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


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

Comm Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

(Registrant’s telephone number, including area code)

(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


*		Not Applicable

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

Foreclosed assets

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

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.

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

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

Loan Portfolio:

According to the United States Department of Commerce, nonresidential investment improved for the third consecutive quarter. For the third quarter of 2010, business spending advanced 9.7 percent. Despite the increase in business spending, commercial loan demand remained subdued. Businesses used pent up liquidity to fund investments. In addition, banks continued to employ tighter underwriting standards. As a result, commercial and industrial loans at all commercial banks throughout the United States decreased $19.7 billion or at an annual rate of 6.3 percent from the end of the second quarter of 2010. With regard to our loan portfolio, business loans, including commercial loans, commercial mortgages, commercial construction and land development loans and lease financing, decreased $15.3 million to $316.1 million at September 30, 2010, from $331.4 million at June 30, 2010.

Mortgage rates, already favorable, reached a historic low at the end of the third quarter of 2010. The rate for a 30-year, fixed-rate mortgage in the United States fell 39 basis points to 4.35 percent at September 30, 2010, from 4.74 percent at June 30, 2010. This was 71 basis points lower than 5.06 percent one year ago. Despite low mortgage rates, the housing market remained soft amid a struggling economy, a large inventory of foreclosed assets and tight credit conditions. Residential mortgage lending in the banking industry decreased in the third quarter, as evidenced by a $40.6 billion or 4.4 percent annualized reduction in real estate loans for all commercial banks from the end of the second quarter of 2010. We experienced a slight reduction in residential mortgage loans of $0.2 million to $102.1 million at September 30, 2010, from $102.3 million at June 30, 2010.

Despite favorable mortgage rates, activity in our secondary mortgage department subsided somewhat in the nine months ended September 30, 2010, compared to the same period of the previous year. Residential mortgage loans serviced for the Federal National Mortgage Association (“FNMA”) increased $13.6 million or at an annual rate of 12.0 percent to $165.5 million at the end of the third quarter of 2010 from $151.9 million at the end of 2009. In comparison, for the same period of 2009, residential mortgage loans serviced for the FNMA increased at an annualized rate of 27.5 percent. For the three months and nine months ended September 30, residential mortgages sold to the FNMA totaled $11.9 million and $29.2 million in 2010 compared to $14.2 million and $63.4 million in 2009. Net gains realized on the sale of residential mortgages totaled $381 for the third quarter and $805 year-to-date 2010, compared to $268 and $1,210 for the same periods of 2009.

Stability of household wealth helped consumer spending advance by a modest 2.6 percent in the third quarter of 2010. Consumers increased spending for durable goods by 6.1 percent, while spending on nondurable goods and services rose 1.3 percent and 2.5 percent. Despite these improvements, our consumer loans decreased $1.4 million from the end of the second quarter of 2010.

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

The composition of the loan portfolio at September 30, 2010, and December 31, 2009, is summarized as follows:

Distribution of loan portfolio


	September 30,					December 31,
	2010					2009
	Amount		%			Amount		%
Commercial, financial and others	$	144,714		32.35	%	$	160,945		33.75	%
Real estate:
Construction		17,777		3.97			23,195		4.86
Residential		102,125		22.83			104,925		22.00
Commercial		152,877		34.18			155,269		32.55
Consumer, net		26,672		5.97			29,447		6.18
Lease financing, net		3,117		0.70			3,163		0.66

Loans, net of unearned income		447,282		100.00	%		476,944		100.00	%

Less: allowance for loan losses		13,669					17,462

Net loans	$	433,613				$	459,482

Average loans decreased $46.5 million or 9.1 percent to $466.8 million for the nine months ended September 30, 2010, from $513.3 million for the same nine months of 2009. The majority of the reduction was in tax-exempt loans of local municipalities, which decreased $34.0 million or 52.1 percent comparing the nine months ended September 30, 2010 and 2009. Several tax and revenue anticipation notes, which were outstanding during the majority of 2009, matured by December 31, 2009, and were not renewed. Due to a sustained low interest rate environment and higher levels of nonaccrual loans, the tax-equivalent yield on our loan portfolio decreased 23 basis points to 5.48 percent for the nine months ended September 30, 2010, from 5.71 percent for the same nine months of 2009. The FOMC has indicated that interest rates will remain at these historically low levels for some time. As a result, we do not anticipate an increase in our loan yields for the remainder of 2010.

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, 2010, is summarized as follows:

Maturity distribution and interest sensitivity of loan portfolio


			After one
	Within		but within		After
September 30, 2010	one year		five years		five years		Total
Maturity schedule:
Commercial, financial and others	$	61,755	$	19,497	$	63,462	$	144,714
Real estate:
Construction		8,098		3,693		5,986		17,777
Residential		8,555		28,784		64,786		102,125
Commercial		12,381		7,459		133,037		152,877
Consumer, net		1,950		18,460		6,262		26,672
Lease financing, net		623		2,494				3,117

Total	$	93,362	$	80,387	$	273,533	$	447,282


Predetermined interest rates	$	38,595	$	63,421	$	75,068	$	177,084
Floating- or adjustable-interest rates		54,767		16,966		198,465		270,198

Total	$	93,362	$	80,387	$	273,533	$	447,282

As previously mentioned, there are numerous risks inherent in the loan portfolio. We manage the portfolio by employing sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we utilize private mortgage insurance and guaranteed Small Business Administration and FHLB-Pgh loan programs to mitigate credit risk in the loan portfolio.

Federal regulators are specifically concerned with certain high-risk loan products offered by the banking industry. Our loan portfolio does not contain option adjustable-rate mortgage products, high loan-to-value ratio mortgages, subprime loans or loans with initial teaser rates. At September 30, 2010, we had $26.0 million in junior lien mortgages and $98.6 million in interest-only loans.

We mitigate credit risk associated with loans having junior-lien positions by limiting the loan-to-value ratios to supervisory limits set forth in the FFIEC Interagency Guidelines for Real Estate Lending Policies. Risk associated with interest-only loans is reduced through ensuring adequate collateralization within our policy guidelines. Generally, collateral for interest-only loans includes deposits, real estate and marketable equity securities. The loan-to-value ratio limit for junior-lien mortgages and interest only loans is 80.0 percent. We monitor loan-to-value ratios for these junior-lien mortgages and interest-only loans that are performing according to contractual terms by requiring a new, independent appraisal for any loan with an appraisal greater than three years old. In addition, for these types of loans, any requests to grant additional credit would require a new, independent appraisal if the existing appraisal is greater than one year old.

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

The majority of our interest-only loans have interest rates that reset daily. Interest rates on remaining interest-only loans have reset dates that reset, monthly, semi-annually, annually or within two through five years. At September 30, 2010, we expect $69.1 million or 70.1 percent of our interest-only loans to reprice within one year.

There were no junior-lien mortgages refinanced or modified during the nine months ended September 30, 2010. Nonperforming junior-lien mortgages totaled $623 and nonperforming interest-only loans amounted to $5.9 million at September 30, 2010. There were no junior-lien mortgages and one interest-only loan of $1.3 million considered troubled debt restructurings at September 30, 2010.

In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Market interest rates have remained at historically low levels and the FOMC has indicated that this low level would likely remain in place for some time. Despite this short-term interest rate forecast, the risk of rising rates in the future caused us to employ an Asset/Liability management strategy for 2010 which focuses on restoring balance to our IRR. Accordingly, we place emphasis on originating loans with shorter repricing terms. Adjustable-rate loans represented 60.4 percent of the loan portfolio at September 30, 2010, compared to 56.2 percent at the end of 2009.

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.

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

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.

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 September 30, 2010, and December 31, 2009.

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

Distribution of off-balance sheet commitments


	September 30,		December 31,
	2010		2009
Commitments to extend credit	$	84,446	$	81,945
Unused portions of lines of credit		27,427		24,723
Commercial letters of credit		16,892		20,982

Total	$	128,765	$	127,650

We record an allowance for credit losses associated with off-balance sheet commitments, if deemed necessary, separately as a liability. The allowance was deemed immaterial at September 30, 2010 and December 31, 2009. We do not anticipate that losses, if any, that may occur as a result of funding off- balance sheet commitments, would have a material adverse effect on our operating results or financial position.

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

Asset Quality:

National, Pennsylvania and market area unemployment rates at September 30, 2010 and 2009, are summarized as follows:


September 30,	2010			2009
United States		9.6	%		9.8	%
Pennsylvania		9.0			8.6
Lackawanna county		9.8			9.0
Luzerne county		10.5			9.9
Monroe county		10.1			9.4
Susquehanna county		9.0			8.7
Wayne county		8.3			7.5
Wyoming county		9.6	%		7.7	%

The National unemployment rate, which spiked to 10.1 percent in the fourth quarter of 2009, rebounded to 9.6 percent at September 30, 2010, a slight improvement from the rate one year ago. However, employment conditions deteriorated significantly for the Commonwealth of Pennsylvania and all counties in our market area from one year ago.

As a result of significant deterioration in asset quality over the previous two years, we initiated several remedial steps to enhance or protect our asset quality in the latter part of 2009. These steps included:

•

Hiring an independent loan review company to assist and advise us with our credit risk management practices;

•

Enhancing the oversight and workout of classified assets by hiring an in-house attorney to expedite the process of loan foreclosures and redeploying existing staff to the workout and loan review functions;

•

Initiating the formation of a problem loan committee for the purpose of monitoring the status of problem assets and devising action plans for the timely workout or liquidation of assets;

•

Overhauling the appraisal process by requiring new appraisals on all impaired loans subject to evaluation under FASB ASC 310, “Receivables,” and any loan that is delinquent over 60 days; and

•

Tightening underwriting standards to ensure a more rigorous review of potential loans and more conservative lending standards.

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

Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans, restructured loans and accruing loans past due 90 days or more. Past due status is based on contractual terms of the loan. Generally, a loan is classified as nonaccrual when it is determined that the collection of all or a portion of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, interest accruals discontinue and uncollected accrued interest is reversed against income in the current period. Interest collections after a loan has been placed on nonaccrual status are credited to a suspense account until either the loan is returned to performing status or charged-off. The interest accumulated in the suspense account is credited to income if the nonaccrual loan is returned to performing status. However, if the nonaccrual loan is charged-off, the accumulated interest is applied as a reduction to principal at the time the loan is charged-off. A nonaccrual loan is returned to performing status when the loan is current as to principal and interest and has performed according to the contractual terms for a minimum of six months.

Restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition. Interest income on restructured loans is recognized when earned, using the interest method. On occasion, we make modifications to loan terms, specifically the interest rate, but would not consider the loan to be a troubled debt restructuring if all of the following conditions are met:

•

The borrower is current as to existing loan payments;

•

The borrower can obtain funds from a new creditor at existing market rates to repay the current loan; and

•

The modification is due to a reduction in the existing market rates as compared to the interest rate on the original loan or an improvement in the creditworthiness of the borrower since the issuance of the loan.

Interest rate modifications on loans, not considered to be a troubled debt restructuring, generally incur a modification fee and are granted for a maximum period not to exceed three years.

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

Foreclosed assets are comprised of properties acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosures. We include such properties in other assets. A loan is classified as in-substance foreclosure when the we have taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Foreclosed assets are recorded at fair value less cost to sell at the time of acquisition. Any excess of the loan balance over the recorded value is charged to the allowance for loan losses. Subsequent declines in the recorded values of the properties prior to their disposal and cost to maintain the assets are included in other expenses. No allowance has been established subsequent to the acquisition of foreclosed assets. Any gain or loss realized upon disposal of foreclosed assets is included in noninterest income or noninterest expense. The historical average holding period for such properties is less than 12 months.

Nonperforming assets decreased $934 from the end of the previous quarter and $3.6 million from year-end 2009. Nonperforming assets equaled $24.6 million or 5.42 percent of loans, net of unearned income, and foreclosed assets at September 30, 2010, compared to $25.5 million or 5.41 percent at June 30, 2010, and $28.2 million or 5.86 percent at December 31, 2009. As compared to the end of 2009, we experienced reductions in nonaccrual loans of $4,140, restructured loans of $2,333 and accruing loans past due 90 days or more of $737. These reductions were partially offset by an increase in foreclosed assets of $3,644.

The decrease in nonaccrual loans resulted primarily from the migration of eight credits secured by real estate, six secured by commercial real estate and two secured by residential properties, to foreclosed assets.

The reduction in restructured loans still accruing resulted primarily from a change in the status of two commercial relationships. In 2009, these customers were each granted modifications to their respective loans, which involved interest-only payment terms for a certain period of time. These credits have since returned to, and are paying according to, their original payment terms.

With regard to foreclosed assets, there were eight properties with an aggregate carrying value of $4,009 transferred to foreclosed assets during the nine months ended September 30, 2010. Three properties with an aggregate carrying value of $365 were sold. There was no net gain or loss which resulted from the sale of these properties. At September 30, 2010, there were thirteen properties with an aggregate carrying value of $6,853 in foreclosed assets. We are actively marketing these properties for sale through a variety of channels including internal marketing and the use of outside realtors.

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

Information concerning nonperforming assets at September 30, 2010, and December 31, 2009, is summarized as follows. The table includes loans or other extensions of credit classified for regulatory purposes and all material loans or other extensions of credit that cause management to have serious doubts as to the borrowers’ ability to comply with present loan repayment terms.

Distribution of nonperforming assets


	September 30,			December 31,
	2010			2009
Nonaccrual loans:
Commercial, financial and others	$	2,199		$	7,438
Real estate:
Construction		5,402			4,532
Residential		1,542			1,797
Commercial		5,566			5,196
Consumer, net		166			52
Lease financing, net

Total nonaccrual loans		14,875			19,015


Restructured loans:
Commercial, financial and others		1,346			1,777
Real estate:
Construction
Residential		275
Commercial		348			2,525
Consumer, net
Lease financing, net

Total restructured loans		1,969			4,302


Accruing loans past due 90 days or more:
Commercial, financial and others		534			263
Real estate:
Construction
Residential		120			603
Commercial					469
Consumer, net		15			134
Lease financing, net		228			165

Total accruing loans past due 90 days or more		897			1,634

Total nonperforming loans		17,741			24,951

Foreclosed assets		6,853			3,209

Total nonperforming assets	$	24,594		$	28,160


Ratios:
Nonperforming loans as a percentage of loans, net		3.97	%		5.23	%
Nonperforming assets as a percentage of loans, net and and foreclosed assets		5.42	%		5.86	%

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

Loans identified to be individually evaluated for impairment under FASB ASC 310, “Receivables,” include:

•

Loans past due 90 days or more;

•

Nonaccrual loans;

•

Restructured loans; and

•

Criticized loans, including regulatory risk ratings of Special Mention, Substandard, Doubtful and Loss.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Impaired loans decreased $10.9 million or 39.4 percent to $16.8 million at September 30, 2010, from $27.7 million at December 31, 2009. The improvement in impaired loans resulted from a $6.7 million decrease in accruing loans, coupled with a $4.2 million decrease in nonaccrual loans, from year-end 2009. The decrease in impaired loans, which was largely concentrated in commercial, financial and other loans and commercial real estate loans, was due primarily to the migration of loans to foreclosed assets and an increase in charge-offs.

We aggressively manage our impaired loans in an effort to reduce our loss exposure related to these loans. Such efforts include, but are not limited to, assisting customers with impaired loans in developing remedial strategies, collateral sale or liquidation, and foreclosure.

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

Information concerning impaired loans at September 30, 2010, and December 31, 2009, is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause management to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.

Distribution of impaired loans


	September 30,			December 31,
	2010			2009
Nonaccrual loans:
Commercial, financial and others	$	2,199		$	7,438
Real estate:
Construction		5,402			4,532
Residential		1,542			1,797
Commercial		5,566			5,196
Consumer, net		166			52
Lease financing, net

Total nonaccrual loans		14,875			19,015


Accruing loans:
Commercial, financial and others		1,346			3,400
Real estate:
Construction
Residential		275			55
Commercial		348			5,198
Consumer, net
Lease financing, net

Total accruing loans		1,969			8,653

Total impaired loans	$	16,844		$	27,668


Ratio:
Impaired loans as a percentage of loans, net		3.77	%		5.80	%

Information related to the recorded investment in impaired loans for which there is a related allowance and the amount of that allowance and the recorded investment in impaired loans for which there is no allowance at September 30, 2010 and December 31, 2009, is summarized as follows:


	September 30, 2010				December 31, 2009
	Recorded		Related		Recorded		Related
	Investment		Allowance		Investment		Allowance
Impaired loans:
With a related allowance	$	8,638	$	2,592	$	13,481	$	5,762
With no related allowance		8,206				14,187

Total	$	16,844	$	2,592	$	27,668	$	5,762

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

We recognize interest income on impaired loans, including the recording of cash receipts, based on our policy for nonaccrual, restructured loans or accruing loans depending on the status of the impaired loan.

Interest income on impaired loans that would have been recognized had the loans been current and the terms of the loans not been modified, the aggregate amount of interest income recognized and the amount recognized using the cash-basis method and the average recorded investment in impaired loans for the three-month and nine-month periods ended September 30, 2010 and 2009 are summarized as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Gross interest due under terms	$	258	$	440	$	966	$	1,362
Interest income recognized		120		211		407		696

Interest income not recognized	$	138	$	229	$	559	$	666


Interest income recognized (cash-basis)	$	210	$	181	$	606	$	528
Average recorded investment in impaired loans	$	18,531	$	32,125	$	22,766	$	31,677

Cash received on impaired loans applied as a reduction of principal totaled $563 and $1,710 for the three and nine months ended September 30, 2010. For the respective periods of 2009 cash receipts on impaired loans applied as a reduction of principal totaled $382 and $3,149.

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 loan 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. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB ASC 310 for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

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

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, our loan review department identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. Internal loan review grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events, however, we consistently utilize the same grading system each quarter. We use loss experience from the most recent rolling eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. We place a higher weight on the latest four quarters to place emphasis on the current periods compared to the previous four quarters in arriving at historical loss factors. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions to assure directional consistency of the provision for loan losses and allowance for loan loss account.

The allocation of the allowance for loan losses at September 30, 2010 and December 31, 2009, is summarized as follows:

Allocation of the allowance for loan losses


	September 30,					December 31,
	2010					2009
			Category					Category
			as a					as a
			% of					% of
	Amount		loans			Amount		loans
Allocated allowance:
Specific:
Commercial, financial and others	$	1,499		0.79	%	$	3,679		2.27	%
Real estate:
Construction		670		1.21			1,002		0.95
Residential		271		0.41			265		0.39
Commercial		82		1.32			812		2.18
Consumer, net		70		0.04			4		0.01
Lease financing, net

Total specific		2,592		3.77			5,762		5.80


Formula:
Commercial, financial and others		4,293		31.56			1,024		31.48
Real estate:
Construction		1,211		2.76			1,645		3.91
Residential		93		22.42			103		21.61
Commercial		3,318		32.86			1,413		30.37
Consumer, net		186		5.93			184		6.17
Lease financing, net		171		0.70			12		0.66

Total formula		9,272		96.23			4,381		94.20

Total allocated allowance		11,864		100.00	%		10,143		100.00	%

Unallocated allowance		1,805					7,319

Total allowance for loan losses	$	13,669				$	17,462

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

The allocated allowance for loan losses account increased $1,721 to $11,864 at September 30, 2010, from $10,143 at December 31, 2009. The change from year-end resulted primarily from a $4,891 increase in the formula portion of the allowance for impairment of loans collectively evaluated under FASB ASC 450, partially offset by a reduction of $3,170 in the specific portion for loans individually evaluated for impairment under FASB ASC 310. With regard to the formula portion, the total loss factor for collectively evaluated commercial, financial and other loans and commercial real estate loans increased from year-end 2009 due to a higher amount of weighted-average net charge-offs for the past eight consecutive quarters. The majority of the decrease in the specific portion resulted from two commercial credits. The collateral supporting one of the credits was transferred to foreclosed assets with the specific reserve recognized as a write down at the time of transfer. The specific reserve associated with the other credit was charged-off as a confirmed loss during the first half of 2010.

The unallocated portion of the allowance for loan losses equaled $1,805 at the end of the third quarter of 2010, which we believe is sufficient to cover any inherent losses in the loan portfolio that have not been identified as part of the allocated allowance using our impairment methodology.

The coverage ratio, the allowance for loan losses, as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio equaled 0.77 percent at September 30, 2010, compared to 0.78 percent at June 30, 2010, and 0.70 percent at December 31, 2009.

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

A reconciliation of the allowance for loan losses and disclosure of charge-offs and recoveries by major loan category for the nine months ended September 30, 2010, is summarized as follows:

Reconciliation of allowance for loan losses


	September 30,
	2010
Allowance for loan losses at beginning of period	$	17,462
Loans charged-off:
Commercial, financial and others		3,376
Real estate:
Construction		1,926
Residential		9
Commercial		332
Consumer, net		78
Lease financing, net

Total		5,721


Loans recovered:
Commercial, financial and others		306
Real estate:
Construction
Residential		4
Commercial
Consumer, net		18
Lease financing, net

Total		328

Net loans charged-off		5,393

Provision charged to operating expense		1,600

Allowance for loan losses at end of period	$	13,669


Ratios:
Net loans charged-off as a percentage of average loans outstanding		1.54	%
Allowance for loan losses as a percentage of period end loans		3.06	%

The allowance for loan losses account equaled $13,669 or 3.06 percent of loans, net of unearned income, at September 30, 2010, compared to $17,462 or 3.65 percent at December 31, 2009. Net charge-offs of $5,393 exceeded the provision for loan losses of $1,600, which resulted in the $3,793 decrease in the allowance for loan losses account.

Past due loans not satisfied through repossession, foreclosure or related actions, are evaluated individually to determine if all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent recoveries are credited to the allowance account. Net charge-offs amounted to $5,393 or 1.54 percent of average loans outstanding for the nine months ended September 30, 2010. For the same period of 2009, net charge-offs were $3,449 or 0.90 percent of average loans outstanding.

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

Deposits:

Real wage and salary income, which had fallen appreciably in 2009, improved for each of the first three quarters of 2010. Disposable personal income, which increased 4.4 percent in the second quarter of 2010, advanced 1.5 percent in the third quarter. Consumers continued to favor saving and reducing household debt as opposed to spending. The personal savings rate was 5.5 percent for the third quarter of 2010.

Cyclical deposit trends of certain not-for-profit and municipal customers influenced an increase in total deposits of $9.2 million from $576.7 million at June 30, 2010, to $585.9 million at the end of the third quarter. The majority of the 6.3 percent annualized growth was concentrated in money market and NOW accounts, which recorded a combined increase of $23.6 million. This increase was due primarily to cyclical deposit trends, specifically, an influx of tax monies from local area school districts. Partially offsetting this increase were decreases in savings accounts of $2.8 million, total time deposits of $6.7 million and noninterest-bearing accounts of $4.9 million.

The average amount of, and the rate paid on, the major classifications of deposits for the nine months ended September 30, 2010 and 2009, are summarized as follows:

Deposit distribution


	September 30,					September 30,
	2010					2009
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
Interest-bearing:
Money market accounts	$	33,881		0.99	%	$	26,059		0.88	%
NOW accounts		104,263		1.33			74,865		1.41
Savings accounts		110,125		0.43			106,680		0.53
Time deposits less than $100		155,704		3.04			164,390		3.33
Time deposits $100 or more		87,737		2.54			81,610		3.30

Total interest-bearing		491,710		1.86	%		453,604		2.21	%
Noninterest-bearing		87,735					81,092

Total deposits	$	579,445				$	534,696

Total deposits averaged $579.4 million for the nine months ended September 30, 2010, an increase of $44.7 million compared to $534.7 million for the same period of 2009. Noninterest-bearing deposits rose $6.6 million, while interest-bearing accounts increased $38.1 million. We experienced growth in all major deposit categories except for time deposits less than $100. Approximately 91.0 percent of the deposit growth was concentrated in interest-bearing transaction accounts.

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

Market interest rates continued to be at historically low levels. The 3-month U.S. Treasury rate was 0.16 percent at September 30, 2010, and 0.14 percent at September 30, 2009. In addition, given the prolonged length of time interest rates have been at historically low levels, management reduced the standard rate paid for interest-bearing transaction accounts 10 basis points to 0.15 percent from 0.25 percent. Furthermore, promotional gas lease certificates of deposit were renewed at lower market rates. As a result, our cost of deposits for the nine months ended September 30, decreased 35 basis points to 1.86 percent in 2010 from 2.21 percent in 2009. The FOMC has indicated that they expect economic conditions to warrant these low interest rate levels for some time. We anticipate our funding costs to remain favorable for the remainder of 2010. However, should competition within our market area intensify, our cost of funds could be negatively impacted.

Volatile time deposits, time deposits in denominations of $100 or more, decreased $4.2 million to $81.3 million at September 30, 2010, from $85.5 million at the end of the previous quarter. These deposits averaged $87.7 million for the nine months ended September 30, 2010, an increase of $6.1 million or 7.5 percent compared to $81.6 million for the same nine months of 2009. The average cost of large denomination time deposits decreased 76 basis points to 2.54 percent for the nine months ended September 30, 2010, compared to 3.30 percent for the same period of 2009.

Maturities of time deposits of $100 or more at September 30, 2010, and December 31, 2009, are summarized as follows:

Maturity distribution of time deposits of $100 or more


	September 30,		December 31,
	2010		2009
Within three months	$	31,668	$	13,860
After three months but within six months		9,706		31,501
After six months but within twelve months		19,117		22,289
After twelve months		20,788		21,287

Total	$	81,279	$	88,937

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

Market Risk Sensitivity:

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily IRR associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

Given the recent financial crisis and current economic recession, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by the Board of Directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should we have material weaknesses in our risk management process or high exposure relative to our capital, bank regulatory agencies will take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

The Asset/Liability Committee (“ALCO”), comprised of members of our Board of Directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes several computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

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

Our interest rate sensitivity gap position, illustrating RSA and RSL at their related carrying values, is summarized as follows. The distributions in the table are based on a combination of maturities, call provisions, repricing frequencies and prepayment patterns. Variable-rate assets and liabilities are distributed based on the repricing frequency of the instrument. Mortgage instruments are distributed in accordance with estimated cash flows, assuming there is no change in the current interest rate environment.

Interest rate sensitivity


			Due after		Due after
			three months		one year
	Due within		but within		but within			Due after
September 30, 2010	three months		twelve months		five years			five years		Total
Rate-sensitive assets:
Investment securities	$	4,119	$	10,599	$	43,222		$	50,615	$	108,555
Loans held for sale, net		625									625
Loans, net of unearned income		174,664		106,966		149,652			16,000		447,282
Federal funds sold		19,501									19,501

Total	$	198,909	$	117,565	$	192,874		$	66,615	$	575,963


Rate-sensitive liabilities:
Money market accounts	$	25,932	$	12,386						$	38,318
NOW accounts		107,517		16,191							123,708
Savings accounts		2,084			$	107,617					109,701
Time deposits less than $100		30,325		36,763		70,828		$	12,614		150,530
Time deposits $100 or more		31,668		28,823		19,432			1,356		81,279
Long-term debt									8,000		8,000

Total	$	197,526	$	94,163	$	197,877		$	21,970	$	511,536


Rate sensitivity gap:
Period	$	1,383	$	23,402	$	(5,003	)	$	44,645
Cumulative	$	1,383	$	24,785	$	19,782		$	64,427	$	64,427

RSA/RSL ratio:
Period		1.01		1.25		0.97			3.03
Cumulative		1.01		1.08		1.04			1.13		1.13

Our cumulative one-year RSA/RSL ratio equaled 1.08 at September 30, 2010, compared to 1.19 at the end of the previous quarter. Given the current rate environment, our asset liability strategy for 2010 focuses on trying to maintain equilibrium between rate sensitive assets and liabilities with a shift towards a positive ratio should interest rates begin to rise. As part of our current strategy, we stress shorter repricing terms for new loan originations. In addition, we are offering preferential rates on our long-term certificates of deposit, including 60-, 72- and 90-month maturities. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

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

The decrease in our RSA/RSL ratio from the end of the second quarter of 2010 resulted from a $14.3 million increase in RSL maturing or repricing within the next 12 months, coupled with a $12.4 million decrease in RSA maturing or repricing within the same time frame. The increase in RSL maturing or repricing within 12 months resulted from cyclical changes in the deposit accounts of local area school districts. Money market and NOW accounts maturing or repricing within 12 months increased of $6.5 million and $17.2 million. As previously mentioned, this resulted from an influx of tax monies in the third quarter. These increases were partially offset by reductions in savings accounts of $0.7 million and total time deposits of $8.7 million. With regard to RSA, the decrease was, for the most part, caused by a $12.2 million reduction in federal funds sold.

We also experienced a decrease in our three-month ratio to 1.01 at September 30, 2010, from 1.20 at the end of the previous quarter. The decrease resulted from a $29.0 million increase in RSL coupled with a $2.8 million reduction in RSA maturing or repricing within three months. The change resulted primarily for the same reasons as did the change in the 12-month ratio.

Static gap analysis, although a credible measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table. For example, the conservative nature of our Asset/Liability Management Policy assigns money market and NOW accounts to the “Due after three but within twelve months” repricing interval. In reality, these items may reprice less frequently and in different magnitudes than changes in general interest rate levels.

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. According to the most recent model results, instantaneous and parallel shifts in general market rates of plus 100 basis points would result in a positive change in net interest income for the 12 months ended September 30, 2011. Model results under a minus 100 basis point scenario were not meaningful, as the majority of short-term general market rates are already near zero.

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.

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

Liquidity:

Liquidity management is essential to our continuing operations as it gives us the ability to meet our financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Our financial obligations include, but are not limited to, the following:

•

Funding new and existing loan commitments;

•

Payment of deposits on demand or at their contractual maturity;

•

Repayment of borrowings as they mature;

•

Payment of lease obligations; and

•

Payment of operating expenses.

Historically, core deposits have been our primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available-for-sale securities and mortgage loans held for sale. We believe our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

Community Bank has a Contingency Funding Plan in place to address alternative sources of liquidity, that go beyond our core deposit base, in the event of a funding crisis. Examples of events that may result in a liquidity crisis include, among others, natural disasters, war, reputational harm and severe and prolonged asset quality problems. The funding program ensures the availability of various alternative wholesale funding sources that can be used whenever appropriate. These identified alternative funding sources include:

•

FHLB-Pgh liquidity contingency line of credit;

•

Federal Reserve Bank discount window;

•

Internet certificates of deposit;

•

Brokered deposits;

•

Institutional Deposit Corporation deposits;

•

Repurchase agreements; and

•

Federal funds purchased.

Based on our liquidity position at September 30, 2010, we do not anticipate the need to utilize any of these sources in the near term.

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

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis related to our reliance on noncore funds to fund our investments and loans maturing after September 30, 2011. Our noncore funds at September 30, 2010, consisted solely of time deposits in denominations of $100 or more. At September 30, 2010, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 9.1 percent, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 6.4 percent. These ratios indicated that we had some reliance on noncore funds at September 30, 2010. These ratios weakened slightly in comparison to 7.3 percent and 3.4 percent for the previous quarter. In addition, according to the most recent Bank Holding Company Performance Report for our Federal Reserve District, we were significantly less reliant on noncore funds than our peer group, which had noncore and short-term noncore funding dependence ratios of 23.0 percent and 11.6 percent.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, noninterest-bearing deposits with other banks, balances with the Federal Reserve Bank of Philadelphia and the FHLB-Pgh, and federal funds sold, increased $22.9 million during the nine months ended September 30, 2010. Similarly, cash and cash equivalents increased $34.1 million for the same period last year. For the nine months ended September 30, 2010, net cash inflows of $20.5 million from investing activities and $7.4 million from operating activities were partially offset by a $5.0 million net cash outflow from financing activities. For the same period of 2009, operating, investing and financing activities all provided net cash inflows.

Operating activities provided net cash of $7.4 million for the nine months ended September 30, 2010, and $6.6 million for the same nine months of 2009. Ordinarily, net income, adjusting for the effects of noncash transactions such as depreciation and the provision for loan losses is the primary source of funds from operations.

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities provided net cash of $20.5 million for the nine months ended September 30, 2010, compared to $16.5 million for the same period of 2009. For 2010, a net decrease in lending activities was the primary factor causing the net cash inflow from investing activities. In comparison, for 2009, proceeds received from repayments and sales of investment securities, net of investment security purchases, exceeded net cash used to fund an increase in lending activities.

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

Deposit gathering is our predominant financing activity. During the first nine months of 2010 deposit gathering slowed, which resulted in a $4.8 million reduction in net cash. Contrarily, deposit gathering provided net cash of $12.8 million for the same period of 2009.

Capital Adequacy:

We attempt to assure capital adequacy by monitoring our current and projected capital positions to support future growth, while providing stockholders with an attractive long-term appreciation of their investments. According to bank regulation, at a minimum, banks must maintain a Tier I capital to risk-adjusted assets ratio of 4.0 percent and a total capital to risk-weighted assets ratio of 8.0 percent. Additionally, banks must maintain a Leverage ratio, defined as Tier I capital to total average assets less intangibles, of 3.0 percent. The minimum Leverage ratio of 3.0 percent only applies to institutions with a composite rating of one under the Uniform Interagency Bank Rating System, that are not anticipating or experiencing significant growth and have well-diversified risk. An additional 100 to 200 basis points are required for all but these most highly-rated institutions. Our minimum Leverage ratio was 4.0 percent at September 30, 2010 and 2009. If an institution is deemed to be undercapitalized under these standards, banking law prescribes an increasing amount of regulatory intervention, including the required institution of a capital restoration plan and restrictions on the growth of assets, branches or lines of business. Further restrictions are applied to significantly or critically undercapitalized institutions, including restrictions on interest payable on accounts, dismissal of management and appointment of a receiver. For well capitalized institutions, banking law provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe and unsound practices or receives a less than satisfactory examination report rating.

Regulatory agencies define institutions, not under a written directive to maintain certain capital levels, as well capitalized if they exceed the following:

•

A Tier I risk-based ratio of at least 6.0 percent;

•

A total risk-based ratio of at least 10.0 percent; and

•

A Leverage ratio of at least 5.0 percent.

However, the periodic regulatory exam process may require institutions to maintain capital ratios and amounts in excess of the minimum levels discussed above.

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

Our and Community Bank’s capital ratios at September 30, 2010 and 2009, as well as the required minimum ratios for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991 are summarized as follows:

Regulatory capital


													Minimum to be Well
													Capitalized under
							Minimum for Capital						Prompt Corrective
	Actual						Adequacy Purposes						Action Provisions
September 30,	2010			2009			2010			2009			2010			2009
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated	$	52,455		$	53,417		$	19,125		$	21,040
Community Bank		46,774			48,080			18,896			20,892		$	28,345		$	31,338
Total capital to risk-weighted assets:
Consolidated		66,528			60,055			38,251			42,079
Community Bank		60,776			54,672			37,793			41,784			47,241			52,230
Tier I capital to total average assets less goodwill:
Consolidated		52,455			53,417			25,703			24,628
Community Bank		46,774			48,080		$	25,469		$	24,481		$	31,837		$	30,601

Risk-weighted assets:
Consolidated		461,385			508,430
Community Bank		455,661			504,735
Risk-weighted off-balance sheet items:
Consolidated		16,748			17,563
Community Bank		16,748			17,563
Average assets for Leverage ratio:
Consolidated		642,564			615,705
Community Bank	$	636,735		$	612,015

Ratios:
Tier I capital as a percentage of risk- weighted assets and off-balance sheet items:
Consolidated		11.0	%		10.2	%		4.0	%		4.0	%
Community Bank		9.9			9.2			4.0			4.0			6.0	%		6.0	%
Total of Tier I and Tier II capital as a percentage of risk-weighted assets and off-balance sheet items:
Consolidated		13.9			11.4			8.0			8.0
Community Bank		12.9			10.5			8.0			8.0			10.0			10.0
Tier I capital as a percentage of total average assets less intangible assets:
Consolidated		8.2			8.7			4.0			4.0
Community Bank		7.3	%		7.9	%		4.0	%		4.0	%		5.0	%		5.0	%

At September 30, 2010, we reported Tier I capital, Total capital and Leverage ratios of 11.0 percent, 13.9 percent and 8.2 percent. In addition, Community Bank reported Tier I capital, Total capital and Leverage ratios of 9.9 percent, 12.9 percent and 7.3 percent. Community Bank continued to exceed the requirements to be categorized as well capitalized under the regulatory framework for prompt corrective action at the close of the third quarter of 2010.

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

Stockholders’ equity equaled $55.2 million or $32.01 per share at September 30, 2010, an increase of $4.9 million compared to $50.3 million or $29.25 per share at December 31, 2009. Net income of $3,340 was the primary factor leading to the capital improvement. We also experienced an increase in other comprehensive income of $1,433 resulting from net of tax market value appreciation on available-for-sale investment securities.

We did not declare any dividends during the three months or nine months ended September 30, 2010. Our ability to declare and pay dividends is based on our operating results, financial and economic conditions, capital and growth objectives, appropriate dividend restrictions and other relevant factors. We rely on dividends received from Community Bank for payment of dividends to stockholders. Community Bank’s ability to pay dividends is subject to federal and state regulations. On March 1, 2010, we received notification from the Federal Reserve Board recommending that we and Community Bank suspend the declaration or payment of dividends. Moreover, this notification requires us and Community Bank to inform the Federal Reserve Board prior to declaring future dividends.

We have a dividend reinvestment plan which allows stockholders to automatically reinvest their dividends in shares of our common stock. We did declare a dividend for the fourth quarter of 2009 that was paid during 2010. As a result, for the nine months ended September 30, 2010, 1,916 shares were issued under this plan relative to the fourth quarter of 2009 dividend.

Review of Financial Performance:

Net income for the third quarter of 2010 equaled $1,000 or $0.58 per share, year-to-date earnings totaled $3,340 or $1.94 per share. In comparison, we reported net losses of $3,375 or $1.95 per share for the third quarter and $385 or $0.22 per share year-to-date 2009. The year-to-date earnings improvement resulted primarily from reductions in the provision for loan losses and noninterest expense, which were partially offset by lower net interest income and noninterest income. Return on average assets was 0.62 percent for the third quarter and 0.69 percent for the nine months ended September 30, 2010, compared to (2.19) percent and (0.08) percent for the respective 2009 periods. Return on average stockholders’ equity was 7.32 percent and 8.54 percent for the third quarter and year-to-date 2010, compared to (22.63) percent and (0.87) percent for the same periods of 2009.

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

Net Interest Income:

Net interest income is still the fundamental source of earnings for commercial banks. Moreover, fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term borrowings and long-term debt comprise interest-bearing liabilities. Net interest income is impacted by:

•

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

•

Changes in general market rates; and

•

The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported on a tax-equivalent basis using the prevailing federal statutory tax rate of 34.0 percent.

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

We analyze interest income and interest expense by segregating rate and volume components of earning assets and interest-bearing liabilities. The impact changes in the interest rates earned and paid on assets and liabilities, along with changes in the volume of earning assets and interest-bearing liabilities have on net interest income are summarized in the following table. The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

Net interest income changes due to rate and volume


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2010 vs. 2009									2010 vs. 2009
	Increase (decrease)									Increase (decrease)
	attributable to									attributable to
	Total									Total
	Change			Rate			Volume			Change			Rate			Volume
Interest income:
Loans:
Taxable	$	(388	)	$	(72	)	$	(316	)	$	(1,389	)	$	(864	)	$	(525	)
Tax-exempt		(423	)		27			(450	)		(1,400	)		167			(1,567	)
Investments:
Taxable		378			(38	)		416			950			(325	)		1,275
Tax-exempt		(284	)		19			(303	)		(997	)		22			(1,019	)
Federal funds sold		8			2			6			24						24

Total interest income		(709	)		(62	)		(647	)		(2,812	)		(1,000	)		(1,812	)


Interest expense:
Money market accounts		22			1			21			78			22			56
NOW accounts		55			(51	)		106			252			(44	)		296
Savings accounts		(36	)		(35	)		(1	)		(70	)		(84	)		14
Time deposits less than $100		(191	)		(108	)		(83	)		(560	)		(351	)		(209	)
Time deposits $100 or more		(183	)		(95	)		(88	)		(344	)		(487	)		143
Short-term borrowings		(5	)		3			(8	)		(97	)		(8	)		(89	)
Long-term debt		160						160			480						480

Total interest expense		(178	)		(285	)		107			(261	)		(952	)		691

Net interest income	$	(531	)	$	223		$	(754	)	$	(2,551	)	$	(48	)	$	(2,503	)

For the nine months ended September 30, tax-equivalent net interest income decreased $2,551 or 14.7 percent to $14,841 in 2010 from $17,392 in 2009. Negative volume and rate variances, caused the net interest income reduction.

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

Changes in the volumes of earning assets and interest-bearing liabilities contributed to a $2,503 decrease in net interest income. For the nine months ended September 30, average earning assets increased $20.6 million or 3.5 percent to $609.7 million in 2010 from $589.1 million in 2009. Despite the growth in average earning assets, tax-equivalent interest income decreased $1,812 due to the volume variance. Specifically, the decline was due, for the most part, to a $46.5 million or 9.1 percent reduction in average loans. Average tax-exempt loans decreased $34.0 million, while taxable loans declined $12.5 million, which resulted in reductions in tax-equivalent interest income of $1,567 and $525. With regard to tax-exempt loans, several large tax and revenue anticipation notes of local municipalities, which were outstanding during 2009, matured by year end. As part of our tax planning strategy for 2010, we chose not to actively compete for these types of loans. The maturities and repayments received from the loan portfolio were reinvested in lower-yielding assets.

Also adversely impacting tax-equivalent net interest income was growth in average interest-bearing liabilities of $27.5 million to $499.7 million for the nine months ended September 30, 2010, from $472.2 million for the same period of 2009. The growth resulted in additional interest expense of $691. Specifically, average interest-bearing transaction accounts, which include money market, NOW and savings accounts, grew $40.7 million and together caused a $366 increase in interest expense. In addition, long-term debt averaged $8.0 million in 2010 and resulted in an increase in interest expense of $480. Partially offsetting these increases, was an $18.6 million decrease in average short-term borrowings and a $2.6 million decrease in total time deposits, which caused decreases to interest expense of $89 and $66.

In addition to the unfavorable volume variance, a negative rate variance resulted in a slight decrease in tax-equivalent net interest income of $48. Reductions in loan and investment yields, more than offset a decrease in funding costs. The tax-equivalent yield on earning assets decreased 81 basis points to 4.86 percent for the nine months ended September 30, 2010, from 5.67 percent for the same period of 2009, resulting in a reduction in interest income of $1,000. Specifically, the tax-equivalent yield on the loan portfolio decreased 23 basis points, while the tax-equivalent yield on the investment portfolio declined 219 basis points comparing the nine months ended September 30, 2010 and 2009. These reductions in yield led to declines in tax-equivalent interest income of $697 and $303.

The reduction in interest revenue due to rates was offset partially by a decrease in interest expense of $952, which resulted from a 19 basis point decrease in the cost of funds to 1.96 percent for the nine months ended September 30, 2010 from 2.15 percent for the same period of 2009. We experienced a significant decrease in our time deposit costs, as promotional gas lease certificates of deposit were renewed at lower rates. As a result, the average cost of time deposits decreased 46 basis points to 2.86 percent in 2010 from 3.32 percent in 2009. This resulted in a reduction in interest expense of $838 and accounted for 88.0 percent of the total decrease in interest expense.

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

For the quarter ended September 30, 2010, tax-equivalent net interest income decreased $531 in comparison to the same three months of last year. The decrease was due primarily to a negative volume variance of $754, partially offset by a positive rate variance of $223. Average earning assets grew $14.0 million comparing the third quarters of 2010 and 2009. However, similar to the year-to-date analysis, the change resulted in a reduction in tax-equivalent interest income of $647. In addition, growth of $27.7 million in interest-bearing liabilities resulted in additional interest expense of $107. The positive rate variance primarily resulted from a 26 basis point decrease in our cost of funds comparing the third quarters of 2010 and 2009, which resulted in a corresponding decrease in interest expense of $285.

Maintenance of an adequate net interest margin is one of our primary concerns. Monies received from repayments and maturities from our loan portfolio reinvested into lower-yielding assets, a reduction in the volume of tax-exempt loans, higher levels of nonaccrual loans and issuance of subordinated debt all factored into the 70 basis point decrease in our tax-equivalent net interest margin to 3.25 percent for the nine months ended September 30, 2010 from 3.95 percent for the same period of 2009. For the third quarter, our net interest margin was 3.27 percent, a contraction of 43 basis points compared to 3.70 percent for the third quarter of 2009. However, our net interest margin improved 8 basis points compared to 3.19 percent for the previous quarter. The FOMC has indicated that general market rates would remain low for some time. However, no assurance can be given that these conditions will continue. Net interest income could be adversely affected by changes in general market rates or increased competition. We believe by following prudent pricing practices coupled with careful investing, our net interest margin will improve.

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

The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid for the nine months ended September 30, 2010 and 2009, are summarized as follows. Earning assets averages include nonaccrual loans. Investment averages include available-for-sale securities at amortized cost. Income on investment securities and loans are adjusted to a tax-equivalent basis using the statutory tax rate of 34.0 percent.

Summary of net interest income


	September 30, 2010							September 30, 2009
			Interest		Average					Interest		Average
	Average		Income/		Interest			Average		Income/		Interest
	Balance		Expense		Rate			Balance		Expense		Rate
ASSETS:
Earning assets:
Loans:
Taxable	$	435,435	$	17,689		5.43	%	$	447,962	$	19,078		5.69	%
Tax-exempt		31,329		1,453		6.20			65,328		2,853		5.84
Investments:
Taxable		91,227		1,848		2.71			31,488		898		3.81
Tax-exempt		20,722		1,150		7.42			39,079		2,147		7.35
Federal funds sold		30,999		29		0.13			5,244		5		0.13

Total earning assets		609,712		22,169		4.86	%		589,101		24,981		5.67	%
Less: allowance for loan losses		15,426							5,855
Other assets		48,723							32,897

Total assets	$	643,009						$	616,143


LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market accounts	$	33,881		250		0.99	%	$	26,059		172		0.88	%
NOW accounts		104,263		1,041		1.33			74,865		789		1.41
Savings accounts		110,125		352		0.43			106,680		422		0.53
Time deposits less than $100		155,704		3,535		3.04			164,390		4,095		3.33
Time deposits $100 or more		87,737		1,670		2.54			81,610		2,014		3.30
Short-term borrowings		11				0.63			18,595		97		0.70
Long-term debt		8,000		480		8.02

Total interest-bearing liabilities		499,721		7,328		1.96	%		472,199		7,589		2.15	%
Noninterest-bearing deposits		87,735							81,092
Other liabilities		3,237							3,758
Stockholders’ equity		52,316							59,094

Total liabilities and stockholders’ equity	$	643,009						$	616,143

Net interest income/spread			$	14,841		2.90	%			$	17,392		3.52	%

Net interest margin						3.25	%						3.95	%
Tax equivalent adjustments:
Loans			$	494						$	970
Investments				391							730

Total adjustments			$	885						$	1,700


Note:		Average balances were calculated using average daily balances. Interest income on loans include fees of $540 in 2010 and $652 in 2009. Available-for-sale securities, included in investment securities, are stated at amortized cost with the related average unrealized holding gains of $1,499 and $2,573 for the nine months ended September 30, 2010 and 2009 included in other assets. Tax-equivalent adjustments were calculated using the prevailing statutory tax rate of 34.0 percent.

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

Provision for Loan Losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio.

For the three months and nine months ended September 30, 2010, the provision for loan losses amounted to $300 and $1,600, compared to $8,670 and $9,760 for the respective periods of 2009. The provision for loan losses in 2009 reflected the effects of collateral valuation revisions to certain large commercial real estate loans, coupled with a change in the methodology for estimating the allowance for loan losses. With regard to collateral valuation revisions, independent appraisals for these commercial real estate loans indicated significant market devaluations brought on by the deterioration in the local economy at that time. In addition, in the third quarter of 2009, management revised its methodology for estimating losses in the remainder of the loan portfolio by shortening the number of periods considered for estimating historical loss factors in order to reflect rapidly changing market conditions.

Noninterest Income:

Noninterest income for the third quarter decreased $1,404 or 55.7 percent to $1,116 in 2010 from $2,520 in 2009. Included in noninterest income in 2009, were gains on the sale of available-for-sale investment securities of $1,385. There were no gains on the sale of available-for-sale investment securities in 2010. Adjusting for these gains, noninterest income for the third quarter decreased $19. A $137 decrease in service charges, fees and commissions was partially offset by a $118 increase in mortgage banking income.

For the nine months ended September 30, 2010, noninterest income totaled $3,443, a decrease of $1,973 or 36.4 percent from $5,416 for the same nine months of 2009. For the nine months ended September 30, noninterest income included a net gain from the sale of available-for-sale investment securities of $361 in 2010 and $1,499 in 2009. In addition, included in year-to-date noninterest income in 2009 was a net gain of $294 from the dispositions of the former Tunkhannock and Eaton Township, Pennsylvania branch offices. Income generated by our secondary mortgage banking division decreased $279 comparing the nine months ended September 30, 2010 and 2009, while service charges, fees and commissions decreased $262.

