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, 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

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

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

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 October 31, 2010.

 

 

Page 1 of 65

Exhibit Index on Page 61

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

INDEX

CONTENTS		Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2010 and 2009			3
Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			4
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 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			58
Item 4T. Controls and Procedures			*
Part II. Other Information:
Item 1. Legal Proceedings			59
Item 1A. Risk Factors			*
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			59
Item 3. Defaults Upon Senior Securities			59
Item 4. Removed and Reserved			59
Item 5. Other Information			59
Item 6. Exhibits			59
Signatures			60
Exhibit Index			61
Exhibit 31(i)
Exhibit 32

Comm Bancorp, Inc.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Interest income:
Interest and fees on loans:
Taxable		$	5,806			$	6,194			$	17,689			$	19,078
Tax-exempt			319				598				959				1,883
Interest and dividends on investment securities available-for-sale:
Taxable			590				205				1,842				869
Tax-exempt			219				407				759				1,417
Dividends			2				9				6				29
Interest on federal funds sold			12				4				29				5
Total interest income			6,948				7,417				21,284				23,281
Interest expense:
Interest on deposits			2,100				2,433				6,848				7,492
Interest on short-term borrowings							5								97
Interest on long-term debt			160								480
Total interest expense			2,260				2,438				7,328				7,589
Net interest income			4,688				4,979				13,956				15,692
Provision for loan losses			300				8,670				1,600				9,760
Net interest income (loss) after provision for loan losses			4,388				(3,691	)			12,356				5,932
Noninterest income:
Service charges, fees and commissions			711				848				2,182				2,444
Mortgage banking income			405				287				900				1,179
Net gain on sale of premises and equipment															294
Net gain on sale of investment securities available-for-sale							1,385				361				1,499
Total noninterest income			1,116				2,520				3,443				5,416
Noninterest expense:
Salaries and employee benefits expense			2,188				2,025				6,558				6,329
Net occupancy and equipment expense			558				591				1,708				1,849
Other expenses			2,203				1,942				5,403				5,735
Total noninterest expense			4,949				4,558				13,669				13,913
Income (loss) before income taxes			555				(5,729	)			2,130				(2,565	)
Income tax benefit			(445	)			(2,354	)			(1,210	)			(2,180	)
Net income (loss)			1,000				(3,375	)			3,340				(385	)
Other comprehensive income (loss):
Unrealized gains on investment securities available-for-sale			777				1,118				2,532				1,473
Reclassification adjustment for gains included in net income							(1,385	)			(361	)			(1,499	)
Income tax expense (benefit) related to other comprehensive income (loss)			264				(91	)			738				(9	)
Other comprehensive income (loss), net of income taxes			513				(176	)			1,433				(17	)
Comprehensive income (loss)		$	1,513			$	(3,551	)		$	4,773			$	(402	)
Per share data:
Net income (loss)		$	0.58			$	(1.95	)		$	1.94			$	(0.22	)
Cash dividends declared						$	0.28							$	0.84
Average common shares outstanding			1,722,923				1,718,439				1,722,923				1,722,994

See Notes to Consolidated Financial Statements.

Comm Bancorp, Inc.

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

		September 30,				December 31,
		2010				2009
		(Unaudited)				(Unaudited)
Assets:
Cash and due from banks		$	52,658			$	23,978
Federal funds sold			19,501				25,300
Investment securities available-for-sale			108,555				108,005
Loans held for sale, net			625				2,016
Loans, net of unearned income			447,282				476,944
Less: allowance for loan losses			13,669				17,462
Net loans			433,613				459,482
Premises and equipment, net			11,300				11,616
Accrued interest receivable			2,023				2,122
Other assets			24,502				19,634
Total assets		$	652,777			$	652,153
Liabilities:
Deposits:
Noninterest-bearing		$	82,407			$	88,335
Interest-bearing			503,536				502,448
Total deposits			585,943				590,783
Long-term debt			8,000				8,000
Accrued interest payable			1,110				1,296
Other liabilities			2,572				1,740
Total liabilities			597,625				601,819
Stockholders’ equity:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding: September 30, 2010, 1,722,923 shares; December 31, 2009, 1,721,007 shares			569				568
Capital surplus			8,010				7,966
Retained earnings			44,321				40,981
Accumulated other comprehensive income			2,252				819
Total stockholders’ equity			55,152				50,334
Total liabilities and stockholders’ equity		$	652,777			$	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											3,340								3,340
Dividend reinvestment plan: 1,916 shares issued			1				44												45
Other comprehensive income, net of income taxes															1,433				1,433
Balance, September 30, 2010		$	569			$	8,010			$	44,321			$	2,252			$	55,152
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

See Notes to Consolidated Financial Statements.

