC”) decided to keep the target range for the federal funds rate unchanged at 0.00 percent or 0.25 percent during the second quarter of 2010 and indicated that conditions would continue to warrant this accommodative position for some time.

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

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The goals of the new legislation include restoring public confidence in the financial system following the 2007-2008 financial and credit crises, preventing another financial crisis and allowing regulators to identify failings in the system before another crisis can occur. Among other things, the Act creates the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services. The Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks. The scope of the Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years. Accordingly, we cannot assess the impact the Act will have on us at the present time.

Review of Financial Position:

Total assets equaled $641.8 million at June 30, 2010, a decrease of $10.4 million from $652.2 million at December 31, 2009. Loans, net of unearned income, decreased $11.8 million to $465.1 million at the close of the second quarter from $476.9 million at year-end 2009. Total deposits decreased $14.1 million to $576.7 million at June 30, 2010, from $590.8 million at December 31, 2009. The reduction in deposits was influenced by the cyclical deposit trends of our school district and municipal customers. Noninterest-bearing deposits decreased $1.0 million, while interest-bearing deposits decreased $13.1 million. Available-for-sale investment securities grew $4.9 million to $112.9 million at June 30, 2010, from $108.0 million at the end of 2009. Federal funds sold outstanding increased $6.4 million from the end of 2009. Stockholders’ equity rose $3.3 million to $53.6 million at June 30, 2010, from $50.3 million at December 31, 2009.

In comparison to the end of the previous quarter, total assets decreased $6.8 million from $648.6 million at March 31, 2010. The change in the balance sheet from the end of the first quarter reflected a $9.6 million decrease in total deposits. Loans, net of unearned income, decreased $1.2 million from the end of the first quarter, while investment securities decreased $3.7 million. Federal funds sold outstanding amounted to $31.7 million at June 30, 2010, compared to $33.8 million at March 31, 2010.

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

Investment Portfolio:

At June 30, 2010, our investment portfolio consisted primarily of short-term U.S. Government agency mortgage-backed securities, which provide us with a source of liquidity and intermediate-term tax-exempt state and municipal obligations, which we use to mitigate our tax burden.

The carrying values of the major classifications of securities as they relate to the total investment portfolio at June 30, 2010, and December 31, 2009, are summarized as follows:

Distribution of investment securities available-for-sale

		June 30,								December 31,
		2010								2009
		Amount				%				Amount				%
State and municipals		$	19,336				17.13	%		$	26,862				24.87	%
Mortgage-backed securities:
U.S. Government agencies			90,557				80.25				78,155				72.36
U.S. Government-sponsored enterprises			182				0.16				220				0.21
Equity securities:
Restricted			2,537				2.25				2,537				2.35
Other			239				0.21				231				0.21
Total		$	112,851				100.00	%		$	108,005				100.00	%

Available-for-sale investment securities increased $4.9 million to $112.9 million at June 30, 2010, from $108.0 million at December 31, 2009. The unrealized holding gain, which equaled $819, net of income taxes of $422, at the end of 2009 appreciated $920 to $1,739, net of income taxes of $896, at June 30, 2010.

During the six months ended June 30, we received proceeds from the sale of available-for-sale investment securities of $6.2 million in 2010 and $4.3 million in 2009. The securities sold in 2010 and 2009 were composed entirely of intermediate-term, tax-exempt state and municipal obligations. These securities were sold as part of alternative minimum tax planning strategies. Net gains recognized on the sale of available-for-sale investment securities totaled $361 for the six months ended June 30, 2010 and $114 for the same six months of 2009.

For the first six months of 2010, the investment portfolio averaged $114.0 million, an increase of $39.0 million compared to $75.0 million for the same period of last year. The tax-equivalent yield on the investment portfolio decreased 229 basis points to 3.67 percent for the first half of 2010 from 5.96 percent for the same period of 2009. Moreover, the tax-equivalent yield fell 108 basis points to 3.13 percent for the second quarter from 4.21 percent for the first quarter of 2010.

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

The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent yield of the available-for-sale portfolio at June 30, 2010, 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. Expected 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.

Maturity distribution of available-for-sale portfolio

										After one								After five
		Within								but within								but within								After
		one year								five years								ten years								ten years								Total
June 30, 2010		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Amortized cost:
State and municipals		$	1,156				7.44	%		$	2,691				7.78	%		$	9,567				7.38	%		$	4,756				7.04	%		$	18,170				7.35	%
Mortgage-backed securities:
U.S. Government			14,493				3.10				39,883				3.02				31,935				3.17				2,888				3.52				89,199				3.10
U.S. Government-sponsored			41				6.80				119				6.73				11				6.66												171				6.74
Equity securities:
Restricted																											2,537				0.26				2,537				0.26
Other																											139				0.98				139				0.98
Total		$	15,690				3.43	%		$	42,693				3.33	%		$	41,513				4.14	%		$	10,320				4.30	%		$	110,216				3.74	%
Fair value:
State and municipals		$	1,176							$	2,817							$	10,414							$	4,929							$	19,336
Mortgage-backed securities:
U.S. Government			14,590								40,320								32,687								2,960								90,557
U.S. Government-sponsored			43								128								11																182
Equity securities:
Restricted																											2,537								2,537
Other																											239								239
Total		$	15,809							$	43,265							$	43,112							$	10,665							$	112,851