Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
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. Critical Accounting Policies:
Our financial statements are prepared in accordance with United States generally accepted accounting principles ("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 value of financial instruments and the valuations of real estate acquired through foreclosure, deferred tax assets and liabilities and intangible assets. Actual amounts could differ from those estimates.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.
The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for the impairment of those loans collectively evaluated. The unallocated element is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.
We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance for any deficiencies through normal operations. This self-correcting mechanism reduces potential differences between

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
estimates and actual observed losses. In addition, the unallocated portion of the allowance is examined quarterly to ensure that it remains relatively constant in relation to the total allowance unless there are 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.
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 market value less cost to sell. Fair market values for real estate properties are based upon estimates derived through independent appraisals. 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 basis of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Intangible assets include goodwill. The valuation of goodwill is analyzed at least annually for impairment.
For a further discussion of our significant accounting policies, refer to the note entitled, "Summary of significant accounting policies," in the Notes to Consolidated Financial Statements to our Annual Report on Form 10-K for the period ended December 31, 2007. 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, Notes to the Consolidated Financial Statements, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our financial position, results of operations and cash flows.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Operating Environment:
Economic conditions significantly deteriorated during the third quarter of 2008. Indicators suggest the United States economy is poised to fall into the deepest recession since the early 1980's. The gross domestic product, the value of all goods and services produced in the Nation, declined at an annual rate of 0.3 percent in the third quarter. In addition, consumers' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest on record dating back to 1947. The subprime mortgage debacle neared crisis stage when the two U.S. Government-sponsored agencies and National mortgage giants, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association ("FNMA"), announced that they sustained severe credit losses and were at the point of bankruptcy as the number of foreclosures across the Nation sky rocketed. The situation was exacerbated when several of the largest investment banks, insurance companies and financial institutions announced that they too were at the brink of failure. Confidence in the United States financial system crumbled, which sent equity markets into a tailspin. At the beginning of the fourth quarter, Congress approved The Emergency Economic Stabilization Act of 2008, a $700.0 billion plan to rescue the economy by injecting money into the financial system. Part of the new plan involves $250.0 billion set aside for the United States Government to purchase preferred equity shares in financial institutions. Furthermore, the malaise has spread overseas with many European and Asian markets reporting record declines. On October 8, 2008, the Federal Open Market Committee ("FOMC"), at an emergency meeting lowered the federal funds target rate 50 basis points to 1.50 percent. The FOMC further reduced rates by another 50 basis points at its regularly scheduled meeting held on October 29, 2008. The FOMC indicated that these moves were in response to incoming data that suggested the pace of economic activity had slowed considerably. Given an economic slowdown, financial institutions could see reductions in earnings as loan demand declines and the level of nonperforming loans increases.
Review of Financial Position:
Total assets increased $58.4 million or at an annualized rate of 14.2 percent to $607.4 million at September 30, 2008, from $549.0 million at December 31, 2007. The balance sheet growth was driven by an increase in total deposits of $56.2 million to $547.6 million, an annualized rate of 15.3 percent. Reduced tolerance for risk due to stock market volatility, coupled with our new service offering, CB&T DirectSM, and promotional certificate of deposit offerings, impacted our deposit gathering. Loans, net of unearned income, rose $22.6 million to $493.9 million at September 30, 2008, from $471.3 million at the end of 2007. Excess deposits not used to fund loans were directed into our investment portfolio. Available-for-

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
sale investment securities increased $37.3 million to $76.7 million from $39.4 million comparing September 30, 2008 and December 31, 2007. The effects of the downturn in economic conditions continued to impact our operations during the third quarter of 2008. Demand for loans subsided in our market area, while deposit gathering strengthened.
One of the major influences on the strength of deposit gathering was the impact of natural gas mining in our market area. Many customers who own land in rural sections of Northeastern Pennsylvania have been offered significant sums of money, including a flat land lease fee per acre and royalties for any gas extracted, by natural gas companies for drilling rights to their property. In order to respond to the needs of these customers, our Trust and Wealth Management Division began offering investment products and services specifically tailored to meet the needs of these individuals. An example of one of these products was the design of a special "gas lease" certificate of deposit product offered at a promotional rate. In order to qualify for this product, the customer had to present funds received from this mining initiative to open the account.
In comparison to the previous quarter end, total assets increased $45.5 million or at an annualized rate of 32.2 percent from $561.9 million at June 30, 2008. As previously mentioned, deposit gathering was the major influence on the growth, as total deposits grew $45.1 million. We experienced significant growth in both interest-bearing and noninterest-bearing deposits. Loans, net of unearned income, increased only $2.8 million from $491.1 million at the end of the prior quarter. The influx of monies from deposit gathering was directed into available-for-sale investment securities, which increased $45.2 million from $31.5 million at June 30, 2008.
During the fourth quarter of 2008, we will open a new branch office in Tunkhannock, Wyoming County, Pennsylvania. This office, located in the downtown business district, will consolidate and replace two outdated facilities located within five miles of the new facility.
Investment Portfolio:
At September 30, 2008, our investment portfolio was predominantly comprised of intermediate-term, tax-exempt obligations of states and municipalities and short-term U.S. Government securities. State and municipal obligations assist us in lowering our tax burden and represented 40.5 percent of our investment portfolio at the end of the third quarter of 2008. U.S. Government securities consist primarily of U.S. Treasury securities and collateralized mortgage obligations ("CMOs") of U.S. Government agencies, which provide a source of liquidity. Approximately 99.0 percent of U.S. Government agency securities were obligations of the Government National

