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 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 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

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
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 value 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 critical account 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 year ended December 31, 2008. This note lists the significant accounting policies used by management in the development and presentation of our financial statements. This Management's Discussion and Analysis, the Notes to the Consolidated Financial Statements, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our financial position, results of operations and cash flows.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Operating Environment:
Recessionary conditions persisted in the United States, as the gross domestic product, the value of all goods and services produced in the Nation decreased at a seasonally-adjusted annual rate of 6.1 percent in the first quarter of 2009. The decline was significantly steeper than anticipated due to a 37.9 percent reduction in business spending. In addition, investment in residential housing decreased 38.0 percent, which marked the thirteenth consecutive quarterly decline. Labor markets weakened considerably as the unemployment rate for the Nation reached 8.5 percent in March 2009. Despite the rise in unemployment, consumer spending rose 2.2 percent in the first quarter, which reflected a 9.4 percent increase in spending for durable goods. Due to the extreme weakness in economic conditions, the Federal Open Market Committee ("FOMC") kept the target range for the federal funds rate unchanged at 0.00 percent to 0.25 percent during the first quarter of 2009. Review of Financial Position:
Total assets equaled $611.8 million at March 31, 2009, an increase of $7.8 million from $604.0 million at December 31, 2008. The 5.2 percent annualized growth resulted primarily from an increase of $21.3 million in loans, net of unearned income, to $507.2 million at the close of the first quarter from $485.9 million at the end of 2008. The increase in loans reflected strong demand for financing from municipalities within our market area. Deposit gathering slowed during the first quarter. Total deposits decreased $21.4 million to $520.9 million at March 31, 2009, from $542.3 million at December 31, 2008. In order to support the municipal loan demand and avoid being placed into an alternative minimum tax position caused by a higher level of tax-exempt income, we liquidated certain tax-exempt securities. We also utilized short-term borrowing arrangements with the Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh"). Available-for-sale investment securities declined $5.4 million, while short-term borrowings increased $27.5 million from December 31, 2008. Stockholders' equity increased $1.1 million to $58.9 million at the end of the first quarter of 2009, from $57.8 million at December 31, 2008. Investment Portfolio:
At March 31, 2009, our investment portfolio consisted primarily of intermediate-term, tax-exempt state and municipal obligations, which we use to mitigate our tax burden and short-term U.S. Government agency mortgage-backed securities, which provides us with a source of liquidity.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The carrying values of the major classifications of available-for-sale
securities as they relate to the total investment portfolio at March 31, 2009,
and December 31, 2008, are summarized as follows:
Distribution of investment securities available-for-sale

                                             March 31,               December 31,
                                               2009                      2008
                                        Amount         %          Amount         %

         State and municipals         $ 40,840        54.27 %   $ 47,007        58.34 %
         Mortgage-backed securities     31,662        42.08       32,226        40.00
         Equity securities:
         Restricted                      2,537         3.37        1,116         1.38
         Other                             210         0.28          225         0.28

         Total                        $ 75,249       100.00 %   $ 80,574       100.00 %

Investment securities totaled $75.2 million at March 31, 2009, a decrease of $5.4 million from $80.6 million at December 31, 2008. As a percentage of earning assets, investments securities equaled 12.9 percent at the close of the first quarter compared to 13.9 percent at year-end 2008. The unrealized holding gain equaled $1,821, net of income taxes of $939 at March 31, 2009, compared to $1,671, net of income taxes of $861 at the end of 2008.
For the three months ended March 31, 2009, we received proceeds from the sale of available-for-sale investment securities of $4.3 million. The securities sold were comprised entirely of intermediate-term, tax-exempt state and municipal obligations. These securities were sold to avoid a potential alternative minimum tax position caused by a higher level of tax-exempt income due to an increase in the demand for financing by municipal customers. Net gains recognized on the sale of available-for-sale investment securities totaled $114 for the three months ended March 31, 2009. No securities were sold during the first quarter of 2008.
For the three months ended March 31, 2009, the investment portfolio averaged $78.1 million, an increase of $41.4 million compared to $36.7 million for the same three months of 2008. The tax-equivalent yield on our investment portfolio declined 55 basis points to 6.09 percent for the first quarter of 2009 compared to 6.64 percent for the same quarter last year.
The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent yield of the available-for-sale portfolio at March 31, 2009, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed for tax-exempt state and municipals on a tax-equivalent basis using the federal statutory tax rate of 34.0 percent. The distributions are based on contractual maturity with the exception of mortgage-backed securities and equity securities. Mortgage-backed