Comm Bancorp, Inc.

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

		2010				2009
Nine Months Ended September 30,		(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	3,340			$	(385	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			1,600				9,760
Depreciation and amortization of premises and equipment			578				678
Net amortization of investment securities			1,575				236
Amortization of net loan costs			255				286
Amortization of mortgage servicing rights			213				310
Deferred income tax expense (benefit)			1,646				(2,044	)
Net gain on sale of investment securities available-for-sale			(361	)			(1,499	)
Net gain on sale of loans			(805	)			(1,210	)
Net gain on sale of premises and equipment							(294	)
Net loss sale of foreclosed assets							159
Changes in:
Loans held for sale, net			2,196				2,600
Accrued interest receivable			99				(454	)
Other assets			(3,083	)			(1,219	)
Accrued interest payable			(186	)			(630	)
Other liabilities			335				339
Net cash provided by operating activities			7,402				6,633
Cash flows from investing activities:
Proceeds from repayments of investment securities available-for-sale			14,092				7,700
Proceeds from sales of investment securities available-for-sale			6,154				40,460
Purchases of investment securities available-for-sale			(19,839	)			(4,651	)
Proceeds from sale of foreclosed assets			365				268
Net decrease (increase) in lending activities			20,005				(26,970	)
Proceeds from sale of premises and equipment							509
Purchases of premises and equipment			(262	)			(771	)
Net cash provided by investing activities			20,515				16,545
Cash flows from financing activities:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts			15,202				7,436
Time deposits			(20,042	)			5,373
Proceeds from issuance of common shares			45				243
Repurchase and retirement of common shares							(684	)
Cash dividends paid			(241	)			(1,435	)
Net cash provided by (used in) financing activities			(5,036	)			10,933
Net increase in cash and cash equivalents			22,881				34,111
Cash and cash equivalents at beginning of year			49,278				20,717
Cash and cash equivalents at end of period		$	72,159			$	54,828
Supplemental disclosures:
Cash paid during the period for:
Interest		$	7,514			$	8,219
Income taxes							691
Noncash items:
Transfers of loans to foreclosed assets			4,009				2,023
Unrealized losses (gains) on investment securities available-for-sale, net		$	(1,433	)		$	17

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 nine months ended and as of September 30, 2010, are not necessarily indicative of the results of operations and financial position 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 Amended 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 nine-month periods ended September 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 September 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)

4. Investment securities:

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

		Amortized				Unrealized				Unrealized				Fair
September 30, 2010		Cost				Gains				Losses				Value
State and municipals		$	18,080			$	1,415							$	19,495
Mortgage-backed securities:
U.S. Government agencies			84,222				1,901			$	5				86,118
U.S. Government-sponsored enterprises			164				9								173
Equity securities:
Restricted			2,537												2,537
Other			139				96				3				232
Total		$	105,142			$	3,421			$	8			$	108,555

		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 $2,252, net of deferred income taxes of $1,161, at September 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 September 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
September 30, 2010		Value				Losses				Value				Losses				Value				Losses
State and municipals
Mortgage-backed securities:
U.S. Government agencies		$	1,723			$	5											$	1,723			$	5
U.S. Government-sponsored enterprises
Equity securities:
Restricted
Other										$	6			$	3				6				3
Total		$	1,723			$	5			$	6			$	3			$	1,729			$	8

		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 September 30, 2010, the Company had 100 investment securities, consisting of 74 tax-exempt state and municipal obligations, 17 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, 2010, including one mortgage-backed security and one marketable equity security. The 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):

The mortgage-backed security having an unrealized loss at September 30, 2010, was a Government National Mortgage Association (“GNMA”) federal agency bond, which is a direct obligation of the U.S. Government. The GNMA mortgage-backed security in an unrealized loss position at September 30, 2010, 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 fluctuation, and management does not intend to sell the security, and it is unlikely that the Company will be required to sell the security, before recovery of its amortized cost basis, which may be at maturity.

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

Marketable equity securities are held at the Parent Company and consist of common stocks of commercial banks. At September 30, 2010, the market value of common stock held in Wells Fargo and Company was below its amortized cost basis. This stock was originally that of 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 September 30, 2010. As a result, the Company does not consider the unrealized loss to be other-than-temporary. 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 September 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
September 30, 2010		one year				five years				ten years				ten years				Total
State and municipals		$	1,129			$	2,753			$	10,550			$	5,063			$	19,495
Mortgage-backed securities:
U.S. Government			13,543				40,356				30,076				2,143				86,118
U.S. Government-sponsored			46				113				14								173
Total		$	14,718			$	43,222			$	40,640			$	7,206			$	105,786

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 September 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
September 30, 2010		Amount				(Level 1)				(Level 2)				(Level 3)
Assets:
Investment securities available-for-sale:
State and municipals		$	19,495							$	19,495
Mortgage-backed securities:
U.S. Government agencies			86,118								86,118
U.S. Government-sponsored enterprises			173								173
Equity securities:
Other			232			$	232
Total		$	106,018			$	232			$	105,786

		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 September 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

September 30, 2010

Amount

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

$

6,046

$

6,046

Foreclosed assets

$

3,564

$

3,564

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 $8,638 and a related allowance of $2,592 at September 30, 2010. Impaired loans had a recorded investment of $13,481 and a related allowance of $5,762 at December 31, 2009.

Foreclosed assets are measured at fair value based upon current estimates derived through independent appraisals 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 94.7 percent of total assets at September 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 September 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.

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

5. Fair values of financial instruments (continued):

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.

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.

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

5. Fair values of financial instruments (continued):

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.

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 September 30, 2010 and December 31, 2009.

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

5. Fair values of financial instruments (continued):

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

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	72,159			$	72,159			$	49,278			$	49,278
Investment securities available-for-sale			108,555				108,555				108,005				108,005
Loans held for sale, net			625				625				2,016				2,016
Net loans			433,613				439,823				459,482				467,018
Mortgage servicing rights			972				972				893				893
Accrued interest receivable			2,023				2,023				2,122				2,122
Total		$	617,947			$	624,157			$	621,796			$	629,332
Financial liabilities:
Deposits without stated maturities		$	354,134			$	354,134			$	338,932			$	338,932
Deposits with stated maturities			231,809				240,495				251,851				256,749
Long-term debt			8,000				8,000				8,000				8,066
Accrued interest payable			1,110				1,110				1,296				1,296
Total		$	595,053			$	603,739			$	600,079			$	605,043

6. Definitive Merger Agreement:

On August 9, 2010, the Company entered into a Definitive Merger Agreement with F.N.B. Corporation (“F.N.B.”) pursuant to which F.N.B. will acquire the Company in a stock and cash transaction. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of the Company will be entitled to receive a fixed exchange ratio of 3.4545 shares of F.N.B. common stock and $10.00 in cash for each share of the Company’s common stock. Completion of the merger requires, among other things, the approval of the Company’s stockholders and customary regulatory approvals. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay to F.N.B. a termination fee of approximately $2.8 million.

The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed by the Company as Exhibit 99.2 to the Current Report on Form 8-K on August 10, 2010.

Pending regulatory and stockholder approvals, the Company expects the merger to be consummated by December 31, 2010. However, there can be no assurance that the transaction will be consummated or, if consummated, when the transaction will occur.

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.

Accounting estimates require 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 adjusted 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:

Similar to the previous two quarters, the United States economy continued to experience only moderate growth during the third quarter of 2010. The gross domestic product, the value of all goods and services produced in the United States, grew at an annual rates of 2.0 percent in the third quarter of 2010, 1.7 percent in the second quarter and 3.7 percent in the first quarter. The third quarter growth primarily reflected increases in consumer, business and federal government spending, partially offset by a reduction in residential construction. Consumer spending increased at an annual rate of 2.6 percent in the third quarter of 2010 while nonresidential spending advanced at an annual rate of 9.7 percent. Spending for equipment and software grew 12.0 percent, while investment in nonresidential structures rose 3.9 percent. In addition, strong defense and nondefense spending, together, influenced an 8.8 percent increase in spending by the federal government. However, labor conditions remained weak in comparison to pre-recession standards. The unemployment rate was 9.6 percent for September 2010, down slightly from a rate of 9.8 percent one year ago. In addition, despite growing 25.7 percent in the second quarter, construction spending declined 29.1 percent in third quarter of 2010, keeping the number of housing starts at depressed levels.

In light of domestic 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 third 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 $652.8 million at September 30, 2010, and $652.2 million at December 31, 2009. Loans, net of unearned income, decreased $29.6 million to $447.3 million at the close of the third quarter from $476.9 million at year-end 2009. Total deposits decreased $4.9 million to $585.9 million at September 30, 2010, from $590.8 million at December 31, 2009. Noninterest-bearing deposits decreased $5.9 million, while interest-bearing deposits increased $1.0 million. Cash and cash equivalents, including federal funds sold, rose $22.9 million from the end of 2009. Stockholders’ equity increased $4.9 million to $55.2 million at September 30, 2010, from $50.3 million at December 31, 2009.

In comparison to the end of the previous quarter, total assets increased $11.0 million from $641.8 million at June 30, 2010. The change in the balance sheet from the end of the second quarter reflected a $9.2 million increase in total deposits. Loans, net of unearned income, decreased $17.9 million from the end of the second quarter, while investment securities decreased $4.3 million. Cash and cash equivalents, including federal funds sold, amounted to $72.2 million at September 30, 2010, compared to $41.8 million at June 30, 2010.

On August 9, 2010, we entered into a definitive merger agreement with F.N.B. providing for F.N.B. to acquire us. Completion of the merger requires, among other things, the approval of stockholders and regulatory approvals. For a further discussion of the merger, refer to Note 6 entitled, “Definitive Merger Agreement,” in the Notes to Consolidated Financial Statements to this Quarterly Report on Form 10-Q.

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

Investment Portfolio:

At September 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 September 30, 2010, and December 31, 2009, are summarized as follows:

Distribution of investment securities available-for-sale

		September 30,								December 31,
		2010								2009
		Amount				%				Amount				%
State and municipals		$	19,495				17.96	%		$	26,862				24.87	%
Mortgage-backed securities:
U.S. Government agencies			86,118				79.33				78,155				72.36
U.S. Government-sponsored enterprises			173				0.16				220				0.21
Equity securities:
Restricted			2,537				2.34				2,537				2.35
Other			232				0.21				231				0.21
Total		$	108,555				100.00	%		$	108,005				100.00	%

Available-for-sale investment securities increased $0.6 million to $108.6 million at September 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 $1,433 to $2,252, net of income taxes of $1,161, at September 30, 2010.

During the nine months ended September 30, we received proceeds from the sale of available-for-sale investment securities of $6.2 million in 2010 and $40.5 million in 2009. In 2009, we sold a portion of our tax-exempt state and municipal obligations to avoid alternative minimum tax consequences related to our investment in an elderly, low-income housing project which we made during the fourth quarter. The securities sold in 2010 were composed entirely of intermediate-term, tax-exempt state and municipal obligations, and were sold as part of continuing tax planning strategies. Net gains recognized on the sale of available-for-sale investment securities totaled $361 for the nine months ended September 30, 2010 and $1,499 for the same nine months of 2009.

For the nine months ended September 30, 2010, the investment portfolio averaged $111.9 million, an increase of $41.3 million compared to $70.6 million for the same period of last year. The tax-equivalent yield on the investment portfolio decreased 219 basis points to 3.58 percent for the nine months ended September 30, 2010, from 5.77 percent for the same period of 2009. In comparison to the previous quarter, the tax-equivalent yield fell 10 basis points to 5.43 percent for the third quarter from 5.53 percent for the second 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 September 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
September 30, 2010		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Amortized cost:
State and municipals		$	1,121				7.48	%		$	2,640				7.77	%		$	9,563				7.38	%		$	4,756				7.04	%		$	18,080				7.35	%
Mortgage-backed securities:
U.S. Government			13,353				2.90				39,627				2.94				29,142				2.81				2,100				3.16				84,222				2.89
U.S. Government-sponsored			44				6.74				107				6.75				13				6.70												164				6.74
Equity securities:
Restricted																											2,537				0.26				2,537				0.26
Other																											139				0.88				139				0.88
Total		$	14,518				3.27	%		$	42,374				3.25	%		$	38,718				3.94	%		$	9,532				4.29	%		$	105,142				3.60	%
Fair value:
State and municipals		$	1,129							$	2,753							$	10,550							$	5,063							$	19,495
Mortgage-backed securities:
U.S. Government			13,543								40,356								30,076								2,143								86,118
U.S. Government-sponsored			46								113								14																173
Equity securities:
Restricted																											2,537								2,537
Other																											232								232
Total		$	14,718							$	43,222							$	40,640							$	9,975							$	108,555