Return on average assets was 0.79% for the second quarter and 0.97% for the first half of 2009, compared to 1.19% and 1.16% for the respective 2008 periods. Return on average stockholders' equity was 8.18% and 10.21%, respectively, for the second quarter and year-to-date 2009, compared to 11.85% and 11.62% for the same periods of 2008.

"Our net income was impacted by increases in noninterest expense and the provision for loan losses, partially offset by increases in net interest income and noninterest income," stated William F. Farber, Sr., President and Chief Executive Officer. "The recessionary conditions, specifically in the housing market and construction sector, continued to adversely impact our commercial customer base. We experienced a reduction in the fair value of the underlying collateral supporting certain impaired loans, which resulted in an increase in our provision for loan losses. In addition, a higher volume of nonaccrual loans compared to the prior year is having an adverse impact on 2009 earnings. Our profitability was also negatively affected by an increase in FDIC deposit insurance, including a 5 basis point special assessment imposed on all insured depository institutions on June 30, 2009," continued Farber. "Despite these circumstances, our capital position is strong and significantly exceeds regulatory standards for well capitalized institutions. I am confident, that our strong capital base and prudent management will provide us with the foundation needed to weather the recession," concluded Farber.

   HIGHLIGHTS    --  Net interest margin continued to improve to 4.09% in the second       quarter of 2009.   --  Mortgage banking income for the first half of 2009 grew 175.3%       compared to 2008.   --  Total assets at June 30, 2009, grew 8.7% over prior year.    --  Key capital adequacy ratio improved to 9.25% at June 30, 2009, from       9.10% at previous quarter end.    INCOME STATEMENT REVIEW   

For the six months ended June 30, tax-equivalent net interest income increased $551 thousand or 4.9% to $11,896 thousand in 2009 from $11,345 thousand in 2008. A $1,279 thousand or 19.9% decrease in interest expense was partially offset by a $728 thousand or 4.1% reduction in tax-equivalent interest revenue. With regard to interest expense, our cost of funds decreased 85 basis points to 2.19% for the first half of 2009 from 3.04% for the same period of last year. We experienced significant reductions in the rates paid for all interest-bearing liability categories. Average interest-bearing liabilities grew $49.5 million or 11.6%, which partially mitigated the positive influence of the reduction in funding costs. The decline in interest revenue resulted primarily from an 89 basis point decrease in the tax-equivalent yield on earning assets to 5.83% for the six months ended June 30, 2009, from 6.72% for the same six months of 2008. Specifically, the tax-equivalent yield on the loan portfolio, which decreased 91 basis points to 5.82% in 2009 from 6.73% in 2008, had the greatest impact on interest revenue. Partially offsetting the decline in the tax-equivalent yield on earning assets was growth in average earning assets. Average investments increased $39.2 million or 109.5% comparing the first six months of 2009 and 2008. In addition, the loan portfolio grew $19.2 million to an average of $513.9 million in 2009 from $494.7 million in 2008. Our tax-equivalent net interest margin for the six months ended June 30, contracted 22 basis points to 4.07% in 2009 compared to 4.29% in 2008. However, our net interest margin improved 4 basis points compared to 4.05% for the first quarter of 2009 and 42 basis points compared to 3.67% for the fourth quarter of 2008.

For the three months and six months ended June 30, 2009, the provision for loan losses totaled $520 thousand and $1,090 thousand. In comparison, the provision for loan losses was $283 thousand and $613 thousand for the respective periods of 2008. The increases were a direct result of a higher volume of impaired loans, coupled with reductions in the fair values of the underlying collateral supporting certain impaired loans.

Noninterest income for the second quarter rose $287 thousand or 27.7% to $1,322 thousand in 2009 from $1,035 thousand in 2008. A $336 thousand or 218.2% increase in mortgage banking income was the primary factor contributing to the second quarter increase. For the six months ended June 30, 2009, noninterest income totaled $2,896 thousand, an increase of $893 thousand or 44.6% from $2,003 thousand for the same six months of 2008. Included in year-to-date noninterest income in 2009 was a net gain of $294 thousand from the dispositions of the former Tunkhannock and Eaton Township, Pennsylvania branch offices. In addition, noninterest income included $114 thousand in net gains from the sale of available-for-sale investment securities. Due to the significantly lower mortgage rates, mortgage banking income increased $568 thousand or 175.3% comparing the six months ended June 30, 2009 and 2008. Service charges, fees and commissions decreased $83 thousand or 4.9% to $1,596 thousand in 2009 from $1,679 thousand in 2008.

For the second quarter, noninterest expense increased $975 thousand or 24.2% to $5,007 thousand in 2009 from $4,032 thousand in 2008. The increase resulted primarily from a $988 thousand or 77.7% increase in other expenses. This increase was due largely to an increase in the cost of FDIC insurance and a special assessment imposed by the FDIC on all insured-depository institutions to help mitigate the effects of recent bank failures on the Deposit Insurance Fund. Salaries and employee benefits expense increased $49 thousand or 2.3%, while net occupancy and equipment expense decreased $62 thousand or 9.6%. For the six months ended June 30, 2009, noninterest expense increased $1,324 thousand or 16.5%. Other expenses rose $1,290 thousand or 51.5%, which was due primarily to the increase in FDIC insurance. The changes in salaries and employee benefits and net occupancy and equipment expenses were negligible.

BALANCE SHEET REVIEW

Total assets amounted to $610.8 million at June 30, 2009, an increase of $48.9 million compared to $561.9 million at June 30, 2008. Loans, net of unearned income, increased $19.8 million or 4.0% to $510.9 million at June 30, 2009, from $491.1 million at June 30, 2008. Excess deposits not used to fund loans were directed into our investment portfolio, which increased $41.7 million or 132.4% from one year ago. Total deposits grew $36.3 million or 7.2%. Noninterest-bearing deposits increased $722 thousand, while interest-bearing deposits rose $35.6 million. Short-term borrowings outstanding at the close of the second quarter were $8.0 million. There were no short-term borrowings outstanding at June 30, 2008.

Stockholders' equity equaled $59.5 million or $34.64 per share at June 30, 2009, and $56.2 million or $32.14 per share at June 30, 2008. Common stock repurchases totaled $684 thousand for the six months ended June 30, 2009. Dividends declared were $0.28 per share and $0.56 per share, for the second quarter and first half of 2009. Accumulated other comprehensive income increased $159 thousand from year-end 2008, which resulted directly from an appreciation in the market value of available-for-sale investment securities.

Nonperforming assets equaled $23.0 million or 4.49% of loans, net of unearned income and foreclosed assets at June 30, 2009, compared to $13.9 million or 2.83% one year earlier. Although a significant weakening from June 30, 2008, asset quality improved slightly from the previous quarter-end and from the end of 2008. Nonperforming assets equaled $23.4 million or 4.60% of loans, net of unearned income and foreclosed assets at March 31, 2009, and $24.2 million or 4.99% at December 31, 2008. The improvement from the previous quarter end resulted primarily from decreases in accruing loans past due 90 days or more and foreclosed assets, as nonaccrual loans, for the most part, were stable. The allowance for loan losses equaled $6.0 million or 1.18% of loans, net of unearned income, at June 30, 2009, compared to $5.1 million or 1.04% one year ago. Loans charged-off, net of recoveries, increased $190 thousand or 139.7% to $326 thousand for the six months ended June 30, 2009, from $136 thousand for the same period last year.

Comm Bancorp, Inc.