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Mortgage Association, which are backed by the full faith and credit of the U.S.
Government.
The carrying values of the major classifications of securities as they relate to
the total investment portfolio at September 30, 2008, and December 31, 2007, are
summarized as follows:
Distribution of investment securities available-for-sale

                                          September 30,             December 31,
                                              2008                      2007
                                       Amount         %          Amount         %

         U.S. Treasury securities     $ 20,000        26.07 %
         State and municipals:
         Taxable                                                $  5,227        13.26 %
         Tax-exempt                     31,073        40.51       30,897        78.41
         Mortgage-backed securities     24,660        32.15        1,904         4.83
         Equity securities:
         Restricted                        760         0.99        1,128         2.86
         Other                             213         0.28          251         0.64

         Total                        $ 76,706       100.00 %   $ 39,407       100.00 %

Available-for-sale investment securities increased $37.3 million to $76.7 million at September 30, 2008, from $39.4 million at December 31, 2007. The unrealized holding gain equaled $439, net of income taxes of $226 at the end of the third quarter of 2008, compared to $1,115, net of income taxes of $574 at the end of 2007.
In comparison to the previous quarter-end, available-for-sale investment securities increased $45.2 million. Purchases during the third quarter totaled $47.8 million and consisted primarily of $23.9 million in mortgage-backed securities, including CMOs, of U.S. Government agencies. In addition, at the close of the third quarter we purchased a $20.0 million U.S. Treasury Bill as an alternative investment to overnight federal funds given the recent financial crisis of several large commercial banks.
For the nine months ended September 30, 2008, the investment portfolio averaged $34.8 million, a decrease of $38.3 million or 52.4 percent compared to $73.1 million for the same period of last year. The tax-equivalent yield on the investment portfolio rose 136 basis points to 6.90 percent for the nine months ended September 30, 2008 from 5.54 percent for the same period of 2007. In addition, the tax-equivalent yield rose 40 basis points to 7.25 percent for the third quarter from 6.85 percent for the second quarter.
The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent yield of the available-for-sale portfolio at

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
September 30, 2008, 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, 2008      Amount       Yield        Amount       Yield        Amount       Yield       Amount       Yield        Amount       Yield

Amortized cost:
U.S. Treasury
securities             $ 20,000        0.01 %                                                                                 $ 20,000        0.01 %
State and
municipals                1,232        6.84      $  6,144        7.81 %    $ 19,247        7.46 %    $ 3,585        7.07 %      30,208        7.46
Mortgage-backed
securities                2,966        4.83        13,082        4.87         8,123        4.92          765        5.22        24,936        4.89
Equity securities:
Restricted                                                                                               760        6.26           760        6.26
Other                                                                                                    137        3.10           137        3.10

Total                  $ 24,198        0.95 %    $ 19,226        5.81 %    $ 27,370        6.71 %    $ 5,247        6.58 %    $ 76,041        4.64 %


Fair value:
U.S. Treasury
securities             $ 20,000                                                                                               $ 20,000
State and
municipals                1,249                  $  6,351                  $ 19,997                  $ 3,476                    31,073
Mortgage-backed
securities                2,939                    12,932                     8,027                      762                    24,660
Equity securities:
Restricted                                                                                               760                       760
Other                                                                                                    213                       213

Total                  $ 24,188                  $ 19,283                  $ 28,024                  $ 5,211                  $ 76,706

Loan Portfolio:
Economic conditions, which influence business investment and consumer spending, were unfavorable for the first nine months of 2008. At the end of the third quarter, conditions further deteriorated due to the recent financial crisis. Both business and consumer spending are expected to retract further during the remainder of 2008.
According to the July 2008 Senior Loan Officer Opinion Survey issued by the Federal Reserve, a majority of banks indicated they had tightened lending standards and reported a decrease in the demand for loans from both businesses and households. With regard to the business sector, the weaker demand was attributed to a decrease in financing needs for plant, equipment and inventories. Despite reporting weaker demand, commercial and industrial

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
loans at all commercial banks increased at an annual rate of 10.8 percent from the end of the second quarter and 10.2 percent from year-end 2007. However, the growth reported during 2008 was significantly lower than the growth experienced in the prior year. Similarly, demand for our commercial loan products, including commercial mortgages, land development loans and lease financing, was slow during the third quarter of 2008. These loans increased $4.9 million or at an annualized rate of 5.7 percent to $346.3 million at September 30, 2008, from $341.4 million at June 30, 2008. Comparatively, commercial loan growth in the third quarter of 2007 was $10.6 million or 13.4 percent.
With respect to retail lending, Northeastern Pennsylvania was not as severely impacted by the downturn in the housing market as was the Nation. Home sales were stable within our market area. As a result, activity in our secondary mortgage department was favorable during the first three quarters of 2008. Residential mortgage loans serviced for the FNMA increased $5.7 million or at an annualized rate of 6.5 percent to $122.4 million at September 30, 2008, from $116.7 million at the end of 2007. In comparison to the same period of 2007, residential mortgage loans serviced for the FNMA increased only $0.8 million or at an annualized rate of 0.9 percent. For the three months and nine months ended September 30, 2008, residential mortgages sold to the FNMA totaled $5.3 million and $19.3 million, compared to $4.7 million and $10.5 million for the same periods of 2007. Net gains totaled $86 for the third quarter and $345 year-to-date 2008, compared to $70 and $188 for the same periods last year. Weak labor markets and higher food and energy prices eroded consumer purchasing power during the first nine months of 2008. In addition, declining home and equity values have further reduced household wealth. These factors resulted in a slowdown in the growth rate of consumer spending. As a result, our consumer loan portfolio declined $0.7 million from the end of the previous quarter. In comparison to the end of 2007, total loans increased $22.6 million or at an annualized rate of 6.4 percent. We experienced growth in all major classifications of loans, except for consumer loans which declined. For the nine months ended September 30, 2008, loans averaged $494.1 million, an increase of $39.1 million or 8.6 percent compared to $455.0 million for the same period of 2007. Given the recent decline in the prime rate and an increase in our nonaccrual loans, we experienced a reduction in the tax-equivalent yield on the loan portfolio. The tax-equivalent yield on the loan portfolio was 6.64 percent for the nine months ended September 30, 2008, a decrease of 65 basis points from 7.29 percent for the same period of 2007. In addition, the tax-equivalent yield on the loan portfolio decreased 16 basis points in the third quarter of 2008. At the beginning of the fourth quarter, the prime rate declined another 100 basis points in

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
response to the FOMC easing monetary policy. As a result, we anticipate a
further decline in our loan yields for the remainder of 2008 as adjustable rate
loans reprice downward.
The composition of the loan portfolio at September 30, 2008, and December 31,
2007, is summarized as follows:
Distribution of loan portfolio

                                            September 30,               December 31,
                                                 2008                       2007
                                         Amount          %          Amount          %

     Commercial, financial and others   $ 185,705        37.60 %   $ 181,417        38.49 %
     Real estate:
     Construction                          25,760         5.22        12,810         2.72
     Residential                          112,594        22.79       110,633        23.47
     Commercial                           133,816        27.09       128,852        27.33
     Consumer, net                         33,301         6.74        35,149         7.46
     Lease financing, net                   2,772         0.56         2,483         0.53

     Loans, net of unearned income        493,948       100.00 %     471,344       100.00 %

     Less: allowance for loan losses        4,691                      4,624

     Net loans                          $ 489,257                  $ 466,720

In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Due to the change in monetary policy, our asset/liability management strategy in 2008 involves shifting our emphasis away from adjustable-rate loans to medium-term, fixed-rate loans. Adjustable-rate loans represented 50.8 percent of the loan portfolio at September 30, 2008, compared to 52.3 percent at the end of 2007.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The maturity and repricing information of the loan portfolio by major
classification at September 30, 2008, is summarized as follows:
Maturity distribution and interest sensitivity of loan portfolio

                                                                After one
                                               Within          but within            After
September 30, 2008                            one year         five years          five years           Total

Maturity schedule:
Commercial, financial and others              $  87,646        $    45,295        $     52,764        $ 185,705
Real estate:
Construction                                     10,877              9,790               5,093           25,760
Residential                                      17,181             48,938              46,475          112,594
. . .