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

Noninterest Expense:

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

Major components of noninterest expense for the three months and nine months ended September 30, 2010 and 2009, are summarized as follows:

Noninterest expenses


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Salaries and employee benefits expense:
Salaries and payroll taxes	$	1,737	$	1,734	$	5,198	$	5,109
Employee benefits		451		291		1,360		1,220

Salaries and employee benefits expense		2,188		2,025		6,558		6,329


Net occupancy and equipment expense:
Net occupancy expense		266		271		856		898
Equipment expense		292		320		852		951

Net occupancy and equipment expense		558		591		1,708		1,849


Other expenses:
Marketing expense		141		167		345		528
Other taxes		154		151		469		497
Stationery and supplies		55		49		151		178
Contractual services		724		482		1,729		1,618
Insurance, including FDIC assessment		398		336		1,160		1,313
Other		731		757		1,549		1,601

Other expenses		2,203		1,942		5,403		5,735

Total noninterest expense	$	4,949	$	4,558	$	13,669	$	13,913

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

For the third quarter, noninterest expense increased $391 or 8.6 percent to $4,949 in 2010 from $4,558 in 2009. The increase resulted from higher salaries and employee benefits expenses and other expenses partially offset by a decrease in net occupancy and equipment expense. We measure our efficiency using two key industry ratios, the operating efficiency ratio and the overhead ratio. The operating efficiency ratio is defined as noninterest expense as a percentage of net interest income and noninterest income, and the overhead ratio is calculated by dividing noninterest expense by average total assets. As a result of the increase in noninterest expense, our operating efficiency ratio weakened to 78.6 percent for the nine months ended September 30, 2010 from 65.9 percent for the same nine months of 2009. Also contributing to the weakening in efficiency were reductions in net interest income and noninterest income. Contrarily, our overhead ratio improved to 2.8 percent for the nine months ended September 30, 2010, compared to 3.0 percent for the same period last year.

Salaries and employee benefits expense comprise the majority of our noninterest expense. These payroll-related expenses increased $163 to $2,188 for the third quarter of 2010 from $2,025 for the same quarter of 2009. The increase resulted primarily from a $160 rise in the cost of employee benefits. For the nine months ended September 30, 2010, payroll and benefit related expenses totaled $6,558, an increase of $229 or 3.6 percent from $6,329 for the same nine months of 2009.

Occupancy and equipment expense decreased $33 or 5.6 percent comparing the third quarters of 2010 and 2009. Building-related expense declined $5 due primarily to a reduction in rental expense, while decreases in software and office equipment depreciation resulted in a $28 decline in equipment-related expense. For the nine months ended September 30, 2010, occupancy and equipment expense totaled $1,708, a decrease of $141 from $1,849 for the same nine months of 2009.

For the third quarter, other expenses increased $261 or 13.4 percent to $2,203 in 2010 from $1,942 in 2009. A $242 increase in contractual services resulting from legal and consulting costs associated with the upcoming merger was the primary factor causing the quarterly increase. Year-to-date other expenses totaled $5,403, a decrease of $332 or 5.8 percent compared to $5,735 for the same period one year ago. The year-to-date decrease was due largely to reductions in marketing-related expenses, directors’ fees and deposit insurance.

Our deposits are insured up to regulatory limits by the FDIC and accordingly, are subject to deposit insurance assessments. Under the provisions of The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the Bank Insurance Fund and the Savings Association Insurance Fund were merged into the Deposit Insurance Fund (“DIF”). Under the Reform Act, the annual DIF assessment rate is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. Each institution is placed into one of four risk categories depending on the institution’s capital ratios and supervisory ratings. Based on our latest assignments, we migrated from Risk Category I, institutions posing the least amount of risk to the DIF, to Risk Category II and will pay approximately $0.22 per $100 dollars of assessable deposits for the third quarter of 2010. The migration resulted directly from the deterioration in our asset quality.

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

On November 12, 2009, the FDIC issued a final rule that required all insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Our prepaid assessment was $2.6 million at September 30, 2010 and $3.5 million at December 31, 2009. The FDIC also adopted a uniform increase in assessment rates of $0.03 per $100 dollars of assessable deposits effective January 1, 2011.

There is a separate levy assessed on all FDIC-insured institutions to cover the cost of Finance Corporation (“FICO”) funding. The FDIC established annual FICO assessment rate effective for the first, second and third quarters of 2010 at $0.0104 per $100 dollars of DIF-assessable deposits. Our FICO assessments totaled $46 and $42 for the nine months ended September 30, 2010 and 2009.

Income Taxes:

For the nine months ended September 30, we recorded an income tax benefit of $1,210 in 2010 and $2,180 in 2009. We utilize tax credits from our investments as a limited partner in elderly and low-income housing projects to lessen our tax burden. One such project affords us approximately $3.7 million in investment tax credits over a 10-year period which began in 2007. We expect to recognize a total of $372 in tax credits from this project in 2010. In the fourth quarter of 2009, Community Bank made an investment in another elderly, low-income housing project. For this investment, Community Bank will receive a one-time historical tax credit of approximately $1.5 million in 2010 and approximately $5.5 million in low-income housing credits spread over a period beginning in 2010 and ending in 2021. For the nine months ended September 30, 2010, we recognized tax credits totaling $1,398 from these investments.

The difference between the amount of income tax currently payable and the provision for income tax expense reflected in the income statements arise from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, which result in deferred tax assets or liabilities. We perform quarterly reviews on the tax criteria related to the recognition of deferred tax assets. We decided not to establish a valuation reserve for the deferred tax assets since it is likely that these assets will be realized through carry-back to taxable income in prior years and by future reversals of existing taxable temporary differences or, to a lesser extent, through future taxable income.

Comm Bancorp, Inc.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of September 30, 2010, the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures, as of September 30, 2010, were effective to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting:

There was no change in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the fiscal quarter ended September 30, 2010, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Comm Bancorp, Inc.
OTHER INFORMATION

Part II. Other Information

Item 1. Legal Proceedings

NONE

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

NONE

Item 3. Defaults Upon Senior Securities

NONE

Item 4. Removed and Reserved

NONE

Item 5. Other Information

NONE

Item 6. Exhibits


31	(i)	CEO and CFO certifications pursuant to Rule 13a-14(a)/15d-14(a).

32		CEO and CFO certifications pursuant to Section 1350.

COMM BANCORP, INC.
FORM 10-Q

SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized.


	Registrant, Comm Bancorp, Inc.
Date: November 15, 2010	/s/ William F. Farber, Sr.
	William F. Farber, Sr.
	President and Chief Executive Officer Chairman of the Board/Director (Principal Executive Officer)

Date: November 15, 2010	/s/ Scott A. Seasock
	Scott A. Seasock
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: November 15, 2010	/s/ Stephanie A. Westington, CPA
	Stephanie A. Westington, CPA
	Vice President of Finance (Principal Accounting Officer)

EXHIBIT INDEX


Item Number			Description	Page

	31	(i)	CEO and CFO Certifications Pursuant to Rule 13a-14(a)/15d-14(a).		62

	32		CEO and CFO Certifications Pursuant to Section 1350.		64

COMM BANCORP INC 10-Q