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
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
March 31, 2009         Amount       Yield        Amount       Yield        Amount       Yield        Amount       Yield        Amount       Yield

Amortized cost:
State and
municipals            $ 1,058        7.85 %    $  4,809        7.81 %    $ 19,270        7.42 %    $ 13,783        7.34 %    $ 38,920        7.45 %
Mortgage-backed
securities              6,964        4.15        22,705        4.09         1,079        4.25           148        3.85        30,896        4.11
Equity securities:
Restricted                                                                                            2,537        1.46         2,537        1.46
Other                                                                                                   136        4.08           136        4.08

Total                 $ 8,022        4.64 %    $ 27,514        4.74 %    $ 20,349        7.25 %    $ 16,604        6.38 %    $ 72,489        5.81 %


Fair value:
State and
municipals            $ 1,078                  $  5,023                  $ 20,659                  $ 14,080                  $ 40,840
Mortgage-backed
securities              7,140                    23,250                     1,120                       152                    31,662
Equity securities:
Restricted                                                                                            2,537                     2,537
Other                                                                                                   210                       210

Total                 $ 8,218                  $ 28,273                  $ 21,779                  $ 16,979                  $ 75,249

Loan Portfolio:
According to the minutes of the March 2009, FOMC meeting, economic activity in recent months continued to fall. Business spending decreased across a broad range of categories. Overall, first quarter 2009 business spending declined 37.9 percent. Investment in structures went down 44.2 percent. Equipment and software outlays decreased 33.8 percent. As a result of this decrease in spending within the corporate sector, commercial and industrial loans at all commercial banks throughout the United States contracted $40.9 billion or at an annualized rate of 10.5 percent from the end of 2008. With regard to our loan portfolio, business loans, including commercial loans, commercial mortgages and lease financing, increased $27.8 million to $343.5 million at March 31, 2009, from $315.7 million at December 31, 2008. However, the demand was concentrated in the municipal sector, as tax-exempt loans increased $28.7 million to $67.3 million at the close of the first quarter of 2009 from $38.6 million at year-end 2008.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Despite relatively low mortgage rates, activity in the housing market remained weak. The rate for a 30-year, fixed-rate mortgage in the United States was 5.00 percent at March 31, 2009, 97 basis points lower than the 5.97 percent one year earlier. Low mortgage rates did not impact demand, as sales for new homes and existing homes both fell in March 2009. In addition, home prices continued to tumble. The median price of a new home decreased 12.2 percent, while the median existing home price fell 12.4 percent, compared to one year ago. Despite the ailing housing market, residential mortgage lending in the banking industry increased in the first quarter, as evidenced by a $43.6 billion or 4.6 percent annualized increase in real estate loans for all commercial banks from the end of 2008.
Due to favorable mortgage rates, activity in our secondary mortgage department was strong during the first quarter of 2009. Residential mortgage loans serviced for the Federal National Mortgage Association ("FNMA") increased $7.1 million or at an annual rate of 23.1 percent to $131.7 million at the end of the first quarter of 2009 from $124.6 million at the end of 2008. In comparison, for the first quarter of 2008, residential mortgage loans serviced for the FNMA increased at an annualized rate of 6.6 percent. For the three months ended March 31, residential mortgages sold to the FNMA totaled $20.9 million in 2009 compared to $5.1 million in 2008. Net gains realized on the sale of residential mortgages totaled $424 for the first quarter of 2009, compared to $141 for the same quarter last year. As a result of the strong secondary market activity, we experienced a decrease of $4.0 million in residential mortgage loans to $108.1 million at March 31, 2009, from $112.1 million at December 31, 2008. Consumer spending throughout the United States rose slightly during the first quarter of 2009 primarily as a result of the 9.4 percent increase in the purchase of durable goods. In addition, first quarter spending on non-durables and services increased 1.3 percent and 1.5 percent. Despite these improvements, our consumer loans decreased $0.9 million or 2.9 percent from the end of 2008. Average loans grew $22.6 million or 4.6 percent to $516.5 million for the quarter ended March 31, 2009, from $493.9 million for the same quarter of 2008. Due to the sustained low interest rate environment and recording a higher volume of nonaccrual loans, the tax-equivalent yield on our loan portfolio decreased 101 basis points to 5.86 percent for the first quarter of 2009 compared to 6.87 percent for the same quarter of 2008. The FOMC has indicated that interest rates will remain at extremely low levels for some time due to the severity of the current recession. As a result, we expect further declines in loan yields.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The composition of the loan portfolio at March 31, 2009, and December 31, 2008,
is summarized as follows:
Distribution of loan portfolio

