Summary of 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 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 the continuation of our current level of income and growth.
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.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Critical Accounting Policies:
Our financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change in the next year relate to the allowance for loan losses, fair values of financial instruments and the valuations of real estate acquired through foreclosure, deferred tax assets and liabilities and intangible assets. Actual amounts could differ from those estimates.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.
The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for the impairment of those loans collectively evaluated. The unallocated element is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.
We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance as necessary 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 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.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Fair values of financial instruments, in cases where quoted market prices are not available, are based on estimates using present value or other valuation techniques which are subject to change.
Real estate acquired in connection with foreclosures or in satisfaction of loans is written-down to fair value based upon current estimates derived through independent appraisals less cost to sell. However, proceeds realized from sales may ultimately be higher or lower than those estimates.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Intangible assets consist of 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, 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.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Operating Environment:
The recession continued into the second quarter of 2009, as the gross domestic product ("GDP"), the value of all goods and services produced in the United States decreased at a seasonally-adjusted annual rate of 1.0 percent. However, the recession appears to have somewhat abated. The pace of the decline was much less severe than the previous two quarters. GDP declined 6.4 percent in the first quarter of 2009 and 5.4 percent in the fourth quarter of 2008. The decrease in GDP reflected declines of 8.9 percent in business investment and 1.2 percent in consumer spending, coupled with another steep retraction of 29.3 percent in residential construction. Partially offsetting these decreases was an increase in government spending and a reduction in imports. Labor markets, already strained, weakened further as the unemployment rate rose to 9.5 percent in June 2009 from 8.5 percent in March 2009. Due to the continued 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 second quarter of 2009. Review of Financial Position:
Total assets were $610.8 million at June 30, 2009, an increase of $6.8 million from $604.0 million at December 31, 2008. The growth resulted primarily from an increase of $25.0 million in loans, net of unearned income, to $510.9 million at the close of the second quarter from $485.9 million at year-end 2008. The increase in loans reflected strong demand for financing from municipalities within our market area. Deposit gathering was slow during the first half of 2009. Total deposits decreased $3.5 million to $538.8 million at June 30, 2009, from $542.3 million at December 31, 2008. Noninterest-bearing deposits increased $2.3 million, while interest-bearing deposits decreased $5.8 million. Available-for-sale investment securities declined $7.4 million to $73.2 million at June 30, 2009, from $80.6 million at the end of 2008. We had $8.0 million in short-term borrowings outstanding at the end of the second quarter. At December 31, 2008, there were $12.7 million in federal funds sold outstanding. In comparison to the previous quarter end, total assets decreased $1.0 million from $611.8 million at March 31, 2009. Loans, net of unearned income, increased $3.7 million from $507.2 million from the end of the first quarter, while investment securities decreased $2.0 million from $75.2 million. Total deposits rose $17.9 million from $520.9 million at March 31, 2009. We repaid $19.5 million of the $27.5 million in short-term borrowings outstanding at the previous quarter-end.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Investment Portfolio:
At June 30, 2009, our investment portfolio consisted primarily of short-term U.S. Government agency mortgage-backed securities, which provide us with a source of liquidity and intermediate-term tax-exempt state and municipal obligations, which we use to mitigate our tax burden.
The carrying values of the major classifications of securities as they relate to the total investment portfolio at June 30, 2009, and December 31, 2008, are summarized as follows:
Distribution of investment securities available-for-sale

                                            June 30,                December 31,
                                              2009                      2008
                                       Amount         %          Amount         %
         State and municipals         $ 30,636        41.87 %   $ 47,007        58.34 %
         Mortgage-backed securities     39,777        54.36       32,226        40.00
         Equity securities:
         Restricted                      2,537         3.47        1,116         1.38
         Other                             219         0.30          225         0.28

Total $ 73,169 100.00 % $ 80,574 100.00 %

Available-for-sale investment securities decreased $7.4 million to $73.2 million at June 30, 2009, from $80.6 million at December 31, 2008. The unrealized holding gain, which equaled $1,671, net of income taxes of $861, at the end of 2008 appreciated $159 to $1,830, net of income taxes of $943, at June 30, 2009. During the first half of 2009, we received proceeds from the sale of available-for-sale investment securities of $4.3 million. The securities sold were composed 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 six months ended June 30, 2009. No securities were sold during the six months ended June 30, 2008.
For the first six months of 2009, the investment portfolio averaged $75.0 million, an increase of $39.2 million compared to $35.8 million for the same period of last year. The tax-equivalent yield on the investment portfolio decreased 79 basis points to 5.96 percent for the first half of 2009 from 6.75 percent for the same period of 2008. In addition, the tax-equivalent yield fell 28 basis points to 5.81 percent for the second quarter from 6.09 percent for the first quarter.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent yield of the available-for-sale portfolio at June 30, 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 securities have been presented based upon estimated cash flows, assuming no change in the current interest rate environment. Equity securities with no stated contractual maturities are included in the "After ten years" maturity distribution. Expected maturities may differ from contractual maturities, or estimated maturities for mortgage-backed securities, because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity distribution of available-for-sale portfolio

                                                      After one                 After five
                              Within                  but within                but within                  After
                             one year                 five years                ten years                 ten years                   Total
June 30, 2009           Amount       Yield        Amount       Yield        Amount       Yield        Amount       Yield        Amount       Yield
Amortized cost:
State and
municipals             $  1,828        7.86 %    $  3,867        7.73 %    $ 19,243        7.40 %    $ 13,085        7.35 %    $ 38,023        7.44 %
Mortgage-backed
securities               10,551        4.35        17,640        4.37         1,307        3.41           199        4.52        29,697        4.32
Equity securities:
Restricted                                                                                              2,537        1.45         2,537        1.45
Other                                                                                                     139        2.33           139        2.33

Total                  $ 12,379        4.87 %    $ 21,507        4.97 %    $ 20,550        7.15 %    $ 15,960        6.33 %    $ 70,396        5.90 %


Fair value:
State and
municipals             $  1,881                  $  4,030                  $ 20,465                  $ 13,401                  $ 39,777
Mortgage-backed
securities               10,886                    18,189                     1,356                       205                    30,636
Equity securities:
Restricted                                                                                              2,537                     2,537
Other                                                                                                     219                       219

Total                  $ 12,767                  $ 22,219                  $ 21,821                  $ 16,362                  $ 73,169

Loan Portfolio:
According to the "Monetary Report to Congress" issued on July 21, 2009, businesses continued to cut back on capital spending. Business spending for both equipment and software and structures fell sharply in the first quarter of 2009 by 33.8 percent and 44.2 percent. Indicators suggest that business spending, although not to the same magnitude, fell once again in the second quarter. Tight credit conditions, coupled with another decrease in business spending, led to a $39.3 billion decrease in commercial and industrial loans at all commercial banks throughout the United States from the end of the first quarter of 2009. With regard to our loan portfolio, business loans, including commercial loans, commercial mortgages and lease financing, increased $8.1 million to $351.6 million at June 30, 2009, from $343.5 million at March 31, 2009. The growth was largely attributable to an increase in the demand for tax-exempt loans from municipalities within our market area.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
Despite an increase in the second quarter, mortgage rates continued to be favorable by historical standards. The rate for a 30-year, fixed-rate mortgage in the United States was 5.42 percent at June 30, 2009, 42 basis points higher than 5.00 percent at the end of the previous quarter, but 90 basis points below 6.32 percent one year earlier. The drastic declines in housing demand and construction since late 2005 appear to be stabilizing. In spite of the continued weakness, residential mortgage lending in the banking industry increased in the second quarter, as evidenced by a $37.4 billion or 3.9 percent annualized increase in real estate loans for all commercial banks from the end of the first quarter of 2009. We experienced a slight reduction in residential mortgage loans of $1.5 million or a 5.6 percent annualized rate to $106.6 million at June 30, 2009, from $108.1 million at March 31, 2009.
Due to favorable mortgage rates, activity in our secondary mortgage department was strong during the first half of 2009. Residential mortgage loans serviced for the Federal National Mortgage Association ("FNMA") increased $19.0 million or at an annual rate of 30.8 percent to $143.6 million at the end of the second quarter of 2009 from $124.6 million at the end of 2008. In comparison, for the same period of 2008, residential mortgage loans serviced for the FNMA increased at an annualized rate of 7.1 percent. For the three months and six months ended June 30, residential mortgages sold to the FNMA totaled $28.3 million and $49.2 million in 2009 compared to $8.9 million and $14.0 million in 2008. Net gains realized on the sale of residential mortgages totaled $518 for the second quarter and $942 year-to-date 2009, compared to $118 and $259 for the same periods of 2008.
According to the "Monetary Report to Congress," consumer spending was flat for the first two months of the second quarter. Continued job losses and declining household wealth has weighed heavily on consumption. Our consumer loans decreased $729 or at an annual rate of 9.2 percent from the end of the first quarter of 2009.
Average loans grew $19.2 million or 3.9 percent to $513.9 million for the six months ended June 30, 2009, from $494.7 million for the same six months 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 91 basis points to 5.82 percent for the first half of 2009 compared to 6.73 percent for the same period 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, the yield on the loan portfolio may decline further.

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Comm Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(Dollars in thousands, except per share data)
The composition of the loan portfolio at June 30, 2009, and December 31, 2008,
is summarized as follows:
Distribution of loan portfolio

                                               June 30,                 December 31,
                                                 2009                       2008
                                         Amount          %          Amount          %
     Commercial, financial and others   $ 191,415        37.47 %   $ 170,305        35.05 %
     Real estate:
     Construction                          21,536         4.21        25,332         5.21
     Residential                          106,611        20.87       112,053        23.06
     Commercial                           157,485        30.83       142,641        29.36
     Consumer, net                         31,135         6.09        32,812         6.76
     Lease financing, net                   2,688         0.53         2,739         0.56

     Loans, net of unearned income        510,870       100.00 %     485,882       100.00 %

     Less: allowance for loan losses        6,019                      5,255

     Net loans                          $ 504,851                  $ 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 half of 2009 market interest rates remained at historically low levels. Accordingly, we continued to place emphasis on originating loans with interest rates that reprice after one but within five years. Upon the threat of rising interest rates, we will shift to promoting floating-rate loans that reprice immediately with changes in the prime rate. Adjustable-rate loans represented 52.5 percent of the loan portfolio at June 30, 2009, compared to 50.2 percent at the end of 2008.

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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 June 30, 2009, is summarized as follows:
Maturity distribution and interest sensitivity of loan portfolio

                                                          After one
                                           Within        but within          After
June 30, 2009                             one year       five years        five years         Total
Maturity schedule:
Commercial, financial and others          $  95,275      $    44,371      $     51,769      $ 191,415
Real estate:
Construction                                 14,534            4,357             2,645         21,536
Residential                                  16,773           48,429            41,409        106,611
Commercial                                   23,663           58,304            75,518        157,485
Consumer, net                                 4,226           22,124             4,785         31,135
Lease financing, net                            539            2,149                            2,688

Total                                     $ 155,010      $   179,734      $    176,126      $ 510,870


Predetermined interest rates              $  76,108      $    99,559      $     67,159      $ 242,826
Floating- or adjustable-interest rates       78,902           80,175           108,967        268,044

Total                                     $ 155,010      $   179,734      $    176,126      $ 510,870

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.

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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 June 30, 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 . . .