                                              March 31,                 December 31,
                                                 2009                       2008
                                           Amount            %        Amount            %

     Commercial, financial and others   $ 198,993        39.24 %   $ 170,305        35.05 %
     Real estate:
     Construction                          23,697         4.67        25,332         5.21
     Residential                          108,107        21.32       112,053        23.06
     Commercial                           141,914        27.98       142,641        29.36
     Consumer, net                         31,864         6.28        32,812         6.76
     Lease financing, net                   2,591         0.51         2,739         0.56

     Loans, net of unearned income        507,166       100.00 %     485,882       100.00 %

     Less: allowance for loan losses        5,531                      5,255

     Net loans                          $ 501,635                  $ 480,627

In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. For the first quarter of 2009 market interest rates remained at historically low levels. Accordingly, we continued to place emphasis on originating medium-term, fixed-rate loans. Once rates appear to be headed higher, we will shift our emphasis to originating adjustable-rate loans. Fixed-rate loans represented 51.5 percent of the loan portfolio at March 31, 2009, compared to 49.8 percent at the end of 2008.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The maturity and sensitivity information of the loan portfolio to changes in
interest rates by major classification at March 31, 2009, is summarized as
follows:
Maturity distribution and interest sensitivity of loan portfolio

                                                                After one
                                               Within          but within            After
March 31, 2009                                one year         five years          five years           Total

Maturity schedule:
Commercial, financial and others              $ 100,580        $    44,248        $     54,165        $ 198,993
Real estate:
Construction                                     14,314              3,460               5,923           23,697
Residential                                      15,800             49,000              43,307          108,107
Commercial                                       20,072             56,373              65,469          141,914
Consumer, net                                     4,555             22,374               4,935           31,864
Lease financing, net                                512              2,079                                2,591

Total                                         $ 155,833        $   177,534        $    173,799        $ 507,166


Sensitivity schedule:
Predetermined interest rates                  $  83,448        $   103,918        $     73,737        $ 261,103
Floating or adjustable interest rates            72,385             73,616             100,062          246,063

Total                                         $ 155,833        $   177,534        $    173,799        $ 507,166

In addition to the risks inherent in our loan portfolio, in the normal course of business we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit, and may involve, to varying degrees, elements of credit risk and IRR in excess of the amount recognized in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of the collateral obtained, if deemed necessary by us, is based on our credit evaluation of the customer. Unused portions of lines of credit, including home equity and credit card lines and overdraft protection agreements, are commitments for possible future extensions of credit to existing customers. Unused portions of home equity lines are collateralized and generally have fixed expiration dates. Credit card lines and overdraft protection agreements are uncollateralized and usually do not carry specific maturity dates. Unused portions of lines of credit ultimately may not be drawn upon to the total extent to which we are committed.

Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Commercial letters of credit are primarily issued to support public and private borrowing arrangements. Essentially, all commercial letters of credit have expiration dates within one year and often expire unused in whole or in part by the customer. The carrying value of the liability for our obligations under guarantees was not material at March 31, 2009 and December 31, 2008. Credit risk is the principal risk associated with these instruments. Our involvement and exposure to credit loss in the event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit, we employ the same credit quality and collateral policies in making commitments that we use in other lending activities. We evaluate each customer's creditworthiness on a case-by-case basis, and if deemed necessary, obtain collateral. The amount and nature of the collateral obtained is based on our credit evaluation. The contractual amounts of off-balance sheet commitments at March 31, 2009 and December 31, 2008, are summarized as follows: