10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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	(I.R.S. Employer Identification Number)
or organization)
125 North State Street, Clarks Summit, PA	18411
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (570) 586-0377

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.33 per share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o           Accelerated filer o           Non-accelerated filer 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

State the aggregate market value of the voting common stock held by non-affiliates based on the closing sale price as of the last business day of the registrant’s most recently completed second fiscal quarter: $59,196,711 at June 30, 2006.

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 1,851,518 at March 14, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2006, are incorporated by reference in Part II of this Annual Report. Portions of the registrant’s 2007 Proxy Statement are incorporated by reference in Part III of this Annual Report.

COMM BANCORP, INC.
FORM 10-K INDEX

	Page
Special Note Regarding Forward-Looking Statements		3
Part I
Item 1. Business		4
Item 1A. Risk Factors		17
Item 2. Properties		22
Item 3. Legal Proceedings		23
Item 4. Submission of Matters to a Vote of Security Holders		23
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
Item 6. Selected Financial Data		26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		26
Item 8. Financial Statements and Supplementary Data		26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		27
Item 9A. Controls and Procedures		27
Item 9B. Other Information		28
Part III
Item 10. Directors, Executive Officers and Corporate Governance		28
Item 11. Executive Compensation		37
Item 12. Security Ownership of Certain Beneficial Owners and Management		47
Item 13. Certain Relationships and Related Transactions and Director Independence		48
Item 14. Principal Accountant Fees and Services		49
Part IV
Item 15. Exhibits and Financial Statement Schedules		49
Signatures		51
Exhibit Index		53
Articles of Incorporation, as amended
By-Laws, as amended
Portions of the Annual Report
Letter dated August 24, 2006
List of Subsidiaries
Certification of CEO and CFO
CEO, CFO certification pursuant to Section 1350
Charter of the Joint Audit Committee, amended March 2, 2007

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COMM BANCORP, INC.
FORM 10-K

Special Note Regarding Forward-Looking Statements

This annual report on Form 10-K, other periodic reports filed by us under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, and any other written or oral statements made by or on behalf of us may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect our current views with respect to future events and financial performance. Such forward-looking statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:

• Possible changes in economic and business conditions and the war on international terrorism that may affect the prevailing interest rates, the prevailing rates of inflation or the amount of growth, stagnation or recession in the global, United States and Northeastern Pennsylvania economies, the value of investments, collectibility of loans and the profitability of business entities;

• Possible changes in monetary and fiscal policies, laws and regulations and other activities of governments, agencies and similar organizations;

• The effects of easing restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, and attendant changes in patterns and effects of competition in the financial services industry;

• The cost and other effects of legal proceedings, claims, settlements and judgments; and

• Our ability to achieve the expected operating results depends on a variety of factors, including, but not limited to, the continued growth of the markets in which we operate consistent with recent historical experience, our ability to expand into new markets and to maintain profit margins in the face of pricing pressures.

The words “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of us. Any such statements speak only as of the date the statement was made. We undertake no obligation to update or revise any forward-looking statements.

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Part I

Item 1. Business

General

We are a registered bank holding company incorporated in 1983 as a Pennsylvania business corporation and are headquartered in Clarks Summit, Pennsylvania. We have two wholly-owned subsidiaries, Community Bank and Trust Company, referred to as Community Bank, and Comm Realty Corporation, referred to as Comm Realty. Our business consists primarily of the management and supervision of Community Bank. Comm Realty, a Pennsylvania business corporation, holds, manages and sells foreclosed or distressed assets on behalf of Community Bank. Our principal source of income is dividends paid by Community Bank. At December 31, 2006, we had approximately:

• $540.4 million in total assets;

• $408.1 million in loans;

• $483.4 million in deposits; and

• $54.1 million in stockholders’ equity.

Community Bank is a Pennsylvania commercial bank and a member of the Federal Reserve System whose deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). Community Bank is a full-service commercial bank providing a wide range of products and services, including time and demand deposit accounts, consumer, commercial and mortgage loans and commercial leases to individuals and small- to medium-sized businesses. Community Bank’s principal market area comprises Lackawanna, Luzerne, Monroe, Susquehanna, Wayne and Wyoming counties located in the Northeast corner of the Commonwealth of Pennsylvania. At December 31, 2006, Community Bank had 16 community banking offices and one loan production office located within this market area.

Community Bank competes with 27 commercial banks, six thrift institutions and 53 credit unions, many of which are substantially larger in terms of assets and liabilities. In addition, Community Bank experiences competition for deposits from mutual funds and security brokers, while consumer discount, mortgage and insurance companies compete for various types of loans. Principal methods of competing for banking, permitted nonbanking services and financial activities include price, nature of product, quality of service and convenience of location.

Community Bank has two wholly-owned subsidiaries, Community Leasing Corporation, referred to as Community Leasing, and Comm Financial Services Corporation, referred to as Comm Financial Services. Community Leasing, a Pennsylvania business corporation, engages in commercial leasing. Comm Financial Services, a Pennsylvania business corporation, engages in selling insurance products and services and in providing asset management services. Community Bank is also a 40.0 percent member in Community Abstract

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Services, LLC, referred to as Community Abstract, a Pennsylvania limited liability company, which offers title insurance and abstract services to residential and commercial mortgage loan customers. Community Bank accounts for Community Abstract using the equity method of accounting.

We have combined financial information about Comm Realty, Community Leasing and Comm Financial Services with our financial information as none of these subsidiaries meet the quantitative thresholds for reportable operating segments. Moreover, we consider Community Bank’s branch banking offices to be a single operating segment because these branches have similar economic characteristics and share a majority of the following aggregation criteria for reportable operating segments:

• Products and services;

• Operating processes;

• Delivery systems;

• Customer bases; and

• Regulatory oversight.

We have not operated any other reportable operating segments in the three-year period ended December 31, 2006.

As of December 31, 2006, Community Bank had 186 full-time equivalent employees. We and Community Bank are not parties to any collective bargaining agreement and employee relations are considered to be good.

Our primary source of funds is the cash flow provided by our financing activities, mainly deposit gathering. Our other sources of funds are provided by investing activities, including principal and interest payments on loans and investment securities, and operating activities, primarily net income. We offer a variety of deposit accounts with a range of interest rates and terms, including money market accounts, NOW accounts, savings accounts, certificates of deposit and demand deposit accounts. Our deposits are primarily obtained from areas surrounding our banking offices. We rely primarily on marketing, new products, service and long-standing relationships with customers to attract and retain these deposits. At December 31, 2006, our deposits totaled $483.4 million. Of the total deposit balance, $176.4 million or 36.5 percent represented time deposits less than $100.0 thousand and $99.3 million or 20.5 percent represented savings accounts. We have maintained a high level of core deposits, which has contributed to our low cost of funds. Core deposits include money market, NOW, savings, time deposits less than $100.0 thousand and demand deposit accounts, which in the aggregate, represented 92.6 percent of total deposits at December 31, 2006, and 95.2 percent of total deposits at December 31, 2005. A further discussion of our deposits is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 1.

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We are not dependent on deposits or exposed by loan concentrations to a single customer or to a small group of customers, the loss of any one or more of whom would have a materially adverse effect on our financial condition.

Supervision and Regulation

The following discussion sets forth the material elements of the basic regulatory framework applicable to us and Community Bank and provides certain specific information. This basic regulatory framework is primarily intended for the protection of investors in our common stock, depositors of Community Bank and the FDIC that insures bank deposits. To the extent that the following information describes statutory and regulatory provisions, it is qualified by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to us or Community Bank may have a material effect on our business.

Intercompany Transactions

Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), limit borrowings by us from Community Bank and also limit various other transactions between us and Community Bank. For example, Section 23A limits to no more than 10.0 percent of its total capital the aggregate outstanding amount of Community Bank’s loans and other “covered transactions” with any particular nonbank affiliate including financial subsidiaries, and limits to no more than 20.0 percent of its total capital the aggregate outstanding amount of Community Bank’s “covered transactions” with all of its affiliates including financial subsidiaries. At December 31, 2006, approximately $5.5 million was available for loans to us from Community Bank. Section 23A also generally requires that Community Bank’s loans to its nonbank affiliates, including financial subsidiaries, be secured, and Section 23B generally requires that Community Bank’s transactions with its nonbank affiliates, including financial subsidiaries, be at arm’s-length terms. Also, we and Community Bank and any financial subsidiary are prohibited from engaging in certain “tie-in” arrangements in connection with extensions of credit or provision of property or services.

Supervisory Agencies

As a Pennsylvania commercial bank and member of the Federal Reserve System, Community Bank is subject to primary supervision, regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board. Community Bank is subject to extensive Pennsylvania and federal statutes and regulations that significantly affect its business and activities. Community Bank must file reports with its regulators concerning its activities and financial condition and obtain regulatory approval to

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enter into certain transactions. Community Bank is also subject to periodic examinations by its primary and secondary regulators to ascertain compliance with various regulatory requirements.

We, Community Bank and our subsidiaries, are also affected by various other governmental requirements and regulations, general economic conditions and the fiscal and monetary policies of the federal government and the Federal Reserve Board. The monetary policies of the Federal Reserve Board influence, to a significant extent, the overall growth of loans, leases, investments, deposits, interest rates charged on loans and interest rates paid on deposits. The nature and impact of future changes in monetary policies are often unpredictable.

We are subject to the jurisdiction of the United States Securities and Exchange Commission (“SEC”) for matters relating to the offering and sale of our securities. We are also subject to the SEC’s rules and regulations relating to periodic reporting, insider trading reports and proxy solicitation materials. Our common stock is listed for quotation of prices on The NASDAQ Global Market^SM and therefore, we are subject to the listing rules and regulations imposed by The NASDAQ Global Market^SM.

Support of Community Bank

Under current Federal Reserve Board policy, we are expected to act as a source of financial and managerial strength to Community Bank by standing ready to use available resources, or obtain additional resources, to provide adequate capital funds during periods of financial adversity. The support expected by the Federal Reserve Board may be required at times when we may not have the resources or inclination to provide it.

If a default occurred with respect to Community Bank, any capital loans to Community Bank from us would be subordinate in right of payment to depositors and certain other debt holders of Community Bank.

Liability of Commonly Controlled Banks

Community Bank can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution, or any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.

“Default” is generally defined as the appointment of a conservator or receiver, and “in danger of default” is generally defined as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.

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Depositor Preference Statute

In the “liquidation or other resolution” of Community Bank by any receiver, federal law provides that deposits and certain claims for administrative expenses and employee compensation against Community Bank are afforded a priority over the general unsecured claims against Community Bank, including federal funds and letters of credit.

Capital Requirements

We are subject to risk-based capital requirements and guidelines imposed by the Federal Reserve Board, which are substantially similar to the capital requirements and guidelines imposed by the Federal Reserve Board on Community Bank. For this purpose, a bank’s or bank holding company’s assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk that is ascribed to those assets or commitments. In addition, risk-weighted assets are adjusted for low-level recourse and market-risk equivalent assets. These risk-based capital requirements also establish a capital framework consisting of Tier I capital and Tier II capital, which together comprise Total capital. Tier I capital is the sum of all common equity, non-cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, certain identifiable intangible assets and certain other assets. Tier II capital may include perpetual preferred stock not meeting the Tier I definition, mandatory convertible debt securities, a limited amount of subordinated debt and the allowance for loan losses in an amount not to exceed 1.25 percent of risk-weighted assets.

Under these risk-based capital requirements, bank holding companies and banks are required to maintain Tier I and Total capital, less certain deductions, of at least 4.0 percent and 8.0 percent of their total risk-weighted assets, including certain off-balance sheet items, such as unused lending commitments and standby letters of credit. At December 31, 2006, we met both requirements, with Tier I and Total capital ratios of 12.5 percent and 13.5 percent. Community Bank also met both requirements at December 31, 2006, with Tier I and Total capital ratios of 12.1 percent and 13.1 percent.

The Federal Reserve Board also requires banks and bank holding companies to maintain a minimum Leverage ratio, Tier I capital to total average assets less intangible assets, of 3.0 percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. Bank holding companies not meeting the criteria are required to maintain the minimum Leverage ratio plus an additional cushion of 1.0 to 2.0 percentage points. Our Leverage ratio was 9.7 percent and Community Bank’s Leverage ratio was 9.4 percent at December 31, 2006.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires Federal Reserve Board regulators to take prompt

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corrective action if an FDIC-insured depository institution does not meet minimum capital requirements, including the termination of deposit insurance by the FDIC and certain restrictions on its business. FDICIA establishes five capital categories for insured banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions depending on the category into which an institution is classified. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits, on “pass-through” insurance coverage for certain of its accounts and on certain other aspects of its operations. FDICIA generally prohibits a bank from paying any dividend or making any capital distribution or paying any management fee to its holding company if the bank would thereafter be undercapitalized. An undercapitalized bank is subject to regulatory monitoring and may be required to divest itself of or liquidate subsidiaries. An undercapitalized bank must develop a capital restoration plan, and its parent bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5.0 percent of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Critically undercapitalized institutions are prohibited from making payments of principal and interest on subordinated debt and are generally subject to the mandatory appointment of a conservator or receiver.

Rules adopted by the Federal Reserve Board under FDICIA provide that a state member bank is deemed to be well capitalized if the bank has a total risk-based capital ratio of 10.0 percent or greater, a Tier I risk-based capital ratio of 6.0 percent or greater, a Leverage ratio of 5.0 percent or greater and the institution is not subject to a written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific level of any capital measure. As of December 31, 2006, Community Bank was well capitalized, based on the prompt corrective action ratios and guidelines described above. It should be noted, however, that a bank’s capital category is determined solely for the purpose of applying the Federal Reserve Board’s prompt corrective action regulations, and that the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects.

In imposing these requirements, regulators must also take into consideration: (i) concentrations of credit risk; (ii) interest rate risk, when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position; and (iii) risk from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. In addition, we and Community Bank, if engaged in significant trading activity, must incorporate a measure for market risk in our regulatory capital calculations.

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The prompt corrective action provisions of FDICIA and the implementing regulations apply to FDIC-insured depository institutions such as Community Bank and are not directly applicable to holding companies, like us, that control such institutions. However, the Federal Reserve Board has indicated that it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations. Although the capital categories defined under the prompt corrective action regulations are not directly applicable to us as a holding company under existing laws and regulations, if we were placed in a capital category we would qualify as well-capitalized at December 31, 2006.

Bank regulatory agencies’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee, a committee comprised of representatives of central banks and bank supervisors and/or regulators from the major industrialized countries, establishes broad policy guidelines that each country’s regulators can use to develop the supervisory policies they enact. The Basel Committee has been working for a number of years on revisions to Basel I. The new regulatory capital guidelines (“Basel II”), published in June 2004 and amended in November 2005, are designed to promote improved risk measurement and management processes and better align minimum capital requirements with risk. However, Basel II guidelines would be mandatory only for core banks, banks with consolidated total assets of $250.0 billion or more. Therefore, we and Community Bank would not be required to comply with Basel II, but would continue to operate under the Basel I guidelines.

On December 5, 2006, the Federal Reserve Board, in conjunction with other United States bank regulatory agencies, released a draft of proposed rules that would revise the existing risk-based capital framework. The proposed rules (“Basel IA”), intended to improve current standards by making them more risk sensitive, would:

• Use loan-to-value ratios to determine risk weights for most residential mortgages;

• Increase the number of risk weight categories to which credit exposures may be assigned;

• Expand the use of external credit rating for certain externally-rated exposures;

• Expand the range of collateral and guarantors that may qualify an exposure for lower risk weights;

• Increase the credit conversion factors for certain commitments with an original maturity of less than one year;

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• Assess a risk-based capital charge to reflect the risks in securitization with early amortization provisions that are backed by revolving exposures; and

• Remove the 50.0 percent limit on the risk weight that applies to certain derivative contracts.

If the proposed rules are adopted, banking organizations not subject to Basel II, including us and Community Bank, would be allowed to either remain under existing risk-based capital rules or adopt the new Basel IA rules. The public comment period for the proposed Basel IA rules, as well as the proposed Basel II rules, ends March 26, 2007, with final rules not expected until late in 2007.

Dividend Restrictions

We are a legal entity separate and distinct from Community Bank. In general, under Pennsylvania law, we cannot pay a cash dividend if the payment would render us insolvent. Our revenues primarily consist of dividends paid by Community Bank. Various federal and state statutory provisions limit the amount of dividends Community Bank can pay to us without regulatory approval. Under Pennsylvania law, Community Bank may declare and pay dividends to us only out of accumulated net earnings and as long as the surplus of Community Bank would not be reduced below its stated paid-in capital. At December 31, 2006, approximately $8.2 million was available for payment of dividends to us.

In addition, federal bank regulatory agencies have the authority to prohibit Community Bank from engaging in an unsafe or unsound practice in conducting its business. Depending upon the financial condition of the bank in question, the payment of dividends could be deemed to constitute an unsafe or unsound practice. The ability of Community Bank to pay dividends in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital guidelines.

Deposit Insurance Assessments

On February 8, 2006, the President signed The Federal Deposit Insurance Reform Act of 2005, and on February 15, 2006, the President signed into law The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, the “Reform Act”).

According to the FDIC, the Reform Act provides for the following changes:

• Merging the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund into a new fund, the Deposit Insurance Fund (“DIF”) effective March 31, 2006;

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• Increasing the coverage limit for retirement accounts to $250,000 and indexing the coverage limit for retirement accounts to inflation as with the general deposit insurance coverage limit effective April 1, 2006;

• Establishing a range of 1.15 percent to 1.50 percent within which the FDIC Board of Directors may set the Designated Reserve Rate (“DRR”);

• Allowing the FDIC to manage the pace at which the reserve ratio varies within this range.

- If the reserve ratio falls below 1.15 percent, or is expected to within six months, the FDIC must adopt a restoration plan to ensure that the DIF will return to 1.15 percent generally within five years.

- If the reserve ratio exceeds 1.35 percent, the FDIC must generally dividend to BIF members half of the amount above the amount necessary to maintain the DIF at 1.35 percent, unless the FDIC Board of Directors, after considering statutory factors, suspends the dividends.

- If the reserve ratio exceeds 1.50 percent, the FDIC must generally dividend to BIF members all amounts above the amount necessary to maintain the DIF at 1.50 percent;

• Eliminating the restrictions on premium rates based on the DRR and granting the FDIC Board of Directors the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio; and

• Granting a one-time initial assessment credit of approximately $4.7 billion to recognize institutions’ past contributions to the fund.

Under the Reform Act, Community Bank is a member of the DIF and expects to receive a one-time assessment credit of approximately $445,816, which will offset the cost of FDIC deposit insurance premiums for 2007.

Beginning in 2007, the annual DIF assessment rate will be determined based first on an institution’s capital category assignment and then on its supervisory group assignment. Based on our latest assignments, we would be assessed at the lowest rates of those institutions that pose the least risks to the DIF. Institutions in this low risk category are expected to pay between 5 and 7 cents per $100 of assessable deposits in 2007. We do not expect that the revisions made to FDIC deposit insurance premiums will have an effect on our operating results or financial position.

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The Deposit Insurance Funds Act of 1996 provides for assessments to pay for the cost of Financing Corporation (“FICO”) funding. In 2006, Community Bank paid FICO assessments of $60,384.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (“Riegle-Neal”) authorized interstate acquisitions of banks and bank holding companies without geographic limitation. Under Riegle-Neal, a bank holding company cannot make an interstate acquisition of a bank if, as a result, it would control more than 10.0 percent of the total United States insured depository deposits and more than 30.0 percent or the applicable state law limit of deposits in that state.

Subject to certain restrictions, Riegle-Neal also permits banks to merge across state lines through purchases or branch openings. However, the ability of banks to acquire branch offices is contingent on the host state having adopted legislation “opting in” to those provisions of Riegle-Neal. In addition, interstate mergers are contingent upon the host state not having adopted legislation “opting out” of that provision of Riegle-Neal. Pennsylvania has opted in to all of these provisions upon the condition that another host state has similar or reciprocal requirements. As of the date of this report, we have not entered into an agreement involving any interstate acquisitions of a bank or a branch office.

Control Acquisitions

Under the Change in Bank Control Act, a bank holding company is required to obtain prior Federal Reserve Board approval before acquiring more than 5.0 percent of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. In determining whether to approve a proposed acquisition, the Federal Reserve Board will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, consistent with the safe and sound operations of the bank under the Community Reinvestment Act of 1977 (“CRA”).

Permitted Nonbanking Activities

The Federal Reserve Board permits us or our subsidiaries to engage in nonbanking activities that are so closely related to banking or managing or controlling banks as to be appropriate. The Federal Reserve Board requires us to serve as a source of financial and managerial strength to Community Bank and not to conduct our operations in an unsafe or unsound manner. The Federal Reserve Board has enforcement powers to require us or our non-banking subsidiaries to terminate any activity it believes constitutes a serious risk to the safety, soundness or stability of Community Bank, and

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is inconsistent with sound banking principles or violates federal banking laws and regulations.

Financial Services Modernization

We must also comply with the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) in the conduct of our operations. The GLB Act eliminates the restrictions placed on the activities of banks and bank holding companies and creates two new structures, financial holding companies and financial subsidiaries. We and Community Bank are now allowed to provide a wider array of financial products and services that were reserved only for insurance companies and securities firms. In addition, we can now affiliate with an insurance company and a securities firm. We can elect to become a financial holding company, which would allow us to engage in activities referred to as “financial activities” that are not permitted to bank holding companies. A financial holding company may also affiliate with companies that are engaged in financial activities. A “financial activity” is an activity that does not pose a safety and soundness risk and is financial in nature, incidental to an activity that is financial in nature, or complimentary to a financial activity. As of the date of this report, we have not elected to become a financial holding company nor do we anticipate electing to become one in the near term.

Privacy

The GLB Act also creates a minimum federal standard of privacy protections for consumers and customers of financial institutions. According to this Act, we must provide notice to consumers and customers about our privacy policies and practices, describe the conditions under which we may disclose nonpublic personal information to non-affiliated third parties, and provide an “opt-out” method to prevent us from disclosing such information to non-affiliated third parties. The GLB Act distinguishes a customer from a consumer for purposes of the notice requirements imposed by this Act. We are required to give a customer a privacy notice at the time a customer relationship is established and then annually thereafter as long as the relationship continues. By contrast, we are required to give notice to a consumer only if we intend to disclose nonpublic personal information about the consumer to a non-affiliated third party.

Community Reinvestment Act

We are also subject to the CRA, and the regulations promulgated to implement the CRA, which are designed to create a system for bank regulatory agencies to evaluate a depository institution’s record in meeting the credit needs of its community. Community Bank received an “outstanding” rating in its last CRA examination which was held on April 25, 2005. “Outstanding” is the highest CRA rating that a depository institution can receive.

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Terrorist Activities

The Office of Foreign Assets Control (“OFAC”) of the Department of the Treasury sends us and our bank regulatory agencies, on a periodic basis, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. Should Community Bank find a name on any transaction, account or wire transfer that is on an OFAC list, Community Bank must freeze the account, file a suspicious activity report and notify the Federal Bureau of Investigation. Community Bank has appointed an OFAC Compliance Officer to oversee the inspection of its accounts and the filing of any notifications.

The USA PATRIOT Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA PATRIOT”) Act of 2001 was enacted by Congress as a result of the terrorist attacks on September 11, 2001. The purpose of the USA PATRIOT Act is to strengthen United States security, law enforcement and intelligence in order to combat terrorism on a variety of fronts. The USA PATRIOT Act contains extensive anti-money laundering and financial transparency laws and imposes rules and regulations to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. In addition, under the USA PATRIOT Act, financial institutions are prohibited from engaging in specified financial transactions and account relationships with foreign financial institutions and foreign customers. Congress is deliberating on amendments to the USA PATRIOT Act. None of these proposed amendments would have a substantial effect on our banking operations.

Subprime and Predatory Lending

The Federal Reserve Board has issued regulations which implement the Home Ownership and Equity Protection Act (“HOEPA”). This Act imposes additional disclosure requirements and certain substantive limitations on certain mortgage loans with rates or fees above specified levels. The regulations lower the rate levels that trigger the application of HOEPA and include additional fees in the calculation of the fee amount that triggers HOEPA. The loans that Community Bank currently makes are generally below the rate and fee levels that trigger HOEPA.

Community Bank must also comply with a Pennsylvania law, Act 55 of 2001, the Mortgage Bankers and Brokers and Consumer Equity Protection Act. This Act addresses what is known as “predatory lending,” among other things, and is applicable to Community Bank’s closed-end home equity mortgage loans, involving property located in Pennsylvania, in an amount less than $100.0 thousand made at a “high cost,” which is generally the rate and point triggers in the HOEPA. Those HOEPA triggers are:

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• An annual percentage rate exceeding 8.0 percentage points for 1^st lien loans or 10.0 percentage points for subordinate lien loans above comparable term U.S. Treasury securities; and/or

• Total points and fees payable by the consumer at or before closing that exceed the greater of 8.0 percent of the total loan amount or $480 for the year 2002 adjusted for each calendar year based on the consumer price index.

Sales of Insurance

Our federal bank regulatory agencies have issued consumer protection rules with respect to the retail sale of insurance products by us, Community Bank, or a subsidiary or joint venture of us or Community Bank. These rules generally cover practices, solicitations, advertising or offers of any insurance product by a depository institution or any person that performs such activities at an office of, or on behalf of, us or Community Bank. Moreover, these rules include specific provisions relating to sales practices, disclosures and advertising, the physical separation of banking and nonbanking activities and domestic violence discrimination.

Corporate Governance

The Sarbanes-Oxley Act of 2002 (“SOX”) has substantially changed the manner in which public companies govern themselves and how the accounting profession performs its statutorily required audit function. SOX makes structural changes in the way public companies make disclosures and strengthens the independence of auditors and audit committees. SOX requires direct responsibility of senior corporate management, namely the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), for establishing and maintaining an adequate internal control structure and procedures for financial reporting and disclosure by public companies.

Under SOX, audit committees will be primarily responsible for the appointment, compensation and oversight of the work of their auditors. The independence of the members of the audit committee is assured by barring members who accept consulting fees from the company or are affiliated with the company other than in their capacity as members of the board of directors.

SOX prohibits insider trades during pension fund blackout periods and requires prompt disclosure of insider transactions in company stock, which must be reported by the second business day following an insider transaction. Furthermore, SOX established a new federal crime of securities fraud with substantial penalties.

As a result of SOX, the costs to enhance our corporate governance regime and financial reporting controls and procedures was approximately $261,300 in 2005 and $18,700 in 2006.

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Community Bank

Community Bank’s legal headquarters is located at 125 North State Street, Clarks Summit, Lackawanna County, Pennsylvania 18411. Community Bank is a commercial bank that seeks to provide personal attention and professional financial assistance to its customers. Community Bank is a locally managed and oriented financial institution established to serve the needs of individuals and small– and medium-sized businesses. Community Bank’s business philosophy includes offering direct access to its President and other officers and providing friendly, informed and courteous service, local and timely decision-making, flexible and reasonable operating procedures and consistently-applied credit policies.

Available Information

We file reports, proxy and information statements and other information electronically with the SEC through the Electronic Data Gathering Analysis and Retrieval filing system. You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 100 F. Street, N.E., Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically. The SEC’s website address is http://www.sec.gov. Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC may be obtained without charge by writing to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations or through our website at http://www.combk.com.

Item 1A. Risk Factors

An investment in our common stock is subject to risks inherent to the nature of our business as a bank holding company. Like other financial institutions, we are subject to a number of risks, many of which are outside our control. We make every effort to manage those risks while maximizing returns. The Federal Reserve Board has identified six major categories of risk associated with financial institutions which include:

• Credit risk. The risk to earnings or capital arising from a borrower’s failure to meet the terms of an obligation with us.

• Market risk. The risk to our earnings or capital arising from adverse movements in market rates or prices, such as interest rates, foreign exchange rates or equity prices.

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• Liquidity risk. The risk to our earnings and capital arising from the inability to meet our obligations when they come due, because of an inability to liquidate assets or obtain adequate funding.

• Operational risk. The risk that arises from the potential that inadequate information systems, operational problems, internal control breaches, fraud, or unforeseen catastrophes will result in unexpected losses.

• Legal risk. The risk that arises from the potential that unenforceable contracts, lawsuits, or adverse judgements can disrupt or otherwise negatively affect our operations or financial position.

• Reputational risk. The potential that negative publicity regarding our business practices, whether true or not, will result in a decline in our customer base, costly litigation or revenue reductions.

The most significant risks in each category that we believe affect us are described below. An investor should carefully consider these risks and uncertainties together with all of the other information included or incorporated by reference in this report.

Credit Risk

Adverse changes in the economic conditions in general, and in our market area specifically, could negatively impact our results of operations and financial position.

Our business is directly impacted by factors such as economic, political and market conditions and government monetary and fiscal policies. A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in our market area, could result in the following consequences, any of which could adversely affect our business:

• Customers’ credit quality may deteriorate;

• Collateral securing loans may decline in value;

• Loan delinquencies may increase;

• Problem assets and foreclosures may increase; and

• Demand for products and services may decrease.

Our allowance for loan losses may not be adequate to cover actual loan losses.

We maintain our allowance for loan losses, through a provision for loan losses charged to earnings, at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses for groups of loans collectively evaluated in the

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remainder of the loan portfolio, as of the balance sheet date. The level of the allowance considered adequate to absorb probable losses for specifically identified loans is based on estimates of the present value of expected future cash flows or the appraised fair value of the loan’s underlying collateral. We consider both historical loss experience and a number of current environmental factors when determining the appropriate level of the allowance for loan losses for groups of loans sharing similar risk. The determination of the allowance for loan loss level is inherently subjective as it requires estimates that are susceptible to significant change. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors which may be outside our control, may require us to increase the level of our allowance for loan losses.

Market Risk

Changes in interest rates could negatively impact our operating results or financial position.

Our earnings depend largely upon net interest income, which is the difference between interest earned on interest-earning assets, loans and investments, and interest paid on interest-bearing liabilities, deposits and borrowings. Interest rates are highly sensitive and are influenced by monetary and fiscal policy and economic and political conditions. Specifically, conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may affect interest rates. If our interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a rising rate environment, our net interest income could be adversely impacted. Conversely, in a falling rate environment, if our interest-earning assets mature or reprice more quickly than interest-bearing liabilities, net interest income could be adversely impacted.

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.

Liquidity Risk

If we fail to attract core deposits, our liquidity may be adversely impacted and we may have to seek alternative and more expensive funding sources.

Adequate liquidity is essential to our continuing operations as it affords us the ability to meet our financial obligations as they come due. Our financial obligations include, among others, funding new and existing loan

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commitments, repaying deposit liabilities and other borrowings as they come due and paying for operating expenses. Historically, core deposits have been our primary source of liquidity because they are more stable and less expensive in comparison to other sources of funds. We may be unable to attract core deposits due to adverse economic conditions, increased competition or other reasons. As a result, we may have to seek alternative funding sources available to us, such as liquidating available-for-sale investment securities and exercising existing credit arrangements with the Federal Home Loan Bank of Pittsburgh, which could negatively impact our operating results by increasing our funding costs.

Operational Risk

The banking and financial services industry is highly competitive, which could adversely affect our operating results or financial position.

We operate in a highly competitive industry and compete for loan and deposit products primarily with numerous commercial banks, thrifts and credit unions in Northeastern Pennsylvania. In addition, we experience competition from finance, mortgage banking and insurance companies and securities firms. Many of our competitors are larger with respect to asset size and are subject to less stringent regulatory restrictions as banks and bank holding companies. As a result, they may be able to offer specialized products and services we cannot, and operate with greater flexibility and at a lower cost. In addition, technology has lowered entry barriers into the industry, increased the geographical market area through Internet banking and made it possible for nonbanks to offer products and services traditionally provided only by banks. These competitive pressures could result in loss of business or we could be forced to price products and services on less advantageous terms to attract or retain customers, either of which would negatively impact our operating results and financial position.

Our internal controls and procedures may fail to work as expected or be circumvented.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policy and procedures. Any system of controls, however well designed and operated, can only provide reasonable, but not absolute assurance that the objectives of the system are met. On a daily basis, we are subject to risk resulting from, among others, breaches of internal control systems and compliance requirements, fraud by persons inside and outside the company, the execution of unauthorized transactions by employees and transaction processing errors. Any of these circumstances could result in loss, which may have a material adverse effect on our results of operations or financial position.

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Extended disruption of infrastructure due to external events could adversely affect our operating results or financial position.

Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Natural disasters, fire, power loss, telecommunications failure, computer viruses, terrorism and other events outside of our control, could cause an extended disruption of our vital infrastructure and result in loss of revenue and/or cause us to incur additional unexpected expenses. In addition, certain events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans or impair the value of collateral securing loans. Although we have established business continuity and disaster recovery plans and procedures, the occurrence of any one of these events could still disrupt or delay normal operations and have a similar impact on our customers and suppliers, which may have a material adverse effect on our results of operation or financial position.

New or changes to existing regulatory laws, accounting principles and interpretations, and security and tax laws could significantly impact our results of operations or financial position.

The financial services industry is highly regulated. We are subject to extensive federal and state banking regulations that are designed to protect depositors and loan customers. These regulations may limit our ability to offer new products and services, obtain financing, attract deposits and originate loans. These regulations, along with accounting principles and security and tax laws, constantly evolve and change over time. They control how we conduct business and implement strategic initiatives and govern our financial reporting and disclosures.

In addition, the failure of several major United States companies has resulted in legislators, regulators, the SEC, the Financial Accounting Standards Board, the Public Accounting Oversight Board and other authorities proposing or adopting substantial revisions to laws, regulations and standards.

Changes to laws, regulations or standards could affect us in substantial and unpredictable ways. Failure to comply with laws, regulations and rules could result in sanctions by regulatory authorities, civil money penalties and/or reputational damage, which could have a material adverse effect on our operating results or financial position.

We depend on the service of our executive officers and the ability to attract and retain skilled people.

Our success depends to a significant extent upon the continued service of our executive officers and our ability to attract and retain skilled people. Competition for such personnel can be intense in the financial services industry and we may not be able to hire or retain the people we want or need. Unexpected loss of one or more of our key personnel could

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occur and may have a material adverse impact on our business because of the loss of employee skills, knowledge of our market, years of experience and the difficulty of promptly finding qualified replacements.

Legal Risk

We may be a defendant in litigation or other actions.

Although we are currently not a party to any material litigation, future litigation that may arise during the normal course of business could have a material adverse effect on our results of operations and financial position, as well as, cause significant damage to our reputation in the communities we serve.

Reputational Risk

Negative public opinion could damage our reputation.

As a financial institution, our business can be significantly impacted by negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including, among others, lending practices, corporate governance, employment practices, criminal activities, insider trading and from actions taken by law enforcement and regulators in response to those activities. Negative public opinion could adversely impact our ability to attract and retain customers and can expose us to litigation and regulatory actions, any of which could have a material adverse effect on our results of operations and financial position.

Our information systems may experience a breach in security.

We collect, process and retain sensitive and confidential customer information as part of our business as a financial institution. Although we have security measures in place, our information systems may be vulnerable to security breaches, acts of vandalism, computer hacking and viruses, misplaced or lost data, programming or human errors or other similar events. Any breach in security involving misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation and expose us to litigation and possible financial liability, any of which could have a material adverse effect on our results of operation and financial position.

Item 2. Properties

Our corporate headquarters is located at 125 North State Street, Clarks Summit, Lackawanna County, Pennsylvania. We own this facility which has approximately 24,000 square feet and contains our main community banking office.

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In addition to the above location, at December 31, 2006, we owned 10 and leased 5 retail community banking offices and leased one limited purpose office used solely for loan production. We also lease an office building located at 1212 South Abington Road, Clarks Summit, Lackawanna County, Pennsylvania, which serves as our loan operations center. We consider our properties to be suitable and adequate for our current and immediate future purposes.

Item 3. Legal Proceedings

We, Community Bank and our subsidiaries are not parties to any legal proceedings that could have any significant effect upon our financial condition or operating results. In addition, we, Community Bank and our subsidiaries are not parties to any legal proceedings under federal and state environmental laws.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Part II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

We had 1,179 stockholders of record, including individual participants in security position listings, and 1,851,518 shares of common stock, par value of $0.33 per share, the only authorized class of common stock outstanding as of March 14, 2007. Our common stock trades on The NASDAQ Global Market^SM as CommBcp under the symbol “CCBP.” The high and low closing sale prices and dividends per share of our common stock for the four quarters of 2006 and 2005 are summarized in the following table:

					Dividends
2006:	High		Low		Declared
First quarter	$	44.45	$	41.00	$	0.25
Second quarter		44.50		39.94		0.25
Third quarter		43.50		38.00		0.25
Fourth quarter	$	43.80	$	40.00	$	0.25

					Dividends
2005:	High		Low		Declared
First quarter	$	43.00	$	40.50	$	0.23
Second quarter		42.72		39.76		0.23
Third quarter		43.16		39.25		0.23
Fourth quarter	$	41.99	$	36.45	$	0.23

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We have paid cash dividends since 1983. It is our present intention to continue the dividend payment policy, although the payment of future dividends must necessarily depend upon earnings, financial position, appropriate restrictions under applicable laws and other factors relevant at the time the Board of Directors considers any declaration of dividends. For information on dividend restrictions on us and Community Bank, refer to our consolidated financial statements and notes to these statements filed at Exhibit 13 to this report and incorporated in their entirety by reference under this Item 5.

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Five-Year Performance Graph

The following line graph compares the cumulative total stockholder return on our common stock, based on the market price change and assumes reinvestment of dividends, with the cumulative total return of the index for The NASDAQ Global Market^SM Composite and the index for Mid-Atlantic Bank Stocks (Delaware, Maryland, New Jersey, New York, Pennsylvania and Washington, D.C. Companies) during the five-year period ended December 31, 2006. The stockholder return shown on the graph and table below is not necessarily indicative of future performance.

Comparison of Five-Year Cumulative Total Returns
Performance Graph for
COMM BANCORP. INC.

          Produced on 03/01/07 including date to 12/31/06

Source: SNL Financial LC, Charlottesville, Virginia
Notes:
A.	The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B.	The indices are reweighed daily, using the market capitalization on the previous trading day.
C.	If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D.	The index level for all series was set to $100.0 on 12/31/01.

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The following table presents information with respect to purchases made by or on behalf of us or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b -18(a)(3), of our common stock during each of the 12 months ended December 31, 2006:

					Total Number of		Maximum Number
	Total Number		Average		Shares Purchased		of Shares that may
	of Shares		Price Paid		as Part of Publicly		yet be Purchased
Month Ending	Purchased		Per Share		Announced Programs(1)		Under the Programs(1)
January 31, 2006								47,214
February 28, 2006								47,214
March 31, 2006								47,214
April 30, 2006		500	$	43.16		500		46,714
May 31, 2006								46,714
June 30, 2006								46,714
July 31, 2006								46,714
August 31, 2006		300		42.18		300		46,414
September 30, 2006		1,600		41.06		1,600		44,814
October 31, 2006		1,400		41.02		1,400		43,414
November 30, 2006		1,000		41.40		1,000		42,414
December 31, 2006		4,040		42.75		4,040		38,374
Total		8,840	$	42.02		8,840

(1) On November 17, 2004, the Board of Directors ratified the purchase of 3.0 percent or 55,931 shares of the then outstanding common stock. As of December 31, 2006, there were 38,374 shares available for repurchase under this Program. The 2004 Stock Repurchase Program has no expiration date.

On March 19, 2007, we filed a Schedule TO with the SEC to initiate a modified “Dutch Auction” tender offer to purchase up to 110,000 shares of our outstanding common stock at a price not greater than $52.00 nor less than $46.00 per share net to the seller in cash, without interest. The tender offer commenced on March 19, 2007, and expire, unless extended, at 5:00 p.m., New York City time, on April 13, 2007.

Item 6. Selected Financial Data

The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 6.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 7.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The information called for by this item is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 7A.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements and notes to these statements are filed at Exhibit 13 to this report and are incorporated in their entirety by reference under this Item 8.

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The supplementary data is filed at Exhibit 13 to this report and is incorporated in its entirety by reference under this Item 8.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

At a meeting on August 16, 2006, the Joint Audit Committee of the Board of Directors of us and Community Bank accepted the resignation of Kronick Kalada Berdy & Co., as our independent registered public accounting firm.

For the years ended December 31, 2005 and 2004, Kronick Kalada Berdy & Co.’s reports on our financial statements did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

For the years ended December 31, 2005 and 2004, and the subsequent interim period through the resignation date, there were no disagreements with Kronick Kalada Berdy & Co. on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of Kronick Kalada Berdy & Co. would have caused it to make reference to the subject matter of the disagreements in its reports on the financial statements for those periods.

For the years ended December 31, 2005 and 2004, and the subsequent interim period through the resignation date, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

A letter from Kronick Kalada Berdy & Co. addressed to the SEC stating whether or not Kronick Kalada Berdy & Co. agrees with the above statements is included as Exhibit 16 to this Form 10-K.

On September 5, 2006, the Joint Audit Committee of the Board of Directors of us and Community Bank appointed Beard Miller Company LLP as its independent registered public accounting firm to audit our financial statements for the year ended December 31, 2006. For the years ended December 31, 2005 and 2004, and through the date of this filing, we did not consult with Beard Miller Company LLP regarding either the application of accounting principles to any specific or completed or contemplated transaction, the type of audit opinion that might be rendered on our financial statements or any matters or reportable events as defined in Items 304(a)(1)(iv) and (v) of Regulation S-K.

Item 9A. Controls and Procedures

Evaluation of Our Disclosure Controls and Internal Controls

As of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, our CEO and CFO evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures, as of December 31, 2006, were

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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.

Changes in Internal Controls Over Financial Reporting

In the ordinary course of business, we may routinely modify, upgrade and enhance our internal controls and procedures for financial reporting. However, there were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the fourth quarter of our fiscal year ended December 31, 2006, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

Directors

At December 31, 2006, we had 13 directors. Our directors are elected at each annual meeting of stockholders for a one-year term and until their successors are duly elected and qualified. A majority of the directors have been determined by the Board of Directors to satisfy the independence requirements mandated by the SEC, The NASDAQ Global Market^SM and any related banking laws.

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The following information is presented for each of our current directors, all of whom have been nominated to become a director at our 2007 Annual Stockholders Meeting.

	Age as of			Director
Name	March 14, 2007		Principal Occupation for Past Five Years	Since
David L. Baker		61	Senior Vice President of Community Bank.		1988
Thomas M. Chesnick		72	Retired.		2000
William F. Farber, Sr.		70	President and CEO of Comm Bancorp, Inc. and Community Bank.		1983
Judd B. Fitze		55	Partner in Farr, Davis & Fitze, a law firm.		1995
Dean L. Hesser		40	President of Tom Hesser Chevrolet, Inc. and Tom Hesser Nissan, LLC, automobile dealerships.		2003
John P. Kameen		65	Publisher of The Forest City News.		1983
William A. Kerl		70	President of Kerl Coal, Oil and Trucking Company, Inc.		2000
Erwin T. Kost		63	President of Kost Tire Distributors, Inc.		1997
Susan F. Mancuso		55	Partner in Mancuso & Mancuso, Accounting & Tax Service.		2003
Robert A. Mazzoni		58	Judge of the Court of Common Pleas of Lackawanna County.		2000
J. Robert McDonnell		71	Owner of McDonnell’s Restaurant.		1983
Joseph P. Moore, III(1)		55	Auto Dealer, Manheim Imports, an automobile dealership from May, 2003 to 2006. President of J.J. Motors, Inc., an automobile dealership 2002 to April, 2003.		2000
Eric G. Stephens		55	Auto Dealer, H.L. Stephens & Son, an automobile dealership.		1988

(1) A son of Joseph P. Moore, Jr., who owns beneficially more than 5.0 percent of our common stock.

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Committees

Our Board of Directors has two standing committees, namely the Nominating and Corporate Governance Committee and the Joint Audit Committee, which also serves as the audit committee for Community Bank. Each member of these committees satisfies the independence requirements applicable to the SEC, The NASDAQ Global Market^sm and any related banking laws.

The Nominating and Corporate Governance Committee assists the Board of Directors in fulfilling their corporate oversight responsibilities. The primary duties of this committee are to:

• Develop and recommend corporate governance policies and guidelines for us and monitor our compliance with these policies and guidelines; and

• Identify and recommend to the Board, director nominees and committee member candidates.

The following directors are members of the Nominating and Corporate Governance Committee: Robert A. Mazzoni, Chairperson; Dean L. Hesser; Joseph P. Moore, III and Eric G. Stephens. The Nominating and Corporate Governance Committee operates pursuant to a Charter approved and adopted by our Board of Directors. A copy of our written Charter of the Nominating and Corporate Governance Committee is filed at Exhibit 99(ii) to our Annual Report on Form 10-K for the year ended December 31, 2003, Commission File Number: 0-17455, and is incorporated in its entirety by reference into this report. The text of the Charter of the Nominating and Corporate Governance Committee and our Bylaws are posted on our website at http://www.combk.com. Copies of this Charter will be provided, without charge, upon written request to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations.

The Joint Audit Committee is responsible for assisting the Boards of Directors’ oversight of:

• The integrity of our financial statements;

• The audit by the independent registered public accounting firm of our financial statements;

• Our report on internal controls;

• The independent registered public accounting firm’s and internal auditing firm’s qualifications and independence; and

• The performance of our internal audit function.

The following directors are members of the Joint Audit Committee: Susan F. Mancuso, Chairperson; Thomas M. Chesnick; Robert A. Mazzoni; and Joseph P. Moore, III. The Joint Audit Committee operates pursuant to a Charter

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approved and adopted by our Board of Directors. A copy of our written Charter of the Joint Audit Committee, as amended March 2, 2007, is filed as Exhibit 99(i) to this report and is incorporated in its entirety by reference under this Item 10. The text of this Charter is posted on our website at http://www.combk.com. Copies of this Charter will be provided, without charge, upon written request to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations.

Our Board of Directors has identified Mrs. Mancuso as the Joint Audit Committee’s financial expert. Mrs. Mancuso is a licensed Pennsylvania public accountant. Mrs. Mancuso received degrees of a Bachelor of Science in Accounting and a Master of Business Administration. From 1976 to the present, she has practiced in the area of taxation, specializing in taxation and financial advisement. During the years 1980 through 1986, she was engaged to perform governmental and school audits. She is a licensed Accredited Tax Preparer and Tax Advisor and member of the National Society of Public Accountants and the Pennsylvania Society of Public Accountants.

In fulfilling its oversight responsibilities, the Joint Audit Committee reviewed with us the audited financial statements and the footnotes to those statements for our fiscal year 2006 Annual Report to Stockholders and discussed with us the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.

The Joint Audit Committee reviewed and discussed with the independent registered public accounting firm their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters required to be discussed by the Joint Audit Committee with the independent registered public accounting firm under the auditing standards of the Public Company Accounting Oversight Board (United States). Our independent registered public accounting firm has expressed the opinion that our audited financial statements present fairly, in all material respects, our financial position, the results of operations and cash flows for the fiscal year 2006, in conformity with accounting principles generally accepted in the United States of America.

The Joint Audit Committee discussed with the independent registered public accounting firm their independence from us and our management, and received from them the written disclosures and the letter required by the Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees.”

Prior to the issuance of this report, the Joint Audit Committee discussed with the independent registered public accounting firm, matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” including the overall scope and timing for their respective audits. In addition, the Joint Audit Committee met with the internal auditing firm, the internal auditor and the independent registered public accounting firm to discuss the results of their

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examinations, their consideration of our internal controls and the overall quality of our financial reporting.

In reliance on the reviews and discussions referred to above, the Joint Audit Committee recommended to the Board of Directors that the audited financial statements be included in this report. The Joint Audit Committee also recommended to the Board of Directors the selection of Beard Miller Company LLP, Certified Public Accountants, to serve as our independent registered public accounting firm.

Director Qualifications and Nominating Process

The Nominating and Corporate Governance Committee is responsible to search for qualified candidates for director for us and Community Bank. The Committee performs its nominating function in accordance with the Charter of the Nominating and Corporate Governance Committee and our Bylaws. In making recommendations for nomination as a director, the committee reviews and considers the qualifications, strengths and abilities of the potential candidates, including new candidates that may be identified from time to time through our internal search and review procedures or as a result of stockholder recommendations. For new candidates, the review process becomes more involved as it becomes increasingly likely that a particular candidate may be recommended for nomination. In deciding whether to recommend the re-nomination of an incumbent director or the nomination of a director who previously served as an officer or director, the committee considers their prior performance as a director or officer. The committee also makes specific recommendations to the Board regarding the directors who it believes should be appointed to particular committees of the Board, based upon its review and assessment of the qualifications and abilities of the individual directors and the differing functions and membership requirements of the committees.

The committee works with the Board, on an ongoing basis, to identify the particular qualities and abilities that we generally seek in our directors, and the mix of experience, expertise and attributes that are sought or required for the Board as a whole. These qualities and attributes include, but are not limited to, integrity, business acumen, financial literacy and community involvement. Target attributes for our Board as a whole include independence, diversity of background and experience, and a range of expertise across all areas vital to corporate governance, including financial expertise and knowledge of the banking business. All candidates for nomination are evaluated against these target qualities and attributes, as well as our particular needs at the time, both on the Board and on committees of the Board. The committee will determine, in its sole discretion, whether a nominee meets the quality and attribute standards.

The committee oversees the internal procedures, adopted from time to time, to assist in the identification of suitable candidates to serve as directors. The committee also has the authority to retain professional consultants to assist in the task of identifying possible candidates, although it did not do so in 2006.

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The Board gives substantial weight to the recommendations of the Nominating and Corporate Governance Committee in selecting nominees for election or appointment as directors. Under normal circumstances, the Board will not select nominees, including incumbent directors, who have not been recommended by a majority of the Nominating and Corporate Governance Committee members.

Under Section 10.1 of our Amended and Restated Bylaws, a stockholder may also nominate a person for director to be elected at our annual meeting. A stockholder must submit a nomination for director to the Secretary of the Board of Directors, in writing, no later than the close of business on the 60^th day preceding the date for the annual meeting. This notification must contain the following information:

• The nominee’s name and address;

• The nominee’s principal occupation;

• The number of shares of our common stock held by the notifying stockholder and the nominee; and

• A certification, under oath before a notary public, that a nominee meets the eligibility requirements under Section 10.3 of our Amended and Restated Bylaws.

Under Section 10.3, a person is not qualified to serve as a director if he or she:

• Is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year;

• Is a person against whom a federal or state bank regulatory agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal;

• Has been found either by any federal or state regulatory agency whose decision is final and not subject to appeal or by a court to have: (i) breached a fiduciary duty involving personal profit; or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency; or

• Has been nominated by a person who would be disqualified from serving as our director under the above eligibility requirements.

If a stockholder’s nomination is not timely and in proper form or in accordance with the above requirements, the nominee will not be recommended by the Nominating and Corporate Governance Committee for consideration by

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the full Board of Directors. Furthermore, nominations not timely and in proper form, shall be disregarded by the presiding officer of the annual meeting, and upon his or her instruction, the vote tellers may disregard all votes cast for such nominee.

Communications with Directors

Stockholders and other interested parties who wish to communicate with our directors may do so by writing to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations-Corporate Secretary. The Office of the Corporate Secretary will forward such written correspondence to the applicable director or to the Nominating and Corporate Governance Committee if such correspondence is not addressed to a specific director. Periodically, the Nominating and Corporate Governance Committee will summarize all stockholder communications it has received and will make all such communications available for the directors’ review. In order to efficiently process all stockholder communications, the Nominating and Corporate Governance Committee, with the Board’s approval, may seek the assistance of counsel or advisors in reviewing and evaluating particular communications. In all cases, the complete text of communications will be made available to the directors in an appropriate and timely manner.

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Executive Officers

Our executive officers are appointed by the Board of Directors and serve at the will of the Board of Directors, subject to certain change in control agreements discussed later in this report.

The following information is presented for our executive officers:

	Held		Employee			Age as of
Name and Position	Since		Since			March 14, 2007
William R. Boyle Senior Vice President and Chief Credit Officer		2001		2001			47
William F. Farber, Sr. President and CEO, Chairman of the Board		2001		2001			70
John P. Kameen Secretary		1996		(1	)		65
J. Robert McDonnell Vice Chairman		1983		(1	)		71
Scott A. Seasock Executive Vice President and CFO		1989		1989			49

(1) Not our employee or an employee of Community Bank. These persons do not receive any additional fees for serving as Executive Officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Executive officers, directors and “beneficial owners” of more than 10.0 percent of our common stock must file initial reports of ownership and reports of changes in ownership with the SEC and The NASDAQ Global Market^sm pursuant to Section 16(a).

We have reviewed the reports and written representations from the executive officers and directors. Based on this review, we believe that all filing requirements were met during 2006.

Codes of Ethics and Business Conduct

The Boards of Directors of us and Community Bank have adopted a Code of Ethics that applies to the CEO and Principal Executive Officer, CFO and Principal Financial Officer, and the Vice President of Finance and Principal Accounting Officer (collectively referred to as the “Senior Financial Officers”). This Code of Ethics for Senior Financial Officers is designed to deter wrongdoing and to promote the following, among other responsibilities:

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• Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

• Full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;

• Compliance with applicable governmental laws, rules and regulations;

• Prompt internal reporting of Code of Ethics violations to an appropriate person or persons identified in the Code of Ethics; and

• Accountability of adherence to the Code of Ethics.

In addition, all of our employees, including our Senior Financial Officers, are required to abide by our Code of Business Conduct to ensure that our business is conducted in a consistently legal and ethical manner. This Code of Business Conduct forms the foundation of a comprehensive process that includes compliance with all corporate policies and procedures, an open relationship among colleagues that contributes to good business conduct, and an abiding belief in the integrity of our employees. Our policies and procedures cover all areas of professional conduct, including employment policies, conflicts of interest, intellectual property and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of our business.

Employees are required to report any conduct they believe in good faith to be an actual or apparent violation of the standards contained in our Code of Business Conduct or any other unusual or suspicious business arrangement or behavior. SOX requires audit committees to have procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. We currently have such procedures in place.

In addition, the members of our Board of Directors are required to comply with the Code of Business Conduct, which is intended to focus the Board and the individual directors on areas of ethical risk, help directors recognize and deal with ethical issues, provide mechanisms to report unethical conduct and foster a culture of honesty and accountability. The Code of Business Conduct covers all areas of professional conduct relating to service on the Board, including conflicts of interest, unfair or unethical use of corporate opportunities, strict maintenance of confidential information, compliance with all applicable laws and regulations and oversight of ethics and compliance by our employees.

A copy of our written Code of Ethics for Senior Financial Officers has been filed as Exhibit 14 to our Annual Report on Form 10-K for the year ended

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December 31, 2003, Commission File Number: 0-17455, and is incorporated in its entirety by reference into this report. The text of the Codes of Ethics for Senior Financial Officers and Business Conduct are posted on our website at http://www.combk.com. Copies of our Codes of Ethics for Senior Financial Officers and Business Conduct will be provided, without charge, upon written request to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations. Any amendment to, or waiver from, the provisions of the Code of Ethics for Senior Financial Officers that require disclosure under applicable rules of the SEC or The NASDAQ Global Market^sm will be disclosed along with the reasons for the amendment or waiver in Item 10 of a current report on Form 8-K and posted on our website.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Executive Compensation Program Philosophy, Policies and Objectives

We believe that a strong management team comprised of competent and talented individuals is essential to our profitability, and our executive compensation program is an important tool for attracting, retaining and motivating such individuals. The objectives of our executive compensation program are to:

• Link the executive’s goals with the interests of our stockholders;

• Support our strategic business plan and long-term development; and

• Tie a portion of the executive’s compensation to our overall performance.

Program Administration and Process

The Executive Compensation Committee of Community Bank’s Board of Directors is responsible for developing and implementing our executive compensation program. The Executive Compensation Committee is comprised of five of our directors who also serve as directors of Community Bank, all of whom meet the independence standards contained in Rule 4200(a)(15) of the listing rules for The NASDAQ Global Market^sm.

Our executive compensation program is designed specifically for our named executive officers, including William F. Farber, Sr., President and Chief Executive Officer, Scott A. Seasock, Executive Vice President and Chief Financial Officer, William R. Boyle, Senior Vice President and Chief Credit Officer, (“CCO”), Timothy P. O’Brien, Vice President and Director of Commercial Lending and Michael A. Narcavage, Vice President and Chief Operations Officer (“COO”). Salaries and bonuses for the named executive officers are reviewed annually. All executive compensation, including employee and personal benefits, are paid by Community Bank to the applicable executive. None of the executive officers participate in discussions or decisions concerning their compensation.

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As part of their annual review process, the Executive Compensation Committee utilizes a report prepared by L.R. Webber Associates, an independent consulting firm. This report compares base salaries and bonuses of other commercial banking institutions of similar size on a regional basis for similar positions and responsibilities. In addition to this report, the Executive Compensation Committee takes into consideration the following criteria:

• An inflation index based on the latest Northeastern Pennsylvania Consumer Price Index;

• The overall annual improvement in our consolidated balance sheets and consolidated statements of income and comprehensive income;

• Their judgement on the extent of support the named executive officer provided us in meeting our strategic business plan and long-term objectives;

• An assessment of the named executive officer’s participation in leadership roles in professional, community and civic organizations; and

• A review of the named executive officer’s attendance at continuing education courses.

Peer Group

For 2006, our peer group, as listed in the previously mentioned report from L.R. Webber Associates, consisted of ten financial institutions located in the Northeast Region of Pennsylvania. These financial institutions included:

• Citizens Savings Association, Clarks Summit;

• ESSA Bank & Trust, East Stroudsburg;

• Fidelity Deposit & Discount Bank, Dunmore;

• First National Community Bank, Dunmore;

• Landmark Community Bank, Pittston;

• Penn Security Bank & Trust Company, Scranton;

• Peoples National Bank, Hallstead;

• Pocono Community Bank, Stroudsburg;

• The Dime Bank, Honesdale; and

• The Honesdale National Bank, Honesdale.

Elements of Executive Compensation

Our executive compensation program is comprised of five elements:

• Salary and benefits;

• Perquisites;

• Annual bonuses and non-equity incentive plan compensation;

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• Discretionary annual and matching contributions to Community Bank’s defined contribution plan; and

• Severance and change in control benefits.

We do not have any long-term compensation programs, including those that are based upon the award of stock options and restricted stock, or other long-term incentive awards.

The following discussion describes each element of compensation for 2006 and explains why each element is utilized.

Salary and Benefits

Each of our executive officers receives a base salary, which is determined by the Executive Compensation Committee based on two factors. The first factor is the Compensation Committee’s evaluation of each executive’s salary to the base pay levels in the peer group for executives with similar responsibilities. The second factor is the evaluation of the executive’s unique role, job performance and contribution in meeting our strategic business plan and long-term objectives. Based on its review of the above criteria, the Executive Compensation Committee decided to increase each of the named executive officers’ base salary in 2006 and such increases were appropriate in light of our performance accomplishments. The base salary amounts paid to the named executive officers for the fiscal year 2006 are reflected in the “Salary” column of the Summary Compensation Table.

In addition to base salary, executive officers participate in healthcare benefits, group-term life insurance, retirement plans, paid vacation, sick and holiday time and other programs that do not discriminate in scope, term or operation, in favor of our executive officers and are available to all of our salaried employees.

Perquisites

Various other perquisites provided to each of the named executive officers are regularly reviewed by the Executive Compensation Committee. These perquisites include use of company-owned vehicles, payment of various civic club dues, and registration fees and travel expenses for attendance at bank-related seminars and conferences. Aggregate perquisites and personal benefits attributable to each of the named executive officers were less than $10,000 in 2006, 2005 and 2004. We believe that the benefits and perquisites we provide to our named executive officers are within competitive practices and customary for executives in key positions at the companies in our peer group. These benefits and perquisites serve us in meeting our objective of offering competitive compensation that allows us to continue to attract, retain and motivate competent and talented individuals to these critical positions for the ultimate goal of increasing stockholder value.

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Annual Bonuses and Non-Equity Incentive Plan Compensation

Except for Mr. Seasock who has an older employment agreement that contains a non-equity incentive plan, the Executive Compensation Committee bases their decision for discretionary annual bonuses paid to each named executive officer on the same two factors discussed for base salary. The amount of discretionary cash bonus paid to each named executive officer, is reflected in the “Bonus” column of the Summary Compensation Table.

Mr. Seasock takes part in our non-equity incentive plan. His bonus is based on a formula for us achieving a certain return on average assets and percentage increase in net income ranges and is intended to serve as incentive for performance to occur over a specified period. Under the bonus formula for Mr. Seasock, the achievement ranges for return on average assets and percentage increase in net income are given equal weighting. The minimum achievement ranges were 1.00 percent to 1.05 percent for return on average assets and 5.00 percent to 5.90 percent for percentage increase in net income for 2006. The bonus Mr. Seasock earned in 2006, based on the above performance measures, is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. Such bonus was not paid to Mr. Seasock until 2007. The Executive Compensation Committee has the discretion to award bonuses in excess of the amounts calculated pursuant to this formula. No such discretionary bonus was paid to Mr. Seasock in 2006.

Discretionary Annual and Matching Contributions to Community Bank’s Defined Contribution Plan

Community Bank has a defined contribution plan, which covers all employees who have completed 1,000 hours of service, attained twenty-one (21) years of age and have been employed by Community Bank for at least one year. Normal retirement age is sixty-five (65). The normal retirement benefit is the accumulated account balance of contributions, investment income and forfeitures. The annual contribution is determined by the Board of Directors and is based on a prescribed percentage of annual net income allocated to each participant on a pro-rata share of compensation covered under the plan. Investment income is allocated to each participant based on a pro-rata share of the account balances accumulated at the beginning of the year. Forfeitures are allocated to each participant based on a pro-rata share of compensation covered under the plan.

The defined contribution plan includes the provisions under section 401(k) of the Internal Revenue Code (“401(k)”). This 401(k) feature of the plan permits employees to make voluntary, pre-tax contributions up to 25.0 percent of their compensation. Our contributions to the 401(k) are based on 100.0 percent matching of voluntary contributions up to 3.0 percent of the employee’s eligible compensation. If a participant separates from service prior to retirement, the participant will be entitled to 100.0 percent (100%) of their contributions made under the 401(k) and also a portion of

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Community Bank’s matching 401(k) contributions and annual discretionary contributions based on years of service according to the following schedule:

Years of Service	Vested Interest
Less than 1		0	%
1		20	%
2		40	%
3		60	%
4		80	%
5		100	%

A participant is always 100.0 percent (100%) vested in pension plan transferred balances.

During 2006, annual discretionary contributions of $165,220 were allocated among participants’ accounts under the defined contribution plan. Discretionary matching contributions under the 401(k) feature of the plan totaled $149,347 in 2006. Contributions made by Community Bank on behalf of the named executive officers to the plan are included in the “All Other Compensation” column of the Summary Compensation Table.

Severance and Change in Control Benefits

In order to retain our long-serving and key named executive officers, we entered into employment agreements with Scott A. Seasock, Executive Vice President and Chief Financial Officer and William R. Boyle, Senior Vice President and Chief Credit Officer and into a severance agreement with respect to a change in control with Timothy P. O’Brien, Vice President and Director of Commercial Lending. The employment agreements with Messrs. Seasock and Boyle contain a provision for a severance payment based on our non-renewal of the agreement or a change-in-control of us or Community Bank.

With respect to the severance payment for our non-renewal under these employment agreements, the affected named executive officer may, at his sole discretion, terminate his employment and receive a lump-sum severance payment equal to 24 months of his then current salary, net of all applicable withholding taxes. The affected named executive officer will receive no other benefits and perquisites as a result of such termination.

With respect to these employment agreements, if a change-in-control of us or Community Bank occurs and the affected named executive officer is terminated because of the change-in-control or for any other good reason, as defined below, then we or our successor is obligated to pay to such terminated named executive officer, for a 24-month period, his then current salary, net of all applicable withholding taxes, and premiums to maintain his long-term disability insurance and medical insurance. Any other benefits and perquisites for such affected named executive officer shall cease upon such termination.

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With respect to the severance agreement with Mr. O’Brien, if a change in control occurs and as a result thereof Mr. O’Brien is terminated or he leaves for good reason, as defined below, then we or our successor is obligated to pay Mr. O’Brien a lump-sum payment equal to two times his then annual salary net of all applicable withholding taxes. Mr. O’Brien will receive no other benefits and perquisites as a result of such termination.

With respect to the employment agreements with Messrs. Seasock and Boyle, there is a non-compete restriction that is triggered if the affected named executive officer is terminated for cause or such executive officer resigns from employment for other than a good reason. These executive officers agreed not to enter into competition with us or Community Bank for 6 months after such termination within the Pennsylvania counties of Lackawanna, Susquehanna and Wayne, and within 20 miles of any branch office located outside these counties which was established during such executive officer’s employment with us and Community Bank. The severance agreement with Mr. O’Brien does not include a non-compete provision.

The following table sets forth the estimated aggregate amount of such severance and change-in-control payments that each of the three named executive officers would receive based upon their salary and benefits as of December 31, 2006, if a termination event as described above had occurred:

	Estimated Lump-Sum	Estimated Aggregate Amount	Estimated Lump-Sum
	Severance Payment	to be Paid as a Result of	Severance Payment
	as a Result of	Change-In-Control under	as a Result of a
	Non-Renewal of	the Employment Agreement	Change-In-Control($)
Name and Title	Agreement ($)(1)	($)(2)	(1)
Scott A. Seasock, Executive Vice President and CFO	279,400	307,269	Not Applicable
William R. Boyle, Senior Vice President and CCO	279,728	288,705	Not Applicable
Timothy P. O’Brien, Vice President and Director of Commercial Lending	Not Applicable	Not Applicable	249,382

(1)	This estimated amount is gross salary without any deductions for applicable withholding taxes.
(2)	This estimated amount includes gross salary without any deductions for applicable withholding taxes and 24 months of premiums for long-term disability insurance and medical insurance. This estimated amount has not been reduced to a present worth value.

A change in control under these agreements is generally defined as:

• A substantial sale or disposition of our or Community Bank’s assets or operations;

• A person holding beneficial ownership of enough shares of our stock to gain majority control of the Board of Directors; or

• At any time during any 24 consecutive months commencing with the date of these agreements, a majority of the directors of us or Community Bank are persons who were not members of the respective boards at the beginning of such period, unless changes in the board’s membership were the result of death, voluntary resignation or retirement.

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A termination for good reason under these agreements is generally defined as:

• Without the officer’s consent, any assignment of duties other than duties described in the agreement;

• Any removal of the officer from, or failure to re-elect the officer to, his position for cause;

• Any failure to pay the officer his benefits as described in his agreement;

• Any material breach of the agreement by us or Community Bank; or

• A change in control.

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Executive Compensation Committee of Community Bank’s Board of Directors is responsible for developing and implementing our executive compensation program. The Executive Compensation Committee is comprised of five of our directors who also serve as directors of Community Bank, all of whom meet the independence standards contained in Rule 4200(a)(15) of the listing rules for the NASDAQ Global Market^sm and Joseph P. Moore, Jr., a director emeritus and one of our principal stockholders.

In 2006, the Executive Compensation Committee met three times to discuss the performance of the named executive officers and compared their performance, and our performance, with peer group companies. In addition, the Executive Compensation Committee reviewed and discussed with our management the text of the Compensation Discussion and Analysis section included in the Annual Report on Form 10-K for 2006. Based upon this review and discussion, the Executive Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis section be included in the Annual Report on Form 10-K.

The Chair of the Executive Compensation Committee distributes relevant material to the members to assist them in discussion and review of each named executive officer’s total compensation package, for example: the Human Resource Officer of Community Bank prepares a spreadsheet delineating each named executive officer’s salary, benefits and perquisites for this committee to review. In addition, the Chair reviews current bank industry trade journals and other publications for articles on executive compensation in the banking industry and the Chair disseminates that information to members of this committee.

The members of this committee also discuss his and other named executive officers’ compensation packages with Mr. Farber, our Chairman, President and Chief Executive Officer, to solicit his views. Generally, this committee meets in November of each year to discuss and award bonuses to

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the named executive officers to be paid prior to year-end. Moreover, the committee meets at least once in the second quarter of each year to fix that year’s compensation package for each named executive officer. The Executive Compensation Committee fixes each named executive officer’s compensation package and the Chair of this committee then informs the Human Resource Officer of Community Bank of that decision.

In addition to the spreadsheet information that this committee will receive, we will also consider for 2007 compensation the contribution of each named executive officer in creating a culture of performance with integrity and in leading us to the following financial results in 2006:

• Net income increased 21.9 percent to $6,350,000;

• Tax-equivalent net interest margin widened 40 basis points to 4.28 percent;

• Average loans, net increased 7.0 percent to $424,304,000; and

• Return on average assets improved to 1.2 percent

We will also consider the years of service that each named executive officer has given to us and their contributions to civic life in the communities in which we conduct business.

Executive Compensation Committee

Judd B. Fitze
John P. Kameen
Erwin T. Kost
J. Robert McDonnell
Joseph P. Moore, Jr.
Eric G. Stephens

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Summary Compensation Tables

The following table presents compensation information for the year ended December 31, 2006, for the named executive officers.

SUMMARY COMPENSATION TABLE

							Non-Equity
							Incentive Plan		All Other
			Salary		Bonus		Compensation		Compensation		Total
Name & Position	Year		($)		($)		($)		($)(1)		($)
William F. Farber, Sr. President and CEO		2006		153,943		25,000		-0-		71,261		250,204
Scott A. Seasock Executive Vice President and CFO		2006		139,700		-0-		25,067		9,135		173,902
William R. Boyle Senior Vice President and CCO		2006		139,864		14,000		-0-		9,157		163,021
Timothy P. O’Brien Vice President and Director of Commercial Lending		2006		124,691		3,000		-0-		7,507		135,198
Michael A. Narcavage Vice President and COO		2006		91,750		3,000		-0-		5,460		100,210

(1) Represents contributions Community Bank made on behalf of the named executive officers pursuant to the defined contribution plan, except for Mr. Farber who also received director fees of $61,500 for services as Chairman of the Board of Community Bank. Aggregate perquisites and other personal benefits were less than $10,000 for each named executive officer, and therefore, need not be presented.

The following table presents compensation information for our executive officers for the years ended December 31, 2005 and 2004.

SUMMARY COMPENSATION TABLE

									Long-Term Compensation
	Annual Compensation								Awards				Payouts
							Other Annual				Restricted		LTIP		All Other
			Salary		Bonus		Compensation		Options		Stock		Payouts		Compensation
Name and Position	Year		($)		($)		($)(1)		(#)		(#)		($)		($)(2)
William F. Farber, Sr.		2005		145,688		10,000		-0-		-0-		-0-		-0-		69,042
President and CEO		2004		142,805		10,000		-0-		-0-		-0-		-0-		68,121
Scott A. Seasock		2005		137,086		14,128		-0-		-0-		-0-		-0-		7,176
Executive Vice President and CFO		2004		135,407		12,000		-0-		-0-		-0-		-0-		6,441
William R. Boyle		2005		134,952		7,000		-0-		-0-		-0-		-0-		6,978
Senior Vice President		2004		135,386		6,500		-0-		-0-		-0-		-0-		6,242
and CCO

(1)	Aggregate perquisites and other personal benefits were less than 10.0 percent of the salary and bonus reported, and therefore, need not be presented.
(2)	Represents contributions Community Bank made on behalf of Mr. Farber, Mr. Seasock and Mr. Boyle pursuant to the defined contribution plan. Mr. Farber also received $61,500 for services as Chairman of the Board of Community Bank in 2005 and 2004.

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The following table presents compensation information for Community Bank’s directors for 2006.

DIRECTORS’ COMPENSATION TABLE

	Fees Earned		All Other
	or Paid in Cash		Compensation			Total
Name	($)		($)(1)			($)
Judd B. Fitze		24,000		3,400	(2)		27,400
John P. Kameen		24,000		4,575	(3)		28,575
Each of our other directors (4)		24,000		1,500	(5)		25,500

(1)	Aggregate perquisites and other personal benefits were less than $10,000 for each director, and therefore, need not be presented.
(2)	Mr. Fitze received: (i) fees totaling $1,900 for appraisal services provided to Community Bank: and (ii) a year-end cash bonus of $1,500 as director of Community Bank.
(3)	Mr. Kameen received: (i) fees totaling $3,075 for appraisal services provided to Community Bank; and (ii) a year-end cash bonus of $1,500 as director of Community Bank.
(4)	Includes David L. Baker, Thomas M. Chesnick, Dean L. Hesser, William A. Kerl, Erwin T. Kost, Susan F. Mancuso, Robert A. Mazzoni, J. Robert McDonnell, Joseph P. Moore, III and Eric G. Stephens.
(5)	Year-end cash bonus of $1,500.

Mr. Baker served as President and CEO from 1995 to 2000. On December 29, 2000, Mr. Baker retired as President and CEO. Mr. Baker, in addition to having extensive banking experience, is well known and respected in the communities we serve. Mr. Baker has since been employed by Community Bank as Senior Vice President and is responsible for business development in the Susquehanna and Wyoming Counties of Pennsylvania. For his services as Senior Vice President, Mr. Baker received a salary of $53,190, a discretionary cash bonus of $5,000, and contributions to Community Bank’s defined contribution plan of $3,481 in 2006. The total amount of all other perquisites received by Mr. Baker was under $10,000.

Director fees and all other compensation are paid to the directors by Community Bank. Our directors are not paid for attendance at Comm Bancorp, Inc.’s Board of Directors meetings. There were no stock awards, option awards, non-equity incentive plan compensation, other long-term compensation or nonqualified deferred compensation earnings paid to any director in 2006.

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Item 12. Security Ownership of Certain Beneficial Owners and Management

This section describes how much stock our directors and executive officers own. It also describes the persons or entities that own more than 5.0 percent of our voting stock.

Stock Owned by Directors and Executive Officers

This table indicates the number of shares of our common stock owned by the directors and executive officers as of March 14, 2007. The aggregate percentage of shares owned by all directors and executive officers is 17.14 percent. Unless otherwise noted, each individual has sole voting and investment power for the shares indicated below.

	Amount and Nature of
Name of Individual or Identity of Group	Beneficial Ownership(1)		Percent of Class
David L. Baker		13,402.571		—
William R. Boyle(2)		2,715.432		—
Thomas M. Chesnick		26,837.902		1.45	%
William F. Farber, Sr.		152,460.000		8.23	%
Judd B. Fitze		15,732.737		—
Dean L. Hesser		1,400.000		—
John P. Kameen		20,572.000		1.11	%
William A. Kerl		17,430.615		—
Erwin T. Kost		10,657.916		—
Susan F. Mancuso		3,976.347		—
Robert A. Mazzoni		100.000		—
J. Robert McDonnell		35,139.000		1.90	%
Joseph P. Moore, III		100.000		—
Scott A. Seasock(2)		7,740.350		—
Eric G. Stephens		9,066.773		—
All Directors and Executive Officers as a group (13 Directors, 5 Executive Officers, 15 persons in total)		317,331.643		17.14	%

(1)	Includes shares held: (i) directly; (ii) jointly with spouse; (iii) by spouse; (iv) jointly with various relatives; (v) by the transfer agent in our dividend reinvestment account; (vi) individually in employee benefit plans; and (vii) in various trusts.
(2)	Executive officer, not a director.

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Voting Stock Owned by “Beneficial Owners”

The following are the persons or entities known by us to own beneficially more than 5.0 percent of our common stock as of March 14, 2007.

Name and Address	Number of Shares(1)		Percent of Class
Joseph P. Moore, Jr. 400 Williamson Road Gladwyne, PA 19035		164,584.328		8.89	%
William F. Farber, Sr. Crystal Lake Road R.R.1, Box 1281 Carbondale, PA 18407		152,460.000		8.23	%

(1) Includes shares held: (i) directly; and (ii) in various trusts.

Item 13. Certain Relationships and Related Transactions and Director Independence

We encourage our directors and executive officers to have banking and financial transactions with Community Bank. All of these transactions are made on comparable terms and with similar interest rates as those prevailing for other customers.

The total consolidated loans made by Community Bank at December 31, 2006, to our directors and officers as a group, members of their immediate families and companies in which they have a 10.0 percent or more ownership interest was $8.2 million or 15.2 percent of our total consolidated capital accounts. The largest aggregate balance for these loans in 2006 was $9.4 million or 17.4 percent of our total consolidated capital accounts. During 2006, advances and repayments on these loans were $4.3 million and $1.6 million. These loans did not involve more than the normal risk of collectibility nor did they present any other unfavorable features.

From time to time, we engage Judd B. Fitze to represent us as our attorney. Mr. Fitze is a director of us and Community Bank. Mr. Fitze billed $14,998 in 2006 for his legal services on our behalf.

McDonnell’s Restaurant, which is owned by J. Robert McDonnell, a director of us and Community Bank, provides catering services for our annual stockholders meeting and other company events. McDonnell’s Restaurant billed us $14,700 in 2006 for catering services.

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Item 14. Principal Accountant Fees and Services

The fees billed for professional services rendered by our independent registered public accounting firm for each of the two years ended December 31, 2006 and 2005, are summarized as follows:

Year Ended December 31,	2006		2005
Audit fees(1)	$	84,319	$	59,015
Audit-related fees(2)		4,741		11,540
Tax fees(3)		7,500		6,590
Other fees(4)				8,625
Total	$	96,560	$	85,770

(1)	Audit fees consist of fees billed for services rendered for the audit of our annual financial statements on Form 10-K and review of financial statements included in our Form 10-Q, or services that are normally provided in connection with statutory and regulatory filings.
(2)	Audit-related fees consist of fees billed for services rendered for assurance and related services on our employee benefit plan and to comply with FDICIA.
(3)	Tax fees consist of fees billed for services rendered for the preparation of federal and state tax returns, tax compliance, tax advice and tax planning.
(4)	Other fees consist of fees billed for services rendered for performing agreed upon procedures with regard to our Trust and Wealth Management Division and those required by the Federal National Mortgage Corporation.

The Joint Audit Committee’s pre-approval policies and procedures related to products and services provided by our independent registered public accounting firm are set forth in the Charter of the Joint Audit Committee of us and Community Bank. For the two years ended December 31, 2006 and 2005, all of the audit fees, audit-related fees, tax fees and other fees were pre-approved by the Joint Audit Committee.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a)  1.  The consolidated financial statements and notes to these statements as well as the applicable report of the independent registered public accounting firm are filed at Exhibit 13 to this report and are incorporated in their entirety by reference under this Item 15(a)1.

2.	All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes to these statements.
3.	The exhibits required by Item 601 of Regulation S-K are included under Item 15(b) to this report.

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(b) Exhibits required by Item 601 of Regulation S-K:

Exhibit Number Referred to
Item 601 of Regulation S-K			Description of Exhibit
	2		None.
	3	(i)	Articles of Incorporation, as amended.
	3	(ii)	By-Laws, as amended.
	4		None.
	9		None.
	10		None.
	11		None.
	12		None.
	13		Portions of the Annual Report to Stockholders for Fiscal Year Ended December 31, 2006.
	14		None.
	16		Letter dated August 24, 2006, from Kronick Kalada Berdy & Co., addressed to SEC.
	18		None.
	21		List of Subsidiaries.
	22		None.
	23		None.
	24		None.
	31	(i)	CEO certification pursuant to Rule 13a-14(a)/15d-14(a).
			CFO certification pursuant to Rule 13a-14(a)/15d-14(a).
	31	(ii)	Not Applicable.
	32		CEO certification pursuant to Section 1350.
			CFO certification pursuant to Section 1350.
	33		Not Applicable.
	34		Not Applicable.
	35		Not Applicable.
	99	(i)	Charter of the Joint Audit Committee, amended March 2, 2007.

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Signatures

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

COMM BANCORP, INC.		Date
(Registrant)
BY:	/s/ William F. Farber, Sr. William F. Farber, Sr.,	March 14, 2007
	President and Chief Executive Officer
	Chairman of the Board
	(Principal Executive Officer)

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature and Capacity	Date
/s/ David L. Baker David L. Baker, Director	March 14 , 2007
/s/ Thomas M. Chesnick Thomas M. Chesnick, Director	March 14 , 2007
/s/ William F. Farber, Sr. William F. Farber, Sr.,	March 14 , 2007
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
/s/ Judd B. Fitze Judd B. Fitze, Director	March 14 , 2007
/s/ Dean L. Hesser Dean L. Hesser, Director	March 14 , 2007
/s/ John P. Kameen John P. Kameen, Secretary/Director	March 14 , 2007

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Signature and Capacity	Date
/s/ William A. Kerl William A. Kerl, Director	March 14 , 2007
/s/ Erwin T. Kost Erwin T. Kost, Director	March 14 , 2007
/s/ Susan F. Mancuso Susan F. Mancuso, Director	March 14 , 2007
/s/ Robert A. Mazzoni Robert A. Mazzoni, Director	March 14 , 2007
/s/ J. Robert McDonnell J. Robert McDonnell,	March 14 , 2007
Vice Chairman/Director
/s/ Joseph P. Moore, III Joseph P. Moore, III, Director	March 14 , 2007
/s/ Scott A. Seasock Scott A. Seasock, Executive Vice	March 14 , 2007
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric G. Stephens Eric G. Stephens, Director	March 14 , 2007
/s/ Stephanie A. Westington Stephanie A. Westington, CPA	March 14 , 2007
Vice President of Finance
(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number	Description	Page
3(i)	Articles of Incorporation , as amended March 13, 2007		54
3(ii)	By-Laws , as amended March 13, 2007		58
13	Portions of the Annual Report to Stockholders for Fiscal Year Ended December 31, 2006		77
16	Letter dated August 24, 2006, from Kronick Kalada Berdy & Co. addressed to the SEC		212
21	List of Subsidiaries		213
31(i)	CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a)		214
	CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a)
32	CEO Certification Pursuant to Section 1350		218
	CFO Certification Pursuant to Section 1350
99(i)	Charter of the Joint Audit Committee, as amended March 2, 2007		220

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EX-3.(I)

EXHIBIT 3(i)

COMM BANCORP, INC.

Amended Articles of Incorporation
As of 13 March 2007

1.	The name of the corporation is: Comm Bancorp, Inc.
2.	The address of this corporation’s current registered office in this Commonwealth and the county of venue is:

125 North State Street, Clarks Summit, PA 18411, Lackawanna County.

3.

The purpose or purposes of the Corporation are to have unlimited power to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania. The Corporation is incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania (Act of May 5, 1933, P.L. 34 as amended).

4.

Authorized Shares; Certificated and Uncertificated Shares.

A. The aggregate number of shares which the Corporation shall have authority to issue is twelve million (12,000,000) shares of Common Stock of the par value of thirty-three cents ($0.33) per share (the “Common Stock”).

B. The shares of the Common Stock shall be represented by certificate or may be uncertificated shares.

     1. Every stockholder shall, except as otherwise provided in this Article 4, be entitled to a share certificate representing the shares held by him/her.

     2. A share certificate shall state, at a minimum, that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania; the name(s) of the person(s) to whom issued; and the number of shares of the Common Stock that the certificate represents. Every share certificate shall be executed, by facsimile or otherwise, by or on behalf of the Corporation, in such manner as to be described in the Bylaws.

     3. The shares of the Common Stock, or any part thereof, may be represented by uncertificated shares, except that this provision of Article 4 shall not apply to shares represented by a share certificate until such certificate is surrendered to the Corporation. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner(s) thereof

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a written notice containing the information required under Subsection B.2. of this Article 4 and under any applicable provisions of law and the Bylaws of the Corporation.

     4. Except as otherwise expressly provided by applicable law, the rights and obligations of the holders of shares of the Common Stock represented by certificates and the rights and obligations of the holders of uncertificated shares of the Common Stock shall be identical.

5.	The term of existence of this Corporation is perpetual.
8.	Cumulative Voting Rights. Cumulative voting rights shall not exist with respect to the election of directors.
9.	Opposition of Tender (or other offer).

A. The Board of Directors may, if it deems it advisable, oppose a tender, or other offer for the Corporation’s securities, whether the offer is in cash or in securities of a corporation or otherwise. When considering whether to oppose an offer, the Board of Directors may, but it is not legally obligated to, consider any pertinent issues; by way of illustration, but not of limitation, the Board of Directors may, but shall not be legally obligated to, consider any and all of the following:

     1. Whether the offer price is acceptable based on the historical and present operating results or financial condition of the Corporation.

     2. Whether a more favorable price could be obtained for the Corporation’s securities in the future.

     3. The impact which an acquisition of the Corporation would have on its employees, depositors and customers of the Corporation and its subsidiaries in the community which they serve.

     4. The reputation and business practices of the offeror and its management and affiliates as they would affect the employees, depositors and customers of the Corporation and its subsidiaries and the future value of the Corporation’s stock.

     5. The value of the securities, if any, which the offeror is offering in exchange for the Corporation’s securities, based on an analysis of the worth of the Corporation as compared to the corporation or other entity whose securities are being offered.

     6. Any antitrust or other legal and regulatory issues that are raised by the offer.

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B. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any and all of the following: advising shareholders not to accept the offer; litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the authorized but unissued securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity.

10. Classification of Directors. Directors will all be placed into one classification. Each director shall serve until his or her successor shall have been elected and shall qualify, even though his or her term of office as herein provided has otherwise expired, except in the event of his or her earlier resignation, removal or disqualification. As adopted at the present time an individual shall be able to serve as director until the completion of the year in which he or she has attained the age of seventy-two (72), except for those directors previously covered by the 80-year old policy.

11. Filling of Vacancies in Board of Directors Caused by Increase in Number of Directors. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors. The Board of Directors shall specify the class in which a director so elected shall serve. Any director elected by the Board of Directors shall hold office only until the next annual meeting of the shareholders and until his successor shall have been elected and qualified, notwithstanding that the term of office of the other directors in the class of which he is a member does not expire at the time of such meeting. His successor shall be elected by the shareholders to a term of office which shall expire at the same time as the term of office of the other directors in the class to which he is elected.

12. Number of Directors. The Board of Directors shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number to be fixed and determined from time to time by resolution of a majority of the shareholders at any annual or special meeting thereof.

13. Preemptive Rights. No holder of shares of any class or of any series of class shall have any preemptive right to subscribe for, purchase or receive any shares of the Corporation, whether now or hereafter authorized, or any obligations or other securities convertible into or carrying options to purchase any such shares of the Corporation, or any options or rights to purchase any such shares or securities, issued or sold by the Corporation for cash or any other form of consideration, and any such shares, securities or rights may be issued or disposed of by the Board of Directors to such persons and on such terms as the Board in its discretion shall deem advisable.

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14. Indebtedness. The Corporation shall have authority to borrow money and the Board of Directors, without the approval of the shareholders and acting within their sole discretion, shall have the authority to issue debt instruments of the Corporation upon such terms and conditions and with such limitation as the Board of Directors deems advisable. The authority of the Board of Directions shall include, but not be limited to, the power to issue convertible debentures.

15. Indemnification. Every person who is or was a director, officer, employee, or agent of the Corporation, or of any corporation which he served as such at the request of the Corporation, shall be indemnified by the Corporation to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him, in connection with any proceeding to which he may be made, or threatened to be made, a party, or in which he may become involved by reason of his being or having been a director, officer, employee or agent of the Corporation, or of such other corporation, whether or not he is a director, officer, employee or agent of the Corporation or such other corporation at the time the expenses or liabilities are incurred.

16. Stockholder Action. No merger, consolidation, liquidation or dissolution of the Corporation nor any action that would result in the sale or other disposition of all or substantially all of the assets of the Corporation (the foregoing transactions referred to collectively as a “Fundamental Transaction”) shall be valid unless approved by the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding shares of Common Stock; provided, however, that if the Corporation shall be the surviving or continuing entity to a Fundamental Transaction, then, in such case, the Fundamental Transaction shall be valid by the approval of the affirmative vote of the holders of a majority of the outstanding shares of the Common Stock. This Article 16 may not be amended unless first approved by the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding shares of Common Stock.

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EX-3.(II)

EXHIBIT 3(ii)

AMENDED AND RESTATED
BY-LAWS
OF
COMM BANCORP, INC.

Article 1
REGISTERED OFFICE

Section 1.1 The Company shall have and continuously maintain in Pennsylvania a registered office.

Section 1.2 The Company may also have offices at such other places within or without the Commonwealth of Pennsylvania as the Board of Directors may from time to time designate or the business of the Company may require.

Article 2
SHAREHOLDERS’ MEETINGS

Section 2.1 All meetings of the shareholders shall be held within the Commonwealth of Pennsylvania at such time and place as may be fixed from time to time by the Board of Directors.

Section 2.2 The annual meeting of the shareholders shall be held at such time and place as may be set by the Board of Directors, when they shall elect directors and transact such other business as may properly be brought before the meeting. Notice of the place, date, time and purpose of the annual meeting of shareholders shall be given in the manner as set forth in Article 31 of these bylaws, to each shareholder of record entitled to vote at such meeting.

Section 2.3 Special meetings of the shareholders may be called at any time by the Chairman of the Board, the President, or a majority of the Board of Directors. If such request is addressed to the Secretary, it shall be signed by the person or persons making the same and shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, the Secretary shall fix the date of such meeting to be held not more than 60 days after the receipt of the request and shall give due notice thereof. In the event of the Secretary’s failure within 30 days after the receipt of the request to fix the date or give the notice, the person or persons making the request may issue the call.

Section 2.4 (a) Any shareholder who intends to submit a proposal for inclusion in the Company’s proxy statement for the annual meeting of shareholders shall submit his or her proposal to the Secretary of the Company not less than 120 calendar days before the date of mailing of the Company’s proxy statement in connection with the previous year’s annual meeting of shareholders. A proposal shall be submitted and be consistent

58

in all other respects, including being a proper subject for action by shareholders, with the then current rules and regulations of the Securities and Exchange Commission.

     (b) A shareholder who intends to submit a proposal at an annual meeting of shareholders and does not intend to request inclusion of such proposal in the Company’s proxy statement for that annual meeting, shall submit the proposal to the Secretary of the Company not later than 45 calendar days before the date of mailing of the Company’s proxy statement in connection with the previous year’s annual meeting of shareholders. Such proposal shall be a proper subject for action by shareholders under applicable federal and state law.

Article 3
QUORUM OF AND ACTION BY SHAREHOLDERS

Section 3.1 The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on the particular matter shall constitute a quorum for purposes of considering such matter, and unless otherwise provided by statute or by the Articles of Incorporation, or in a bylaw adopted by shareholders, the acts of the shareholders present, in person or by proxy, who are entitled to cast at least a majority of the votes which all shareholders present, in person or by proxy, are entitled to cast shall be the acts of the shareholders. If, however, any meeting of shareholders cannot be organized because of lack of a quorum, those present, in person or by proxy, shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present, in person or by proxy, except that in the case of any meeting called for the election of directors such meeting may be adjourned only for periods not exceeding 15 days as the holders of a majority of the shares present, in person or by proxy, shall direct, and those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purposes of electing directors. At any adjourned meeting at which a quorum shall be present or so represented, any business may be transacted which might have been transacted at the original meeting if a quorum had been present. The shareholders present, in person or by proxy, at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

Article 4
VOTING RIGHTS

Section 4.1 Except as may be otherwise provided by statute or by the Articles of Incorporation, at every shareholders’ meeting, every shareholder entitled to vote thereat shall have the right to one vote for every share having voting power standing in his name on the books of the

59

Company on the record date fixed for the meeting. No share shall be voted at any meeting if an installment is due and unpaid thereon.

Section 4.2 When a quorum is present at any meeting the voice vote of the holders of a majority of the stock having voting power, present, in person or by proxy, shall decide any question brought before such meeting except as provided differently by statute or by the Articles of Incorporation.

Section 4.3 Upon demand made by a shareholder entitled to vote at any election for directors before the voting begins, the election shall be by ballot. The candidates receiving the highest number of votes from each class or group of classes entitled to elect directors separately, up to the number of directors to be elected in the same election by such class or group of classes, shall be elected.

Article 5
PROXIES

Section 5.1 Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his duly authorized attorney-in-fact and filed with the Secretary of the Company. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Company. No unrevoked proxy shall be valid after 11 months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted after 2 years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Company.

Article 6
RECORD DATE

Section 6.1 The Board of Directors may fix a time, not more than 90 days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive

60

payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Company after any record date fixed as aforesaid. The Board of Directors may close the books of the Company against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten days before closing thereof to each shareholder of record at the address appearing on the records of the Company or supplied by him to the Company for the purpose of notice. While the stock transfer books of the Company are closed, no transfer of shares shall be made thereon. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, and vote at, a shareholders’ meeting, transferees of shares which are transferred on the books of the Company within 20 business days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting.

Article 7
VOTING LISTS

Section 7.1 The officer or agent having charge of the transfer books for shares of the Company shall make, at least five days before each meeting of shareholders, a complete alphabetical list of the shareholders entitled to vote at any meeting, with their addresses and the number of shares held by each, which list shall be kept on file at the registered office or principal place of business of the Company and shall be subject to inspection by a shareholder during normal business hours and at the time and place of the meeting during the entire meeting. The original transfer books for shares of the Company, or a duplicate thereof kept in this Commonwealth, shall be prima facie evidence as to who are the shareholders entitled to exercise the rights of a shareholder.

Article 8
JUDGES OF ELECTION

Section 8.1 In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the Chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of judges shall be one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present and entitled to vote shall determine whether one or three judges are to be appointed. No person who is a candidate for office shall act as a judge. The judges of election shall do all such acts as may be proper to conduct the election or vote, and such other duties as may be prescribed by statute, with fairness to all shareholders and, if requested by the Chairman of the meeting or any shareholder present at the meeting, shall make a written report of any matter determined by them and execute a certificate of any fact found by them. If there are three judges of

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election, the decision, act or certificate of a majority shall be the decision, act or certificate of all.

Article 9
CONSENT OF SHAREHOLDERS IN LIEU OF MEETING

Section 9.1 Any action required to be taken at a meeting of the shareholders, or of a class of shareholders, may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Company.

Article 10
DIRECTORS

Section 10.1 Nominations for directors to be elected at an annual meeting of shareholders, except those made by the Board of Directors of the Company, must be submitted to the Secretary of the Company in writing not later than the close of business on the sixtieth (60^th) day immediately preceding the date of the meeting. Such notification shall contain the following information: (a) name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the Company owned by the notifying shareholder and each nominee; and (d) a certification, under oath before a notary public, by each nominee that he or she meets the eligibility requirements to be a director set forth in Section 10.3 of these Bylaws. Nominations not made in accordance herewith may, in his or her discretion, be disregarded by the presiding officer of the meeting, and upon his or her instruction, the vote tellers may disregard all votes cast for each such nominee. In the event the same person is nominated by more than one shareholder, the nomination shall be honored, and all shares of capital stock of the Company shall be counted if at least one nomination for that person complies herewith.

Only nominations for directors made by shareholders entitled to vote at the meeting after compliance with the foregoing provisions of this Section, and nominations of candidates proposed by the Board, shall be eligible for election as directors at the meeting.

Section 10.2 The number of directors that shall constitute the whole Board of Directors shall be not less than five nor more than twenty-five. Within the foregoing limits, the Board of Directors may from time to time fix the number of directors subject to any requirements contained in the Articles of Incorporation.

Section 10.3 A person is not qualified to serve as a director if he or she: (a) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year; (b) is a person against whom a federal or state bank regulatory agency has, within

62

the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal; (c) has been found either by any federal or state regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency; or (d) has been nominated by a person who would be disqualified from serving as a director of this Company under Subsection 10.3(a), (b) or (c).

Section 10.4 The Board of Directors may declare vacant the office of a director if he or she is declared of unsound mind by an order of court or convicted of felony or for any other proper cause or if, within 60 days after notice of election, he or she does not accept the office either in writing or by attending a meeting of the Board of Directors. The entire Board of Directors or an individual director may be removed without cause by the vote of shareholders entitled to cast at least a majority of the votes which all shareholders would be entitled to cast at an annual election of directors.

Section 10.5 The Board of Directors may designate any director of the Company who has attained the age of 65 years as a director emeritus upon receipt of a written resignation from such director. A director emeritus may attend meetings of the Board of Directors, but shall have no authority to vote. The Board of Directors may fix a fee to be paid a director emeritus for attendance at meetings of the Board of Directors and agree to reimburse such director emeritus for any expenses incurred in the performance of any duties assigned to him or her by the Board of Directors.

Article 11
VACANCIES ON BOARD OF DIRECTORS

Article 11.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining members of the Board of Directors, though less than a quorum, and each person so appointed shall be a director until the expiration of the term of office to which he was appointed. If a vacancy occurs on the Board of Directors within 60 days prior to the annual meeting of shareholders as a result of the death of a director, then the Board of Directors may defer the appointment of a successor for a period of time not to exceed 90 days after the date of death of such director.

Article 12
POWERS OF BOARD OF DIRECTORS

Section 12.1 The business and affairs of the Company shall be managed by its Board of Directors, which may exercise all such powers of the Company and do all such lawful acts and things as are not by statute or by the

63

Articles of Incorporation, or by these By-Laws directed or required to be exercised and done by the shareholders.

Section 12.2 The Board of Directors shall have the power and authority to appoint an Executive Committee, consisting of three or more directors as determined by the Board, and such other committees as may be deemed necessary by the Board of Directors for the efficient operation of the Company. The Executive Committee shall meet at such time as may be fixed by the Board of Directors, or upon call of the Chairman of the Board or the President. The Executive Committee shall have and exercise the authority of the Board of Directors in the intervals between the meetings of the Board of Directors as far as may be permitted by law.

Article 13
MEETINGS OF THE BOARD OF DIRECTORS

Section 13.1 An organization meeting may be held immediately following the annual shareholders meeting without the necessity of notice to the directors to constitute a legally convened meeting, or the directors may meet at such time and place as may be fixed by either a notice or waiver of notice or consent signed by all of such directors.

Section 13.2 Regular meetings of the Board of Directors may be held without notice at the principal place of business of the Company or at such place or places, and at such dates and times, as the Board may from time to time designate. If any day fixed for a regular meeting shall be a holiday, then the meeting shall be held at the same hour and place on the next succeeding business day.

Section 13.3 Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on one day’s notice to each director, either personally or by mail, e-mail, telephone or facsimile; special meetings shall be called by the Chairman of the Board or the President in like manner and on like notice upon the written request of a majority of the directors.

Section 13.4 One or more directors may participate in any meeting of the Board of Directors, or of any committee thereof, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another.

Section 13.5 At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting in person or by conference telephone or similar communications equipment (by means of which all persons participating in the meeting can hear one another) at which a quorum is present in person or by such communications equipment shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation, or by these By-Laws. If a quorum shall not be present in person or by such

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communications equipment at any meeting of the directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or as permitted herein.

Article 14
INFORMAL ACTION BY THE BOARD OR COMMITTEE OF DIRECTORS

Section 14.1 Notwithstanding anything to the contrary contained in these By-Laws, any action which may be taken at a meeting of the directors or the members of the executive or other committee may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by all of the directors or the members of the executive or other committee, as the case may be, and shall be filed with the Secretary of the Company.

Article 15
COMPENSATION OF DIRECTORS

Section 15.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings, or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefor.

Article 16
OFFICERS

Section 16.1 The officers of the Company shall be elected by the Board of Directors at its organization meeting and shall be a President and Chief Executive Officer, a Vice President, a Secretary and a Treasurer. At its option, the Board of Directors may elect a Chairman and one or more Vice-Chairmen of the Board. The Board of Directors may also elect such other officers and appoint such agents as it shall deem necessary, who shall hold their offices for such terms, have such authority and perform such duties as may from time to time be prescribed by the Board of Directors. Any two or more offices may be held by the same person except both the offices of President and of Treasurer.

Section 16.2 The compensation of all officers of the Company shall be fixed by the Board of Directors.

Section 16.3 The Board of Directors may remove any officer or agent elected or appointed, at any time and within the period, if any, for which such person was elected or employed whenever in the Board of Directors’ judgment it is in the best interests of the Company, and all persons shall be elected and employed subject to the provisions thereof. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.

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Article 17
THE CHAIRMAN AND VICE-CHAIRMAN OF THE BOARD

Section 17.1 The Chairman of the Board shall preside at all meetings of the shareholders and directors. He shall supervise the carrying out of the policies adopted or approved by the Board of Directors. He shall have general executive powers, as well as the specific powers conferred by these By-Laws. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors.

Section 17.2 The Vice-Chairman of the Board or, if more than one, the Vice-Chairmen in the order established by the Board of Directors, shall preside at meetings of the shareholders and directors as a result of the absence or incapacity of the Chairman of the Board. If there is no Chairman of the Board, the Vice-Chairman designated by the Board shall have and exercise all powers conferred by these By-Laws or otherwise on the Chairman of the Board. The Vice-Chairman or, if more than one, the Vice-Chairmen designated by the Board shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him or them by the Board of Directors.

Article 18
THE PRESIDENT

Section 18.1 The President shall have general executive powers; shall be the Chief Executive Officer of the Company; shall be a member of the Board of Directors; and shall have any specific powers conferred by these By-Laws. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors.

Article 19
THE VICE PRESIDENTS

Section 19.1 Any Vice President may, in the discretion of the Board of Directors, be designed as “Senior,” or by departmental or functional classification. Additional Vice Presidents may be appointed as the Board of Directors, in its discretion, may deem appropriate. The Vice Presidents, in the order established by the Board of Directors, shall, in the absence or incapacity of the President, exercise all powers and perform the duties of the President. The Vice President shall also have such other authority and perform such other duties as may be provided in these By-Laws or as shall be determined by the Board of Directors or the President.

Article 20
THE SECRETARY

Section 20.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one

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or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a company and such other duties as may be assigned to him by the Board of Directors or the President.

Article 21
THE TREASURER

Section 21.1 The Treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall perform such other duties as may be assigned to him by the Board of Directors or the President. He shall give a bond in such sum and with such surety as the Board of Directors may from time to time direct.

Article 22
ASSISTANT OFFICERS

Section 22.1 Each assistant officer shall assist in the performance of the duties of the officer to whom he is assistant and shall perform such duties in the absence of the officer. He shall perform such additional duties as the Board of Directors, the President or the officer to whom he is assistant, may from time to time assign to him. Such officers may be given such functional titles as the Board of Directors shall from time to time determine.

Article 23
CERTIFICATED AND UNCERTIFICATED SHARES

Section 23.1 The share certificates of the Company shall be numbered and registered in a share register as they are issued; shall bear the name of the registered holder, the number and class of shares represented thereby, the par value of each share; shall include a statement that the institution is incorporated under the laws of the Commonwealth; shall be signed by the President and the Secretary or any other person properly authorized by the Board of Directors; and shall bear the corporate seal, which seal may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Company with the same effect as if the officer had not ceased to be such at the date of its issue.

Section 23.2 The Board of Directors may participate in any direct registration program which eliminates physical stock certificates or allows for holders of the Common Stock to own such shares represented by a share certificate or be kept of record on the books of the Corporation as uncertificated shares. If the Board of Directors decides to allow the shares of the Common Stock of the Company to be represented in an uncertificated form, then the Company shall comply with the Articles of Incorporation, as amended; any applicable law; any applicable stock

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exchange listing rule; and any applicable rule of its transfer agent, in the execution of the issuance of uncertificated shares of the Common Stock.

Article 24
TRANSFER OF SHARES

Section 24.1 Upon surrender to the Company of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate canceled and the transfer recorded upon the share register of the Company. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code.

Article 25
LOST CERTIFICATES

Section 25.1 Where a shareholder of the Company alleges the loss, theft or destruction of one or more certificates for shares of the Company and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person’s making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Company shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. When authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Company a bond in such form and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity for any liability or expense which it may incur by reason of the original certificate remaining outstanding.

Article 26
DIVIDENDS

Section 26.1 The Board of Directors may, from time to time, at any duly convened regular or special meeting or by unanimous consent in writing, declare and pay dividends upon the outstanding shares of capital stock of the Company in cash, property or shares of the Company, so long as any dividend shall not be in violation of law and the Articles of Incorporation.

Section 26.2 Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board of Directors may from time to time, in their absolute discretion,

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think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purposes as the Board of Directors shall believe to be in the best interests of the Company, and the Board of Directors may reduce or abolish any such reserve in the manner in which it was created.

Article 27
FINANCIAL REPORT TO SHAREHOLDERS

Section 27.1 The President and the Board of Directors shall present at each annual meeting of the shareholders a full and complete statement of the business and affairs of the Company for the preceding year.

Article 28
INSTRUMENTS

Section 28.1 All checks or demands for money and notes of the Company shall be signed by such officer or officers or such other persons as the President or the Board of Directors may from time to time designate.

Section 28.2 All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments and documents may be signed, executed, acknowledged, verified, delivered or accepted, on behalf of the Company by the President or other persons as may be designated by him.

Article 29
FISCAL YEAR

Section 29.1 The fiscal year of the Company shall be the calendar year.

Article 30
SEAL

Section 30.1 The corporate seal shall have inscribed thereon the name of the Company, the year of its organization and the words “Corporate Seal, Pennsylvania.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.

Article 31
NOTICES AND WAIVERS THEREOF

Section 31.1 Whenever, under the provisions of applicable law or of the Articles of Incorporation, or of these By-Laws, written notice is required to be given to any person, it may be given to the person either personally or by sending a copy thereof through the mail, by telegram, by facsimile, charges prepaid, or by telephone or e-mail to his address, telephone number or e-mail address appearing on the books of the Company or supplied by him

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to the Company for the purpose of notice. If the notice is sent by mail, telegraph, e-mail or facsimile, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person, or when the facsimile or e-mail transmission is complete and confirmed. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of shareholders, the general nature of the business to be transacted.

Section 31.2 Any written notice that is required to be given to any person may be waived in writing signed by the person entitled to such notice whether before or after the time when the notice would otherwise be required to be given. Attendance of any person entitled to notice whether in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where any person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Where written notice is required of any meeting, the waiver thereof must specify the purpose only if it is for a special meeting of shareholders.

Article 32
INDEMNIFICATION OF OFFICERS AND EMPLOYEES

Section 32.1 The Company shall indemnify any officer and/or employee, or any former officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that such person is or was an officer and/or employee of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith in a manner which he or she reasonably believed to be in or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

Section 32.2 The Company shall indemnify any officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with any threatened, pending or completed

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action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, and/or employee or agent of another corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of, or serving as a witness in, such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his or her duty to the Company.

Section 32.3 Except as may be otherwise ordered by a court, there shall be a presumption that any officer and/or employee is entitled to indemnification as provided in Sections 32.1 and 32.2 of this Article unless either a majority of the directors who are not involved in such proceedings (“disinterested directors”) or, if there are less than three disinterested directors, then the holders of a majority of the outstanding shares of the Company determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Company. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Company shall request of independent counsel, who may be the outside general counsel of the Company, a written opinion as to whether or not the parties involved are entitled to indemnification under Section 32.1 and 32.2 of this Article.

Section 32.4 Expenses incurred by an officer and/or employee in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided under Section 32.3 of this Article upon receipt of an undertaking by or on behalf of the officer and/or employee to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company.

Section 32.5 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity while serving as an officer and/or employee and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer and/or employee and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 32.6 The Company may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article.

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Section 32.7 The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was an officer and/or employee of the Company, or is or was serving at the request of the Company as an officer and/or employee of another Company, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power to indemnify him or her against such liability under the provisions of this Article.

Section 32.8 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

Section 32.9 For purposes of this Article:

     (a) references to “other enterprises” shall include employee benefit plans and references to “serving at the request of the Company” shall include any service as a representative of the Company that imposes duties on, or involves services by, the representative with respect to an employee benefit plan, its participants or beneficiaries;

     (b) excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be deemed “fines;” and

     (c) action with respect to an employee benefit plan taken or omitted in good faith by a representative of the Company in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be action in a manner that is not opposed to the best interests of the Company.

Article 33
INDEMNIFICATION OF DIRECTORS

Section 33.1 A director of this Company shall stand in a fiduciary relation to the Company and shall perform his or her duties as a director, including his or her duties as a member of any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interests of the Company, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

     (a) one or more officers or employees of the Company whom the director reasonably believes to be reliable and competent in the matters presented;

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     (b) counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person; and

     (c) a committee of the board upon which he or she does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence.

A director shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted.

Section 33.2 In discharging the duties of their respective positions, the board of directors, committees of the board, and individual directors may, in considering the best interests of the Company, consider the effects of any action upon employees, upon suppliers and customers of the Company and upon communities in which offices or other establishments of the Company are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of Section 33.1.

Section 33.3 Absent a breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Company.

Section 33.4 A director of this Company shall not be personally liable for monetary damages as such for any action taken or for any failure to take any action, unless:

     (a) the director has breached or failed to perform the duties of his office under the provisions of Sections 33.1 and 33.2; and

     (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

Section 33.5 The provisions of Section 33.4 shall not apply to:

     (a) the responsibility or liability of a director pursuant to a criminal statute, or

     (b) the liability of a director for the payment of taxes pursuant to local, state or federal law.

Section 33.6 The Company shall indemnify any director, or any former director who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that such person is or was a director of the Company, or is or was serving at the request of the Company as a

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director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

Section 33.7 The Company shall indemnify any director who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was a director, officer and/or employee or agent of another Company, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of, or serving as a witness in, such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his or her duty to the Company.

Section 33.8 Except as may be otherwise ordered by a court, there shall be a presumption that any director is entitled to indemnification as provided in Sections 33.6 and 33.7 of this Article unless either a majority of the directors who are not involved in such proceedings (“disinterested directors”) or, if there are less than three disinterested directors, then the holders of a majority of the outstanding shares of the Company determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Company. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Company shall request of independent counsel, who may be the outside general counsel of the Company, a written opinion as to whether or not the parties involved are entitled to indemnification under Sections 33.6 and 33.7 of this Article.

Section 33.9 Expenses incurred by a director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided under Section 33.8 of this Article upon receipt of

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an undertaking by or on behalf of the director, officer and/or employee to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company as authorized by this Article.

Section 33.10 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity while serving as a director and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 33.11 The Company may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article.

Section 33.12 The Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or is or was serving at the request of the Company as a director, officer, employee or agent of another Company, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power to indemnify him or her against such liability under the provisions of this Article.

Section 33.13 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

Section 33.14 For purposes of this Article:

     (a) references to “other enterprises” shall include employee benefit plans and references to “serving at the request of the Company” shall include any service as a representative of the Company that imposes duties on, or involves services by, the representative with respect to an employee benefit plan, its participants or beneficiaries;

     (b) excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be deemed “fines;” and

     (c) action with respect to an employee benefit plan taken or omitted in good faith by a representative of the Company in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be action in a manner that is not opposed to the best interests of the Company.

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Article 34
AMENDMENTS

Section 34.1 These By-Laws may be altered, amended or repealed by a majority vote of the members of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose.

Article 35
EMERGENCIES

Section 35.1 In the event of any emergency declared by governmental authorities, as a result of a regional or national disaster and of such severity as to prevent the normal conduct and management of the affairs of the Company by its directors and officers as contemplated by these By-Laws, any three available directors shall constitute the Executive Committee to exercise the full authority of that Committee until such time as a duly elected Board of Directors can again assume full responsibility and control of the Company.

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EX-13

EXHIBIT 13

PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 2006

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Comm Bancorp, Inc.
CONTENTS

Introduction

79 President’s Message to Stockholders

81 Consolidated Selected Financial Data

Management’s Discussion and Analysis

82 Forward-Looking Discussion

83 Critical Accounting Policies

85 Operating Environment

89 Review of Financial Position

130 Review of Financial Performance

Consolidated Financial Statements

143 Report of Management

145 Reports of Independent Registered Public Accounting Firms

147 Consolidated Statements of Income and Comprehensive Income

148 Consolidated Balance Sheets

149 Consolidated Statements of Changes in Stockholders’ Equity

150 Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

151 Summary of significant accounting policies

169 Cash and due from banks

170 Investment securities

175 Loans, nonperforming assets and allowance for loan losses

177 Commitments, concentrations and contingent liabilities

179 Premises and equipment, net

180 Other assets

181 Deposits

182 Short-term borrowings

183 Fair value of financial instruments

183 Employee benefit plan

184 Income taxes

186 Parent Company financial statements

187 Regulatory matters

192 Summary of quarterly financial information (unaudited)

Management’s Discussion and Analysis 2005 versus 2004

193 Operating Environment

194 Review of Financial Position

202 Review of Financial Performance

Directors and Officers

206 Boards of Directors and Corporate Officers

Other Information

210 Locations

211 Stockholder Information

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Comm Bancorp, Inc.
PRESIDENT’S MESSAGE TO STOCKHOLDERS

Dear Fellow Stockholders, Customers and Friends:

On behalf of the Board of Directors and the entire Community Bank and Trust Company team, I am pleased to announce that 2006 was an extremely profitable year for our Company. Net income increased $1,140 thousand or 21.9 percent to $6,350 thousand or $3.43 per share in 2006 from $5,210 thousand or $2.80 per share in 2005. This past year proved extremely challenging for the banking industry. The economic climate was driven by an inverted yield curve, which placed undue pressure on net interest margins. Through strong teamwork and innovative planning, we were able to effectively manage our rate-sensitive assets and liabilities and create greater operating efficiency. As a result, net interest income improved 12.5 percent, our net interest margin widened 40 basis points and our operating efficiency improved 8.7 percent.

This solid earnings growth has strengthened our capital position, as evidenced by an 8.9 percent increase in stockholders’ equity. Our Leverage ratio improved from 9.04 percent at December 31, 2005, to 9.74 percent at the end of 2006, well above the minimum risk-based capital requirement. In addition, book value per share rose $2.41 to $29.27 at the close of 2006 from $26.86 at the end of last year. Our Board of Directors continually monitors our capital position and evaluates strategies to better serve the financial interests of our stockholders. On March 19, 2007, our Board of Directors approved a modified “Dutch Auction” tender offer to repurchase up to 110,000 shares of our outstanding common stock at a price between $46.00 and $52.00 per share. We believe this Dutch Auction will increase stockholder value for those choosing to retain their holdings in the Company, while allowing stockholders who wish to sell their shares a chance to do so without incurring fees or negatively impacting the price of our stock.

We began 2006 with several goals in mind, building our commercial customer base through new market development, creating greater efficiency within our retail operations, and expanding our product and service offerings. At the beginning of the year, we added two commercial loan officers to our lineup. One of these individuals has extensive experience with a new market south of us in Luzerne County. This long-term resident, active in the community, is based in our recently opened Loan Production Office located in Kingston, Pennsylvania. This is the first step to expanding our retail and commercial operations into this market area. In addition, we were also fortunate to be able to entice a seasoned veteran to retire from his own successful leasing company in order to build and direct our leasing operations. Leasing is an attractive financing alternative as business owners do not have to come up with a significant down payment in order to purchase various machinery and equipment. We welcome these two individuals to the Community Bank and Trust Company team.

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Comm Bancorp, Inc.
PRESIDENT’S MESSAGE TO STOCKHOLDERS (CONTINUED)

As an independent community bank, we realize that in order to stay competitive in this industry we need to constantly improve efficiency while at the same time offer our customers new value-added products and services. In order to accomplish these goals, we need to keep up with the latest innovations that technology has to offer. In the second half of the year, we migrated our retail operations to a new, state-of-the-art teller platform. This new platform, in addition to being compliant with recently enacted banking laws, improves efficiency by reducing transaction processing time and cost. The new platform also provides the technology needed to expand our product and service offerings.

With this in mind, I am excited to announce our new service, remote deposit image capture, that we will begin offering to our commercial customers in the second quarter of 2007. This remote deposit image capture, called CB&T Direct^SM, will provide customers with banking capabilities that were offered previously only at our branch offices. Deposits will be easily processed through a remote scanner, located at their business, that reads the information on the checks and sends it directly to the bank over a secure data line. Their bank account will be credited immediately for the deposit without the customer or their employee ever leaving the office. This new and exciting product will provide greater operating efficiency for both us and our customers.

As a community bank, we know we need to “think outside the bank” and share our success with the people and communities we serve. If our neighborhoods do not thrive, we will not survive. During 2006, we provided funding to various educational organizations, civic groups, youth sports and recreational leagues and charitable associations. The cover of this report depicts our contribution of a new scoreboard for a local little league, just one way our resources were put to use. Not only do we provide monetary resources, our entire Community Bank and Trust Company team steps up to the plate by volunteering numerous hours of their time. Among other community activities, our employees are involved in service clubs, coaching, Sunday school teaching and scouting. We are proud of each and every one of our employees and the service they provide to our communities.

In closing, I would like to thank our Board of Directors, management team and all of our employees for their constant hard work and dedication and for making our Company “The Best Bank Under the Sun!” I would also like to thank you, our stockholders, for your continued confidence and support. We look forward to the many opportunities and challenges that may present themselves as we move into the new year.

Sincerely,

/s/ William F. Farber, Sr.

William F. Farber, Sr.

President and Chief Executive Officer,

Chairman of the Board

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Comm Bancorp, Inc.
CONSOLIDATED SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)

Year Ended December 31	2006			2005			2004			2003			2002
Condensed statements of financial performance:
Interest income	$	33,040		$	28,359		$	26,333		$	26,808		$	29,284
Interest expense		12,505			10,103			9,233			9,972			12,216
Net interest income		20,535			18,256			17,100			16,836			17,068
Provision for loan losses		890			782			600			480			1,100
Net interest income after provision for loan losses		19,645			17,474			16,500			16,356			15,968
Noninterest income		3,408			3,884			3,566			4,034			4,145
Noninterest expense		14,829			14,897			14,662			14,484			13,530
Income before income taxes		8,224			6,461			5,404			5,906			6,583
Provision for income tax expense		1,874			1,251			679			1,206			1,383
Net income	$	6,350		$	5,210		$	4,725		$	4,700		$	5,200
Condensed statements of financial position:
Investment securities	$	91,213		$	104,965		$	118,756		$	105,248		$	124,203
Net loans		403,639			384,475			377,864			354,356			319,830
Other assets		45,552			54,137			31,702			49,848			42,385
Total assets	$	540,404		$	543,577		$	528,322		$	509,452		$	486,418
Deposits	$	483,442		$	491,365		$	478,484		$	459,466		$	437,213
Other liabilities		2,844			2,523			2,520			3,445			3,872
Stockholders’ equity		54,118			49,689			47,318			46,541			45,333
Total liabilities and stockholders’ equity	$	540,404		$	543,577		$	528,322		$	509,452		$	486,418
Per share data:
Net income	$	3.43		$	2.80		$	2.50		$	2.45		$	2.65
Cash dividends declared		1.00			0.92			0.88			0.88			0.82
Stockholders’ equity	$	29.27		$	26.86		$	25.38		$	24.41		$	23.31
Cash dividends declared as a percentage of net income		29.18	%		32.84	%		35.09	%		35.89	%		30.83	%
Average common shares outstanding		1,853,089			1,860,563			1,890,960			1,921,063			1,960,140
Selected ratios (based on average balances):
Net income as a percentage of total assets		1.17	%		0.97	%		0.92	%		0.93	%		1.10	%
Net income as a percentage of stockholders’ equity		12.18			10.68			9.97			10.23			11.99
Stockholders’ equity as a percentage of total assets		9.62			9.13			9.19			9.14			9.13
Tier I capital as a percentage of adjusted total assets		9.74			9.04			8.75			8.66			8.77
Net interest income as a percentage of earning assets		4.28			3.88			3.76			3.80			4.09
Loans, net, as a percentage of deposits		87.58	%		82.59	%		80.34	%		76.43	%		74.33	%
Selected ratios and data (based on period end balances):
Tier I capital as a percentage of risk-weighted assets		12.50	%		11.99	%		11.36	%		11.92	%		12.93	%
Total capital as a percentage of risk-weighted assets		13.55			13.02			12.33			12.90			14.10
Allowance for loan losses as a percentage of loans, net		1.09	%		1.06	%		1.01	%		1.00	%		1.16	%
Full-time equivalent employees		186			194			205			203			196
Locations		17			16			17			17			16

Note: Average balances were calculated using average daily balances. Average balances for loans include nonaccrual loans. Tax-equivalent adjustments were calculated using the prevailing statutory rate of 34.0 percent.

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

Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements beginning on page 143 and Management’s Discussion and Analysis 2005 versus 2004 beginning on page 193.

Forward-Looking Discussion:

Certain statements in this Form 10-K 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 governmental monetary and fiscal policies affect banking both directly and indirectly. Inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors beyond our control may also adversely affect our future results of operations. Our management team, consisting of the Board of Directors and executive officers, expects that no particular factor will affect the results of operations. Downward trends in areas such as real estate, construction and consumer spending may adversely impact our ability to maintain or increase profitability. Therefore, we cannot assure the continuation of our current rates of income and growth.

Our earnings depend largely upon net interest income. The relationship between our cost of funds, deposits and borrowings, and the yield on our interest-earning assets, loans and investments, all influence net interest income levels. This relationship, defined as the net interest spread, fluctuates and is affected by regulatory, economic and competitive factors that influence interest rates, the volume, rate and mix of interest-earning assets and interest-bearing liabilities and the level of nonperforming assets. As part of our interest rate risk (“IRR”) strategy, we monitor the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities to control our exposure to interest rate changes.

To a certain extent, our success depends upon the general economic conditions in the geographic market area that we serve. Although we expect economic conditions in our market area to remain favorable, assurance cannot be given that these conditions will continue. 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.

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(Dollars in thousands, except per share data)

The banking industry is highly competitive, with rapid changes in product delivery systems and 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.

Critical Accounting Policies:

Our financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change in the next year relate to the allowance for loan losses, fair value of financial instruments and the valuations of real estate acquired through foreclosure, deferred tax assets and liabilities and intangible assets. Actual amounts could differ from those estimates.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.

The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for the impairment of those loans collectively evaluated. The unallocated element is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.

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

We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance for any deficiencies through normal operations. This self-correcting mechanism reduces potential differences between estimates and actual observed losses. In addition, the unallocated portion of the allowance is examined quarterly to ensure that it remains relatively constant in relation to the total allowance unless there are changes in the related criteria that would indicate a need to either increase or decrease it. The determination of the allowance for loan loss level is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, we cannot ensure that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required resulting in an adverse impact on operating results.

Fair values of financial instruments, in cases where quoted market prices are not available, are based on estimates using present value or other valuation techniques which are subject to change.

Real estate acquired in connection with foreclosures or in satisfaction of loans is written-down to the lower of the related loan balance or fair market value less cost to sell. Fair market value for real estate properties are based upon estimates derived through independent appraisals. However, proceeds realized from sales may ultimately be higher or lower than those estimates.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Intangible assets include goodwill. The valuation of goodwill is analyzed at least annually for impairment.

For a further discussion of our critical accounting policies, refer to the note entitled, “Summary of significant accounting policies,” in the Notes to Consolidated Financial Statements to this Annual Report. This note lists the significant accounting policies used by us in the development and presentation of our financial statements. The section entitled “Risk Factors” located in Part I, Item 1A. of this Annual Report, 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

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(Dollars in thousands, except per share data)

are necessary for the understanding and valuation of our financial position, results of operations and cash flows.

Operating Environment:

Despite a slowdown in economic growth in the fourth quarter, the economy expanded at a solid pace in 2006. The gross domestic product, the value of all goods and services produced in the Nation, rose 3.3 percent in 2006, similar to the growth experienced in the previous two years. Consumer, business and governmental spending all increased in 2006. A downturn in the housing market was the only restraining factor on the economy, as residential investment contracted 4.2 percent and partially offset the gains in other sectors. The majority of the economic growth in 2006 occurred early in the year. Due to exceptionally strong economic growth of 5.6 percent in the first quarter and elevated inflationary pressures, the Federal Open Market Committee (“FOMC”) chose to increase the target rate for federal funds 25 basis points at each of its four meetings during the first six months of the year. As a result, the federal funds target rate rose from 4.25 percent at year-end 2005 to 5.25 percent at June 30, 2006. Economic growth subsided for the remainder of 2006, growing 2.6 percent in the second quarter, 2.0 percent in the third quarter and 2.2 percent in the fourth quarter. Due to this reduced pattern of growth, the FOMC decided to leave short-term rates unchanged for the second half of 2006.

Favorable employment conditions, higher income and wealth appreciation from equity gains all bolstered consumer spending, which increased 3.2 percent in 2006. For the second consecutive year, consumer spending outpaced the increase in disposable personal income (“DPI”) resulting in a negative savings rate. In recent years, consumer wealth benefitted from rising home values. However, increases in home values slowed considerably in 2006 as a result of the weaker housing market. Despite the slowdown in home values, consumer wealth continued to increase, as corporate equities appreciated significantly.

Business spending increased 7.3 percent in 2006. Spending in the corporate sector was supported by strong fundamentals including higher profits, favorable credit terms and declining equipment costs. Decreases in the price of high-technology equipment resulted in a 6.6 percent increase in spending for equipment and software. An accommodative credit market helped boost spending for nonresidential structures by 8.8 percent.

The demand for labor expanded in 2006 given the strong performance in the corporate sector. As a result, the unemployment rate for the Nation improved to 4.5 percent in 2006 from 4.9 percent in 2005. Total nonfarm employment increased 2,776,000 in 2006. Service-providing industries added 2,527,000 jobs, while goods-producing industries increased employment by

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

249,000. The strong job growth in the service sector reflected employment gains in industries providing professional and business services, education and health services and leisure and hospitality services. Labor costs edged up slightly in 2006, as indicated by a 3.3 percent increase in the employment cost index (“ECI”). The wages and salaries component of the ECI rose 3.2 percent, while annual employee benefit costs rose 3.6 percent.

National, Pennsylvania and our market area’s seasonally adjusted unemployment rates at December 31, 2006 and 2005, are summarized as follows:

December 31	2006			2005
National		4.5	%		4.9	%
Pennsylvania		4.6			4.7
Lackawanna County		4.8			4.9
Luzerne County		5.1			5.4
Monroe County		4.9			5.0
Susquehanna County		4.6			4.5
Wayne County		3.9			4.4
Wyoming County		5.0	%		4.9	%

Similar to the Nation, employment conditions improved for the Commonwealth of Pennsylvania and the majority of the counties in our market area. Aggregate employment for the Scranton/Wilkes-Barre metro area reached a record high of 266,500 jobs in October 2006. Our region experienced job gains in retail, healthcare, business and educational services. Manufacturing jobs in our area, which have been declining recently, also expanded. The unemployment rate for this metro area decreased to 5.0 percent at December 31, 2006, from 5.2 percent at the end of 2005.

With regard to economic activity in our market area, there are currently several major on-going projects in Northeastern Pennsylvania that have the potential to stimulate economic development in our region well into the future. These projects include, among others:

• On November 14, 2006, Mohegan Sun at Pocono Downs, the Commonwealth’s first slot machine gaming facility, opened its doors. The $70.0 million casino is owned by the Mohegan Tribe of Connecticut and has approximately 1,100 slot machines, a food court, bar and patio. This is just the first phase of the project. A second phase, which will double the number of machines, add retail shops, a night club and other amenities is scheduled for construction in the Spring of 2007. Once the second phase is complete, annual revenues are expected to reach $167.9 million.

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

	This was the first casino to open under the Race Horse Development and Gaming Act of 2004. One purpose of this Act is to generate additional revenue for Pennsylvania to fund property tax relief for residents. There are a total of 11 licenses under this Act. On December 20, 2006, the Gaming Control Board announced that one of the at-large licenses would be awarded to a Dunmore, Pennsylvania, businessman’s Mount Airy Resort and Casino Project. This 196-room resort located in Monroe County will create approximately 1,000 jobs and boost tourism in this area. The resort is scheduled to open in November 2007.
•	In September 2006, Lackawanna County officials announced that the New York Yankees Triple-A franchise would replace the Philadelphia Phillies Triple-A franchise at the former Lackawanna County Stadium in 2007. The Yankees have a large fan base in Northeastern Pennsylvania. Local merchants anticipate a rise in tourism and trade for area hotels, restaurants and other businesses. Demand for season tickets soared, with more than 60.0 percent of the seats available for home games sold by the end of October.
•	In October of 2006, Governor Edward Rendell awarded a $35.0 million grant to build the Medical College of Northeastern Pennsylvania in Scranton. The school received another $35.0 million in the form of a donation from Blue Cross of Northeastern Pennsylvania. This school, which will have an expected enrollment of 360 students and an operating budget of $25.0 million, is scheduled to open in August of 2009.

In light of these and other on-going projects, we anticipate economic conditions in our market area to remain favorable.

The banking industry reported record earnings for the sixth consecutive year, as net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks rose 12.8 percent in 2006, compared to 9.7 percent in 2005. Increased profits of the largest institutions, with assets greater than $10.0 billion, accounted for the majority of the earnings improvement. However, banks with assets between $100.0 million and $1.0 billion and banks with less than $100.0 million in assets did not fare as well, recording reductions of 1.1 percent and 10.7 percent in net income for 2006. In addition, 2006 marked the second consecutive year since the inception of deposit insurance that no bank failures were recorded. Commercial banks continued to experience strong balance sheet growth. Total assets for all FDIC-insured commercial banks grew 11.6 percent in 2006, after growing 7.4 percent in 2005. Over 97.0 percent of the growth was concentrated in large banks with assets greater than $10.0 billion. This

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(Dollars in thousands, except per share data)

group recorded asset growth of 15.0 percent, while smaller institutions recorded balance sheet growth of 3.9 percent. Earning assets for all FDIC-insured commercial institutions grew 11.8 percent. Deposit growth kept pace with a 10.8 percent increase. Interest-bearing deposits grew 13.3 percent, while noninterest-bearing deposits rose 1.1 percent. For the first time in four years, asset quality for the banking industry deteriorated. Nonperforming loans and leases increased 16.6 percent in 2006, after declining 4.3 percent in 2005. Subprime lending problems and rising debt burdens greatly impacted the asset quality of the banking industry as customers were not able to pay their obligations as they came due. Equity capital increased 12.9 percent in 2006, after increasing 7.3 percent in 2005. The growth was attributable to merger-related goodwill. The Leverage ratio for the industry remained stable at 7.9 percent at year-end 2006 and 2005. The Tier I and Total risk-based capital ratios also remained relatively stable in 2006. These ratios were 9.8 percent and 12.4 percent in 2006, compared to 9.9 percent and 12.3 percent in 2005.

As mentioned earlier, earnings growth for the banking industry grew at a record pace for the sixth year in a row. Net income for all FDIC-insured commercial banks increased $14.6 billion or 12.8 percent to $128.6 billion in 2006, compared to $114.0 billion in 2005. Increases in net interest income and noninterest income were partially offset by higher interest expense and noninterest expense. Also affecting net income was the recognition of a net loss on the sale of investment securities, which was offset by a decrease in loan loss provisions. The banking industry recorded a net loss on the sale of investment securities of $1.3 billion in 2006, compared to a net loss of $158.0 million in 2005. The provision for loan losses decreased by $1.2 billion or 4.6 percent in 2006. Noninterest expense increased 5.1 percent. In addition, earnings growth did not keep pace with balance sheet growth. Return on average assets (“ROAA”) was constant while return on average equity (“ROAE”) weakened. These banks reported ROAA of 1.33 percent for 2006 and 2005, and ROAE of 13.06 percent in 2006 compared to 13.26 percent in 2005.

FDIC-insured commercial banks located in Pennsylvania recorded a decrease in earnings in 2006, after posting an earnings increase in 2005. For these banks, net income decreased $388.0 million or 14.1 percent in 2006, after increasing $463.0 million or 20.1 percent in 2005. Higher interest expense, resulting from a $4.7 billion increase in the volume of deposits and an 83 basis point increase in the cost of funds, led to the earnings decline. Partially offsetting higher interest expense was a 14.8 percent increase in interest income and a 4.9 percent increase in noninterest income. In addition to the decline in net income, growth in both total assets and equity caused a deterioration in ROAA and ROAE for insured Pennsylvania banks.

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

It was a banner year for the stock market in 2006. Strong merger and acquisition activity, higher corporate earnings performance and stabilized interest rates in the second half of the year all contributed to a 16.3 percent increase in the Dow Jones Industrial Average (“DJIA”). The DJIA closed the year at 12,463.15, 1,745.65 points higher than at year-end 2005. The DJIA declined 0.6 percent in 2005. Similarly, the Standard and Poor’s 500 and the NASDAQ Composite advanced 13.6 percent and 9.5 percent. These indices recorded total returns of only 3.0 percent and 1.4 percent in 2005. Bank stock values also gained, as evidenced by an 11.0 percent increase in the NASDAQ Bank Index Composite. This index retracted 4.3 percent in 2005. As a result of rising stock prices and accommodative credit markets, merger and acquisition activity flourished in 2006. Total deals world-wide reached a record $3.8 trillion, 38.0 percent higher than in 2005. The previous record was $3.4 trillion set in 2000. The largest deal announced was AT&T’s agreement to buy BellSouth Corp. for $72.7 billion. Several large mergers and acquisitions were announced in the banking industry. Bank of New York agreed to purchase Mellon Financial Corporation for $16.8 billion, while Capital One Financial Corporation contracted to buy North Fork Bancorporation for $14.6 billion. With strong fundamentals and available credit, merger and acquisition activity is expected to remain strong in 2007.

Despite the retraction in business spending in the fourth quarter of 2006 and the ailing housing market, the FOMC anticipates the economy to expand at a moderate rate. The FOMC decided to leave the federal funds target rate unchanged at each of its two meetings in 2007, and indicated that future policy adjustments would depend on incoming economic data.

Review of Financial Position:

We are located in Northeastern Pennsylvania and offer traditional bank products and services, including loans, deposits and trust and wealth management services, through our primary subsidiary, Community Bank and Trust Company (“Community Bank”). Our other subsidiary, Comm Realty Corporation (“Comm Realty”), holds, manages and sells foreclosed or distressed assets on behalf of Community Bank. Community Bank operates 16 full-service branch banking offices and one loan production office located within a six-county market area and primarily services individuals and small- and medium-sized businesses. Community Bank has two subsidiaries, Community Leasing Corporation (“Community Leasing”) and Comm Financial Services Corporation (“Comm Financial Services”). Community Leasing provides direct lease financing to commercial customers and Comm Financial Services offers various types of insurance products and asset management services to both individuals and businesses.

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

We consider Community Bank’s 16 branch banking offices and one loan production office to be a single operating segment. Community Leasing, Comm Financial Services and Comm Realty did not meet the quantitative thresholds for required segment disclosure. For a further discussion of the requirements for segment disclosure, refer to the note entitled, “Summary of significant accounting policies-Segment disclosure,” in the Notes to Consolidated Financial Statements to this Annual Report.

At the end of 2005, we initiated several projects and formulated goals to strengthen our current product and service offerings, increase market coverage and upgrade our retail infrastructure. These projects and goals included:

• Restructuring our trust division and financial services subsidiary;

• Developing our commercial lease portfolio;

• Increasing our market area to include Luzerne County, Pennsylvania; and

• Improving retail operations through implementation of a new teller platform.

At the end of the third quarter of 2005, we began restructuring Community Bank’s trust division and financial services subsidiary by hiring a Director of Wealth Management to oversee and evaluate these areas and to devise a plan to improve their profitability. By the end of 2005, an approved plan was in place which involved increasing efficiency through improved policies and procedures, changing the fee structure, expanding products and services to include wealth management offerings, developing sales goals and revising the agreement with our third party broker dealer. As a result, these divisions, which were consistently unprofitable in past years, broke-even in 2006. Trust revenue rose 62.2 percent, while revenue generated from the financial services subsidiary increased 48.4 percent.

During the first quarter of 2006, we hired an officer who has extensive experience in commercial lease financing to grow and direct the operations of Community Leasing. As a result, lease originations increased dramatically in 2006. Total lease originations were $1,191 in 2006, an increase of $938 or 370.8 percent compared to originations of only $253 in 2005. Aggressive goals for 2007 were established for Community Leasing, and as a result, we anticipate strong future growth for this subsidiary.

We also hired an officer who has a strong local government and business relations background in Luzerne County to develop a presence in this market area. This officer is based out of our recently opened Loan Production

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(Dollars in thousands, except per share data)

Office located in Kingston, Pennsylvania. This is the first step in expanding our retail and commercial operations into this market area. Based on the results of this office, we will evaluate the need to establish a full-service branch office in this market area.

We know that in order to be a strong competitor in the banking industry, we must be up-to-date with the latest technology. In the second half of 2006, we migrated our retail operations to a new, state-of-the-art teller platform. This new platform is fully compliant with recently enacted banking laws. In addition, the platform improves efficiency by reducing transaction processing time and cost and provides the technology needed to expand our product and service offerings.

In line with our goal to provide the latest technology, we will be offering a new service to our commercial customers beginning in the second quarter of 2007, called “CB&T Direct^SM”, a remote deposit image capture system. This new service will provide certain business customers with banking capabilities that were previously offered only at our branch offices. These customers will be able to process deposits directly through a remote scanner, located at their business, that reads the information on the checks and sends it electronically to the bank. Their accounts will be credited automatically without the customer or their employee ever having to leave the office. We believe this new service will provide greater efficiency for both us and our customers.

Competition for deposits remained intense in 2006. An increase in interest rates during the first half of the year and an inverted yield curve drove up short-term deposit costs. Although we tried to maintain our core deposit base through short-term promotional certificate of deposit offerings, we experienced a decline in total deposits. Loan demand was strong throughout the year. A significant portion of our investment portfolio was held in short-term bullet U.S. Government-sponsored agency securities which matured in constant intervals over the course of the year. This provided us with sufficient liquidity to meet loan demand. As a result, we did not have to become overly aggressive in competing for deposits.

Due to a decrease in deposits, total assets decreased $3.2 million to $540.4 million at December 31, 2006, from $543.6 million at the end of 2005. Total assets averaged $542.2 million in 2006, an increase of $7.5 million or 1.4 percent compared to $534.7 million in 2005. Earning assets averaged $516.3 million and equaled 95.2 percent of total average assets in 2006, compared to $508.5 million and 95.1 percent of total average assets in 2005. Higher interest rates in the first half of 2006 resulted in an 83 basis point increase in the tax-equivalent yield on average earning assets to 6.70 percent in 2006 from 5.87 percent in 2005.

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(Dollars in thousands, except per share data)

Loans, net of unearned income, grew $19.5 million or 5.0 percent to $408.1 million at December 31, 2006, from $388.6 million at year-end 2005. Loans averaged $424.3 million in 2006, and represented 82.2 percent of average earning assets. In comparison, loans averaged $396.6 million in 2005 and represented 78.0 percent of average earning assets. Upward movement in short-term interest rates during the first six months of the year caused corresponding increases in the prime rate. The tax-equivalent yield on our loan portfolio increased 73 basis points to 7.03 percent in 2006 from 6.30 percent in 2005, as adjustable-rate loans continued to reprice higher.

Total deposits decreased $8.0 million or 1.6 percent from the previous year-end. Demand for our deposits waned amid competitive pressures from financial intermediaries in our local market area and a stronger stock market. Specifically, we experienced a $15.0 million or 4.5 percent decrease in personal accounts, partially offset by an increase in commercial deposits of $7.0 million or 4.5 percent. With regard to personal deposits, decreases in interest-bearing transaction accounts and time deposits were partially offset by an increase in demand deposits. Activity in commercial deposits reflected an increase in time deposits and interest-bearing transaction accounts. A significant portion of the commercial growth resulted from higher deposit balances of local area school districts and municipalities. Partially offsetting these increases was a decrease in nonpersonal demand deposits. As a result of higher short-term interest rates and a greater concentration of deposits with interest rates tied to the three-month U.S. Treasury, our cost of funds rose 56 basis points to 3.01 percent in 2006, from 2.45 percent in 2005.

Stockholders’ equity amounted to $54.1 million or $29.27 per share at December 31, 2006, an increase of $4.4 million from $49.7 million or $26.86 per share at December 31, 2005. Net income of $6.4 million was the primary factor contributing to the improvement. The higher capital position resulted in an increase in our Leverage ratio to 9.7 percent at year-end 2006, from 9.0 percent at the end of 2005.

Investment Portfolio:

Primarily, our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging requirements and reduce income taxes. Our investment portfolio primarily consists of short-term bullet U.S. Government-sponsored agency securities, which provide a source of liquidity, and intermediate-term, tax-exempt state and municipal obligations, which mitigate our income tax burden.

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Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or IRR. Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.

Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since our entire investment portfolio is designated as available-for-sale and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.

As previously mentioned, the FOMC raised the federal funds target rate a total of 100 basis points in four 25-basis-point increments during the first half of 2006. The federal funds target rate was unchanged for the remainder of the year. Both short-term and longer-term interest rates rose proportionately with movements in the federal funds target rate during the first six months of 2006. General market rates decreased slightly for much of the second half of 2006, as the economy appeared to be slowing, but closed the year higher than at their year-end 2005 levels. Since our investment portfolio primarily consists of fixed-rate bonds, changes in general market interest rates have a substantial influence on the fair value of the portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year and 10-year U.S. Treasuries. The yield on the 2-year U.S. Treasury affects the values of our U.S. Government-sponsored agency securities, mortgage-backed securities and other short-term investments, whereas the 10-year U.S. Treasury influences the value of tax-exempt state and municipal obligations. The 2-year U.S. Treasury yield, which started the year at 4.41 percent, rose 71 basis points to 5.12 percent on June 30, 2006, and then fell 30 basis points to close the year at 4.82 percent, 41 basis points higher than year-end 2005. Similarly, the yield on the 10-year U.S. Treasury rose 72 basis points from 4.39 percent at the end of 2005 to 5.11 percent half-way through 2006 and then declined 40 basis points to 4.71 percent at December 31, 2006, 32 basis points higher than the end of 2005. Longer-term rates were slightly below short-term rates throughout the year, resulting in an inverted yield curve. Contrary to what movements in rates should indicate, the net unrealized loss on our investment securities tied to the change in the 2-year U.S. Treasury decreased 50.3 percent. The decline in the unrealized

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holding loss on our short-term investments was primarily attributable to the amount of taxable state and municipal securities that matured in 2006 and a reduction in the weighted-average maturity of these investments. Market values of our holdings of taxable municipal obligations increased as more than half of these securities mature in 2007. Due to the year-to-year increase in the 10-year U.S. Treasury rate, the unrealized gain on our investments in tax-exempt municipal obligations decreased $342 or 17.3 percent. At December 31, 2006, short-term investment securities as a group had an unrealized loss of $323 compared to an unrealized gain of $1,633 for intermediate-term tax-exempt state and municipal obligations. Equity securities had an unrealized gain of $140 at December 31, 2006.

We reported net unrealized holding gains, included as a separate component of stockholders’ equity, of $957, net of income taxes of $493, at December 31, 2006, and $959, net of income taxes of $494, at December 31, 2005. We realize that increases in interest rates could negatively impact the market value of our investments and our capital position. In order to monitor the potential effects a further rise in interest rates could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted on our portfolio at December 31, 2006, indicated that should general market rates instantaneously increase by 100, 200 and 300 basis points, we would anticipate declines of 1.7 percent, 3.2 percent and 4.7 percent in the market value of our portfolio. Our IRR exposure with regard to market value depreciation improved slightly in comparison to the previous year-end. At December 31, 2005, we anticipated market value depreciation of 1.8 percent, 3.6 percent and 5.4 percent given the same rate shocks.

In order to independently measure our performance, we monitor and evaluate our investment portfolio with respect to total return and risk in comparison to national and market area industry benchmarks. Total return is a comprehensive industry-wide approach measuring investment portfolio performance. This measure is superior to measuring performance strictly on the basis of yield since it not only considers income earned similar to the yield approach, but also includes the reinvestment income on repayments and capital gains and losses, whether realized or unrealized. The total return of our investment portfolio improved to 5.2 percent in 2006 from 3.6 percent in 2005. Our investment portfolio outperformed the Lehman Brothers’ aggregate-bond index, a benchmark used by most investment managers. This index scored a total return of 4.3 percent in 2006. In addition, our investment portfolio’s total return outperformed the average total return of 4.6 percent for the eight community banks located in our market area. Based on a study from an independent national investment performance ranking company, our investment portfolio ranked in the top 10.0 percent of all FDIC-insured bank holding companies with respect to total return over the previous 12 months.

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Similar to the approach taken in assessing our performance with respect to return, we evaluate our risk in comparison to all other financial institutions. Risk is assessed by quantifying the average life of the investment portfolio as compared to U.S. Treasury securities. Average life is derived from the volatility of our total return to that of U.S. Treasury securities over a one-year time horizon. The amount of risk in our investment portfolio declined, as evidenced by a decrease in the average life to 1.8 years from 2.2 years last year. We ranked in the top 25.0 percent of all FDIC-insured bank holding companies with regard to low risk, according to the same independent ranking company. In addition, the risk associated with our portfolio was less than that of the same eight community banks, whose average life for their portfolios was 2.7 years. The total return for the eight community banks did not reflect the added risk in their portfolios. In general, the total return of an investment portfolio would be expected to increase as the average life of the portfolio increases.

The carrying values of the major classifications of available-for-sale securities as they relate to the total investment portfolio for the past five years are summarized as follows:

Distribution of investment securities available-for-sale

	2006					2005					2004					2003					2002
December 31	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
U.S. Government agencies	$	39,201		42.98	%	$	42,711		40.69	%	$	44,645		37.59	%	$	16,377		15.56	%	$	10,350		8.33	%
State and municipals:
Taxable		11,912		13.06			15,268		14.54			16,898		14.23			17,051		16.20
Tax-exempt		30,956		33.94			33,795		32.20			34,605		29.14			34,788		33.05			35,003		28.18
Mortgage-backed securities		7,760		8.51			12,217		11.64			21,281		17.92			35,099		33.35			77,579		62.46
Equity securities:
Restricted		1,206		1.32			808		0.77			1,153		0.97			1,783		1.70			1,149		0.93
Other		178		0.19			166		0.16			174		0.15			150		0.14			122		0.10
Total	$	91,213		100.00	%	$	104,965		100.00	%	$	118,756		100.00	%	$	105,248		100.00	%	$	124,203		100.00	%

     Our investment portfolio provided a stable source of liquidity in 2006 and was used to supplement deposit gathering activities. As a result, total investments decreased $13.8 million to $91.2 million at December 31, 2006, from $105.0 million at December 31, 2005. The investment portfolio played a less prominent role in our earning assets mix in 2006. Investment securities averaged $87.0 million and equaled 16.8 percent of average earning assets in 2006, compared to $103.9 million and 20.4 percent in 2005. The tax-equivalent yield on the investment portfolio rose 82 basis points to 5.21 percent in 2006 from 4.39 percent in 2005. This increase was a result of reinvesting security repayments, not utilized to fund loans, into short-term investments with higher yields.

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We did not sell any securities in 2006 and 2005. Repayments from investment securities totaled $51.5 million in 2006. The majority of repayments resulted from maturities of short-term U.S. Government-sponsored agency securities. At the end of 2005, we had $42.7 million of these securities with a weighted-average life of 0.6 years. A total of $40.0 million of these securities matured in constant intervals during 2006. We purchased $37.9 million in investment securities in 2006. Due to the inverted yield curve, we chose to once again limit our purchases primarily to short-term, single maturity bonds of U.S. Government-sponsored agencies, as we would not receive a premium for extending maturity terms. In addition, the single maturity bonds ensure the certainty of cash flows for liquidity purposes. The weighted-average life of the U.S. Government-sponsored agency securities purchased in 2006 was 0.3 years, with scheduled maturity dates occurring at constant intervals over the next 12 months.

At December 31, 2006, investment securities with an amortized cost of $47.1 million were pledged to secure deposits, to qualify for fiduciary powers and for other purposes required or permitted by law. At December 31, 2005, the amortized cost of pledged securities equaled $36.6 million. The fair value of such securities equaled $47.0 million at December 31, 2006, and $36.5 million at December 31, 2005.

At December 31, 2006 and 2005, there were no securities from any one issuer that had an aggregate book value exceeding 10.0 percent of stockholders’ equity, except for those issued by U.S. Government-sponsored agencies which are exempt from concentration of credit risk considerations.

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The maturity distribution of the amortized cost, fair value and weighted-average tax-equivalent yield of the available-for-sale portfolio at December 31, 2006, 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 prevailing 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 are 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
December 31, 2006	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Amortized cost:
U.S. Government agencies	$	39,258		5.04	%																$	39,258		5.04	%
State and municipals:
Taxable		6,878		3.15		$	5,261		2.77	%												12,139		2.99
Tax-exempt		190		4.02			5,121		7.85		$	16,218		7.64	%	$	7,794		7.35	%		29,323		7.58
Mortgage-backed securities		5,895		5.36			1,820		4.53			84		6.27								7,799		5.18
Equity securities:
Restricted																	1,206		5.23			1,206		5.23
Other																	38		12.94			38		12.94
Total	$	52,221		4.82	%	$	12,202		5.16	%	$	16,302		7.63	%	$	9,038		7.09	%	$	89,763		5.61	%
Fair value:
U.S. Government agencies	$	39,201																			$	39,201
State and municipals:
Taxable		6,814				$	5,098															11,912
Tax-exempt		190					5,336				$	17,088				$	8,342					30,956
Mortgage-backed securities		5,870					1,805					85										7,760
Equity securities:
Restricted																	1,206					1,206
Other																	178					178
Total	$	52,075				$	12,239				$	17,173				$	9,726				$	91,213

For a discussion of the recent Staff Positions and Statements of Financial Accounting Standards (“SFAS”) issued by the Financial Accounting Standards Board (“FASB”) related to investment securities, refer to the note entitled, “Summary of significant accounting policies-Investment securities,” in the Notes to Consolidated Financial Statements to this Annual Report.

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Loan Portfolio:

Economic factors and how they affect loan demand are of extreme importance to us and the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue for us. Similar to the investment portfolio, there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks which influence loan demand, the composition of the loan portfolio and profitability of the lending function. Strong corporate earnings influenced business spending and, in turn, commercial lending in 2006. However, a downturn in the housing market resulted in a decline in residential mortgage lending for the banking industry.

Corporate profits remained strong in 2006. According to the February 2007 Monetary Policy Report to Congress, the ratio of pre-tax profits to income for nonfinancial firms rose 14.0 percent in 2006, the highest level since 1969. As a result, business investment gained 7.3 percent in 2006. Spending on equipment and software increased 6.6 percent as costs for computer-related equipment became more affordable. In addition, spending on commercial structures rose 8.8 percent in 2006, significantly higher than the prior two years. According to the January 2007 “Senior Loan Officers Opinion Survey on Bank Lending Practices,” issued by the Board of Governors of the Federal Reserve System, a majority of responding banks in the United States reported that demand for commercial loans and commercial mortgages remained stable throughout 2006. Most respondents indicated that competition for such loans increased, and as a result, banks had eased terms and credit standards. Respondents to the survey indicated that demand continued to be strong, with financing used for investment in plant and equipment. As a result, commercial loans, including commercial real estate loans for all FDIC-insured commercial banks, grew $193.1 billion or 11.0 percent to $1,949.9 billion at December 31, 2006, from $1,756.8 billion at the end of the previous year.

The housing market, which had been expanding since 2001, weakened significantly, and noticeably restrained the rate of economic expansion in 2006. Rising mortgage rates in the first half of the year influenced the decline in demand for both new and existing homes. The rate for a 30-year, fixed-rate mortgage rose 41 basis points from 6.27 percent at the end of 2005 to 6.68 percent at June 30, 2006. The decline in demand for new homes caused a backlog of inventory and, in turn, resulted in a drop-off in new construction. Both the number of permits issued for new homes and the number of homes started were approximately 30.0 percent below 2005 figures. In the second half of 2006, mortgage rates decreased and closed the year 13

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basis points lower than at year-end 2005. As a result, the demand for homes, although below recent years, appeared to improve.

Activity in our secondary mortgage banking program in 2006 was significantly lower than in 2005. The volume of mortgages originated and subsequently sold in the secondary market declined $6.4 million or 27.4 percent to $17.0 million in 2006 from $23.4 million in 2005. Rising interest rates, coupled with greater competition, forced spreads between originations and sales tighter. As a result of the decline in volume and tighter spreads, gains realized on the sale of these loans declined $244 or 50.1 percent to $243 in 2006 from $487 in 2005. Residential mortgage loans serviced for the Federal National Mortgage Association (“FNMA”) totaled $115.1 million at December 31, 2006, an increase of $5.0 million or 4.5 percent from $110.1 million at the end of 2005. Serviced loans increased $12.3 million or 12.6 percent in 2005. Mortgage loans held for sale totaled $0.6 million at December 31, 2006, and $1.9 million at the end of 2005.

Similar to secondary mortgage banking, refinancing activity also declined in 2006 due to higher mortgage rates. Refinancings totaled $6.8 million in 2006, a decline of $4.8 million or 41.4 percent from $11.6 million in 2005.

The composition of the loan portfolio at year-end for the past five years is summarized as follows:

Distribution of loan portfolio

	2006					2005					2004					2003					2002
December 31	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Commercial, financial and others	$	143,792		35.24	%	$	137,302		35.33	%	$	114,341		29.95	%	$	100,723		28.14% $			90,747		28.05	%
Real estate:
Construction		5,513		1.35			2,575		0.66			6,704		1.76			2,983		0.83			5,398		1.67
Mortgage		225,703		55.31			217,827		56.06			230,555		60.40			222,621		62.20			193,012		59.65
Consumer, net		31,546		7.73			29,217		7.52			27,893		7.31			29,726		8.30			32,631		10.08
Lease financing, net		1,520		0.37			1,682		0.43			2,230		0.58			1,887		0.53			1,787		0.55
Loans, net of unearned income		408,074		100.00	%		388,603		100.00	%		381,723		100.00	%		357,940		100.00	%		323,575		100.00	%
Less: allowance for loan losses		4,435					4,128					3,859					3,584					3,745
Net loans	$	403,639				$	384,475				$	377,864				$	354,356				$	319,830

We experienced strong demand in all major loan categories. As a result of our strategic focus on building commercial relationships, business loans, including commercial loans, commercial mortgages and lease financing, increased $10.8 million or 4.1 percent to $275.9 million at December 31, 2006, from $265.1 million at year-end 2005. Specifically, commercial loans grew $6.5 million or 4.7 percent, while commercial real estate loans rose $4.4 million or 3.5 percent. Commercial leases declined slightly as repayments exceeded originations. We have recently restructured our commercial leasing subsidiary and have added a full-time leasing officer to manage the subsidiary. This re-emphasis resulted in an increase in commercial leases originated of $938 or 370.8 percent to $1,191 in 2006

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compared to $253 in 2005. In addition, very aggressive goals have been set for Community Leasing for 2007. Residential mortgages, including construction loans, rose $6.4 million or 6.8 percent to $100.7 million at December 31, 2006, from $94.3 million at December 31, 2005, due to an increase in demand for home equity loans, coupled with a lower volume of refinancings. In addition, consumer loans increased $2.3 million or 8.0 percent to $31.5 million at year-end 2006 from $29.2 million at the end of 2005. Overall, our loan portfolio grew $19.5 million or 5.0 percent to $408.1 million at December 31, 2006, from $388.6 million at December 31, 2005.

Loans averaged $424.3 million in 2006, an increase of $27.7 million or 7.0 percent compared to $396.6 million in 2005. The majority of the growth was in taxable loans which increased $27.9 million. Tax-exempt loans decreased $0.2 million. The loan portfolio played a greater role in our earning assets mix, as average investments and federal funds sold declined. As a percentage of earning assets, average loans equaled 82.2 percent in 2006 and 78.0 percent in 2005.

Corresponding with increases in the federal funds target rate, the prime rate climbed 100 basis points in four 25-basis-point increments over the first six months of 2006 to 8.25 percent, and remained stable for the second half of the year. A significant portion of our loan portfolio consists of commercial loans with adjustable interest rates that either reprice immediately or in the near term. As a result, the tax-equivalent yield on the loan portfolio increased 73 basis points to 7.03 percent in 2006 from 6.30 percent in 2005. The yield on taxable loans rose 70 basis points, while the yield on tax-exempt loans increased 93 basis points. The increase was gradual throughout the year, with the greatest increase occurring during the second and third quarters. By the fourth quarter of 2006, loan yields appeared to be stabilizing. The tax-equivalent yield on the loan portfolio increased 17 basis points to 6.77 percent in the first quarter of 2006 from 6.60 percent in the fourth quarter of 2005. Loan yields increased another 19 basis points and 21 basis points in the second and third quarters before leveling off in the fourth quarter. The tax-equivalent yield on the loan portfolio increased only 3 basis points in the fourth quarter. Interest rates are expected to remain relatively stable during the first half of 2007. The yield on our loan portfolio may increase further, but to a lesser extent, as adjustable-rate loans with repricing frequencies beyond one year will reprice at higher rates.

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The maturity distribution and repricing information of the loan portfolio by major classification at December 31, 2006, is summarized as follows:

Maturity distribution and interest sensitivity of loan portfolio

			After one
	Within		but within		After
December 31, 2006	one year		five years		five years		Total
Maturity schedule:
Commercial, financial and others	$	50,466	$	43,276	$	50,050	$	143,792
Real estate:
Construction		5,513						5,513
Mortgage		26,260		85,191		114,252		225,703
Consumer, net		4,941		20,713		5,892		31,546
Lease financing, net		297		1,223				1,520
Total	$	87,477	$	150,403	$	170,194	$	408,074
Repricing schedule:
Predetermined interest rates	$	28,720	$	75,235	$	63,437	$	167,392
Floating or adjustable interest rates		58,757		75,168		106,757		240,682
Total	$	87,477	$	150,403	$	170,194	$	408,074

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 continuously monitor our liquidity position so that adequate funds are available to meet loan demand. Based on our asset/liability simulation model, we feel confident that loan demand can be facilitated through payments and prepayments on investments and loans, and increases in core deposits. We expect to receive approximately $139.7 million from repayments on loans and investment securities during 2007. In the event an unforeseen increase in loan demand arises, we could facilitate the demand by aggressively competing for deposits, by selling available-for-sale securities or by utilizing various credit products available through the Federal Home Loan Bank of Pittsburgh (“FHLB-Pgh”).

In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. As part of our asset/liability management strategy to reduce the amount of IRR in the loan portfolio, we price loan products to increase our holdings of adjustable-rate loans and reduce the average term of fixed-rate loans. Approximately 46.2 percent of the loan portfolio is expected to reprice within the next 12 months. Our continued focus on commercial lending activities resulted in an increase in adjustable-rate loans. These loans increased $15.0 million or 6.6 percent to $240.7 million at December 31, 2006, from $225.7 million at year-end 2005. Adjustable-rate loans represented 59.0 percent of the loan portfolio at December 31, 2006, compared to 58.1 percent at the end of 2005. Fixed-rate loans increased $4.5 million to $167.4 million at December 31, 2006, from $162.9 million at December 31, 2005.

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Additionally, our secondary mortgage banking program provides us with an additional source of liquidity and a means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked in at the time of commitment, thereby greatly reducing our exposure to IRR.

Loan concentrations are considered to exist when the total amount of loans to any one borrower, or a multiple number of borrowers engaged in similar business activities or having similar characteristics, exceeds 10.0 percent of loans outstanding in any one category. We provide deposit and loan products and other financial services to individual and corporate customers in our six-county market area. There are no significant concentrations of credit risk from any individual counterparty or groups of counterparties, except for locational concentrations.

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 home equity and credit card lines and commercial letters of credit, and may involve, to varying degrees, elements of credit risk and IRR in excess of the amount recognized in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of the collateral obtained, if deemed necessary by us, is based on our credit evaluation of the customer.

Unused portions of home equity and credit card lines are commitments for possible future extensions of credit to existing customers. Unused portions of home equity lines are collateralized and generally have a fixed expiration date. Credit card lines are uncollateralized and usually do not carry a specific maturity date. Unused portions of home equity and credit card lines 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

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(Dollars in thousands, except per share data)

expiration dates within one year. Collateral supporting commercial letters of credit amounted to $11.2 million at December 31, 2006, and $10.1 million at December 31, 2005. Commercial letters of credit with collateral values less than the contractual amount of the commitment are supported by existing lines of credit with us. The carrying value of the liability for our obligations under guarantees was not material at December 31, 2006 and 2005.

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 year-end for the past five years are summarized as follows:

Distribution of off-balance sheet commitments

December 31	2006		2005		2004		2003		2002
Commitments to extend credit	$	66,192	$	64,816	$	49,504	$	44,025	$	48,478
Unused portions of home equity and credit card lines		15,777		14,576		12,776		9,806		6,892
Commercial letters of credit		21,405		18,565		9,062		2,255		986
Total	$	103,374	$	97,957	$	71,342	$	56,086	$	56,356

We record an allowance for credit losses, if deemed necessary, separately as a liability. No allowance was deemed necessary at December 31, 2006 and 2005. 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.

For a discussion of the recent Statement of Position issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants related to lending or financing activities, refer to the note entitled, “Summary of significant accounting policies-Loans,” in the Notes to Consolidated Financial Statements to this Annual Report.

For a discussion of the recent SFAS issued by the FASB related to mortgage servicing rights associated with our secondary mortgage banking program, refer to the note entitled, “Summary of significant account policies — Mortgage servicing rights,” in the Notes to Consolidated Financial Statements to this Annual Report.

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Asset Quality:

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect. This Act tightened bankruptcy legislation by making it more difficult for persons with above average incomes to qualify for protection under Chapter 7 bankruptcy laws and increased the amount of debt that a person would have to repay under Chapter 13 bankruptcy laws. In addition, individuals would have to pay greater fees and complete mandatory debt counseling before filing. As a result, the number of personal bankruptcy filings, which spiked in 2005 prior to the new laws taking effect, dramatically decreased during the 12-month period ended September 30, 2006. According to the Administrative Office of the U.S. Courts, personal bankruptcy filings during the 12 months ended September 30, 2006, fell 37.7 percent compared to the same period in 2005. Similarly, the number of businesses filing for bankruptcy protection declined 20.1 percent comparing the same periods. The Commonwealth of Pennsylvania also experienced reductions in both the number of personal and business bankruptcy filings for the 12-month period ended September 30, 2006. Specifically, in our district, according to the data released by the Administrative Office of the U.S. Courts, the number of individuals and businesses filing for bankruptcy protection decreased 37.2 percent and 24.1 percent. The 2006 decrease may be artificially low due to the influx of filings in 2005. However, recent statistics indicate that the number of filings has leveled off.

Rising residential real estate delinquencies caused deterioration in asset quality for the banking industry in 2006. For all FDIC-insured commercial banks, nonperforming loans and leases increased $6.7 billion or 16.6 percent to $47.0 billion at December 31, 2006, from $40.3 billion at year-end 2005. Higher delinquencies in one-to-four family, construction and home equity loans caused a 33.0 percent increase in noncurrent residential real estate loans. Banks also experienced greater delinquencies in consumer loans, which were offset by lower delinquencies in commercial and industrial loans. The ratio of nonperforming assets to total assets for these institutions increased to 0.51 percent at December 31, 2006, from 0.48 percent at year-end 2005. Despite the increase in noncurrent loans, net charge-offs, as a percentage of loans outstanding, declined from 0.56 percent in 2005 to 0.40 percent in 2006.

Contrary to all FDIC-insured commercial banks, nonperforming asset levels improved for insured Pennsylvania banks, as evidenced by a 22.5 percent decrease in nonperforming assets to $692.7 billion at December 31, 2006, from $893.4 billion at the end of 2005. However, net charge-offs for these institutions increased 45.8 percent.

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(Dollars in thousands, except per share data)

Several issues are of recent concern and have begun to pose credit risks to the banking industry. These issues include:

• Subprime lending;

• Adjustable-rate mortgages and home equity lines of credit; and

• Deflation in real estate values.

Subprime lending generally refers to lending to borrowers who do not qualify for prime interest rates because of one or more of the following characteristics: (i)weakened credit histories; (ii) previous charge-offs; (iii) judgments or bankruptcies; (iv) low credit scores; (v) high debt-burden ratios; or (vi) high loan-to-value ratios. These borrowers are charged either higher or adjustable interest rates to compensate for the higher credit risk. In the past two years, 21.0 percent of all home mortgages were deemed subprime. Rising interest rates have begun posing problems for many subprime borrowers. According to the Mortgage Bankers Association, at year-end 2006, 4.5 percent of all subprime mortgages were in the process of collection. This figure equaled 3.3 percent at the end of 2005. In addition, 13.3 percent of subprime borrowers were behind in their payments, the highest level since 2002.

We do not have a subprime lending program. Our residential mortgage portfolio consists primarily of one-to-four family residential mortgages originated with loan-to-value ratios not exceeding 80.0 percent. Borrowers wanting to finance more than 80.0 percent of the appraised value are required to obtain private mortgage insurance (“PMI”). The majority of these loans are sold without recourse to FNMA.

In addition to subprime borrowers, many borrowers with good credit were attracted to adjustable-rate mortgage loans because of their lower initial interest rates. Furthermore, many homeowners borrowed against their rising home values through home equity lines of credit having adjustable interest rates. These borrowers may find it increasingly difficult to pay additional debt service costs resulting from rising interest rates.

We offer loans with adjustable interest rates to individual and commercial customers. In order to mitigate the credit risk inherent in these loans, we perform stress tests to determine if the customer’s cash flow would be able to cover the increase in interest given rate shocks of plus 100, 200 and 300 basis points. We perform these stress tests as part of the loan approval process.

Finally, the increase in property values over the past few years has caused some institutions to extend credit based on inflated collateral values. Should borrowers default, banks may not be able to realize a liquidation value at or beyond the amount of debt owed in order to facilitate a

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secondary source of repayment. These factors have already begun, and may continue to, subject the banking industry to increased levels of nonperforming assets and net loans charged-off. As a result, the profitability of financial institutions could be adversely affected as banks are forced to increase their provision for loan losses or sustain losses upon liquidating collateral.

With regard to managing our exposure to credit risk caused by devaluations in real estate values, according to our Loan Policy, maximum loan-to-value ratios for commercial mortgage loans cannot exceed 80.0 percent of the lower of cost or appraised value. With regard to residential mortgages, customers with loan-to-value ratios between 80.0 percent and 100.0 percent are required to obtain PMI insurance. There are no residential mortgage loans outstanding with loan-to-value ratios in excess of 100.0 percent. The 80.0 percent loan-to-value threshold provides a cushion in the event the property is devalued. PMI insurance is used to protect us from loss in the event loan-to-value ratios exceed 80.0 percent and the customer defaults on the loan. Written appraisals are obtained prior to approval for all real estate loans. Appraisals are performed by an independent appraiser engaged by us, not the customer, who is either state certified or state licensed depending upon collateral type and loan amount.

We are committed to developing and maintaining sound, quality assets through our credit risk management procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their loan agreement. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed to foster sound lending practices. These policies include certain standards that assist lenders in making judgments regarding the character, capacity, capital structure and collateral of the borrower. In addition, the lender must determine the borrower’s ability to repay the credit based on prevailing and expected business conditions. The Board of Directors establishes and reviews, at least annually, the lending authority for all loan officers and branch managers. Credits beyond the scope of the loan officers and branch managers are forwarded to the Directors’ Loan Committee. This Committee, comprised of senior management and board members, attempts to assure the quality of the loan portfolio through careful analysis of credit applications, adherence to credit policies and the examination of outstanding loans and delinquencies. These procedures assist in the early detection and timely follow-up of problem loans. Credits in excess of $2.0 million are subject to approval by our Board of Directors.

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Credit risk is also minimized by quarterly internal reviews of our loan portfolio. These reviews aid us in identifying deteriorating financial conditions of borrowers, allowing us to assist customers in remedying these situations.

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. For a discussion of our policy regarding nonperforming assets, refer to the note entitled, “Summary of significant accounting policies-Nonperforming assets,” in the Notes to Consolidated Financial Statements to this Annual Report.

Information concerning nonperforming assets for the past five years is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.

Distribution of nonperforming assets

December 31	2006			2005			2004			2003			2002
Nonaccrual loans:
Commercial, financial and others	$	1,060		$	1,574		$	849		$	306		$	541
Real estate:
Construction
Mortgage		856			1,714			1,123			1,077			1,213
Consumer, net		94			98						63			238
Lease financing, net
Total nonaccrual loans		2,010			3,386			1,972			1,446			1,992
Accruing loans past due 90 days or more:
Commercial, financial and others		13			62			91			124			97
Real estate:
Construction
Mortgage		217			333			653			352			281
Consumer, net		60			118			169			151			132
Lease financing, net		2			33						73
Total accruing loans past due 90 days or more		292			546			913			700			510
Total nonperforming loans		2,302			3,932			2,885			2,146			2,502
Foreclosed assets		352			363			399			261			40
Total nonperforming assets	$	2,654		$	4,295		$	3,284		$	2,407		$	2,542
Ratios:
Nonperforming loans as a percentage of loans, net		0.56	%		1.01	%		0.76	%		0.60	%		0.77	%
Nonperforming assets as a percentage of loans, net, and foreclosed assets		0.65	%		1.10	%		0.86	%		0.67	%		0.79	%

More effective special asset management over the past year has led to prompt resolution of troubled loans and liquidation of foreclosed properties. As a result, our asset quality improved, as evidenced by a decrease in nonperforming assets of $1,641 to $2,654 or 0.65 percent of loans, net of unearned income, and foreclosed assets at December 31, 2006, from $4,295 or 1.10 percent at the end of 2005. The improvement resulted

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from a $1,376 decrease in nonaccrual loans, coupled with declines of $254 in accruing loans past due 90 days or more and $11 in foreclosed assets. All major loan categories experienced declines in the amount of loans that were nonperforming.

There were 5 properties with an aggregate carrying value of $352 in foreclosed assets at December 31, 2006, compared to 8 properties with an aggregate carrying value of $363 at the end of 2005. We transferred 12 properties totaling $659 into foreclosed assets during 2006. Fifteen properties with a net carrying value of $624 were sold for $664, which resulted in a net gain recognized on the sales of $40. We wrote down one property with a $46 charge to noninterest expense. The carrying values of all foreclosed properties at December 31, 2006, did not exceed 80.0 percent of their collateral values in the case of residential properties and 75.0 percent of their collateral values in the case of commercial properties.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, 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 SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” for loans specifically identified to be individually evaluated for impairment, and the requirements of SFAS No. 5, “Accounting for Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

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 division identifies those loans to be individually evaluated for impairment and those to be 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 consistently use loss experience from the latest eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions.

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Regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and the systematic methodology utilized to determine its adequacy. This methodology was reviewed as part of the scope of the most recent regulatory examination and was deemed satisfactory by the regulators.

For a further discussion of our accounting policies for determining the amount of the allowance and a description of the systematic analysis and procedural discipline applied, refer to the notes entitled, “Summary of significant accounting policies-Use of estimates,” and “Summary of significant accounting policies-Allowance for loan losses,” in the Notes to Consolidated Financial Statements to this Annual Report.

Information concerning impaired loans for the past five years is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.

Distribution of impaired loans

December 31	2006			2005			2004			2003			2002
Nonaccrual loans:
Commercial, financial and others	$	1,060		$	1,574		$	849		$	306		$	541
Real estate:
Construction
Mortgage		856			1,714			1,123			1,077			1,213
Consumer, net		94			98						63			238
Lease financing, net
Total nonaccrual loans		2,010			3,386			1,972			1,446			1,992
Accruing loans:
Commercial, financial and others		1,312			638			3,889						889
Real estate:
Construction
Mortgage		6,334			1,622			1,205			207			485
Consumer, net		44			61						1			292
Lease financing, net
Total accruing loans		7,690			2,321			5,094			208			1,666
Total impaired loans	$	9,700		$	5,707		$	7,066		$	1,654		$	3,658
Ratio:
Impaired loans as a percentage of loans, net		2.38	%		1.47	%		1.85	%		0.46	%		1.13	%

At December 31, 2006 and 2005, we had a recorded investment in impaired loans of $9,700 and $5,707. The recorded investment in impaired loans averaged $8,841 in 2006 and $6,285 in 2005. At December 31, 2006, the amount of recorded investment in impaired loans for which there was a related allowance for loan losses was $8,017. The amount of the corresponding allowance was $2,410. Comparatively, the amount of these loans and their related allowance was $3,844 and $2,206 at December 31, 2005. The amount of recorded investment for which there was no related allowance for loan losses was $1,683 and $1,863 at December 31, 2006 and

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2005. During 2006, activity in the allowance for loan losses account related to impaired loans included a provision charged to operations of $662 and losses charged to the allowance of $458. There were no recoveries of impaired loans previously charged-off in 2006. The 2005 activity in the allowance for loan losses account related to impaired loans included a provision charged to operations of $1,337, losses charged to the allowance of $318 and recoveries of impaired loans previously charged-off of $8. Interest income related to impaired loans would have been $703 in 2006 and $434 in 2005, had the loans been current and the terms of the loans not been modified. Interest recognized on impaired loans amounted to $693 in 2006 and $337 in 2005. Included in these amounts was interest recognized on a cash basis of $693 and $337. Cash received on impaired loans, applied as a reduction of principal, totaled $1,445 in 2006 and $5,543 in 2005. At December 31, 2006, we had a $465 commitment to one commercial customer with impaired loans. The commitment involved a bridge loan to be paid off within 90 days by guaranteed funds from governmental agencies. There were no commitments to extend additional funds to customers with impaired loans at December 31, 2005.

A reconciliation of the allowance for loan losses and an illustration of charge-offs and recoveries by major loan category for the past five years are summarized as follows:

Reconciliation of allowance for loan losses

December 31	2006			2005			2004			2003			2002
Allowance for loan losses at beginning of period	$	4,128		$	3,859		$	3,584		$	3,745		$	3,220
Loans charged-off:
Commercial, financial and others		136			16			45			94			167
Real estate:
Construction
Mortgage		267			273			125			415			222
Consumer, net		314			297			312			244			317
Lease financing, net														3
Total		717			586			482			753			709
Loans recovered:
Commercial, financial and others		12			1			27			29			31
Real estate:
Construction
Mortgage		4			13			19			19			11
Consumer, net		118			59			111			64			92
Lease financing, net
Total		134			73			157			112			134
Net loans charged-off		583			513			325			641			575
Provision for loan losses		890			782			600			480			1,100
Allowance for loan losses at end of period	$	4,435		$	4,128		$	3,859		$	3,584		$	3,745
Ratios:
Net loans charged-off as a percentage of average loans outstanding		0.14	%		0.13	%		0.09	%		0.18	%		0.18	%
Allowance for loan losses as a percentage of period end loans		1.09	%		1.06	%		1.01	%		1.00	%		1.16	%

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The allowance for loan losses equaled $4,435 and 1.09 percent of loans, net of unearned income, at December 31, 2006, compared to $4,128 and 1.06 percent at December 31, 2005. The $307 increase resulted from the provision for loan losses exceeding net charge-offs.

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 loans charged-off were $583 or 0.14 percent of average loans outstanding in 2006, an increase of $70 or 13.6 percent from $513 or 0.13 percent of average loans outstanding in 2005. For our peer group, a group of 413 bank holding companies located within the Federal Reserve District of Philadelphia with consolidated assets between $500.0 million and $1.0 billion, net charge-offs, as a percentage of average loans outstanding, improved to 0.11 percent in 2006 from 0.12 percent in 2005.

The allocation of the allowance for loan losses for the past five years is summarized as follows:

Allocation of the allowance for loan losses

	2006					2005					2004					2003					2002
			Category					Category					Category					Category					Category
			as a					as a					as a					as a					as a
			% of					% of					% of					% of					% of
December 31	Amount		loans			Amount		loans			Amount		loans			Amount		loans			Amount		loans
Allocated allowance:
Specific:
Commercial, financial and others	$	1,000		0.58	%	$	1,549		0.57	%	$	728		1.24	%	$	237		0.09	%	$	597		0.44	%
Real estate:
Construction
Mortgage		1,296		1.76			532		0.86			451		0.61			124		0.36			173		0.53
Consumer, net		114		0.03			125		0.04								16		0.01			107		0.16
Lease financing, net
Total specific		2,410		2.37			2,206		1.47			1,179		1.85			377		0.46			877		1.13
Formula:
Commercial, financial and others		120		34.66			123		34.76			149		28.71			237		28.05			367		27.61
Real estate:
Construction				1.35					0.66					1.76					0.83					1.67
Mortgage		520		53.55			472		55.20			878		59.79			974		61.84			2,071		59.12
Consumer, net		374		7.70			360		7.48			288		7.31			316		8.29			419		9.92
Lease financing, net				0.37					0.43			1		0.58			1		0.53					0.55
Total formula		1,014		97.63			955		98.53			1,316		98.15			1,528		99.54			2,857		98.87
Total allocated allowance		3,424		100.00	%		3,161		100.00	%		2,495		100.00	%		1,905		100.00	%		3,734		100.00	%
Unallocated allowance		1,011					967					1,364					1,679					11
Total	$	4,435				$	4,128				$	3,859				$	3,584				$	3,745

The allocated element of the allowance for loan losses account increased $263 to $3,424 at December 31, 2006, compared to $3,161 at December 31, 2005. The addition to the allowance resulted from increases of $204 in the specific portion for the impairment of loans individually evaluated under

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SFAS No. 114 and $59 in the formula portion for the impairment of loans collectively evaluated under SFAS No. 5. The increase in the specific portion primarily resulted from the greater amount of impaired loans which were collateral deficient, having a recorded investment which exceeded their respective collateral value, at December 31, 2006. Impaired loans with a recorded investment in excess of their fair value amounted to $8,017 at year-end 2006 compared to $3,844 at the end of the previous year. For these loans, the amount by which the recorded investment exceeded the fair market value was $2,410 at December 31, 2006, compared to $2,206 at the end of 2005.

With regard to the formula portion, the increase primarily resulted from an increase in the total loss factor for mortgage loans collectively evaluated for impairment under SFAS No. 5 due to a higher historical loss factor. The historical loss factor is the average of actual net charge-offs by loan classification for the preceding eight quarters. Net charge-off levels for the prior eight quarters ended December 31, 2006, increased in comparison to the prior eight quarters ended December 31, 2005.

The unallocated element was $1,011 at December 31, 2006, and $967 at December 31, 2005. As is inherent with all estimates, the allowance for loan losses methodology is subject to a certain level of imprecision as it provides reasonable, but not absolute, assurance that the allowance will be able to absorb probable losses, in their entirety, as of the financial statement date. Factors, among others, including judgments made in identifying those loans considered impaired, appraisals of collateral values and measurements of certain qualitative factors, all cause this imprecision and support the establishment of the unallocated element. We believe the unallocated element is sufficient to cover any inherent losses in the loan portfolio that have not been identified as part of the allocated element at December 31, 2006.

The coverage ratio, the allowance for loan losses account, 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. This ratio improved to 192.7 percent at December 31, 2006, from 105.0 percent at December 31, 2005. The decrease in the volume of nonaccrual loans was the predominant factor causing the improvement. We believe that our allowance account was more than adequate to absorb all potential losses associated with nonperforming loans at December 31, 2006. With regard to all nonperforming assets, our allowance was able to cover 167.1 percent at the end of 2006, compared to 96.1 percent at year-end 2005.

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Deposits:

DPI in the United States of America, boosted by strong wage and salary gains, rose 3.1 percent in 2006. Due to further wealth appreciation, consumers continued to increase spending above their disposable income. Although home price appreciation, the driving force of increased wealth in recent years, slowed significantly in 2006, the value of equity portfolios grew solidly and counteracted the effect of declining home values. This propensity to spend forced the savings rate to be negative for the second consecutive year. The savings rate was negative 1.1 percent in 2006 and negative 0.4 percent in 2005.

The negative savings rate and stronger equity markets did not appear to materially affect deposit growth for FDIC-insured commercial banks in 2006. Total deposits grew $658.3 billion or 10.8 percent in 2006 after growing $480.2 billion or 8.6 percent in 2005. Interest-bearing deposits increased $645.5 billion or 13.3 percent, while noninterest-bearing deposits rose $12.8 billion or 1.1 percent. FDIC-insured Pennsylvania banks also experienced deposit growth, but to a lesser extent. Total deposits for these institutions rose only $4.7 billion or 2.6 percent in 2006 compared to $35.7 billion or 24.7 percent in 2005.

Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual and commercial customers. We experienced a reduction in demand for our deposit products in 2006. However, we were able to experience modest success in building commercial deposit relationships within our market area, as nonpersonal deposit accounts grew $7.0 million or 4.5 percent. This increase in commercial deposits partially offset a $15.0 million or 4.5 percent decrease in personal deposits. The growth in business accounts resulted from increases of $4.8 million or 4.6 percent in interest-bearing transaction accounts, which include money market, NOW and savings accounts, and $6.6 million or 60.3 percent in time deposits. Partially offsetting these increases were declines in total commercial noninterest-bearing accounts of $4.4 million. With regard to personal deposits, the greatest factors influencing the change were decreases of $13.7 million or 13.4 percent in interest-bearing transaction accounts and $3.3 million or 1.7 percent in total time deposits. These declines were partially offset by an increase in noninterest-bearing deposits of $2.0 million.

Overall, total deposits declined $8.0 million or 1.6 percent to $483.4 million at December 31, 2006, from $491.4 million at the end of 2005. Total deposits grew $12.9 million or 2.7 percent in 2005. Noninterest-bearing deposits declined $2.4 million or 3.1 percent from the end of 2005, while interest-bearing deposits decreased $5.6 million or 1.3 percent.

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(Dollars in thousands, except per share data)

The average amount of, and the rate paid on, the major classifications of deposits for the past five years are summarized as follows:

Deposit distribution

	2006					2005					2004					2003					2002
	Average		Average			Average		Average			Average		Average			Average		Average			Average		Average
Year Ended December 31	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
Interest-bearing:
Money market accounts	$	30,220		2.58	%	$	24,694		1.56	%	$	20,098		1.06	%	$	16,494		1.03	%	$	19,073		1.92	%
NOW accounts		60,814		2.40			54,354		1.66			42,480		1.00			38,600		0.90			38,125		1.37
Savings accounts		109,588		1.32			120,550		0.93			129,564		0.76			127,975		1.03			108,137		1.88
Time deposits less than $100		187,385		4.05			180,457		3.65			180,044		3.68			185,873		3.88			185,508		4.44
Time deposits $100 or more		24,599		4.38			28,484		3.52			29,488		3.31			27,755		3.30			27,861		3.79
Total interest-bearing		412,606		2.99	%		408,539		2.45	%		401,674		2.30	%		396,697		2.51	%		378,704		3.23	%
Noninterest-bearing		71,853					71,606					63,954					56,743					49,441
Total deposits	$	484,459				$	480,145				$	465,628				$	453,440				$	428,145

Total deposits averaged $484.5 million in 2006, an increase of $4.4 million compared to $480.1 million in 2005. Average noninterest-bearing deposits increased slightly compared to the previous year, while average interest-bearing accounts grew $4.1 million. Average money market and NOW accounts growing $5.5 million and $6.5 million in 2006 were responsible for the increase in nonpersonal accounts. Disintermediation of deposits, due to higher yield offerings on short-term certificates of deposit, resulted in a $10.9 million decline in average savings accounts. Time deposits averaged $3.0 million higher, as depositors took advantage of short-term promotional rates.

In an environment characterized by relatively stable interest rates and an inverted yield curve, the average funding costs for FDIC-insured commercial banks increased dramatically in 2006. For these institutions, the cost of funding earning assets rose 94 basis points. Large commercial banks with asset sizes greater than ours experienced the greatest impact, as funding costs for FDIC-insured commercial banks with assets between $1.0 billion and $10.0 billion rose 111 basis points. Funding costs for Pennsylvania banks increased 83 basis points comparing 2006 and 2005.

We regularly monitor interest rates of local competitors and prevailing market rates when setting interest rates on our deposit products. Given the FOMC’s four additional 25-basis-point increases in the federal funds target rate during the first half of the year and the inverted yield curve, price competition in our market area for short-term certificates of deposit elevated during 2006. As a result, deposit costs for banks in our market area, rose gradually over the first six months in response to the FOMC policy initiatives. Certificate of deposit costs stabilized during the second half of 2006, as the FOMC chose to keep the federal funds target rate status quo based on economic data that was lower than expected. For community banks in our market area, the average rate paid for a 6-month

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certificate rose 69 basis points during the first half of the year, from 2.85 percent at January 1, 2006, to 3.54 percent at June 30, 2006. At year-end, the average rate for this deposit product was 3.56 percent, only 2 basis points higher. Similarly, the average rate paid for the 12-month and 24-month certificates increased 54 basis points and 47 basis points from January 1, 2006, to mid-year and then remained relatively unchanged through year-end. In order to further compete for deposits, banks in our market area relied heavily on short-term, promotional-rate certificates having odd-term maturities. Specifically, banks offered 5-month, 7-month and 9-month maturity terms with interest rates in excess of 5.00 percent.

Due to a favorable liquidity position for much of the year, we were not forced to aggressively compete for deposits by making a unilateral increase along all deposit types and maturities. However, being a community bank, we wanted to retain our current customer base and maintain market share. We continued to offer a 13-month, non-renewable certificate of deposit at a promotional rate as an alternative to raising the rates paid on all of our certificate of deposit products. On January 1, 2006, the rate paid for this certificate was 3.70 percent. Corresponding to the rise in short-term rates during the first half of the year, we increased the rate paid for this product a total of 130 basis points to 5.00 percent at June 30, 2006. The composition of our deposit structure continued to evolve as a result of this product offering. Customers continued to move balances from savings accounts and longer-term certificates of deposit as they came due. In 2006, personal 13-month certificates of deposit increased approximately $14.0 million, which partially offset declines of $9.8 million in personal savings accounts and $17.3 million in personal certificates of deposit having different maturity terms.

Although our deposit costs in 2006 continued to increase in comparison to the previous year, the increase was significantly less than the increase experienced for the banking industry. Our cost of deposits rose 54 basis points to 2.99 percent in 2006, from 2.45 percent in 2005. Our cost of deposits averaged 2.75 percent in the first quarter, 15 basis points higher than the 2.60 percent in the fourth quarter of 2005. Deposit costs continued to rise steadily over the course of the year, increasing another 15 basis points to 2.90 percent in the second quarter, 20 basis points to 3.10 percent in the third quarter, and finally, 12 basis points to 3.22 percent in the fourth quarter. In addition to the aforementioned promotional rate certificate of deposit products, nonpersonal interest-bearing transaction accounts caused the greatest pressure on our rising cost of funds. A large portion of these transaction accounts are tied to the three-month U.S. Treasury, which increased 94 basis points from 4.08 percent at December 31, 2005, to 5.02 percent at year-end 2006. The FOMC has not changed short-term interest rates since the end of the second quarter of 2006 and indicated future policy initiatives would be based on

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incoming economic data. Despite the stability of the rate environment, competition for deposits remains intense. We may be able to continue to mitigate the effects of this pressure as we expect our liquidity position to remain favorable with a significant portion of our investment portfolio coming due within the next 12 months.

Short-term promotional rate offerings resulted in a $12.3 million increase in volatile deposits, time deposits $100 or more, to $35.9 million at December 31, 2006, from $23.6 million at the end of 2005. Large denomination time deposits averaged $24.6 million in 2006 and $28.5 million in 2005. Our average cost of these funds increased 86 basis points to 4.38 percent in 2006, from 3.52 percent in 2005, due to higher interest rates. This type of funding is very volatile and therefore, is not considered to be a strong source of liquidity. We continued to be less reliant on this type of funding as compared to our peer group. Our ratio of average volatile deposits, as a percentage of average total assets, equaled 4.5 percent in 2006, compared to 16.1 percent for our peer group.

Maturities of time deposits $100 or more for the past five years are summarized as follows:

Maturity distribution of time deposits $100 or more

December 31	2006		2005		2004		2003		2002
Within three months	$	5,307	$	3,964	$	7,353	$	4,414	$	3,020
After three months but within six months		6,923		2,547		4,426		4,845		3,333
After six months but within twelve months		13,136		4,238		6,198		3,861		8,230
After twelve months		10,554		12,830		16,515		15,969		9,961
Total	$	35,920	$	23,579	$	34,492	$	29,089	$	24,544

In addition to deposit gathering, we have in place a secondary source of liquidity to fund operations through exercising existing credit arrangements with the FHLB-Pgh. We had only minimal reliance on this type of funding in 2006 and 2005. For a further discussion of our borrowings and their terms, refer to the note entitled, “Short-term borrowings,” in the Notes to Consolidated Financial Statements to this Annual Report.

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

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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.

Short-term interest rates continued to increase during the first half of 2006 in response to monetary policy tightening by the FOMC. In addition, IRR management became very difficult due to an inverted yield curve. Due to this interest rate environment, IRR and effectively managing it, are extremely critical 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 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”), rate sensitive liabilities (“RSL”) and overall operating results and financial position.

We utilize the tabular presentation alternative in complying with quantitative and qualitative disclosure rules. Information with respect to maturities and fair values of our financial instruments at December 31, 2006, is summarized as follows. For expected maturity distributions, the financial assets and liabilities are presented based on their carrying values, except for investment securities, which are based on amortized costs. Investment distributions and their related weighted-

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average interest rates are based on contractual maturities, with the exception of mortgage-backed securities and equity securities. Mortgage-backed securities are presented based upon estimated principal cash flows and related weighted-average interest rates, assuming no change in the current interest rate environment. The amount of, and weighted-average interest rate earned on, equity securities are included in the “Thereafter” maturity category. Loans and their related weighted-average interest rates are categorized based on payment due dates, assuming no change in current interest rates. For noninterest-bearing deposits, money market, NOW and savings accounts that have no contractual maturity, principal cash flows and related weighted-average interest rates are presented based on our historical experience, judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. The table also presents distributions and related weighted-average interest rates for time deposits based on contractual maturities assuming no change in current interest rates. The weighted-average yields of tax-exempt securities and loans have been computed on a tax-equivalent basis using the prevailing federal statutory tax rate of 34.0 percent. For additional information on the assumptions used to determine fair values, refer to the note entitled, “Summary of significant accounting policies-Fair value of financial instruments,” in the Notes to Consolidated Financial Statements to this Annual Report.

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Market risk disclosures

	Expected Maturity Date
																There-						Fair
	2007			2008			2009			2010			2011			after			Total			Value
Financial assets:
Cash and due from banks	$	25,584																	$	25,584		$	25,584
Average interest rate
Federal funds sold		2,050																		2,050			2,050
Average interest rate		5.25	%																	5.25	%
Investment securities:
U.S. Treasuries and agencies		39,258																		39,258			39,201
Average interest rate		5.04	%																	5.04	%
State and municipals:
Taxable		6,878		$	5,261															12,139			11,912
Average interest rate		3.15	%		2.77	%														2.99	%
Tax-exempt		190					$	1,449		$	2,042		$	1,630		$	24,012			29,323			30,956
Average interest rate		4.02	%					7.86	%		7.78	%		7.92	%		7.55	%		7.58	%
Mortgage-backed securities		5,895			906			527			338			49			84			7,799			7,760
Average interest rate		5.36	%		4.44	%		4.51	%		4.55	%		6.29	%		6.27	%		5.18	%
Equity securities:
Restricted																	1,206			1,206			1,206
Average interest rate																	5.23	%		5.23	%
Other																	38			38			178
Average interest rate																	12.94	%		12.94	%
Total		52,221			6,167			1,976			2,380			1,679			25,340			89,763			91,213
Average interest rate		4.82	%		3.02	%		6.97	%		7.32	%		7.87	%		7.44	%		5.61	%
Loans held for sale, net		572																		572			579
Average interest rate		6.51	%																	6.51	%
Net loans:
Fixed-rate		28,408			21,072			18,939			17,727			16,679			62,748			165,573			161,562
Average interest rate		6.95	%		6.63	%		6.93	%		6.82	%		6.80	%		6.75	%		6.80	%
Adjustable-rate		58,118			18,939			21,592			16,673			17,147			105,597			238,066			233,683
Average interest rate		8.46	%		7.62	%		7.75	%		7.31	%		7.72	%		7.67	%		7.85	%
Total		86,526			40,011			40,531			34,400			33,826			168,345			403,639			395,245
Average interest rate		7.96	%		7.10	%		7.37	%		7.06	%		7.27	%		7.33	%		7.42	%
Mortgage servicing rights		676																		676			676
Average interest rate
Accrued interest receivable		2,863																		2,863			2,863
Average interest rate
Total	$	170,492		$	46,178		$	42,507		$	36,780		$	35,505		$	193,685		$	525,147		$	518,210
Financial liabilities:
Noninterest-bearing deposits	$	15,342		$	13,881		$	12,419		$	10,958		$	9,497		$	10,958		$	73,055		$	73,055
Average interest rate
Interest-bearing liabilities:
Money market, NOW and savings		41,596			37,635			33,673			29,712			25,750			29,712			198,078			198,078
Average interest rate		2.07	%		2.07	%		2.07	%		2.07	%		2.07	%		2.07	%		2.07	%
Time deposits		121,880			33,318			7,962			22,753			9,618			16,778			212,309			212,361
Average interest rate		4.38	%		4.30	%		3.79	%		4.43	%		4.37	%		4.73	%		4.38	%
Total		163,476			70,953			41,635			52,465			35,368			46,490			410,387			410,439
Average interest rate		3.79	%		3.12	%		2.40	%		3.09	%		2.70	%		3.03	%		3.26	%
Accrued interest payable		1,106																		1,106			1,106
Average interest rate
Total	$	179,924		$	84,834		$	54,054		$	63,423		$	44,865		$	57,448		$	484,548		$	484,600

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At December 31, 2006, total interest-earning assets scheduled to mature within one year totaled $141.4 million with a weighted-average tax-equivalent yield of 6.75 percent. Total interest-bearing liabilities scheduled to mature within one year equaled $163.5 million with a weighted-average cost of 3.79 percent. Interest-earning assets scheduled to mature within one year were primarily comprised of investment securities having an amortized cost of $52.2 million and a weighted-average tax-equivalent yield of 4.82 percent and net loans of $86.5 million with a weighted-average tax-equivalent yield of 7.96 percent. With regard to interest-bearing liabilities, based on historical withdrawal patterns, interest-bearing transaction accounts, defined as money market, NOW and savings accounts, of $41.6 million with a weighted-average cost of 2.07 percent were anticipated to mature within one year. In addition, time deposits totaling $121.9 million with a weighted-average cost of 4.38 percent were scheduled to mature within the same time frame.

Limitations of the market risk disclosure model include, among others, the magnitude, timing and frequency of interest rate changes of other financial assets and liabilities. Historical withdrawal patterns with respect to interest-bearing and noninterest-bearing transaction accounts are not necessarily indicative of future performance. In addition, loan information is presented based on payment due dates, which may materially differ from actual results. Both historical withdrawal patterns and loan payment information may be affected by changes in interest rates, sociological conditions, demographics and economic climate.

Maturity distributions and fair values are primarily based on contractual maturities or payment due dates and do not consider repricing frequencies for adjustable-rate assets and liabilities. The table does not include maturity distribution and fair value information on certain assets and liabilities which are not considered financial, and does not anticipate future business activity. Actual results will, more likely than not, differ from results presented in the table.

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Additionally, we supplement the market risk disclosure model through simulation analysis utilizing interest rate shocks. The model analyzes the effects instantaneous parallel shifts of plus or minus 100 basis points will have on the economic values of other financial instruments. The results of the model at December 31, 2006, are summarized as follows:

Changes in fair value of financial instruments

	Fair Value
December 31, 2006	+100 BPS		Level		-100 BPS
Financial assets:
Cash and due from banks	$	25,584	$	25,584	$	25,584
Federal funds sold		2,050		2,050		2,050
Investment securities		89,723		91,213		92,599
Loans held for sale, net		579		579		579
Net loans		390,403		395,245		400,168
Mortgage servicing rights		676		676		676
Accrued interest receivable		2,863		2,863		2,863
Total	$	511,878	$	518,210	$	524,519
Financial liabilities:
Noninterest-bearing deposits	$	73,055	$	73,055	$	73,055
Money market, NOW and savings accounts		198,078		198,078		198,078
Time deposits		209,239		212,361		215,619
Accrued interest payable		1,106		1,106		1,106
Total	$	481,478	$	484,600	$	487,858

For a discussion of the recent SFAS issued by the FASB related to the fair value of financial instruments, refer to the note entitled, “Summary of significant accounting policies-Fair value of financial instruments,” in the Notes to Consolidated Financial Statements to this Annual Report.

We also utilize a gap analysis model that considers repricing frequencies of RSA and RSL in addition to maturity distributions 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.

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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. Adjustable-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
December 31, 2006	three months		twelve months			five years		five years		Total
Rate-sensitive assets:
Investment securities	$	17,773	$	34,302		$	12,239	$	26,899	$	91,213
Loans held for sale, net		572									572
Loans, net of unearned income		118,326		70,354			154,346		65,048		408,074
Federal funds sold		2,050									2,050
Total	$	138,721	$	104,656		$	166,585	$	91,947	$	501,909
Rate-sensitive liabilities:
Money market accounts	$	23,986	$	7,478						$	31,464
NOW accounts		52,443		14,830							67,273
Savings accounts		6,825				$	92,516				99,341
Time deposits less than $100		18,223		78,291			65,700	$	14,175		176,389
Time deposits $100 or more		5,307		20,059			7,951		2,603		35,920
Total	$	106,784	$	120,658		$	166,167	$	16,778	$	410,387
Rate-sensitivity gap:
Period	$	31,937	$	(16,002	)	$	418	$	75,169
Cumulative	$	31,937	$	15,935		$	16,353	$	91,522	$	91,522
RSA/RSL ratio:
Period		1.30		0.87			1.00		5.48
Cumulative		1.30		1.07			1.04		1.22		1.22

Our cumulative one-year RSA/RSL ratio was 1.07 at December 31, 2006, which was a decrease from 1.21 at the end of 2005. Given the change in the FOMC’s policy stance during the latter part of 2006, ALCO attempted to reduce its positive gap position to provide a better balance between repricing RSA and RSL. With regard to RSA, we predominantly offered commercial loans with adjustable-rate terms that either reprice immediately or within one year. RSL were more difficult to manage given the current rate environment characterized by an inverted yield curve. However, we benefitted from a favorable liquidity position in 2006, which allowed us to maintain our core deposit base without having to aggressively compete for new deposits. Given our current position, if interest rates begin to rise as was experienced in the early part of 2006, a greater amount of RSA would reprice upward in the near term and at a faster pace than RSL, thereby positively affecting net interest income. However, these forward-looking statements are qualified in

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the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

The reduction in our ratio from the previous year-end resulted from a $29.2 million or 14.7 percent increase in RSL partially offset by a $3.8 million or 1.6 percent increase in RSA maturing or repricing within one year. The increase in RSL resulted primarily from a $27.9 million increase in total time deposits maturing or repricing within 12 months. During the first quarter of 2005, we began offering a 13-month certificate of deposit. These non-renewable certificates began maturing during the second quarter of 2006. As a result, the amount of total time deposits maturing after three months but within twelve months increased $26.7 million or 37.2 percent.

With respect to the increase in RSA maturing or repricing within a 12-month time horizon, loans, net of unearned income, rose $9.2 million, while investment securities increased $5.9 million. The increase in loans, net of unearned income, resulted from an increase in commercial lending, which involved loans with adjustable rates that reprice in the near term. With regard to the investment portfolio, given the flattened yield curve, the majority of securities purchased were fixed-rate, short- term U.S. Government-sponsored agency securities. These increases were partially offset by reductions in federal funds sold of $9.9 million and loans held for sale, net, of $1.4 million.

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 personal money market and NOW accounts to the “Due after three months but within twelve months” repricing interval. In reality, these accounts may reprice less frequently and in different magnitudes than changes in general market interest rate levels.

We utilize a simulation model to address the failure of the static gap model to address the dynamic changes in the balance sheet composition or prevailing interest rates and to enhance our asset/liability management. This model creates pro forma net interest income scenarios under various interest rate shocks. Model results at December 31, 2006, were similar to the performance indicated by our static gap analysis. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending December 31, 2007,

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would increase 0.9 percent from model results using current interest rates. Conversely, our net interest income would decrease by 1.2 percent given an instantaneous and parallel shift in general market rates of minus 100 basis points.

We will continue to monitor our IRR position in 2007 and employ deposit and loan pricing strategies and direct the reinvestment of loan and investment payments and prepayments in order to maintain our favorable IRR position.

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 our asset/liability management program.

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.

Our liquidity position is impacted by several factors which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, demand for core deposits and certificate of deposit maturity structure and retention. We manage these liquidity risks daily, thus enabling us to effectively monitor fluctuations in our position and to adapt our position according to market influence and balance sheet trends. We also forecast future liquidity needs and develop strategies to ensure adequate liquidity at all times.

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. As a final source of liquidity, we can exercise existing credit arrangements with the FHLB-Pgh.

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We believe our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

Information concerning our future contractual obligations by payment due dates at December 31, 2006, is summarized as follows. Contractual obligations for deposit accounts do not include accrued interest. Payments for deposits without a contractual maturity, noninterest-bearing deposits and money market, NOW and savings accounts, are based on our historical experience, judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. Operating lease contractual payments include the effects of escalation clauses that provide for inflation adjustments to the rental payments.

Maturity distribution of contractual obligations

			After one		After three
	Due within		but within		but within		After
December 31, 2006	one year		three years		five years		five years		Total
Deposits without a contractual maturity	$	56,938	$	97,608	$	75,917	$	40,670	$	271,133
Time deposits less than $100		96,514		35,739		29,961		14,175		176,389
Time deposits $100 or more		25,366		5,541		2,410		2,603		35,920
Operating leases		194		333		238		469		1,234
Total	$	179,012	$	139,221	$	108,526	$	57,917	$	484,676

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to illustrate our reliance on noncore funds, time deposits in denominations of $100 or more and borrowings from the FHLB-Pgh, to fund our investments and loans maturing after 2007. At December 31, 2006, our noncore funds consisted of only large denomination time deposits, as we had no outstanding borrowings from the FHLB-Pgh. Large denomination time deposits are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At December 31, 2006, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was negative 4.1 percent. Similarly, our net short-term noncore funding dependence ratio, noncore funds maturing within one year, less short-term investments to long-term assets equaled negative 6.5 percent. Negative ratios indicated that at December 31, 2006, we did not use noncore funds to fund our long-term assets. In comparison, our peer group, with net noncore and net short-term noncore funding dependence ratios of 24.2 percent and 15.0 percent, relied on noncore funds as a significant source of liquidity. We believe that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, we can ensure adequate liquidity to support future growth.

The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of

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(Dollars in thousands, except per share data)

collection, noninterest-bearing deposits with other banks, balances with the Federal Reserve Bank of Philadelphia and the FHLB-Pgh and federal funds sold. Cash and cash equivalents decreased $7.8 million for the year ended December 31, 2006. For the year ended December 31, 2005, cash and cash equivalents increased by $22.7 million. During 2006, cash provided by operating activities was more than offset by cash used in financing and investing activities.

Net cash provided by operating activities was $9.7 million in 2006 and $7.8 million in 2005. Net income, adjusted for the effects of noncash transactions such as depreciation and the provision for loan losses, and net changes in current assets, is the primary source of funds from operations. The increase in net cash provided by operating activities resulted from higher net income, coupled with a decrease in loans held for sale, net.

Net cash used in financing activities equaled $9.8 million in 2006. Contrarily, financing activities provided net cash of $10.6 million in 2005. Deposit gathering, which is our predominant financing activity, slowed in 2006 as compared to 2005. The decrease in total deposits resulted in a net cash outflow of $8.0 million. Deposit gathering provided a net cash inflow in 2005 of $12.9 million. Another source of funds generated by financing activities is the proceeds received from the issuance of common stock as part of our dividend reinvestment plan (“DRP”). Uses of cash categorized as financing activities include the repurchase and retirement of shares of our common stock and the payment of dividends to stockholders.

Our primary investing activities involve transactions relative to our investment and loan portfolios. Net cash used in investing activities totaled $7.7 million in 2006. In 2005, investing activities provided us with net cash of $4.3 million. The change resulted primarily from a $13.0 million increase in cash used in lending activities to $21.0 million in 2006 from $8.0 million in 2005. Our investment portfolio provided us with net cash of $13.7 million in 2006 and $12.2 million in 2005. Repayments of investment securities amounted to $51.6 million in 2006 and $46.2 million in 2005, which were partially offset by purchases of investment securities of $37.9 million in 2006 and $34.0 million in 2005.

Interest rates are expected to remain at their current levels in the first half of 2007. As a result, deposit growth could continue to stagnate. We have strategically structured the maturity schedule of our investment portfolio to provide a secondary source of liquidity to supplement deposit growth. Although we cannot predict how changes in interest rates and competition will affect our liquidity, we believe that through constant monitoring and adherence to our liquidity plan, we will have the means to provide adequate cash to fund our normal operations in 2007.

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

Capital Adequacy:

We believe a strong capital position is essential to our continued growth and profitability. We maintain a relatively high level of capital to provide our depositors and stockholders with a margin of safety. In addition, a strong capital base allows us to take advantage of profitable opportunities, support future growth and provide protection against any unforeseen losses.

Our ALCO continually reviews our capital position. As part of its review, the ALCO considers:

• The current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;

• The market value of our securities and the resulting effect on capital;

• Any planned asset growth;

• The anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates; and

• The source and timing of additional funds to fulfill future capital requirements.

Stockholders’ equity amounted to $54.1 million or $29.27 per share at December 31, 2006, compared to $49.7 million or $26.86 per share at December 31, 2005. Net income of $6.4 million was the primary factor contributing to the $4.4 million or 8.9 percent improvement. Also, affecting stockholders’ equity in 2006 were net cash dividends declared and common stock repurchases.

We declared dividends totaling $1,853 or $1.00 per share in 2006, compared to $1,711 or $0.92 per share in 2005. The dividend payout ratio, dividends declared as a percent of net income, equaled 29.2 percent in 2006 and 32.8 percent in 2005. Our Board of Directors intends to continue to pay cash dividends in the future. However, they consider our operating results, financial and economic conditions, capital and growth objectives, appropriate dividend restrictions and other relevant factors when declaring dividends. We rely on dividends received from our subsidiary, Community Bank, for payment of dividends to stockholders. Community Bank’s ability to pay dividends is subject to federal and state regulations. Accordingly,

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(Dollars in thousands, except per share data)

Community Bank, without prior regulatory approval, may declare dividends to us totaling $8,167 at December 31, 2006.

Stockholders may automatically reinvest their dividends in shares of our common stock through our DRP. The DRP not only provides stockholders with a convenient means to invest in our common stock without brokerage commissions, but also furnishes us with additional funds for general corporate purposes. Shares issued under the DRP amounted to 7,373 in 2006 and 6,357 in 2005.

We periodically purchase shares of our common stock under a Board-approved stock repurchase program. Under this program, we repurchased and retired 8,840 shares for $0.4 million in 2006, 20,594 shares for $0.8 million in 2005 and 48,365 shares for $2.0 million in 2004. As of December 31, 2006, there were 38,374 shares available for repurchase under this program.

Our Board of Directors continually monitors our capital position and evaluates strategies to better serve the financial interests of our stockholders. On March 19, 2007, our Board of Directors approved a modified “Dutch Auction” tender offer to repurchase up to 110,000 shares of our outstanding common stock at a price between $46.00 and $52.00 per share. This tender offer commenced on March 19, 2007, and expires on April 13, 2007, unless extended. We believe this Dutch Auction will increase stockholder value for those choosing to retain their holdings in our common stock, and will allow stockholders who wish to sell their shares a chance to do so without incurring fees or negatively impacting the stock price.

Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies, in light of past bank failures, adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. For a further discussion of these risk-based capital standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements to this Annual Report.

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

Our and Community Bank’s capital ratios at December 31, 2006 and 2005, 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
December 31	2006			2005			2006			2005			2006			2005
Basis for ratios:
Tier I capital to risk-weighted assets:
Consolidated	$	52,745		$	48,308		$	16,881		$	16,113
Community Bank		50,827			46,229			16,851			16,076		$	25,277		$	24,114
Total capital to risk-weighted assets:
Consolidated		57,180			52,436			33,763			32,227
Community Bank		55,262			50,357			33,703			32,152			42,128			40,190
Tier I capital to total average assets less intangible assets:
Consolidated		52,745			48,308			21,670			21,373
Community Bank		50,827			46,229		$	21,631		$	21,343		$	27,039		$	26,679
Risk-weighted assets:
Consolidated		408,540			389,044
Community Bank		407,785			388,108
Risk-weighted off-balance sheet items:
Consolidated		13,497			13,789
Community Bank		13,497			13,789
Average assets for Leverage ratio:
Consolidated		541,760			534,314
Community Bank	$	540,783		$	533,570
Ratios:
Tier I capital as a percentage of risk- weighted assets and off-balance sheet items:
Consolidated		12.5	%		12.0	%		4.0	%		4.0	%
Community Bank		12.1			11.5			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		13.5			13.0			8.0			8.0
Community Bank		13.1			12.5			8.0			8.0			10.0			10.0
Tier I capital as a percentage of total average assets less intangible assets:
Consolidated		9.7			9.0			4.0			4.0
Community Bank		9.4	%		8.7	%		4.0	%		4.0	%		5.0	%		5.0	%

Our and Community Bank’s risk-based capital ratios are strong and have consistently exceeded the minimum regulatory capital ratios of 4.0 percent and 8.0 percent required for adequately capitalized institutions. Our risk-based capital position at December 31, 2006, improved in comparison to the prior year-end. Due to strong earnings growth our Tier I and Total capital increased at a greater rate than risk-weighted assets and off-balance sheet

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

items. Tier I Capital increased 9.2 percent and Total capital increased 9.0 percent, while risk-weighted assets and off-balance sheet items grew 4.8 percent. As a result, our ratio of Tier I capital to risk-weighted assets and off-balance sheet items improved to 12.5 percent at December 31, 2006, from 12.0 percent at December 31, 2005. Similarly, our Total capital ratio improved to 13.5 percent at year-end 2006, from 13.0 percent at the end of 2005. Community Bank’s Tier I risk-based and Total risk-based capital ratios also improved for reasons similar to those discussed for the consolidated ratios. Our Leverage ratio improved to 9.7 percent at December 31, 2006, from 9.0 percent at December 31, 2005. Community Bank’s Leverage ratio, which was 8.7 percent at the end of 2005, improved to 9.4 percent at year-end 2006. Similar to the Tier I risk-based and Total risk-based capital ratios, the Leverage ratio for us and Community Bank well exceeded the minimum of 4.0 percent for capital adequacy purposes. Based on the most recent notification from the FDIC, Community Bank was categorized as well capitalized under the regulatory framework for prompt corrective action at December 31, 2006 and 2005. There are no conditions or events since this notification that we believe have changed Community Bank’s category.

We anticipate that our risk-based capital ratios will decrease upon the completion of the previously mentioned tender offer. The extent of the decrease will depend on the number of shares repurchased and the agreed upon price per share. Proforma ratios at December 31, 2006, assuming the entire 110,000 shares are repurchased at the maximum purchase price of $52.00 per share, indicate that us and Community Bank would still be considered well capitalized with regulatory capital ratios exceeding the minimum capital requirements.

Review of Financial Performance:

We experienced a successful year in 2006, as evidenced by a $1,140 or 21.9 percent increase in earnings to $6,350 or $3.43 per share from $5,210 or $2.80 per share in 2005. Strong net interest income growth was the major factor leading to the record earnings. Greater operating efficiency also contributed to the favorable earnings growth. ROAA and ROAE improved significantly in comparison to the previous year. ROAA was 1.17 percent for the year ended December 31, 2006, compared to 0.97 percent for the year ended December 31, 2005. ROAE was 12.18 percent in 2006 compared to 10.68 percent in 2005.

Tax-equivalent net interest income rose $2,362 or 12.0 percent in 2006. An increase in the tax-equivalent yield on earning assets over the increase in our cost of funds was the primary factor leading to the increase in net interest income. Also contributing to the increase was growth in earning assets exceeding the growth in interest-bearing liabilities. Our net interest margin equaled 4.28 percent in 2006, a 40 basis point improvement compared to 3.88 percent in 2005.

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

Decreases in net occupancy and equipment expense and other expenses, partially offset by higher salaries and employee benefits expense, contributed to the slight decrease of $68 in noninterest expense. Our productivity improved dramatically as evidenced by the change in the operating efficiency ratio. The operating efficiency ratio, defined as noninterest expense divided by the total of net interest income and noninterest income, is an industry ratio used to measure productivity. Our operating efficiency ratio improved to 61.9 percent in 2006 compared to 67.3 percent in 2005. Our productivity also exceeded that of our peer group, which deteriorated in comparison to the previous year. The operating efficiency ratio for our peer group was 66.6 percent in 2006 compared to 64.3 percent in 2005.

For a discussion of the recent SFAS issued by FASB and Staff Accounting Bulletin issued by the SEC related to Financial Performance, refer to the note entitled, “Summary of significant accounting policies — Accounting changes and error corrections,” in the Notes to Consolidated Financial Statements to this Annual Report.

Net Interest Income:

Net interest income is still the fundamental source of earnings for commercial banks. Moreover, fluctuations in the level of noninterest 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 interest 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 average 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 pretax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more

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(Dollars in thousands, except per share data)

comparable, tax-exempt income and yields are reported on a tax-equivalent basis using the prevailing federal statutory tax rate of 34.0 percent.

The banking industry experienced margin compression for the fourth consecutive year. The net interest margin for FDIC-insured commercial banks decreased 22 basis points to 3.39 percent in 2006 from 3.61 percent in 2005. Average funding costs rose more rapidly than average earning asset yields given the relatively stable rate environment and inverted yield curve. Commercial banks larger than us felt the greatest pressure, as these institutions tend to fund a significant portion of their assets with short-term nondeposit liabilities. The net interest margin for FDIC-insured commercial banks with assets between $1.0 billion and $10.0 billion declined 10 basis points, while the net interest margin for the largest commercial banks compressed 25 basis points. Contrarily, net interest margins for smaller community banks, which obtain most of their funding from core deposits, increased 3 basis points in 2006. Pennsylvania insured banks felt the effects of the inverted yield curve, as borrowing costs rose to a greater degree than yields on average earning assets. Banks in our peer group reported lower net interest margins. For these banks, the net interest margin decreased 9 basis points to 4.02 percent in 2006 from 4.11 percent in 2005.

Similar to all banks, we consider the maintenance of an adequate net interest margin to be of primary concern. The current economic environment has begun to pose problems for the banking industry. A further rise in interest rates, coupled with increased competition for loans and deposits, could adversely affect net interest margins should fund costs continue to rise faster, or to a greater extent, than earning asset yields. No assurance can be given as to how general market conditions will change or how such changes will affect net interest income. Therefore, we believe through prudent deposit-pricing practices and careful investing and conservative loan pricing, our net interest margin will remain strong.

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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 volumes of earning assets and interest-bearing liabilities, have on net interest income are summarized as follows. The net change or mix component, attributable to the combined impact of rate and volume changes within earning assets and interest-bearing liabilities’ categories, 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

	2006 vs. 2005								2005 vs. 2004
	Increase (decrease)								Increase (decrease)
	attributable to								attributable to
	Total								Total
	Change			Rate		Volume			Change			Rate			Volume
Interest income:
Loans:
Taxable	$	4,472		$	2,599	$	1,873		$	1,388		$	671		$	717
Tax-exempt		344			355		(11	)		730			155			575
Investments:
Taxable		75			611		(536	)		33			6			27
Tax-exempt		(101	)		4		(105	)		(23	)		(3	)		(20	)
Federal funds sold		(26	)		98		(124	)		139			200			(61	)
Total interest income		4,764			3,667		1,097			2,267			1,029			1,238
Interest expense:
Money market accounts		395			294		101			172			115			57
NOW accounts		558			441		117			476			334			142
Savings accounts		331			441		(110	)		136			209			(73	)
Time deposits less than $100		1,001			741		260			(46	)		(61	)		15
Time deposits $100 or more		74			223		(149	)		27			61			(34	)
Short-term borrowings		43			68		(25	)		105			2			103
Total interest expense		2,402			2,208		194			870			660			210
Net interest income	$	2,362		$	1,459	$	903		$	1,397		$	369		$	1,028

Tax-equivalent net interest income was favorably affected by both rate and volume variances. An improvement in our net interest spread resulted in additional net interest income of $1,459. In addition, the growth in average earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income of $903.

Overall, tax-equivalent interest revenue rose $4,764 or 16.0 percent in 2006. Our net interest spread widened 27 basis points to 3.69 percent in 2006 from 3.42 percent in 2005. Our tax-equivalent yield on average earning assets increased 83 basis points to 6.70 percent in 2006 from 5.87 percent in 2005, causing a $3,667 increase in interest revenue. Tax-equivalent yields on both the loan and investment portfolios rose significantly in 2006. Specifically, the tax-equivalent yield on the loan portfolio rose 73 basis points to 7.03 percent in 2006 from 6.30 percent in 2005, as adjustable-rate loans continued to reprice upward. The increase in taxable

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

loan yields had the greatest impact on interest revenue. The yield on taxable loans rose 70 basis points and resulted in additional interest revenue of $2,599. The yield on tax-exempt loans increased 93 basis points and resulted in additional interest revenue of $355. In addition, the yield on our investment portfolio rose 82 basis points to 5.21 percent in 2006 from 4.39 percent in 2005, which resulted in an increase to interest revenue of $615. Repayments and maturities of investment securities not used to fund loan demand were subsequently reinvested in securities bearing yields considerably higher than those earned on the matured securities. Furthermore, the average yield on federal funds sold increased 154 basis points and resulted in additional interest revenue of $98.

Partially offsetting the 83 basis point increase in the yield on earning assets, was a 56 basis point rise in our cost of funds to 3.01 percent in 2006 from 2.45 percent in 2005. Due to the increase in the cost of funds, we incurred an additional $2,208 in interest expense. Our cost of funds in 2006 was affected by increases in the three-month U.S. Treasury and promotional certificate of deposit offerings. A significant portion of nonpersonal interest-bearing transaction accounts, which include money market, NOW and savings accounts, are indexed to the three-month U.S. Treasury. This rate rose steadily throughout 2006 and closed the year at 5.02 percent, 94 basis points higher than 4.08 percent at year-end 2005. As a result, our rates paid for money market, NOW and savings accounts increased 102 basis points, 74 basis points and 39 basis points, which collectively resulted in additional interest expense of $1,176. Rates paid for time deposits were impacted by several promotional offerings with 13-month and 24-month maturity terms. As a result, the average rate paid for time deposits less than $100 rose 40 basis points and resulted in additional interest expense of $741. In addition, the average rate paid for time deposits $100 or more increased 86 basis points, which accounted for $223 of additional interest expense.

With regard to volume changes, average earning assets grew $7.8 million to $516.3 million in 2006 from $508.5 million in 2005 and accounted for an additional $1,097 in interest revenue. Average loans, net of unearned income, grew $27.7 million, which resulted in additional interest income of $1,862. Partially offsetting the effect of loan growth was a reduction in interest revenue of $765, which resulted from a decrease in average investments and federal funds sold of $19.9 million. Counteracting the additional interest revenue from growth in earning assets was additional interest expense of $194 due to an increase of $3.3 million in interest-bearing liabilities. Increases in average money market, NOW and time deposits less than $100 were partially offset by decreases in savings accounts, large denomination time deposits and short-term borrowings.

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(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 are summarized as follows. Averages for earning assets 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 prevailing federal statutory tax rate of 34.0 percent.

Summary of net interest income

	2006							2005
			Interest		Average					Interest		Average
	Average		Income/		Interest			Average		Income/		Interest
	Balance		Expense		Rate			Balance		Expense		Rate
ASSETS:
Earning assets:
Loans:
Taxable	$	386,268	$	27,457		7.11	%	$	358,326	$	22,985		6.41	%
Tax-exempt		38,036		2,358		6.20			38,246		2,014		5.27
Investments:
Taxable		56,578		2,276		4.02			72,155		2,201		3.05
Tax-exempt		30,374		2,258		7.43			31,792		2,359		7.42
Federal funds sold		5,064		261		5.15			7,943		287		3.61
Total earning assets		516,320		34,610		6.70	%		508,462		29,846		5.87	%
Less: allowance for loan losses		4,363							4,025
Other assets		30,219							30,299
Total assets	$	542,176						$	534,736
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market accounts	$	30,220		780		2.58	%	$	24,694		385		1.56	%
NOW accounts		60,814		1,459		2.40			54,354		901		1.66
Savings accounts		109,588		1,452		1.32			120,550		1,121		0.93
Time deposits less than $100		187,385		7,587		4.05			180,457		6,586		3.65
Time deposits $100 or more		24,599		1,078		4.38			28,484		1,004		3.52
Short-term borrowings		3,102		149		4.80			3,894		106		2.72
Total interest-bearing liabilities		415,708		12,505		3.01	%		412,433		10,103		2.45	%
Noninterest-bearing deposits		71,853							71,606
Other liabilities		2,476							1,897
Stockholders’ equity		52,139							48,800
Total liabilities and stockholders’ equity	$	542,176						$	534,736
Net interest/income spread			$	22,105		3.69	%			$	19,743		3.42	%
Net interest margin						4.28	%						3.88	%
Tax-equivalent adjustments:
Loans			$	802						$	685
Investments				768							802
Total adjustments			$	1,570						$	1,487

Note: Average balances were calculated using average daily balances. Average balances for loans include nonaccrual loans. Interest income on loans includes fees of $360 in 2006, $541 in 2005, $763 in 2004, $1,030 in 2003 and $812 in 2002. Available-for-sale securities, included in investment securities, are stated at amortized cost with the related average unrealized holding gains of $1,265 in 2006, $1,956 in 2005, $2,839 in 2004, $3,367 in 2003 and $2,614 in 2002 included in other assets. Tax-equivalent adjustments were calculated using the prevailing federal statutory tax rate of 34.0 percent.

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(Dollars in thousands, except per share data)

Summary of net interest income (continued)

2004							2003							2002
		Interest		Average					Interest		Average					Interest		Average
Average		Income/		Interest			Average		Income/		Interest			Average		Income/		Interest
Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate
$	346,990	$	21,597		6.22	%	$	324,705	$	22,228		6.85	%	$	304,849	$	22,811		7.48	%
	27,090		1,284		4.74			21,853		1,181		5.40			13,386		1,043		7.79
	71,274		2,168		3.04			80,520		2,034		2.53			72,155		3,552		4.92
	32,057		2,382		7.43			32,240		2,403		7.45			38,060		2,856		7.50
	10,857		148		1.36			16,116		180		1.12			21,241		348		1.64
	488,268		27,579		5.65	%		475,434		28,026		5.89	%		449,691		30,610		6.81	%
	3,779							3,732							3,488
	31,396							31,160							28,748
$	515,885						$	502,862						$	474,951
$	20,098		213		1.06	%	$	16,494		170		1.03	%	$	19,073		367		1.92	%
	42,480		425		1.00			38,600		348		0.90			38,125		524		1.37
	129,564		985		0.76			127,975		1,322		1.03			108,137		2,030		1.88
	180,044		6,632		3.68			185,873		7,212		3.88			185,508		8,240		4.44
	29,488		977		3.31			27,755		917		3.30			27,861		1,055		3.79
	15		1		2.35			265		3		1.13			8				2.00
	401,689		9,233		2.30	%		396,962		9,972		2.51	%		378,712		12,216		3.23	%
	63,954							56,743							49,441
	2,856							3,207							3,435
	47,386							45,950							43,363
$	515,885						$	502,862						$	474,951
		$	18,346		3.35	%			$	18,054		3.38	%			$	18,394		3.58	%
					3.76	%						3.80	%						4.09	%
		$	436						$	401						$	355
			810							817							971
		$	1,246						$	1,218						$	1,326

136

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

Provision for Loan Losses:

As previously mentioned, asset quality in the banking industry deteriorated in 2006. Nonperforming assets for all FDIC-insured commercial banks rose 16.6 percent in 2006 after decreasing 4.3 percent in 2005. Conversely, net charge-off levels improved for these institutions, as evidenced by an improvement in the ratio of net charge-offs, as a percentage of loans, from 0.56 percent in 2005 to 0.40 percent in 2006. Despite the increase in nonperforming assets, banks reduced their provision for loan losses by $1.2 billion or 4.6 percent in 2006. Asset quality performance for Pennsylvania banks differed from that of the overall banking industry as these institutions experienced a 22.5 percent improvement in nonperforming asset levels. However, the amount of loans charged-off by these banks increased 45.8 percent, which caused Pennsylvania banks to more than double their 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 an appropriate level. The provision for loan losses equaled $890 in 2006 and $782 in 2005. We consider the increase in the provision to be warranted based on the increase in both our impaired loans and net loans charged-off. Based on our most recent evaluation at December 31, 2006, we believe that the allowance was adequate to absorb any known or potential losses in our portfolio.

Noninterest Income:

Noninterest income for the banking industry improved in 2006. The composite of all FDIC-insured banks experienced a $16.3 billion or 8.1 percent increase in noninterest income in 2006. Similarly, noninterest income for insured Pennsylvania banks increased $244.9 million or 4.9 percent.

Contrary to the banking industry, our noninterest revenue decreased $476 or 12.3 percent to $3,408 in 2006 from $3,884 in 2005. Noninterest income, as a percentage of average total assets, equaled 0.63 percent in 2006 compared to 0.73 percent in 2005. Comparatively, our peer group’s ratio was 0.92 percent in 2006 and 0.96 percent in 2005.

The sale of our merchant services portfolio in 2005, coupled with the slowdown in the housing market, had the greatest impact on noninterest revenue. The one-time gain of $235 realized from this sale was included in noninterest revenue in 2005. In addition, income generated from mortgage

137

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

banking activities declined $222 or 37.4 percent to $372 in 2006 compared to $594 in 2005, as a result of a decrease in mortgage loan volume due to the downturn in the housing market.

Service charges, fees and commissions also decreased, but to a lesser extent. We continue to receive referral fees and residual payments on net revenue generated from existing merchant contracts. However, because of the sale of our merchant services, we no longer receive servicing fees which were included in service charges, fees and commissions in 2005. As a result, this form of revenue decreased $265 or 86.8 percent. Total service charges, fees and commissions declined $19 in comparison to the previous year. Partially offsetting the decline in merchant income were increases of 62.2 percent in trust revenue, 48.4 percent in insurance, annuity and discount brokerage sales and 3.9 percent in deposit service charges.

In the second half of 2005, we restructured Community Bank’s trust division and financial services subsidiary in order to increase efficiency in these areas. The restructuring involved personnel changes, revisions to existing policies and procedures and expansion of products and services to include wealth management offerings, the development of sales goals and changes to the agreement with our third party broker dealer. These changes resulted in additional noninterest revenue of $128.

Deposit service charges increased $85 to $2,265 in 2006 from $2,180 in 2005. We received additional revenue of $137 from recently implemented overdraft protection alternatives. Partially offsetting this additional revenue were reductions in service charges from demand deposit and savings accounts due to volume decreases in each of these specific deposit categories.

We will continue to focus on developing new sources of fee income to supplement traditional spread-based income as we attempt to improve our profitability in 2007.

Noninterest Expense:

Noninterest expense for the banking industry increased $13.9 billion or 5.1 percent. Despite the increase, bank productivity improved slightly in comparison to the prior year, as evidenced by a decrease in the efficiency ratio for all FDIC-insured commercial banks to 57.8 percent in 2006 from 58.7 percent in 2005. Similarly, insured Pennsylvania banks experienced an increase in noninterest expense of $295.9 million or 3.9 percent in 2006, and also recorded an improvement in efficiency.

138

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

In general, noninterest expense is categorized into three main groups, including 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.

Noninterest expense decreased $68 to $14,829 in 2006 from $14,897 in 2005. An increase in salaries and employee benefits was partially offset by decreases in occupancy and equipment expense and other expenses.

The major components of noninterest expense for the past five years are summarized as follows:

Noninterest expense

Year Ended December 31	2006		2005		2004		2003		2002
Salaries and employee benefits expense:
Salaries and payroll taxes	$	6,122	$	5,880	$	5,617	$	5,929	$	5,623
Employee benefits		1,526		1,354		1,351		1,248		1,144
Salaries and employee benefits expense		7,648		7,234		6,968		7,177		6,767
Net occupancy and equipment expense:
Net occupancy expense		1,158		1,183		1,158		991		836
Equipment expense		1,195		1,179		1,306		1,259		1,017
Net occupancy and equipment expense		2,353		2,362		2,464		2,250		1,853
Other expenses:
Marketing expense		569		634		586		425		482
Other taxes		503		449		394		444		399
Stationery and supplies		330		367		365		385		465
Contractual services		1,777		1,982		1,556		1,579		1,494
Insurance, including FDIC assessment		278		277		235		207		187
Other		1,371		1,592		2,094		2,017		1,883
Other expenses		4,828		5,301		5,230		5,057		4,910
Total noninterest expense	$	14,829	$	14,897	$	14,662	$	14,484	$	13,530

Salaries and employee benefits expense constitutes the majority of our noninterest expense. Total personnel costs increased $414 or 5.7 percent to $7,648 in 2006 from $7,234 in 2005. Recent staffing additions in our commercial loan and trust and wealth management divisions, coupled with annual employee merit increases, factored into the $242 or 4.1 percent increase in salaries and payroll taxes. Employee benefits expense increased $172 or 12.7 percent due to rate increases in health insurance plans and higher contributions to the deferred contribution plan as a result of the increase in our earnings.

139

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

Net occupancy and equipment expense, which decreased slightly, amounted to $2,353 in 2006 and $2,362 in 2005. A reduction of $25 in net occupancy expense more than offset an increase of $16 in equipment related expenses. With regard to net occupancy expense, an exceptionally mild winter resulted in reduced maintenance costs for snow plowing. Equipment costs, including depreciation and annual service contracts, increased due to the recent implementation of the new teller platform.

For a discussion on recent FASB Interpretations related to net occupancy and equipment expense, specifically conditional asset retirement obligations, refer to the note entitled, “Summary of significant accounting policies-Premises and equipment, net,” in the Notes to Consolidated Financial Statements to this Annual Report.

Other expenses decreased $473 or 8.9 percent to $4,828 in 2006 from $5,301 in 2005. We experienced a significant reduction of $205 in expenditures for contractual services. Contractual services in 2005 included costs associated with preparing for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Also affecting other expenses was a decrease in processing fees related to the merchant services portfolio. As previously mentioned, the merchant services portfolio was sold in 2005.

Our deposits are insured up to regulatory limits by the FDIC and accordingly, are subject to deposit insurance assessments administered by the FDIC. On February 8, 2006, the President signed the Federal Deposit Insurance Reform Act of 2005, and on February 15, 2006, the President signed into law The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, the “Reform Act”). The Reform Act provides for the following changes:

• Merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new fund, the Deposit Insurance Fund (“DIF”) effective March 31, 2006;

• Increasing the coverage limit for retirement accounts to $250,000 and indexing the coverage limit for retirement accounts to inflation as with the general deposit insurance coverage limit effective April 1, 2006;

• Establishing a range of 1.15 percent to 1.50 percent within which the FDIC Board of Directors may set the Designated Reserve Rate (“DRR”);

• Allowing the FDIC to manage the pace at which the reserve ratio varies within this range;

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

• Eliminating the restriction on premium rates on the DRR and granting the FDIC Board of Directors the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio; and

• Granting a one-time credit of approximately $4.7 billion to institutions for their past contributions to the fund.

Beginning in 2007, the annual DIF assessment rate will be determined first by the capital category we are assigned to by the FDIC and then on which supervisory group we are assigned to. Based on our latest assignments, we would be assessed at the lowest rates of those institutions posing the least amount of risk to the DIF and would expect to pay between 5 and 7 cents per $100 dollars of assessable deposits in 2007. We do not expect that the revisions made to FDIC deposit insurance premiums will have a material effect on our operating results or financial position.

Under the Reform Act, we are a member of the DIF and received notice that we will receive a one-time credit of approximately $446, which will be used to offset the cost of FDIC deposit insurance premiums for 2007.

For 2006, we continued to be assessed at rates in existence prior to the Reform Act, which were determined by the FDIC by placing each insured bank into one of nine risk categories based on the bank’s capitalization and supervisory evaluations provided to it by the bank’s primary federal regulator. An insured bank’s assessment rate was then determined by the risk category into which it was classified. We were classified in the highest capital and supervisory evaluation category and were exempt from paying deposit insurance assessments in 2006.

There is a separate levy assessed on all FDIC-insured institutions to bear the cost of Finance Corporation (“FICO”) funding. The FDIC established the annual FICO assessment rates effective for the fourth quarter of 2006 at $0.0124 and the first quarter of 2007 at $0.0122 per 100 dollars of DIF-assessable deposits. Our FICO assessments were $60 and $64 for the years ended December 31, 2006 and 2005.

Income Taxes:

Our income tax expense increased $623 to $1,874 in 2006, from $1,251 in 2005. The increase resulted from higher net income, coupled with a lower amount of tax-exempt interest revenue as a percentage of total interest revenue. We utilize loans and investments of tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. Tax-exempt interest revenue, as a percentage of total interest revenue, declined to 9.2 percent in 2006 from 10.2 percent in 2005. Our effective tax rate increased to 22.8 percent in

141

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

2006, compared to 19.4 percent in 2005. Our effective tax rate continued to be more advantageous than that of our peer group’s of 23.2 percent in 2006 and 25.7 percent in 2005.

Recently, we executed a subscription agreement to become a limited partner in an elderly housing project that will afford us approximately $3.7 million of investment tax credits over a 10-year period beginning in 2007. We anticipate investment tax credits from this housing project of $125 in 2007.

The difference between the amount of income tax currently payable and the provision for income tax expense reflected in the income statements arises 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.

For a discussion on recent FASB Interpretations related to income taxes, refer to the note entitled, “Summary of significant accounting policies-Income Taxes,” in the Notes to Consolidated Financial Statements to this Annual Report.

142

Comm Bancorp, Inc.
REPORT OF MANAGEMENT

We are responsible for the preparation and fair presentation of the accompanying consolidated balance sheets of Comm Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006, in accordance with United States generally accepted accounting principles. This responsibility includes: establishing, implementing and maintaining adequate internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable under the circumstances. We are also responsible for compliance with the laws and regulations relating to safety and soundness that are designed by the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and the Commonwealth of Pennsylvania’s Department of Banking.

The internal controls of the Company are established by us. These controls are designed to provide reasonable assurance that assets are safeguarded and transactions are executed, recorded and reported in accordance with our intentions and authorizations and to comply with applicable laws and regulations. The internal control system includes an organizational structure that provides appropriate delegation of authority and segregation of duties, established policies and procedures and comprehensive internal audit and loan review programs. To enhance the reliability of internal controls, we recruit and train highly qualified personnel and maintain sound risk management practices. The internal control system is maintained through a monitoring process that includes a program of internal audits.

There are inherent limitations in any internal control system, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Furthermore, due to changes in conditions, the effectiveness of internal controls may vary over time. The internal auditor of the Company reviews, evaluates and makes recommendations on policies and procedures, which serves as an integral, but independent, component of our internal control.

The 2006 consolidated financial statements have been audited by Beard Miller Company LLP and the 2005 and 2004 consolidated financial statements were audited by Kronick Kalada Berdy & Co. Both companies are independent registered public accounting firms and performed the audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that the auditor complies with ethical requirements, including independence. The auditor plans and performs the audits to obtain reasonable assurance as to whether the financial statements are free from material misstatement. The audits involve

143

Comm Bancorp, Inc.
REPORT OF MANAGEMENT (CONTINUED)

selecting and performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including an assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor gains an understanding of the internal controls relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls. Our independent registered public accounting firm reviews the results of its audits with both us and the Joint Audit Committee of the Board of Directors.

The Company’s financial reporting and internal controls are under the general oversight of the Board of Directors, acting through the Joint Audit Committee. The Joint Audit Committee is composed entirely of independent directors. The independent registered public accounting firm and the internal auditor have direct and unrestricted access to the Joint Audit Committee at all times. The Joint Audit Committee meets periodically with us, the internal auditor and the independent registered public accounting firm to determine that each is fulfilling its responsibilities and to support actions to identify, measure and control risks and augment internal controls.

Based on our assessment, we believe that the Company was compliant with all designated laws and regulations for the year ended December 31, 2006.

/s/ William F. Farber, Sr.                    
William F. Farber, Sr.
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Scott A. Seasock                    
Scott A. Seasock
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

February 26, 2007

144

Comm Bancorp, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
 and Stockholders
Comm Bancorp, Inc.
Clarks Summit, Pennsylvania

We have audited the accompanying consolidated balance sheet of Comm Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 31, 2005 and 2004 were audited by other auditors whose report dated February 6, 2006, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BEARD MILLER COMPANY LLP

BEARD MILLER COMPANY LLP
Allentown, Pennsylvania
February 26, 2007

145

Comm Bancorp, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
 and Stockholders
Comm Bancorp, Inc.
Clarks Summit, Pennsylvania

We have audited the accompanying consolidated balance sheet of Comm Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with United States generally accepted accounting principles.

/s/ Kronick Kalada Berdy & Co.

KRONICK KALADA BERDY & CO., P.C.
Kingston, Pennsylvania
February 6, 2006

146

Comm Bancorp, Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)

Year Ended December 31	2006			2005			2004
Interest income:
Interest and fees on loans:
Taxable	$	27,457		$	22,985		$	21,597
Tax-exempt		1,556			1,329			848
Interest and dividends on investment securities available-for-sale:
Taxable		2,208			2,160			2,139
Tax-exempt		1,490			1,557			1,572
Dividends		68			41			29
Interest on federal funds sold		261			287			148
Total interest income		33,040			28,359			26,333
Interest expense:
Interest on deposits		12,356			9,997			9,232
Interest on short-term borrowings		149			106			1
Total interest expense		12,505			10,103			9,233
Net interest income		20,535			18,256			17,100
Provision for loan losses		890			782			600
Net interest income after provision for loan losses		19,645			17,474			16,500
Noninterest income:
Service charges, fees and commissions		3,036			3,055			2,911
Mortgage banking income		372			594			655
Net gains on sale of merchant services					235
Total noninterest income		3,408			3,884			3,566
Noninterest expense:
Salaries and employee benefits expense		7,648			7,234			6,968
Net occupancy and equipment expense		2,353			2,362			2,464
Other expenses		4,828			5,301			5,230
Total noninterest expense		14,829			14,897			14,662
Income before income taxes		8,224			6,461			5,404
Provision for income tax expense		1,874			1,251			679
Net income		6,350			5,210			4,725
Other comprehensive loss:
Unrealized holding losses on investment securities available-for-sale		(3	)		(871	)		(878	)
Income tax benefit related to other comprehensive loss		(1	)		(296	)		(299	)
Other comprehensive loss, net of income taxes		(2	)		(575	)		(579	)
Comprehensive income	$	6,348		$	4,635		$	4,146
Per share data:
Net income	$	3.43		$	2.80		$	2.50
Cash dividends declared	$	1.00		$	0.92		$	0.88
Average common shares outstanding		1,853,089			1,860,563			1,890,960

See Notes to Consolidated Financial Statements.

147

Comm Bancorp, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

December 31	2006		2005
Assets:
Cash and due from banks	$	25,584	$	23,403
Federal funds sold		2,050		12,000
Investment securities available-for-sale		91,213		104,965
Loans held for sale, net		572		1,934
Loans, net of unearned income		408,074		388,603
Less: allowance for loan losses		4,435		4,128
Net loans		403,639		384,475
Premises and equipment, net		11,018		11,003
Accrued interest receivable		2,863		2,487
Other assets		3,465		3,310
Total assets	$	540,404	$	543,577
Liabilities:
Deposits:
Noninterest-bearing	$	73,055	$	75,428
Interest-bearing		410,387		415,937
Total deposits		483,442		491,365
Accrued interest payable		1,106		1,024
Other liabilities		1,738		1,499
Total liabilities		486,286		493,888
Stockholders’ equity:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
2006, 1,848,687 shares; 2005, 1,850,154 shares		610		611
Capital surplus		7,146		6,869
Retained earnings		45,405		41,250
Accumulated other comprehensive income		957		959
Total stockholders’ equity		54,118		49,689
Total liabilities and stockholders’ equity	$	540,404	$	543,577

See Notes to Consolidated Financial Statements.

148

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’
For the Three Years Ended December 31, 2006	Stock			Surplus			Earnings			Income			Equity
Balance, December 31, 2003	$	629		$	6,576		$	37,223		$	2,113		$	46,541
Net income								4,725						4,725
Dividends declared: $0.88 per share								(1,658	)					(1,658	)
Dividend reinvestment plan: 6,228 shares issued		2			244									246
Repurchase and retirement: 48,365 shares		(16	)		(145	)		(1,796	)					(1,957	)
Other comprehensive loss, net of income taxes											(579	)		(579	)
Balance, December 31, 2004		615			6,675			38,494			1,534			47,318
Net income								5,210						5,210
Dividends declared: $0.92 per share								(1,711	)					(1,711	)
Dividend reinvestment plan: 6,357 shares issued		2			256									258
Repurchase and retirement: 20,594 shares		(6	)		(62	)		(743	)					(811	)
Other comprehensive loss, net of income taxes											(575	)		(575	)
Balance, December 31, 2005		611			6,869			41,250			959			49,689
Net income								6,350						6,350
Dividends declared: $1.00 per share								(1,853	)					(1,853	)
Dividend reinvestment plan: 7,373 shares issued		2			303									305
Repurchase and retirement: 8,840 shares		(3	)		(26	)		(342	)					(371	)
Other comprehensive loss, net of income taxes											(2	)		(2	)
Balance, December 31, 2006	$	610		$	7,146		$	45,405		$	957		$	54,118

See Notes to Consolidated Financial Statements.

149

Comm Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)

Year Ended December 31	2006			2005			2004
Cash flows from operating activities:
Net income	$	6,350		$	5,210		$	4,725
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		890			782			600
Depreciation and amortization of premises and equipment		1,022			1,013			1,191
Amortization of core deposit intangible					270			270
Net amortization of investment securities		87			733			877
Amortization of net loan costs		298			200			6
Amortization of mortgage servicing rights		224			218			235
Deferred income tax expense (benefit)		(74	)		(246	)		113
Net gains on sale of loans		(243	)		(487	)		(577	)
Losses (gains) on foreclosed assets		6			(37	)		34
Gains on disposition of equipment		(1	)
Changes in:
Loans held for sale, net		1,605			470			1,865
Accrued interest receivable		(376	)		(168	)		(90	)
Other assets		(347	)		(432	)		(309	)
Accrued interest payable		82			(51	)		(68	)
Other liabilities		234			314			(525	)
Net cash provided by operating activities		9,757			7,789			8,347
Cash flows from investing activities:
Proceeds from repayments of investment securities available-for-sale		51,547			46,225			18,218
Purchases of investment securities available-for-sale		(37,885	)		(34,038	)		(33,481	)
Proceeds from sale of foreclosed assets		664			486			280
Net increase in lending activities		(21,011	)		(8,006	)		(24,566	)
Proceeds from sale of premises and equipment		6			97
Purchases of premises and equipment		(1,042	)		(485	)		(335	)
Net cash provided by (used in) investing activities		(7,721	)		4,279			(39,884	)
Cash flows from financing activities:
Net changes in:
Money market, NOW, savings and noninterest-bearing accounts		(11,189	)		14,757			18,134
Time deposits		3,266			(1,876	)		884
Proceeds from the issuance of dividend reinvestment plan shares		305			258			246
Repurchase and retirement of common shares		(371	)		(811	)		(1,957	)
Cash dividends paid		(1,816	)		(1,695	)		(1,667	)
Net cash provided by (used in) financing activities		(9,805	)		10,633			15,640
Net increase (decrease) in cash and cash equivalents		(7,769	)		22,701			(15,897	)
Cash and cash equivalents at beginning of year		35,403			12,702			28,599
Cash and cash equivalents at end of year	$	27,634		$	35,403		$	12,702
Supplemental disclosures:
Cash paid during the period for:
Interest	$	12,423		$	10,154		$	9,301
Income taxes		1,820			1,657			578
Noncash items:
Transfers of loans to foreclosed assets		659			413			452
Unrealized losses on investment securities available-for-sale, net	$	2		$	575		$	579

See Notes to Consolidated Financial Statements.

150

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of operations:

Comm Bancorp, Inc., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiaries: Community Bank and Trust Company (“Community Bank”), including its subsidiaries, Community Leasing Corporation and Comm Financial Services Corporation; and Comm Realty Corporation (collectively, the “Company”). The Company services its individual and commercial customers through 16 full-service branches and one loan production office located within the Lackawanna, Luzerne, Monroe, Susquehanna, Wayne and Wyoming counties of Northeastern Pennsylvania.

Community Bank’s primary product is loans to small- and medium-sized businesses. Other lending products include one-to-four family residential mortgages and consumer loans. Community Bank primarily funds its loans by offering certificates of deposit to commercial enterprises and individuals. Other deposit product offerings include various demand and savings accounts. In addition, Community Bank provides fiduciary services through its Trust and Wealth Management Division.

Community Leasing Corporation provides equipment lease financing to small- and middle-market commercial customers. Comm Financial Services Corporation sells insurance products and services and provides wealth management services to individuals and small- and medium-sized businesses. Comm Realty Corporation holds, manages and sells foreclosed or distressed assets on behalf of Community Bank.

Community Bank is a 40.0 percent member in Community Abstract Services, LLC, a limited liability company which offers title insurance and abstract services to residential and commercial mortgage loan customers. Community Bank has significant influence over the operating and financing decisions and accounts for this investment using the equity method of accounting. The investment is included in other assets with Community Bank’s proportionate share of income or loss included in noninterest income or noninterest expense.

The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the Northeastern Pennsylvania market, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.

151

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

The Company is subject to regulations of certain federal and state regulatory agencies and undergoes periodic examinations.

Basis of presentation:

The consolidated financial statements of the Company have been prepared in conformity with United States generally accepted accounting principles (“GAAP”), Regulation S-X, Item 302 of Regulation S-K and reporting practices applied in the banking industry. All significant intercompany balances and transactions have been eliminated in consolidation. The Company also presents herein condensed parent company only financial information regarding Comm Bancorp, Inc. (“Parent Company”). Prior period amounts are reclassified when necessary to conform with the current year’s presentation.

Accounting changes and error corrections:

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaced Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changed the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. The requirements of this Statement improve financial reporting by enhancing the consistency of financial information between periods. The adoption of this Statement had no effect on the operating results or financial position of the Company.

On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying the misstatements in current year financial statements. SAB No. 108 requires that misstatements be quantified using both the year end balance sheet perspective or iron curtain method and the current year income statement perspective or rollover method and to evaluate whether either approach results in quantifying the aggregate impact of prior period uncorrected misstatements as material in light of relevant quantitative and qualitative factors. SAB No. 108 had no effect on the operating results or financial position of the Company.

152

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Segment disclosure:

Public companies are required by GAAP to report information about operating segments in annual financial statements and to report selected information about operating segments in interim financial reports issued to stockholders. GAAP permits the aggregation of two or more operating segments into a single segment if the segments have similar economic characteristics and share a majority of the following aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory oversight. The Company’s 16 branch banking offices and one loan production office, all similar with respect to these characteristics, have exhibited similar long-term financial performance. Therefore, they were aggregated into a single operating segment.

GAAP also permits the aggregation of segments not meeting the quantitative threshold requirements if the segments share a majority of the above aggregation criteria. Community Leasing Corporation, Comm Financial Services Corporation and Comm Realty Corporation did not meet the quantitative thresholds for required segment disclosure under GAAP. These companies share a majority of the above criteria and were therefore aggregated with the other offices into a single operating segment.

Use of estimates:

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates that are particularly susceptible to material change in the next year relate to the allowance for loan losses, fair value of financial instruments and the valuations of real estate acquired through foreclosure, deferred tax assets and liabilities and intangible assets. Actual results could differ from those estimates.

Management maintains the allowance for loan losses at a level it believes adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet dates. The balance in the allowance for loan losses account is based on past events and current economic conditions. The Company employs the Federal Financial Institutions Examination Council Interagency Policy Statement on the

153

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Allowance for Loan and Lease Losses as the primary analytical guidance in assessing the adequacy of the allowance account. This Statement requires adherence to GAAP for determining the adequacy of the allowance for loan losses account for both financial and regulatory reporting purposes. Under GAAP, the adequacy of the allowance account is determined based on the provisions of SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” for loans specifically identified to be individually evaluated for impairment, and the requirements of SFAS No. 5, “Accounting for Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

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 under SFAS No. 114, and a formula portion for the impairment of those loans collectively evaluated under SFAS No. 5.

Identified loans individually evaluated for impairment under SFAS No. 114 include: (i) loans to borrowers having an aggregate exposure of $500 or more; (ii) loans that are past due 90 days or more; (iii) nonaccrual loans; (iv) any loans internally classified as substandard, doubtful, loss, special mention or watch; (v) loans to officers and directors; (vi) loans to overdraft privilege accounts; and (vii) a random sample of loans with balances between $250 and $500. A loan is considered impaired when, based on current information and events, it is probable that the Company 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. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans considered impaired under SFAS No. 114 are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. If the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent, is less than the

154

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

recorded investment in the loan, including accrued interest and net deferred loan fees or costs, the Company will recognize the impairment by adjusting the allowance for loan losses account through charges to earnings as a provision for loan losses. For identified loans considered not impaired, management determines if these loans share similar risk with those grouped and collectively evaluated for impairment under SFAS No. 5.

Large groups of smaller-balance homogeneous loans and those identified loans considered not impaired having similar characteristics as these groups are segregated into major pools and are collectively evaluated, on a pool-by-pool basis, for impairment under SFAS No. 5. Impairment for each of the major loan pools is determined by applying a total loss factor to the current balance outstanding for each individual pool. The total loss factor is comprised of a historical loss factor using the loss migration method plus a qualitative factor, which adjusts the historical loss factor for changes in trends, conditions and other relevant factors that may affect repayment of the loans in these pools as of the evaluation date. Loss migration involves determining the percentage of each pool that is expected to ultimately result in loss based on historical loss experience. The historical loss factor is based on the ratio of net loans charged-off to loans, net of unearned income. These historical loss percentages are updated quarterly and are based on the average actual amount of loans in each pool that resulted in loss over the past eight quarters. Management adjusts these historical loss factors by a qualitative factor that represents a number of environmental risks that may cause estimated credit losses associated with the current portfolio to differ from historical loss experience. These environmental risks include: (i) changes in lending policies and procedures including underwriting standards and collection, charge-off and recovery policies; (ii) changes in the composition and volume of the portfolio; (iii) changes in national, local and industry conditions; (iv) changes in the volume of classified loans, including past due, nonaccrual, troubled debt restructuring and other loan modifications; (v) changes in the levels of, and trends in, charge-offs and recoveries; (vi) the existence and effect of any concentrations of credit and changes in the level of such concentrations; (vii) changes in the experience, ability and depth of lending management and other relevant staff; (viii) changes in the quality of the loan review system and the degree of oversight by the board of directors; and (ix) the effect of external factors such as competition and legal and regulatory requirements.

Loans identified to be collectively evaluated for impairment are separated into three major pools in order to determine applicable loss factors. These

155

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

pools include: (i) identified loans individually evaluated but considered not impaired that share risk characteristics with other collectively evaluated loans having an internal loan grading classification of watch, special mention or substandard; (ii) identified loans individually evaluated but considered not impaired that share risk characteristics with other collectively evaluated loans having an internal loan grading classification of superior, satisfactory or acceptable; and (iii) identified loans to be collectively evaluated for impairment. Specifically, management applies loss factors to identified loans individually evaluated but considered not impaired that share risk characteristics with other collectively evaluated loans having an internal loan grading classification of substandard, special mention or watch based on actual historical loss experience over the latest eight quarters, adjusted for current environmental risks, for the Company’s portfolio of loans having these loan grading classifications. Loss factors applied to identified loans individually evaluated but considered not impaired that share risk characteristics with other collectively evaluated loans having an internal loan grading classification of superior, satisfactory or acceptable are based on actual historical loss experience and current environmental factors for the Company’s portfolio of loans having these loan grading classifications. Identified loans to be collectively evaluated under SFAS No. 5 are applied a loss factor based on the actual historical loss experience and current environmental conditions for the overall loan portfolio. The loss factors for these pools are further defined for the major classifications of loans including: (i) commercial, financial and others; (ii) real estate-construction; (iii) real estate-mortgage;(iv) consumer; and (v) lease financing.

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 the above impairment evaluation methodology due to limitations in the process. One such limitation is the imprecision of accurately estimating the impact current economic conditions will have on historical loss rates. Variations in the magnitude of impact may cause estimated credit losses associated with the current portfolio to differ from historical loss experience, resulting in an allowance that is higher or lower than the anticipated level. Management establishes the unallocated element of the allowance by considering a number of environmental risks similar to the ones used for determining the qualitative factors. Management continually monitors trends in historical and qualitative factors, including trends in the volume, composition and credit quality of the portfolio. Management utilizes these trends to evaluate the reasonableness of the unallocated element.

156

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Management monitors the adequacy of the allocated portion of the allowance quarterly and adjusts the allowance for any deficiencies through normal operations. This self-correcting mechanism reduces potential differences between estimates and actual observed losses. In addition, the unallocated portion of the allowance is examined quarterly to ensure that it remains relatively constant in relation to the total allowance unless there are changes in the related criteria that would indicate a need to either increase or decrease it. The determination of the allowance for loan loss level is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, management 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.

As subsequently discussed in this note, in cases where quoted market prices are not available, fair values of financial instruments are based on estimates using present value or other valuation techniques which are subject to change.

Real estate acquired in connection with foreclosures or in satisfaction of loans is written-down to the lower of the related loan balance or fair market value 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 basis of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Intangible assets include goodwill. Goodwill is evaluated at least annually for impairment. Any impairment losses arising from such testing are reported in the income statement in the current period as a separate line item within operations.

157

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Investment securities:

Investment securities are classified and accounted for as either held-to-maturity, available-for-sale or trading based on management’s intent at the time of acquisition. Management is required to reassess the appropriateness of the classifications at each reporting date. The Company does not buy or hold securities principally for the purpose of selling them in the near term in order to generate profits from market appreciation. Accordingly, there were no investment securities classified as trading at December 31, 2006 and 2005.

Transfers of securities between categories are recorded at fair value at the date of the transfer. The accounting for the resulting unrealized gains or losses is determined by the category into which the security is transferred. There were no transfers of securities between categories during the years ended December 31, 2006 and 2005.

Investment securities are classified as held-to-maturity when management has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount. The Company did not have any investment securities classified as held-to-maturity at December 31, 2006 and 2005.

All of the Company’s investment securities are classified as available-for-sale and are held for indefinite periods of time for the purpose of implementing management’s asset/liability strategies. The Company may also sell these securities in response to changes in interest rates, prepayment risk, liquidity requirements or other circumstances identified by management.

Available-for-sale securities are carried at estimated fair value with unrealized gains and losses and their related income tax effect included in other comprehensive income, which is reported as a separate component of stockholders’ equity. Restricted equity investment securities of the Federal Home Loan Bank of Pittsburgh (“FHLB-Pgh”) and the Federal Reserve Bank of Philadelphia (“FRB”) are carried at cost. Estimated fair values for investment securities are based on quoted market prices from a national electronic pricing service. Except for restricted equity investment securities, all of the Company’s investments trade actively in a liquid market.

158

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Realized gains and losses are computed using the specific identification method and are included in noninterest income. Premiums are amortized and discounts are accreted over the contractual lives of investment securities using the interest method.

Management evaluates each investment security to determine if a decline in fair value below its amortized cost is other than temporary at least quarterly, and more frequently when economic or market concerns warrant an evaluation. Factors considered in determining whether an other than temporary impairment was incurred include: (i) the length of time and the extent to which the fair value has been less than amortized cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) the intent and ability of the Company to retain the investment security for a period of time sufficient to allow for any anticipated recovery in fair value. If a decline is judged to be other than temporary, the individual security is written-down to fair value with the amount of the write-down included in earnings.

On December 31, 2005, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) SFAS No. 115-1 and SFAS No. 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” In addition, this FSP nullifies certain requirements of the FASB’s Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and supersedes EITF Topic No. D-44, “The Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” FSP SFAS No. 115-1 and SFAS No. 124-1 addressed the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The application of this guidance had no effect on the operating results or financial position of the Company.

On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and

159

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Extinguishments of Liabilities.” This Statement improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, this Statement allows financial instruments that have embedded derivatives to be accounted for as a whole instrument if the holder elects to account for the instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this Statement on January 1, 2007, is not expected to have a material effect on the operating results or financial position of the Company.

Loans held for sale, net:

Loans held for sale consist of one-to-four family residential mortgages originated and intended for sale in the secondary market. The loans are carried in aggregate at the lower of cost or estimated market value, based upon current delivery prices in the secondary mortgage market. Net unrealized losses are recognized through a valuation allowance by corresponding charges to income. Gains or losses on the sale of these loans are recognized in noninterest income at the time of sale using the specific identification method. Loan origination fees, net of certain direct loan origination costs, are included in net gains or losses upon the sale of the related mortgage loan. All loans are sold without recourse. The aggregate cost of these loans was lower than their estimated market value at December 31, 2006 and 2005, accordingly, no valuation allowance was deemed necessary.

Loans:

Loans are stated at their outstanding principal balances, net of unearned interest and net deferred loan fees or costs. Interest income is accrued on the principal amount outstanding, except for certain scheduled payment loans for which interest is accrued based on a predetermined amortization schedule. Direct financing leases, included in loans, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned interest. Unearned interest on installment loans and direct financing leases is recognized over the respective loan terms using the effective interest method. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized over the contractual life of the related loan as an adjustment to yield using the effective interest method. Delinquency fees are recognized in income when chargeable, assuming collectibility is reasonably assured. For direct financing leases, residual values are reviewed periodically for other-than-temporary

160

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

impairment, with valuation adjustments, if any, included in noninterest expense. Any gain or loss realized upon disposal of equipment returned at the end of the lease term is included in noninterest income or noninterest expense.

On January 1, 2005, the Company adopted the Accounting Standards Executive Committee’s of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or loans accounted for as debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in business combinations and applies to all nongovernmental entities. It does not apply to loans originated by the entity. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not have a material effect on the operating results or financial position of the Company.

Nonperforming assets:

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. 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. There were no restructured loans outstanding at December 31, 2006 and 2005.

161

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

The Company recognizes interest income on impaired loans, including the recording of cash receipts, based on its policy for nonaccrual, restructured or accruing loans depending on the status of the impaired loan.

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. The Company includes such properties in other assets. A loan is classified as in-substance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Foreclosed assets are recorded at the lower of the related loan balance or fair market 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 during the three years ended December 31, 2006. 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.

Allowance for loan losses:

The allowance for loan losses account is maintained through a provision for loan losses charged to earnings. Loans, or portions of loans, determined to be uncollectible are charged against the allowance account and subsequent recoveries, if any, are credited to the account. Nonaccrual, restructured and large delinquent commercial and real estate loans are reviewed monthly to determine if carrying value reductions are warranted or if these classifications should be changed. Consumer loans are considered losses when they are 120 days past due, except those expected to be recovered through insurance or collateral disposition proceeds.

Management evaluates the adequacy of the allowance for loan losses account quarterly. Identified loans individually evaluated for impairment under SFAS No. 114 are reviewed to determine if impairment exists or if the level of impairment has changed. Historical loss factors and qualitative factors are updated and used to estimate the level of impairment for loans collectively evaluated under SFAS No. 5. Based on these evaluations, the allowance for loan losses account is adjusted for any deficiency through the provision for loan losses in the current period.

162

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Off-balance sheet financial instruments:

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under home equity and credit card arrangements and commercial letters of credit. These financial instruments are recorded in the financial statements when they are exercised. Fees on commercial letters of credit and on unused, available lines of credit and credit card arrangements are recorded as service charges, fees and commissions and are included in noninterest income when earned.

Premises and equipment, net:

Land is stated at cost. Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. The cost of routine maintenance and repairs is expensed as incurred. The cost of major replacements, renewals and betterments is capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in noninterest income or noninterest expense. Depreciation and amortization is computed principally using the straight-line method based on the following estimated useful lives of the related assets or in the case of leasehold improvements to the expected terms of the leases, if shorter:

Premises	15-45 years
Equipment	3-10 years
Leasehold improvements	15 years

On December 31, 2005, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” Interpretation No. 47 clarified that the term, conditional asset retirement obligation, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” referred to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The Interpretation also clarified when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of Interpretation No. 47 did not have a material effect on the operating results or financial position of the Company.

163

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

Mortgage servicing rights:

Mortgage servicing rights are recognized as a separate asset when acquired through sales of loan originations. The Company determines a mortgage servicing right by allocating the total costs incurred between the loan sold and the servicing right, based on their relative fair values at the date of the sale. Mortgage servicing rights are included in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. In addition, mortgage servicing rights are evaluated for impairment at each reporting date based on the fair value of those rights. To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates. For purposes of measuring impairment, the rights are stratified by loan type, term and interest rate. The amount of impairment recognized, through a valuation allowance, is the amount by which the mortgage servicing rights for a stratum exceed their fair value.

On March 17, 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” This Statement, which amends SFAS No. 140, addressed the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like accounting. SFAS No. 156: (i) clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability; (ii) requires that separately recognized servicing assets or liabilities be measured at fair value; and (iii) permits an entity to choose either the amortization method or the fair value method in order to subsequently measure the separately recognized servicing asset or liability. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued subsequent to fiscal years beginning after September 15, 2006. Early adoption of this Statement is permitted. The adoption of this Statement on January 1, 2007, is not expected to have a material effect on the operating results or financial position of the Company.

Intangible assets:

Goodwill is included in other assets, and as required by GAAP, tested for impairment annually or when circumstances arise indicating impairment has occurred. Any impairment losses arising from such testing are reported in the income statement as a separate line item within operations. There were no impairment losses recognized as a result of periodic impairment testing in 2006, 2005 and 2004.

164

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

The core deposit intangible that resulted from branch acquisitions was included in other assets and amortized on a straight-line basis over eight years ending December 31, 2005. Management, on a periodic basis, reviewed the core deposit intangible and evaluated events or changes in circumstances that may have indicated a change in its remaining useful life.

Trust and wealth management assets:

Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets since they are not the Company’s assets. Fees associated with providing trust and wealth management services are recorded on a cash basis, which is not materially different than if reported on an accrual basis, and are included in noninterest income. Revenue from trust and wealth management services did not meet any of the quantitative thresholds for required segment disclosure under GAAP.

Statements of Cash Flows:

The Consolidated Statements of Cash Flows are presented using the indirect method. For the purpose of cash flow, cash and cash equivalents include cash on hand, cash items in the process of collection, noninterest-bearing deposits with other banks, balances with the FRB and FHLB-Pgh and federal funds sold. Federal funds sold are highly-liquid investments sold for one-day periods.

Fair value of financial instruments:

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of 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. Other significant items that are not considered financial instruments include deferred tax assets, premises and equipment, foreclosed assets and intangible assets. Accordingly, the net aggregate fair value amounts presented do not represent the underlying value of the Company.

165

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

The Company’s assets that were considered financial instruments approximated 97.5 percent of total assets at December 31, 2006 and 2005. Liabilities that were considered financial instruments approximated 99.6 percent of total liabilities at December 31, 2006 and 99.7 percent of total liabilities at December 31, 2005. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the 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.

The following methods and assumptions were used by the Company to construct the summary table in Note 10 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: The fair value of investment securities 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 immediately 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 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.

Deposits without stated maturities: The fair value of noninterest-bearing deposits, savings accounts and certain 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.

166

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

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 for time deposits with similar maturities.

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 home equity and credit card lines 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 December 31, 2006 and 2005.

On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. This Standard responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157, which does not expand the use of fair value, applies whenever other Standards require or permit assets or liabilities to be measured at fair value, and is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 on January 1, 2008, is not expected to have a material effect on the operating results or financial position of the Company.

On February 15, 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities — Including an Amendment of SFAS No. 115.” The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Statement requires companies to: (i) provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings; and (ii)

167

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The adoption of this Statement on January 1, 2008, is not expected to have a material effect on the operating results or financial position of the Company.

Comprehensive income:

The components of comprehensive income and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income. The accumulated other comprehensive income included in the Consolidated Statements of Changes in Stockholders’ Equity relates entirely to the net unrealized gains and losses on available-for-sale securities.

Advertising costs:

Advertising costs are expensed as incurred and totaled $490 in 2006, $512 in 2005 and $405 in 2004.

Website operational costs:

Costs associated with the operation of the Company’s website are expensed as incurred and totaled $15 in 2006, $22 in 2005 and $30 in 2004.

Other expenses:

None of the items included in other expenses reported in the Consolidated Statements of Income and Comprehensive Income exceeded 1.0 percent of the aggregate of total interest income and noninterest income, with the exception of directors and committee fees, audit and exam fees and Pennsylvania capital shares tax expense. Directors and committee fees amounted to $436 in 2006, $427 in 2005 and $438 in 2004. Audit and exam fees totaled $291 in 2006, $414 in 2005 and $172 in 2004. Capital shares tax expense is disclosed in Note 12.

Income taxes:

The Company recognizes the current and deferred tax consequences of all transactions that have been recorded in the financial statements using the provisions of the enacted tax laws. The Parent Company and its subsidiaries file a consolidated federal income tax return. The subsidiaries provide for income taxes on a separate return basis, and remit amounts determined to be currently payable to the Parent Company.

168

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

1. Summary of significant accounting policies (continued):

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109.” Interpretation No. 48 increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. The Interpretation prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. In addition, the Interpretation requires expanded disclosure with respect to uncertainty in income taxes. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation on January 1, 2007, is not expected to have a material effect on the operating results or financial position of the Company.

Earnings per common share:

The Company had no dilutive potential common shares outstanding during the three-year period ended December 31, 2006, therefore, the per share data presented on the face of the Consolidated Statements of Income and Comprehensive Income relates to basic per share amounts.

2. Cash and due from banks:

The Federal Reserve Act, as amended, imposes reserve requirements on all member depository institutions. The Company’s required reserve balances, which were satisfied through the restriction of vault cash, were $3,128 and $3,070 at December 31, 2006 and 2005, respectively. These reserve requirements averaged $3,068 in 2006 and $3,012 in 2005.

169

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

3. Investment securities:

All investment securities were classified as available-for-sale for the years ended December 31, 2006 and 2005. The amortized cost and fair value of available-for-sale securities aggregated by investment category at December 31, 2006 and 2005, are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
December 31, 2006	Cost		Gains		Losses		Value
U.S. Government agencies	$	39,258	$	3	$	60	$	39,201
State and municipals:
Taxable		12,139				227		11,912
Tax-exempt		29,323		1,634		1		30,956
Mortgage-backed securities		7,799		11		50		7,760
Equity securities:
Restricted		1,206						1,206
Other		38		140				178
Total	$	89,763	$	1,788	$	338	$	91,213

	Amortized		Unrealized		Unrealized		Fair
December 31, 2005	Cost		Gains		Losses		Value
U.S. Government agencies	$	42,938			$	227	$	42,711
State and municipals:
Taxable		15,697	$	1		430		15,268
Tax-exempt		31,820		1,983		8		33,795
Mortgage-backed securities		12,211		86		80		12,217
Equity securities:
Restricted		808						808
Other		38		128				166
Total	$	103,512	$	2,198	$	745	$	104,965

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 $957, net of deferred income taxes of $493, at December 31, 2006, and $959, net of deferred income taxes of $494, at December 31, 2005. There were no sales of investment securities in 2006, 2005 and 2004. As a result, the Company recorded no gains or losses which were required to be reclassified out of other comprehensive income and into noninterest income for any of the three years ended December 31, 2006.

170

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

3. 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 December 31, 2006 and 2005, 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
December 31, 2006	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	7,326	$	3	$	5,956	$	57	$	13,282	$	60
State and municipals:
Taxable						11,912		227		11,912		227
Tax-exempt						129		1		129		1
Mortgage-backed securities		2,667		2		4,332		48		6,999		50
Equity securities:
Restricted
Other
Total	$	9,993	$	5	$	22,329	$	333	$	32,322	$	338

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2005	Value		Losses		Value		Losses		Value		Losses
U.S. Government agencies	$	29,769	$	128	$	12,942	$	99	$	42,711	$	227
State and municipals:
Taxable		1,571		4		13,541		426		15,112		430
Tax-exempt		1,382		5		388		3		1,770		8
Mortgage-backed securities		211		1		5,094		79		5,305		80
Equity securities:
Restricted
Other
Total	$	32,933	$	138	$	31,965	$	607	$	64,898	$	745

At December 31, 2006, the Company had 184 investment securities, consisting of 20 U.S. Government agency securities, 10 taxable and 129 tax-exempt state and municipal obligations, 18 mortgage-backed securities, including collateralized mortgage obligations, and two restricted and five marketable equity securities. There were 25 debt securities in an unrealized loss position at December 31, 2006, including 17 which have been in a continuous unrealized loss position for 12 months or more. None of the equity securities had an unrealized loss at December 31, 2006. 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. The decline in the fair value below the amortized cost basis of each of the debt securities was attributable to the increase in interest rates and the correspondingly higher current interest rate offerings on

171

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

3. Investment securities (continued):

comparable securities then when the securities were purchased and was not indicative of a downgrade in the credit quality of the issuer. 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.

All of the Company’s holdings of agency securities were obligations of federally-sponsored agencies of the U.S. Government and had a credit quality rating of “AAA” at December 31, 2006. There were six U.S. Government agency securities which had an unrealized loss at December 31, 2006, with three of those securities having been in a continuous unrealized loss position for 12 months or more. The longest duration that any of these three securities were in a continuous unrealized loss position was six consecutive quarters. The greatest severity of an unrealized loss on these securities was 1.0 percent of amortized cost at December 31, 2006. Although there are no explicit or implicit federal guarantees on these securities issued by the federally-sponsored agencies, the general market perception that the government would ultimately cover any default indicates that these securities would not be settled at a price less than amortized cost. As a result, the Company does not consider the unrealized losses to be other than temporary because they were a direct result of interest rate fluctuations and the Company has the intent and ability to hold all of these investment securities until such time when their fair value meet or exceed the amortized cost basis or the securities mature at stated par.

The Company’s investment in taxable state and municipal securities included insured general obligations and revenue bonds of counties, municipal authorities, cities and school districts. Each of the 10 taxable state and municipal obligations had a continuous unrealized loss position longer than 12 months at December 31, 2006. The longest period that any of these securities were in a continuous loss position was 15 quarters. The longevity of the loss position is a direct result of purchasing these short-term securities during a period of low interest rates and is not attributable to a deterioration in credit quality. Yields on taxable state and municipal securities having similar terms have gradually increased since these securities were purchased. None of these securities had an unrealized loss greater than 3.6 percent of amortized cost at December 31, 2006. The insured general obligations bear a credit quality rating of “AA” or higher and all of the insured revenue bonds have a rating of “Aaa.” The general obligation securities are secured by the unlimited taxing power of the issuer and are further safeguarded against default by unconditional guarantees of various insurance companies over the term of the bond to pay

172

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  (Dollars in thousands, except per share data)

3. Investment securities (continued):

the bondholder any principal or interest that is due on a stated maturity date not paid by the issuer. The revenue bonds are secured by the revenues generated by the underlying project and contractual commitments from insurance companies to pay any principal or interest defaults on the part of an issuer. Because there has been no change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and the Company has the intent and ability to hold the securities until costs are fully recovered, the unrealized losses are not considered to be other-than-temporary impairments at December 31, 2006.

All of the Company’s holdings of tax-exempt state and municipal securities were insured general obligations with unlimited taxing powers of states, counties, cities and school districts. There was one security of the 129 tax-exempt state and municipal obligations that was in an unrealized loss position at December 31, 2006. This security has been in a continuous unrealized loss position for eight consecutive quarters. The unrealized loss on this security was 0.5 percent of amortized cost at December 31, 2006. This security had a credit quality rating of “AAA.” Because the decline in fair value is directly attributable to increases in interest rates and not credit rating, and the Company has the intent and ability to hold this security until the recovery of fair value, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2006.

Mortgage-backed securities consisted entirely of obligations of federally-sponsored agencies of the U.S. Government, except for one Government National Mortgage Association (“GNMA”) federal agency bond which is a direct obligation of the U.S. Government. GNMA securities are backed by the full faith and credit of the U.S. Government and thus are considered to have no risk of default. The federally-sponsored agency securities had a credit rating of “AAA” at December 31, 2006. Eight of the 18 mortgage-backed securities held by the Company had an unrealized loss at December 31, 2006, of which three had been in a continuous unrealized loss position for 12 months or more. The longest duration that any of these three securities were in an unrealized loss position was 14 consecutive quarters. The greatest severity of an unrealized loss on these securities was 1.6 percent of amortized cost at December 31, 2006. As previously mentioned, a default on the contractual cash flows of securities issued by federally-sponsored agencies is remote which indicates that there is a high level of assurance that these securities would not be settled at a price less than amortized cost. The Company does not consider the unrealized losses to be other than temporary because they were a direct result of interest rate fluctuations and the Company has the intent and ability to

173

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  (Dollars in thousands, except per share data)

3. Investment securities (continued):

hold all of these investment securities until such time when their fair value meet or exceed the amortized cost basis or the securities mature at stated par.

Investment securities with an amortized cost of $47,057 at December 31, 2006, and $36,604 at December 31, 2005, were pledged to secure deposits, to qualify for fiduciary powers and for other purposes required or permitted by law. The fair value of these securities was $46,961 at December 31, 2006, and $36,474 at December 31, 2005.

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at December 31, 2006, 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. Expected maturities may differ from contracted 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
December 31, 2006	one year		five years		ten years		ten years		Total
Fair value:
U.S. Government agencies	$	39,201							$	39,201
State and municipals:
Taxable		6,814	$	5,098						11,912
Tax-exempt		190		5,336	$	17,088	$	8,342		30,956
Mortgage-backed securities		5,870		1,805		85				7,760
Total	$	52,075	$	12,239	$	17,173	$	8,342	$	89,829

Except for U.S. Government agencies, including mortgage-backed securities, there were no securities of any individual issuer that exceeded 10.0 percent of stockholders’ equity at December 31, 2006 and 2005.

174

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

4. Loans, nonperforming assets and allowance for loan losses:

The major classifications of loans outstanding, net of unearned interest and net deferred loan costs at December 31, 2006 and 2005, are summarized as follows. Unearned interest totaled $2,029 and $1,815 at December 31, 2006 and 2005, respectively. Net deferred loan costs were $484 at December 31, 2006, and $257 at December 31, 2005.

December 31	2006		2005
Commercial, financial and others	$	143,792	$	137,302
Real estate:
Construction		5,513		2,575
Mortgage		225,703		217,827
Consumer, net		31,546		29,217
Lease financing, net		1,520		1,682
Total	$	408,074	$	388,603

Fixed-rate loans totaled $167,392 and $164,146, while loans with adjustable interest rates were $240,682 and $224,457, respectively, at December 31, 2006 and 2005.

Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $8,209 at December 31, 2006, and $5,510 at December 31, 2005. Advances and repayments during 2006 totaled $4,266 and $1,567, respectively. These loans are made during the ordinary course of business at normal credit terms. There were no related party loans that were classified as nonaccrual, past due, restructured or considered a potential credit risk at December 31, 2006 and 2005.

At December 31, 2006, the majority of the Company’s loans were at least partially secured by real estate in Northeastern Pennsylvania. Therefore, a primary concentration of credit risk is directly related to the real estate market in this area. Changes in the general economy, local economy or in the real estate market could affect the ultimate collectibility of this portion of the loan portfolio. Management does not believe there are any other significant concentrations of credit risk that could affect the loan portfolio.

The analysis of changes affecting the allowance for loan losses account for each of the three years ended December 31, 2006, 2005 and 2004, is summarized as follows:

	2006			2005			2004
Balance, January 1	$	4,128		$	3,859		$	3,584
Provision for loan losses		890			782			600
Loans charged-off		(717	)		(586	)		(482	)
Loans recovered		134			73			157
Balance, December 31	$	4,435		$	4,128		$	3,859

175

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

4. Loans, nonperforming assets and allowance for loan losses (continued):

Information concerning nonperforming assets at December 31, 2006 and 2005, is summarized as follows:

December 31	2006		2005
Nonaccrual loans:
Commercial, financial and others	$	1,060	$	1,574
Real estate:
Construction
Mortgage		856		1,714
Consumer, net		94		98
Lease financing, net
Total nonaccrual loans		2,010		3,386
Accruing loans past due 90 days or more:
Commercial, financial and others		13		62
Real estate:
Construction
Mortgage		217		333
Consumer, net		60		118
Lease financing, net		2		33
Total accruing loans past due 90 days or more		292		546
Total nonperforming loans		2,302		3,932
Foreclosed assets		352		363
Total nonperforming assets	$	2,654	$	4,295

Information relating to the recorded investment in impaired loans at December 31, 2006 and 2005, is summarized as follows:

December 31	2006		2005
Impaired loans:
With a related allowance	$	8,017	$	3,844
With no related allowance		1,683		1,863
Total	$	9,700	$	5,707

The analysis of changes affecting the specific portion of the allowance for loan losses related to impaired loans for each of the three years ended December 31, 2006, 2005 and 2004, is summarized as follows:

	2006			2005			2004
Balance, January 1	$	2,206		$	1,179		$	377
Provision for loan losses		662			1,337			1,002
Loans charged-off		(458	)		(318	)		(212	)
Loans recovered					8			12
Balance, December 31	$	2,410		$	2,206		$	1,179

176

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

4. Loans, nonperforming assets and allowance for loan losses (continued):

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 each of the three years ended December 31, 2006, 2005 and 2004, are summarized as follows:

Year Ended December 31	2006		2005		2004
Gross interest due under terms	$	703	$	434	$	279
Interest income recognized		693		337		246
Interest income not recognized	$	10	$	97	$	33
Interest income recognized (cash-basis)	$	693	$	337	$	246
Average recorded investment in impaired loans	$	8,841	$	6,285	$	4,564

Cash received on impaired loans applied as a reduction of principal totaled $1,445 in 2006, $5,543 in 2005 and $1,692 in 2004. At December 31, 2006, the Company had a $465 commitment to one commercial customer with impaired loans. The commitment involved a bridge loan to be paid off within 90 days by guaranteed funds from governmental agencies. There were no commitments to extend additional funds to customers with impaired loans at December 31, 2005.

5. Commitments, concentrations and contingent liabilities:

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Management does 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 the operating results or financial position of the Company.

The contractual amounts of off-balance sheet commitments at December 31, 2006 and 2005, are summarized as follows:

December 31	2006		2005
Commitments to extend credit	$	66,192	$	64,816
Unused portions of home equity and credit card lines		15,777		14,576
Commercial letters of credit		21,405		18,565
Total	$	103,374	$	97,957

177

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

5. Commitments, concentrations and contingent liabilities (continued):

The Company’s involvement in, and exposure to, credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, unused portions of home equity and credit card lines and commercial letters of credit is represented by the contractual amounts of those instruments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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 draw upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of the collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unused portions of home equity and credit card lines are commitments for possible future extensions of credit to existing customers. Unused portions of home equity lines are collateralized and generally have a fixed expiration date. Credit card lines are uncollateralized and usually do not carry a specific maturity date. Unused portions of home equity and credit card lines ultimately may not be drawn upon to the total extent to which the Company is committed.

Commercial letters of credit are conditional commitments issued by the Company 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. Collateral supporting commercial letters of credit amounted to $11,180 at December 31, 2006, and $10,134 at December 31, 2005. Commercial letters of credit with collateral values less than the contractual amount of the commitment are supported by existing lines of credit with the Company. The carrying value of the liability for the Company’s obligations under guarantees was not material at December 31, 2006 and 2005.

The Company provides deposit and loan products and other financial services to individual and corporate customers in its six-county market area of Lackawanna, Luzerne, Monroe, Susquehanna, Wayne and Wyoming. There are no significant concentrations of credit risk from any individual counterparty or groups of counterparties, except for locational concentrations. The concentrations of the credit portfolio by loan type are set forth in Note 4. Collateral is required for all real estate exposure and for most other loans, including off-balance sheet commitments upon extension of credit.

178

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

5. Commitments, concentrations and contingent liabilities (continued):

Loan-to-value ratios of no greater than 80.0 percent are maintained, except in the case of loans secured by deposits or U.S. Government securities. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral varies but may include property, plant and equipment, primary residential properties, and to a lesser extent, income-producing properties. Although the credit portfolio is diversified, the Company and its borrowers are dependent on the continued viability of the Northeastern Pennsylvania economy. The loan portfolio does not include any form of credit involving highly-leveraged transactions, defined as financing transactions that involve the buyout, acquisition or recapitalization of an existing business, including credit extended to highly- leveraged industries. The Company’s underwriting procedures include monitoring the abilities of its borrowers to continue to service loans in periods of rising interest rates through stress testing which could expose the Company to a concentration of credit risk. The Company was not exposed to any potential changes in the terms of loan products that may give rise to a concentration of credit risk at December 31, 2006 and 2005.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and depository institutions. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At December 31, 2006 and 2005, there were no significant concentrations of credit risk from any one issuer, with the exception of securities issued by U.S. Government agencies, including mortgage-backed securities.

Neither the Company nor any of its property is subject to any material legal proceedings. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of pending and threatened lawsuits will have a material effect on the operating results or financial position of the Company.

6. Premises and equipment, net:

Premises and equipment at December 31, 2006 and 2005, are summarized as follows:

December 31	2006		2005
Land	$	3,519	$	3,519
Premises		10,446		10,406
Leasehold improvements		291		291
Furniture and equipment		10,068		9,140
Total premises and equipment		24,324		23,356
Less: accumulated depreciation and amortization		13,306		12,353
Premises and equipment, net	$	11,018	$	11,003

179

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

6. Premises and equipment, net (continued):

Depreciation and amortization charged to noninterest expense amounted to $1,022 in 2006, $1,013 in 2005 and $1,191 in 2004. Occupancy expense has been reduced by rental income from premises leased to others in the amount of $27 in 2006, $15 in 2005 and $39 in 2004.

Certain facilities are leased under operating lease agreements expiring on various dates until the year 2022. Three leases contain escalation clauses that provide for inflation adjustments. The effects of such adjustments are included in the following table. Two leases contain renewal options that provide for extensions of the original lease terms up to 20 years. The cost of such rentals is not included in the following table. The realty leases require the Company to pay real estate taxes, insurances, utilities and repair costs. Rental expense on operating leases amounted to $229 in 2006, $225 in 2005 and $226 in 2004.

Future minimum annual rentals required under noncancellable leases are summarized as follows:

2007	$	194
2008		186
2009		147
2010		119
2011		119
2012 and thereafter		469
Total	$	1,234

7. Other assets:

The major components of other assets at December 31, 2006 and 2005, are summarized as follows:

December 31	2006		2005
Goodwill	$	349	$	349
Deferred income taxes		363		288
Foreclosed assets		352		363
Mortgage servicing rights		676		735
Other		1,725		1,575
Total	$	3,465	$	3,310

The net costs of operating foreclosed assets, including gains and losses on the sale of such properties, were $59 in 2006, $65 in 2005 and $51 in 2004.

The Company originates one-to-four family residential mortgage loans for sale in the secondary market with servicing rights retained. Mortgage loans serviced for others are not included in the accompanying Consolidated

180

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

7. Other assets (continued):

Balance Sheets. The unpaid principal balances of mortgage loans serviced for others were $115,120 at December 31, 2006, and $110,133 at December 31, 2005. Custodial escrow balances, maintained in connection with the loan servicing and included in demand deposits, were $222 and $66 at December 31, 2006 and 2005, respectively.

The analysis of the changes in the balances of mortgage servicing rights for each of the three years ended December 31, 2006, 2005 and 2004, is summarized as follows:

	2006			2005			2004
Balance, January 1	$	735		$	719		$	740
Additions		165			234			214
Amortization		(224	)		(218	)		(235	)
Balance, December 31	$	676		$	735		$	719

At December 31, 2006, 2005 and 2004, the fair value of the mortgage servicing rights approximated their carrying value, therefore, no valuation allowance was deemed necessary.

8. Deposits:

The major components of interest-bearing and noninterest-bearing deposits at December 31, 2006 and 2005, are summarized as follows:

December 31	2006		2005
Interest-bearing deposits:
Money market accounts	$	31,464	$	30,839
NOW accounts		67,273		60,191
Savings accounts		99,341		115,864
Time deposits less than $100		176,389		185,464
Time deposits $100 or more		35,920		23,579
Total interest-bearing deposits		410,387		415,937
Noninterest-bearing deposits		73,055		75,428
Total deposits	$	483,442	$	491,365

Deposits of directors, executive officers, principal stockholders or their affiliates are accepted on the same terms and at the prevailing interest rates offered at the time of deposit for comparable transactions with unrelated parties. The amount of related party deposits totaled $7,053 at December 31, 2006, and $6,648 at December 31, 2005.

181

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

8. Deposits (continued):

The aggregate amounts of maturities for all time deposits at December 31, 2006, are summarized as follows:

2007	$	121,880
2008		33,318
2009		7,962
2010		22,753
2011		9,618
2012 and thereafter		16,778
Total	$	212,309

The aggregate amount of deposits reclassified as loans was $537 at December 31, 2006, and $321 at December 31, 2005. Management evaluates transaction accounts that are overdrawn for collectibility as part of its evaluation for credit losses. During 2006 and 2005, no deposits were received on terms other than those available in the normal course of business.

9. Short-term borrowings:

Short-term borrowings available to the Company consist of a line of credit and advances with the FHLB-Pgh secured under terms of a blanket collateral agreement by a pledge of FHLB-Pgh stock and certain other qualifying collateral, such as investment and mortgage-backed securities and mortgage loans. The line of credit is limited to the Company’s maximum borrowing capacity (“MBC”) with the FHLB-Pgh, which is based on a percentage of qualifying collateral assets. At December 31, 2006, the MBC was $178,267. Interest accrues daily on the line based on the rates of FHLB-Pgh discount notes. This rate resets each day. The line is renewable annually on its anniversary date and carries no associated commitment fees. The FHLB-Pgh has the right to reduce or terminate the line at any time without prior notice and the Company may repay the line at any time without incurring prepayment penalties. Short-term advances are issued with maturities less than one year based on the FHLB-Pgh’s current cost of funds rate. Advances are limited to the MBC and are not prepayable. There are no commitment fees associated with the advances, except those for forward settlement that are based on FHLB-Pgh hedging costs.

There were no short-term borrowings outstanding at December 31, 2006 and 2005. The maximum amount of all short-term borrowings outstanding under the line of credit agreement at any month-end was $11,800 during 2006 and $24,275 during 2005. The average daily balance and weighted-average rate on aggregate short-term borrowings, which consisted entirely of the FHLB-Pgh line of credit, was $3,102 at 4.8 percent in 2006 and $3,894 at 2.7 percent in 2005.

182

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

10. Fair value of financial instruments:

The estimated fair value of financial instruments at December 31, 2006 and 2005, is summarized as follows:

	2006				2005
	Carrying		Fair		Carrying		Fair
December 31	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	27,634	$	27,634	$	35,403	$	35,403
Investment securities available-for-sale		91,213		91,213		104,965		104,965
Loans held for sale, net		572		579		1,934		1,951
Net loans		403,639		395,245		384,475		381,730
Mortgage servicing rights		676		676		735		735
Accrued interest receivable		2,863		2,863		2,487		2,487
Total	$	526,597	$	518,210	$	529,999	$	527,271
Financial liabilities:
Deposits without stated maturities	$	271,133	$	271,133	$	282,322	$	282,322
Deposits with stated maturities		212,309		212,361		209,043		210,271
Accrued interest payable		1,106		1,106		1,024		1,024
Total	$	484,548	$	484,600	$	492,389	$	493,617

11. Employee benefit plan:

The Company has a defined contribution plan covering all employees who have completed 1,000 hours of service, attained 21 years of age and have been employed by the Company for at least one year. Contributions to the plan are determined by the Board of Directors and are based on a prescribed percentage of annual net income allocated to each participant based on their pro rata share of annual compensation. Pension costs are accrued monthly to salaries and benefits expense with the plan being funded annually. In addition, the defined contribution plan includes the provisions under section 401(k) of the Internal Revenue Code (“401(k)”). The 401(k) feature of the plan permits employees to make voluntary, pre-tax contributions up to 25.0 percent of their compensation. Company contributions to the 401(k) are determined by the Board of Directors and are currently based on 100.0 percent matching of voluntary contributions up to 3.0 percent of the employee’s eligible compensation. Company matching contributions to the 401(k) are funded biweekly and are included in salaries and benefits expense. Employee contributions under the 401(k) vest immediately, while matched contributions and discretionary annual contributions made under the defined contribution plan vest proportionally over five years of credited service.

183

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

11. Employee benefit plan (continued):

Discretionary annual contributions to the plan were $165 in 2006, $103 in 2005 and $77 in 2004. Discretionary matching contributions under the 401(k) feature of the plan totaled $149 in 2006, $137 in 2005 and $145 in 2004.

12. Income taxes:

The current and deferred amounts of the provision for income tax expense for each of the three years ended December 31, 2006, 2005 and 2004, are summarized as follows:

Year Ended December 31	2006			2005			2004
Current	$	1,948		$	1,497		$	566
Deferred		(74	)		(246	)		113
Total	$	1,874		$	1,251		$	679

A reconciliation between the effective income tax expense and the amount of income tax expense that would have been provided at the federal statutory tax rate of 34.0 percent for each of the three years ended December 31, 2006, 2005 and 2004, is summarized as follows:

Year Ended December 31	2006			2005			2004
Federal income tax at statutory rate	$	2,796		$	2,197		$	1,837
Differences resulting from:
Tax-exempt interest, net		(930	)		(891	)		(748	)
Residential housing program tax credit					(9	)		(419	)
Other		8			(46	)		9
Federal income tax on income before income taxes	$	1,874		$	1,251		$	679

Sources of change in deferred income taxes and the related tax effects for each of the three years ended December 31, 2006, 2005 and 2004, are summarized as follows:

Year Ended December 31	2006			2005			2004
Allowance for loan losses	$	(128	)	$	(119	)		$	(116	)
Loans, net of unearned income		78			49				198
Accrued interest receivable		25			(32	)			8
Prepaid expenses		28			(57	)			147
Premises and equipment, net		(122	)		(91	)			(70	)
Core deposit intangible		49			(42	)			(42	)
Other		(4	)		46				(12	)
Change in deferred income taxes affecting the statements of income		(74	)		(246	)			113
Deferred income taxes on investment securities recognized in stockholders’ equity		(1	)		(296	)			(299	)
Total change in deferred income taxes	$	(75	)	$	(542	)		$	(186	)

184

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

12. Income taxes (continued):

Temporary differences between financial statement carrying amounts and tax bases of assets and liabilities that represent the deferred tax assets and liabilities at December 31, 2006 and 2005, are summarized as follows:

December 31	2006		2005
Deferred tax assets:
Allowance for loan losses	$	1,290	$	1,162
Accrued interest receivable		48		73
Core deposit intangible		292		341
Total		1,630		1,576
Deferred tax liabilities:
Investment securities available-for-sale		493		494
Loans, net of unearned income		165		87
Prepaid expenses		118		90
Premises and equipment, net		421		543
Other		70		74
Total		1,267		1,288
Net deferred tax assets	$	363	$	288

The Company has determined that the establishment of a valuation reserve for the deferred tax assets is not required, since it is more likely than not that the net deferred tax assets could be principally realized through carryback to taxable income in prior years, and by future reversals of existing taxable temporary differences, or to a lesser extent, through future taxable income. A review of the accounting criteria related to the recognition of deferred tax assets is performed quarterly. Banks in Pennsylvania are not subject to state or local income taxes, but rather are assessed a tax based on capital. This capital shares tax, which is included in other expenses, was $481 in 2006, $432 in 2005 and $377 in 2004.

185

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

13. Parent Company financial statements:

CONDENSED STATEMENTS OF INCOME

Year Ended December 31	2006			2005		2004
Income:
Dividends from subsidiaries	$	1,866		$	2,255	$	3,848
Management fees from subsidiaries		284			281		262
Other income		5			119		3
Total income		2,155			2,655		4,113
Expense:
Occupancy and equipment expenses		76			76		76
Other expenses		377			281		367
Total expenses		453			357		443
Income before income taxes and undistributed income of subsidiaries		1,702			2,298		3,670
Income tax expense (benefit)		(57	)		4		(480	)
Income before undistributed income of subsidiaries		1,759			2,294		4,150
Equity in undistributed income of subsidiaries		4,591			2,916		575
Net income	$	6,350		$	5,210	$	4,725

CONDENSED BALANCE SHEETS

December 31	2006		2005
Assets:
Cash	$	235	$	53
Investment in bank subsidiary		52,108		47,526
Investment securities available-for-sale		178		166
Other assets		2,192		2,478
Total assets	$	54,713	$	50,223
Liabilities:
Dividends payable	$	463	$	426
Other liabilities		132		108
Total liabilities		595		534
Stockholders’ equity		54,118		49,689
Total liabilities and stockholders’ equity	$	54,713	$	50,223

186

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

13. Parent Company financial statements (continued):

CONDENSED STATEMENTS OF CASH FLOWS

Year Ended December 31	2006			2005			2004
Cash flows from operating activities:
Net income	$	6,350		$	5,210		$	4,725
Adjustments:
Equity in undistributed income of subsidiaries		(4,591	)		(2,916	)		(575	)
Depreciation and amortization		76			76			76
Changes in:
Other assets		210			(5	)		(811	)
Other liabilities		19			(203	)		82
Net cash provided by operating activities		2,064			2,162			3,497
Cash flows from financing activities:
Issuance of dividend reinvestment plan shares		305			258			246
Repurchase and retirement of common shares		(371	)		(811	)		(1,957	)
Cash dividends paid		(1,816	)		(1,695	)		(1,667	)
Net cash used in financing activities		(1,882	)		(2,248	)		(3,378	)
Net increase (decrease) in cash		182			(86	)		119
Cash at beginning of year		53			139			20
Cash at end of year	$	235		$	53		$	139

14. Regulatory matters:

Under the Pennsylvania Business Corporation Law of 1988, as amended, the Company may not pay a dividend if, after payment, either the Company could not pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than its total liabilities. The determination of total assets and liabilities may be based upon: (i) financial statements prepared on the basis of GAAP; (ii) financial statements that are prepared on the basis of other accounting practices and principles that are reasonable under the circumstances; or (iii) a fair valuation or other method that is reasonable under the circumstances.

In addition, the Company is subject to dividend restrictions under the Pennsylvania Banking Code of 1965, as amended, which allows cash dividends to be declared and paid out of accumulated net earnings. More stringent dividend restrictions apply under Federal Reserve Regulation H, which restricts calendar year dividend payments of member banks to the total of its net profits for that year combined with its retained net profits of the preceding two calendar years, less any required transfer to surplus, unless a bank has received prior approval from the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Accordingly, Community Bank, without prior approval from the Federal Reserve Board, may declare dividends to the Parent Company of $8,167 at December 31, 2006.

187

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

14. Regulatory matters (continued):

Although subject to the aforementioned regulatory restrictions, the Company’s consolidated retained earnings at December 31, 2006 and 2005, were not restricted under any borrowing agreement as to payment of dividends or reacquisition of common stock.

The Company has paid cash dividends since its formation as a bank holding company in 1983. It is the present intention of the Board of Directors to continue this dividend payment policy, however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors considers payment of dividends.

The amount of funds available for transfer from Community Bank to the Parent Company in the form of loans and other extensions of credit is also limited. Under the provisions of Section 23A of the Federal Reserve Act, transfers to any one affiliate are limited to 10.0 percent of capital and surplus. At December 31, 2006, the maximum amount available for transfer from Community Bank to the Parent Company in the form of loans amounted to $5,526. At December 31, 2006 and 2005, there were no loans outstanding, nor were any advances made during 2006 and 2005.

The Company and Community Bank are subject to certain regulatory capital requirements administered by the federal banking agencies, which are defined in Section 38 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Community Bank’s financial statements. In the event an institution is deemed to be undercapitalized by such standards, FDICIA 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 the significantly or critically undercapitalized institutions including restrictions on interest payable on accounts, dismissal of management and appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention when the institution is deemed to be engaging in unsafe and unsound practices or receives a less than satisfactory examination report rating. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Community Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under

188

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

14. Regulatory matters (continued):

regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Community Bank was categorized as well capitalized under the regulatory framework for prompt corrective action at December 31, 2006 and 2005, based on the most recent notification from the Federal Deposit Insurance Corporation. To be categorized as well capitalized, Community Bank must maintain certain minimum Tier I risk-based, total risk-based and Tier I Leverage ratios as set forth in the following tables. The Tier I Leverage ratio is defined as Tier I capital to total average assets less intangible assets. There are no conditions or events since the most recent notification that management believes have changed Community Bank’s category.

189

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

14. Regulatory matters (continued):

The Company’s and Community Bank’s capital ratios at December 31, 2006 and 2005, 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 FDICIA, are summarized as follows:

											Minimum to be Well
											Capitalized under
						Minimum for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier I capital to risk-weighted assets:
Consolidated	$	52,745		12.5	%	$	16,881		4.0	%
Community Bank		50,827		12.1			16,851		4.0		$	25,277		6.0	%
Total capital to risk-weighted assets:
Consolidated		57,180		13.5			33,763		8.0
Community Bank		55,262		13.1			33,703		8.0			42,128		10.0
Tier I capital to total average assets
less intangible assets:
Consolidated		52,745		9.7			21,670		4.0
Community Bank	$	50,827		9.4	%	$	21,631		4.0	%	$	27,039		5.0	%
Risk-weighted assets:
Consolidated	$	408,540
Community Bank		407,785
Risk-weighted off-balance sheet items:
Consolidated		13,497
Community Bank		13,497
Average assets for Leverage ratio:
Consolidated		541,760
Community Bank	$	540,783

											Minimum to be Well
											Capitalized under
						Minimum for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
December 31, 2005	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier I capital to risk-weighted assets:
Consolidated	$	48,308		12.0	%	$	16,113		4.0	%
Community Bank		46,229		11.5			16,076		4.0		$	24,114		6.0	%
Total capital to risk-weighted assets:
Consolidated		52,436		13.0			32,227		8.0
Community Bank		50,357		12.5			32,152		8.0			40,190		10.0
Tier I capital to total average assets less intangible assets:
Consolidated		48,308		9.0			21,373		4.0
Community Bank	$	46,229		8.7	%	$	21,343		4.0	%	$	26,679		5.0	%
Risk-weighted assets:
Consolidated	$	389,044
Community Bank		388,108
Risk-weighted off-balance sheet items:
Consolidated		13,789
Community Bank		13,789
Average assets for Leverage ratio:
Consolidated		534,314
Community Bank	$	533,570

190

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

14. Regulatory matters (continued):

Management periodically purchases shares of the Company’s common stock under a stock repurchase program. For the years ended December 31, 2006, 2005 and 2004, 8,840 shares, 20,594 shares and 48,365 shares having an aggregate cost of $371, $811 and $1,957, respectively, were purchased and retired under the program. On November 17, 2004, the Board of Directors ratified the purchase of 3.0 percent or 55,931 shares of the then outstanding common stock. At December 31, 2006, 38,374 shares authorized under the program were available to be repurchased.

The Company offers its stockholders a Dividend Reinvestment Plan (“DRP”). Under the DRP, the Company registered 300,000 shares of its common stock to be sold pursuant to this plan. The DRP provides stockholders with a simple and convenient method to invest cash dividends in the Company’s common stock without payment of any brokerage commissions, while also furnishing the Company with additional funds for general corporate purposes. Main features of the DRP include the following: (i) shares will be purchased from original issuances; (ii) no optional cash payments; (iii) eligibility for all registered and street name stockholders; (iv) no minimum or maximum number of shares participation restrictions; and (v) availability of full or partial dividend reinvestment. During the years ended December 31, 2006, 2005 and 2004, 7,373 shares, 6,357 shares and 6,228 shares, respectively, were issued under the DRP.

191

Comm Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)

15. Summary of quarterly financial information (unaudited):

	2006												2005
Quarter Ended	March 31			June 30			Sept. 30		Dec. 31			March 31			June 30		Sept. 30			Dec. 31
Interest income:
Interest and fees on loans:
Taxable	$	6,324		$	6,733		$	7,133	$	7,267		$	5,489		$	5,566	$	5,809		$	6,121
Tax-exempt		430			446			352		328			330			347		337			315
Interest and dividends on investment securities available-for-sale:
Taxable		603			503			490		612			555			475		493			637
Tax-exempt		379			377			368		366			391			381		396			389
Dividends		11			25			14		18			8			14		10			9
Interest on federal funds sold		6			67			136		52						14		144			129
Total interest income		7,753			8,151			8,493		8,643			6,773			6,797		7,189			7,600
Interest expense:
Interest on deposits		2,820			2,991			3,197		3,348			2,380			2,363		2,522			2,732
Interest on short-term borrowings		84			60					5			79			27
Total interest expense		2,904			3,051			3,197		3,353			2,459			2,390		2,522			2,732
Net interest income		4,849			5,100			5,296		5,290			4,314			4,407		4,667			4,868
Provision for loan losses		180			225			270		215			300			158		161			163
Net interest income after provision for loan losses		4,669			4,875			5,026		5,075			4,014			4,249		4,506			4,705
Noninterest income:
Service charges, fees and commissions		752			776			769		739			811			802		720			722
Mortgage banking income		108			75			89		100			182			148		145			119
Net gains on sale of merchant services													125			110
Total noninterest income		860			851			858		839			1,118			1,060		865			841
Noninterest expense:
Salaries and employee benefits		1,790			1,918			1,903		2,037			1,795			1,843		1,778			1,818
Net occupancy and equipment		605			596			571		581			638			584		588			552
Other		1,161			1,205			1,273		1,189			1,187			1,373		1,254			1,487
Total noninterest expense		3,556			3,719			3,747		3,807			3,620			3,800		3,620			3,857
Income before income taxes		1,973			2,007			2,137		2,107			1,512			1,509		1,751			1,689
Provision for income tax expense		423			432			512		507			232			289		371			359
Net income		1,550			1,575			1,625		1,600			1,280			1,220		1,380			1,330
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available- for-sale		(450	)		(289	)		868		(132	)		(813	)		889		(721	)		(226	)
Income tax expense (benefit) related to other comprehensive income (loss)		(153	)		(98	)		295		(45	)		(276	)		302		(245	)		(77	)
Other comprehensive income (loss), net of income taxes		(297	)		(191	)		573		(87	)		(537	)		587		(476	)		(149	)
Comprehensive income	$	1,253		$	1,384		$	2,198	$	1,513		$	743		$	1,807	$	904		$	1,181
Per share data:
Net income	$	0.84		$	0.85		$	0.87	$	0.87		$	0.69		$	0.65	$	0.74		$	0.72
Cash dividends declared	$	0.25		$	0.25		$	0.25	$	0.25		$	0.23		$	0.23	$	0.23		$	0.23

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(Dollars in thousands, except per share data)

Operating Environment:

Despite the threat of inflation and the effects of devastating hurricanes, the United States economy moved forward in 2005, as the gross domestic product, the value of all goods and services produced in the Nation, rose 3.5 percent. Home price appreciation, higher equity values, favorable employment conditions and strong corporate earnings led to solid spending increases in both the consumer and business sectors. However, inflationary pressures began to heighten amid escalating energy prices. In light of the elevated inflation, the Federal Open Market Committee continued to gradually remove monetary policy accommodation by increasing the federal funds target rate 25 basis points at each of its eight meetings in 2005. In total, the federal funds target rate increased 200 basis points to 4.25 percent at December 31, 2005, from 2.25 percent at year-end 2004.

In spite of higher energy costs and rising short-term interest rates, consumer spending remained strong in 2005, increasing 3.6 percent. Consumer spending was bolstered by wealth appreciation from rising home and equity values and improved confidence due to a favorable labor market. In addition, outlays in the consumer sector exceeded the 1.5 percent growth in disposable personal income. As a result, the personal savings rate, which had been decreasing in recent years, fell to negative 0.4 percent in 2005.

Business spending rose 6.0 percent in 2005. Strong sales figures, improved earnings performance and an accommodative credit market supported the spending increase.

Solid performance in the corporate sector once again led to improvement in labor market conditions. The National unemployment rate declined to 4.9 percent in 2005 from 5.4 percent in 2004, as the labor force participation rate remained constant at 66.0 percent. Labor productivity, slightly under the productivity experienced over the past several years, continued to advance, increasing 2.3 percent in 2005. Labor costs remained relatively contained despite rising inflation and diminishing labor market resources. According to the employment cost index, compensation increased 3.0 percent in 2005, just under the 3.8 percent increase in 2004. Similar to the Nation, employment conditions improved significantly in 2005 for the Commonwealth of Pennsylvania and all counties in our market area.

The banking industry reported record earnings, as net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks rose 9.7 percent in 2005, compared to 2.2 percent in 2004. Commercial banks continued to experience strong balance sheet growth. Total assets for all FDIC-insured commercial banks grew 7.4 percent in 2005, after growing 10.7

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percent in 2004. Earning assets for all FDIC-insured institutions grew 7.7 percent. Deposit growth kept pace with an 8.6 percent increase. Asset quality for the banking industry improved as the volume of nonperforming loans and leases decreased 4.3 percent in 2005. Equity capital increased 7.3 percent in 2005, compared to 22.9 percent in 2004. The slower growth was attributable to declines in the market values of available-for-sale investment securities.

Higher corporate earnings performance and bolstered confidence from favorable economic and employment conditions were able to mitigate any downward pressures on equity markets. Equity values appreciated once again in 2005 as the major indices posted total return gains but to a lesser extent compared to 2004. Contrary to the overall market, bank stock values declined. The NASDAQ Bank Index Composite fell 4.3 percent in 2005 after gaining 11.0 percent in 2004. Despite the lackluster performance of the stock market, merger and acquisition activity soared, with a total world-wide volume exceeding $2.7 trillion. With regard to merger and acquisition activity for the banking industry, the number of deals announced declined in comparison to 2004. With regard to deal values, the average price to book value increased as compared to 2004, while the median price to earnings decreased slightly.

Review of Financial Position:

Rising interest rates and intensified competition within our market area impacted our growth in 2005. Higher interest rates slowed loan demand and caused disintermediation of deposits. As a result, many of our competitors relaxed loan standards and priced deposits at rates higher than those offered nationally. Despite this competitive pressure, we chose not to relax our credit standards, but attempted to grow the loan portfolio through leveraging our existing business and municipal relationships. Our liquidity position remained favorable throughout most of the year. This afforded us the ability to fund our operations without having to aggressively price deposits. As a result, we were able to maintain our funding costs at a reasonable level.

Despite these factors, total assets grew $15.3 million or 2.9 percent to $543.6 million at December 31, 2005, from $528.3 million at the end of 2004. Total assets averaged $534.7 million in 2005, an increase of $18.9 million or 3.7 percent compared to 2004. Earning assets averaged $508.5 million and equaled 95.1 percent of total average assets in 2005. In comparison, earning assets averaged $488.3 million and equaled 94.7 percent of total average assets in 2004. Interest rates began increasing in 2004 with the shift in monetary policy and continued to rise throughout 2005. As a result, our tax-equivalent yield on earning assets rose 22 basis points from 5.65 percent in 2004 to 5.87 percent in 2005.

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Loans, net of unearned income, grew to $388.6 million at December 31, 2005, from $381.7 million at year-end 2004, an increase of $6.9 million. Total deposits grew $12.9 million or 2.7 percent to $491.4 million at December 31, 2005, from $478.5 million at December 31, 2004. Stockholders’ equity improved $2.4 million to $49.7 million or $26.86 per share at December 31, 2005, compared to $47.3 million or $25.38 per share at December 31, 2004.

Investment Portfolio:

Total return is the principal gauge and comprehensive industry-wide approach for measuring investment portfolio performance. The total return of our investment portfolio posted relatively similar total returns of 3.6 percent in 2005 and 3.5 percent in 2004. Based on a study from an independent national investment performance ranking company, our investment portfolio ranked in the top third of all FDIC-insured bank holding companies with respect to total return in 2005.

Similar to the approach taken in assessing our performance with respect to return, we evaluate our risk in comparison to all other financial institutions. Risk is assessed by quantifying the average life of the investment portfolio as compared to that of U.S. Treasury securities. This risk measure equaled 2.2 years in 2005, not materially different from the 2.1 years reported in 2004. Similar to our ranking for total return, we ranked in the top third of all FDIC-insured bank holding companies with regard to low risk, according to the same independent ranking company.

Our investment portfolio decreased $13.8 million to $105.0 million at December 31, 2005, from $118.8 million at December 31, 2004. The investment portfolio averaged $103.9 million and equaled 20.4 percent of average earning assets in 2005, compared to $103.3 million and 21.2 percent in 2004. Despite the rise in market rates, the tax-equivalent yield on the investment portfolio equaled 4.39 percent in 2005, 1 basis point lower than 4.40 percent in 2004. This slight decrease could be explained by our continued actions to shorten the average life of the investment portfolio. Net unrealized holding gains in the investment portfolio, included as a separate component of stockholders’ equity, were $959, net of income taxes of $494, at December 31, 2005, and $1,534, net of income taxes of $790, at December 31, 2004.

We did not sell any securities in 2005 and 2004. Repayments from investment securities totaled $46.2 million in 2005 and $18.2 million in 2004. The majority of the increase in repayments resulted from maturities of short-term U.S. Government-sponsored agency securities. At the end of 2004, we had $44.6 million in U.S. Government-sponsored agency securities with a weighted-average life of 0.8 years. A total of $31.5 million of these

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securities matured in constant intervals during 2005. We purchased a total of $34.0 million in investment securities in 2005.

At December 31, 2005, investment securities with an amortized cost of $36.6 million were pledged to secure deposits, to qualify for fiduciary powers and for other purposes required or permitted by law. At December 31, 2004, the amortized cost of pledged securities equaled $37.4 million. The fair value of such securities equaled $36.5 million at December 31, 2005, and $37.4 million at December 31, 2004.

Loan Portfolio:

Rising interest rates, coupled with greater competition, forced spreads between originations and sales tighter. As a result, net gains realized on the sale of these loans declined $90 or 15.6 percent to $487 in 2005 from $577 in 2004. Residential mortgage loans serviced for the Federal National Mortgage Association totaled $110.1 million at December 31, 2005, an increase of $12.3 million or 12.6 percent from $97.8 million at the end of 2004. Serviced loans increased $7.8 million or 8.7 percent in 2004. Mortgage loans held for sale, net, totaled $1.9 million at the end of 2005 and 2004.

Our on-going strategic focus includes developing sound relationships with commercial businesses within our market area, along with providing personalized service to our retail customers. During 2005, the majority of the growth in our loan portfolio was concentrated in the business sector. Business loans, including commercial loans, commercial mortgages and lease financing, grew $7.7 million or 3.0 percent to $265.1 million at year-end 2005 from $257.4 million at the end of 2004. Specifically, commercial loans and leases grew $22.4 million or 19.2 percent, while commercial real estate loans declined $14.7 million or 10.4 percent. Residential mortgages, including construction loans, decreased $2.2 million or 2.3 percent. Mortgages originated and subsequently sold in the secondary market totaled $23.4 million in 2005, compared to $23.7 million in 2004. Consumer loans increased $1.3 million or 4.8 percent from year-end 2004 to year-end 2005. Overall, our loan portfolio grew $6.9 million or 1.8 percent to $388.6 million at December 31, 2005, from $381.7 million at December 31, 2004. The relatively nominal change in year-end loan balances is not indicative of the actual performance of our loan portfolio in 2005. We received significant repayments on several large one-year term, tax-exempt commercial loans that matured at year-end. These loans were subsequently refinanced with us during the beginning of 2006. A better indication of our 2005 performance can be gained through a review of our average loan balances. Loans averaged $396.6 million in 2005, an increase of $22.5 million or 6.0 percent compared to $374.1 million in 2004. The tax-

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equivalent yield on the loan portfolio increased 18 basis points to 6.30 percent in 2005 from 6.12 percent in 2004.

Our holdings of adjustable-rate loans increased $3.4 million or 1.5 percent in 2005. Adjustable-rate loans totaled $225.7 million and represented 58.1 percent of the loan portfolio at December 31, 2005, compared to $222.3 million or 58.2 percent at the end of 2004. Fixed-rate loans increased $3.5 million to $162.9 million at December 31, 2005, from $159.4 million at December 31, 2004.

Asset Quality:

Our asset quality deteriorated from the end of 2004 as evidenced by an increase in the ratio of nonperforming assets as a percentage of loans, net of unearned income, and foreclosed assets, to 1.10 percent at December 31, 2005, from 0.86 percent at December 31, 2004. Total nonperforming assets increased $1,011 or 30.8 percent to $4,295 at December 31, 2005, from $3,284 at year-end 2004. The majority of the deterioration was due to a $1,414 increase in nonaccrual loans. Commercial loans on nonaccrual status increased $725, while nonaccruing real estate and consumer loans rose by $591 and $98. Partially offsetting the increase in nonaccrual loans were decreases of $367 in accruing loans past due 90 days or more and $36 in foreclosed assets.

At December 31, 2005 and 2004, we had a recorded investment in impaired loans of $5,707 and $7,066. The recorded investment in impaired loans averaged $6,285 in 2005 and $4,564 in 2004. At December 31, 2005, the amount of recorded investment in impaired loans for which there was a related allowance for loan losses was $3,844. The amount of the corresponding allowance was $2,206. Comparatively, the amount of these loans and their related allowance was $2,930 and $1,179 at December 31, 2004. The amount of recorded investment for which there was no related allowance for loan losses was $1,863 and $4,136 at December 31, 2005 and 2004. During 2005, activity in the allowance for loan losses account related to impaired loans included a provision charged to operations of $1,337, losses charged to the allowance of $318 and recoveries of impaired loans previously charged-off of $8. The 2004 activity in the allowance for loan losses account related to impaired loans included a provision charged to operations of $1,002, losses charged to the allowance of $212 and recoveries of impaired loans previously charged-off of $12. Interest income related to impaired loans would have been $434 in 2005 and $279 in 2004, had the loans been current and the terms of the loans not been modified. Interest recognized on impaired loans amounted to $337 in 2005 and $246 in 2004. Included in these amounts was interest recognized on a cash basis of $337 and $246. Cash received on impaired loans applied as a reduction of principal totaled $5,543 in 2005 and $1,692 in 2004.

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(Dollars in thousands, except per share data)

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses increased $269 to $4,128 at December 31, 2005, from $3,859 at the end of 2004. As a percentage of loans, net of unearned income, the allowance equaled 1.06 percent at the end of 2005, compared to 1.01 percent at year-end 2004. The increase in the allowance resulted from a higher provision for loan losses, offset by an increase in net loans charged-off during 2005. Net loans charged-off increased $188 or 57.9 percent to $513 or 0.13 percent of average loans outstanding in 2005 from $325 or 0.09 percent of average loans outstanding in 2004.

The allocated element of the allowance for loan losses account increased $666 to $3,161 at December 31, 2005, compared to $2,495 at December 31, 2004. The increase resulted from an increase of $1,027 in the specific portion for the impairment of loans individually evaluated under Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” partially offset by a reduction of $361 in the formula portion for the impairment of loans collectively evaluated under SFAS No. 5, “Accounting for Contingencies.” The increase in the specific portion primarily resulted from the greater amount of impaired loans which were collateral deficient, having a recorded investment which exceeded their respective collateral value, at December 31, 2005. Impaired loans with a recorded investment in excess of their fair value amounted to $3,844 at year-end 2005 compared to $2,930 at the end of 2004. For these loans, the amount by which the recorded investment exceeded the fair market value was $2,206 at December 31, 2005, compared to $1,179 at the end of 2004.

With regard to the formula portion, the decline resulted from a reduction in the total loss factors for most of the major loan classifications, partially offset by an increase in the volume of loans collectively evaluated for impairment under SFAS No. 5. The reduction in the total loss factors was due to a reduction in the historical loss factors for each loan classification. The unallocated element was $967 at December 31, 2005, and $1,364 at December 31, 2004.

The coverage ratio, the allowance for loan losses account, as a percentage of nonperforming loans, weakened to 105.0 percent at December 31, 2005, from 133.8 percent at December 31, 2004. Nonperforming loans growing at a higher proportional rate as compared to the allowance for loan losses account caused the decline in the coverage ratio. With regard to all nonperforming assets, our allowance was able to cover 96.1 percent at the end of 2005, compared to 117.5 percent at year-end 2004.

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(Dollars in thousands, except per share data)

Deposits:

Our deposit growth moderated in 2005 compared to 2004. Commercial deposit accounts increased $19.4 million, while retail deposits declined $6.5 million. The growth in business accounts resulted from increases of $7.0 million or 21.4 percent in demand deposits and $18.6 million or 21.6 percent in interest-bearing transaction accounts, which include money market, NOW and savings accounts. Partially offsetting these increases was a decline in total commercial time deposits of $6.2 million or 36.4 percent. With regard to personal deposits, the greatest factor influencing the change was an $11.6 million or 10.2 percent decrease in interest-bearing transaction accounts. This decline was partially offset by increases in total time deposits of $4.4 million and demand deposits of $0.7 million. Overall, total deposits grew $12.9 million or 2.7 percent to $491.4 million at December 31, 2005, from $478.5 million at the end of 2004. Total deposits grew $19.0 million or 4.1 percent in 2004. Noninterest-bearing deposits rose $7.7 million or 11.4 percent from the end of 2004, while interest-bearing deposits increased $5.2 million or 1.3 percent.

Total deposits averaged $480.1 million in 2005, an increase of $14.5 million or 3.1 percent compared to $465.6 million in 2004. Noninterest-bearing deposits averaged $7.7 million or 12.0 percent higher in 2005, while average interest-bearing accounts grew $6.8 million or 1.7 percent. The growth in interest-bearing transaction accounts reflected the growth in nonpersonal accounts, as average money market and NOW accounts grew $4.5 million and $11.9 million. Consumer savings habits, coupled with greater competition in our market area, directly influenced declines of $9.0 million in average savings accounts and $0.6 million in average aggregate time deposits. Our cost of deposits rose 15 basis points to 2.45 percent in 2005, from 2.30 percent in 2004.

Volatile deposits, time deposits $100 or more decreased $10.9 million to $23.6 million at December 31, 2005, from $34.5 million at the end of 2004. Large denomination time deposits averaged $28.5 million in 2005 and $29.5 million in 2004. Our average cost of these funds increased only 21 basis points to 3.52 percent in 2005, from 3.31 percent in 2004.

Market Risk Sensitivity:

We utilize various computerized modeling techniques for market risk management. One such technique utilizes a tabular presentation of fair value information and contractual terms relevant to determine the future cash flows of market risk sensitive instruments, categorized by expected maturity dates. According to the results of this presentation at December 31, 2005, total interest-earning assets scheduled to mature within one year

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totaled $137.2 million with a weighted-average tax-equivalent yield of 5.73 percent. Total interest-bearing liabilities scheduled to mature within one year equaled $137.4 million with a weighted-average cost of 2.62 percent. Interest-earning assets scheduled to mature within one year were primarily comprised of investment securities having an amortized cost of $46.3 million and a weighted-average tax-equivalent yield of 3.66 percent and net loans of $76.9 million with a weighted-average tax-equivalent yield of 7.19 percent. With regard to interest-bearing liabilities, based on historical withdrawal patterns, interest-bearing transaction accounts, defined as money market, NOW and savings accounts, of $43.4 million with a weighted-average cost of 1.51 percent were anticipated to mature within one year. In addition, time deposits totaling $94.0 million with a weighted-average cost of 3.14 percent were scheduled to mature within the same time frame.

In addition to monitoring market risk based on this tabular presentation, we analyze changes in the fair value of other financial instruments utilizing interest rate shocks. Specifically, we analyze the effects instantaneous parallel shifts of plus or minus 100 basis points have on the economic values of other financial instruments. The results of the model at December 31, 2005, indicated fair value declines of 1.3 percent in other financial assets and 0.8 percent in other financial liabilities given a parallel and instantaneous rise of 100 basis points in market interest rates. Conversely, a 100 basis point decline in market interest rates would result in fair value appreciation of 1.4 percent in other financial assets and 0.8 percent in other financial liabilities.

We also use models that consider repricing frequencies of rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”) in addition to maturity distributions. One such technique utilizes a static gap report, which attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. At December 31, 2005, our cumulative one-year RSA/RSL ratio was 1.21, compared to 1.23 at December 31, 2004.

As a final tool to assist in managing market risk sensitivity, we enhance our asset/liability management by using a simulation model. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results, using parallel and instantaneous shifts in general market interest rates of plus and minus 100 basis points, did not change materially from model results using current interest rates at December 31, 2005.

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(Dollars in thousands, except per share data)

Liquidity:

The net noncore and net short-term noncore funding dependence ratios illustrate the change in our liquidity position over the prior year. At December 31, 2005, our net noncore funding dependence ratio was negative 8.0 percent, compared to negative 2.2 percent at December 31, 2004. Our net short-term noncore funding dependence ratio equaled negative 11.0 percent at the end of 2005, compared to negative 5.8 percent at year-end 2004. Negative ratios indicated that at December 31, 2005 and 2004, we had no reliance on noncore deposits and borrowings to fund our long-term assets, namely loans and investments.

Our liquidity position is further explained by analyzing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased $22.7 million for the year ended December 31, 2005. Cash and cash equivalents decreased by $15.9 million in 2004. During 2005, financing, operating and investing activities each provided us with net cash and improved our liquidity position at year-end.

Financing activities provided net cash of $10.6 million in 2005 compared to $15.6 million in 2004. Deposit gathering, our predominant financing activity, slowed in comparison to the previous year. Competitive pressures intensified as interest rates continued to rise. The $6.1 million decrease in the amount of funds provided from deposit gathering was caused by reductions in commercial time deposits and personal interest-bearing transaction accounts.

Operating activities provided net cash of $7.8 million in 2005 and $8.4 million in 2004. Net income, adjusted for the effects of noncash transactions such as depreciation and the provision for loan losses, and net changes in current assets, is the primary source of funds from operations.

Our primary investing activities involve transactions relative to our investment and loan portfolios. Investing activities provided us with net cash of $4.3 million in 2005. Conversely in 2004, we used net cash of $39.9 million. Our investment portfolio provided us with $12.2 million in net cash in 2005, compared to a net outflow of cash of $15.3 million in 2004. Cash received from repayments of investment securities were $46.2 million in 2005, an increase of $28.0 million from $18.2 million in 2004. In addition, loan demand continued to subside, resulting in a decline of $16.6 million in the amount of net cash used for lending activities from $24.6 million in 2004 to $8.0 million in 2005.

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(Dollars in thousands, except per share data)

Capital Adequacy:

Stockholders’ equity improved $2.4 million to $49.7 million or $26.86 per share at December 31, 2005, compared to $47.3 million or $25.38 per share at December 31, 2004. Net income of $5.2 million was the primary factor contributing to our improved capital position. Repurchases of common stock, net cash dividends declared and a decrease in the net unrealized gain on investment securities also affected stockholders’ equity during 2005.

Under the stock repurchase program, we repurchased and retired 20,594 shares for $0.8 million in 2005 and 48,365 shares for $2.0 million in 2004. Dividends declared totaled $1,711 or $0.92 per share in 2005 and $1,658 or $0.88 per share in 2004. The dividend payout ratio, dividends declared as a percentage of net income, equaled 32.8 percent in 2005 and 35.1 percent in 2004. During the years ended December 31, 2005 and 2004, 6,357 shares and 6,228 shares were issued under the dividend reinvestment plan.

Our risk-based capital ratios exceeded the minimum regulatory capital ratios of 4.0 percent and 8.0 percent required for adequately capitalized institutions. Our risk-based capital position at December 31, 2005, improved in comparison to the prior year-end. Our ratio of Tier I capital to risk-weighted assets improved to 12.0 percent at December 31, 2005, compared to 11.4 percent at December 31, 2004. Total capital, as a percentage of risk-weighted assets, improved to 13.0 percent at year-end 2005, from 12.3 percent at the end of 2004. Our Leverage ratio improved to 9.0 percent at December 31, 2005, from 8.8 percent at December 31, 2004.

Review of Financial Performance:

We posted record earnings of $5,210 or $2.80 per share in 2005. This was a $485 or 10.3 percent increase compared to earnings of $4,725 or $2.50 per share in 2004. Higher net interest income and noninterest income were the major factors leading to the improved earnings. Greater operating efficiency also aided the favorable earnings growth. Return on average assets and return on average equity were 0.97 percent and 10.68 percent in 2005, compared to 0.92 percent and 9.97 percent in 2004. Rising market rates continued to impact the value of our available-for-sale investment securities. As a result, we experienced net losses in other comprehensive income, net of income tax benefits, of $575 in 2005 and $579 in 2004.

Net Interest Income:

Growth in average earning assets of $9.5 million more than that of interest-bearing liabilities, coupled with a 7 basis point improvement in our net interest spread, led to an increase in tax-equivalent net interest income of $1,397 or 7.6 percent to $19,743 in 2005 from $18,346 in 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS 2005 VERSUS 2004 (CONTINUED)
(Dollars in thousands, except per share data)

Volume changes in earning assets and interest-bearing liabilities resulted in additional tax-equivalent net interest income of $1,028 in 2005. Average earning assets grew $20.2 million or 4.1 percent in 2005 to $508.5 million from $488.3 million in 2004, which resulted in additional tax-equivalent interest revenue of $1,238. Loan growth was the predominant factor leading to the overall growth in average earning assets. Taxable loans averaged $11.3 million or 3.3 percent higher in 2005, while average tax-exempt loans grew $11.2 million or 41.2 percent. Loan growth in 2005 contributed $1,292 to tax-equivalent interest revenue. Partially mitigating the positive effects due to earning asset growth was a $10.7 million or 2.7 percent increase in average interest-bearing liabilities to $412.4 million in 2005, from $401.7 million in 2004. This resulted in additional interest expense of $210 in 2005. The majority of the growth in interest-bearing liabilities was concentrated in lower-costing NOW and money market accounts, supplemented by an increase in average short-term borrowings. Growth in NOW accounts of $11.9 million, money market accounts of $4.5 million and short-term borrowings of $3.9 million together resulted in additional interest expense of $302. Savings accounts and total time deposits averaged $9.0 million and $0.6 million less in 2005, which caused reductions in interest expense of $73 and $19.

Tax-equivalent net interest income was also increased by $369 in 2005 due to changes in interest rates. Our net interest spread widened 7 basis points to 3.42 percent in 2005 from 3.35 percent in 2004. Tax-equivalent interest revenue rose $1,029 or 3.7 percent, as our tax-equivalent yield on earning assets increased 22 basis points to 5.87 percent in 2005 from 5.65 percent in 2004. This increase was offset partially by a $660 or 7.1 percent increase in interest expense which resulted from a 15 basis point increase in our cost of funds to 2.45 percent in 2005 from 2.30 percent in 2004. In addition, our net interest margin improved 12 basis points to 3.88 percent in 2005 from 3.76 percent in 2004. The tax-equivalent yield on our loan portfolio increased 18 basis points to 6.30 percent in 2005 from 6.12 percent in 2004, which resulted in additional interest revenue of $826. The yield on taxable loans, which rose 19 basis points had the most significant effect, causing an increase of $671. In addition, the yield on tax-exempt loans increased 53 basis points and resulted in additional interest revenue of $155. The yield on federal funds sold improved from 1.36 percent in 2004 to 3.61 percent in 2005, which increased interest revenue by $200. With regard to our cost of funds, we experienced a notable increase in rates paid for interest-bearing transaction accounts. Certain larger-balance, money market, NOW and savings accounts of local school districts and municipalities are priced in accordance with changes in the three-month U.S. Treasury. As a result, the cost of money market, NOW and savings accounts rose 50 basis points, 66 basis points and 17 basis points in 2005, which accounted for $658 or 99.7 percent of the additional interest expense

203

Comm Bancorp, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 2005 VERSUS 2004 (CONTINUED)
(Dollars in thousands, except per share data)

due to changes in interest rates. Due to a favorable liquidity position, we were able to maintain funding costs for time deposits at 2004 levels.

Provision for Loan Losses:

The provision for loan losses equaled $782 in 2005 and $600 in 2004. We considered the increase in the provision to be warranted based on the increase in both our nonperforming assets and net loans charged-off.

Noninterest Income:

Our noninterest revenue increased $318 or 8.9 percent to $3,884 in 2005 from $3,566 in 2004. Service charges, fees and commissions increased $144 or 4.9 percent, while a slowdown in the housing market caused by rising mortgage rates led to a $61 or 9.3 percent reduction in mortgage banking income. Also included in noninterest revenue in 2005 was a gain of $235 from the sale of our merchant services portfolio.

Noninterest Expense:

Due to cost containment efforts, noninterest expense rose by a modest $235 or 1.6 percent to $14,897 in 2005 from $14,662 for the same period of 2004. Increases in salaries and employee benefits expense and other expenses were partially offset by a decrease in occupancy and equipment expense.

Salaries and employee benefits expense constitutes the majority of our noninterest expense. Total personnel costs increased $266 or 3.8 percent to $7,234 in 2005 from $6,968 in 2004, primarily as a result of annual merit increases.

Net occupancy and equipment expense decreased $102 or 4.1 percent to $2,362 in 2005, compared to $2,464 in 2004. A reduction in depreciation expense was the primary factor leading to this decrease. The effect of lower depreciation was partially offset by additional hardware and software maintenance costs, real estate tax increases and a reduction in rental income.

Other expenses increased $71 or 1.4 percent to $5,301 in 2005 from $5,230 in 2004. Higher contractual services related to preparing for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 was the primary factor contributing to the increase in other expenses. In addition, marketing costs, insurance and bank shares tax expenses all increased in comparison to the prior year. The increases were offset by a $423 reduction in merchant processing fees as a result of the sale of our merchant services portfolio.

204

Comm Bancorp, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS 2005 VERSUS 2004 (CONTINUED)
(Dollars in thousands, except per share data)

Income Taxes:

Our income tax expense increased $572 to $1,251 in 2005, from $679 in 2004. Our income tax in 2004 was reduced by a one-time Federal Historic tax credit of $419 related to an investment in a limited partnership. Adjusting for this credit, income tax expense increased $153 in 2005 resulting from higher net income, partially offset by the effects of higher tax-exempt revenue. In addition to using tax credits, we utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. Tax-exempt interest revenue, as a percentage of total interest revenue, increased to 10.2 percent in 2005 from 9.2 percent in 2004.

205

Comm Bancorp, Inc.
DIRECTORS AND OFFICERS

BOARD OF DIRECTORS
Comm Bancorp, Inc. and
Community Bank and Trust Company

DAVID L. BAKER
Senior Vice President,
Community Bank and Trust Company

THOMAS M. CHESNICK
Retired

WILLIAM F. FARBER, SR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD

JUDD B. FITZE
Attorney, Farr, Davis & Fitze

DEAN L. HESSER
President, Tom Hesser Chevrolet, Inc. and
Tom Hesser Nissan, LLC

JOHN P. KAMEEN
SECRETARY
Publisher, The Forest City News

WILLIAM A. KERL
President, Kerl Coal, Oil and
Trucking Company, Inc.

ERWIN T. KOST
President, Kost Tire Distributors, Inc.

SUSAN F. MANCUSO
Partner, Mancuso & Mancuso
Accounting & Tax Service

ROBERT A. MAZZONI
Judge of the Court of Common Pleas of
Lackawanna County

J. ROBERT McDONNELL
VICE CHAIRMAN
Owner, McDonnell’s Restaurant

JOSEPH P. MOORE, III
Auto Dealer, Manheim Imports

ERIC G. STEPHENS
Auto Dealer, H.L. Stephens and Son

CORPORATE OFFICERS

Comm Bancorp, Inc.

WILLIAM R. BOYLE
Senior Vice President
Chief Credit Officer

WILLIAM F. FARBER, SR.
President and Chief Executive Officer
Chairman of the Board

JOHN P. KAMEEN
Secretary

J. ROBERT McDONNELL
Vice Chairman

SCOTT A. SEASOCK
Executive Vice President
Chief Financial Officer

DIRECTORS EMERITUS

MICHAEL T. GOSKOWSKI
President, Kartri Sales Co., Inc.,
M.G. Manufacturing Co., Inc.

WILLIAM B. LOPATOFSKY
Retired

JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.

206

Comm Bancorp, Inc.
DIRECTORS AND OFFICERS (CONTINUED)

ADVISORY BOARDS
Community Bank and Trust Company

CARBONDALE BRANCH

JOSEPH J. BRENNAN
Brennan and Brennan Funeral Home

JOHN J. CERRA
Attorney

HENRY E. DEECKE
Henry E. Deecke Real Estate

ROBERT W. FARBER
Quality Perforating, Inc.

JOSEPH R. MAZZA
Mazza Linen Service

CLIFFORD BRANCH

THOMAS J. LOPATOFSKY, JR.
Lenox Propane

SEAN P. McGRAW
Attorney, McGraw, Peterson & Nepa

PATRICK J. OLIVERI
Oliveri’s Crystal Lake Hotel

EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK BRANCHES

DOUGLAS A. GAY
Gay’s True Value, Inc.

THOMAS S. HENRY
Mile Hill Auto Parts

JEFFREY KINTNER
Kintner Modular Homes
and Nostalgia Car Wash

FOREST CITY BRANCH

THOMAS BAILEYS
Does Not Compute

RICHARD E. CURTIS
CUBE Auto Supply

ALLAN A. HORNBECK, JR.
Allan Hornbeck Chevrolet

JOSEPH LUCCHESI, D.M.D.
Dentist

J. SCOTT MISKOVSKY
Pharmacist, Red Cross Pharmacy

LINDA M. RICHARDS
Sparkware Associates, Inc.

MONTROSE BRANCH

EDGAR B. BAKER
Consultant

THOMAS R. KERR
Tom Kerr Chevrolet

FRANCIS J. PINKOWSKI
Country Landmarks Real Estate, Inc.

DONNA L. WILLIAMS
Livestock Dealer/Farmer

NICHOLSON BRANCH

RICHARD S. LOCHEN
Lochen’s Market

MARK W. NOVITCH
Sherwood’s Freightliner
Western Star Sterling

MARK D. VANKO
Gin’s Restaurant

SIMPSON BRANCH

FRANCIS X. LAPERA, SR.
Lapera Oil Company, Inc.

ROBERT M. McDONNELL
McDonnell’s Restaurant

GERALD G. SALKO, D.D.S.
Dentist

TANNERSVILLE BRANCH

TIMOTHY B. FISHER, II
Attorney, Fisher & Fisher

GARY HAZEN, CPA
John J. Riley, Inc.
Certified Public Accountants

CHARLES R. MARZZACCO
Weichert Realtors Acclaim

MATILDA B. SHEPTAK
Pocono Mountains Vacation Bureau

207

Comm Bancorp, Inc.
DIRECTORS AND OFFICERS (CONTINUED)

OFFICERS

Community Bank and Trust Company

DAVID L. BAKER
Senior Vice President

J. KEVIN BOYLAN
Commercial Loan Officer

WILLIAM R. BOYLE
Senior Vice President
Chief Credit Officer

ROBIN M. BULZONI
Trust Officer

DEBRA A. CARR
Dickson City and Eynon Regional Manager

MARK E. CATERSON
Montrose Branch Manager

ROBERT F. DAVIS
Commercial Loan Officer

WILLIAM F. FARBER, SR.
President and Chief Executive Officer
Chairman of the Board

MICHAEL J. GAGLIARDI
Special Assets Officer

DEBRA A. GAY
Eaton Township and Lake Winola Regional Manager

GREGORY G. GULA
Internal Loan Review Officer

DONALD J. GIBBS
Clarks Summit and Scranton Regional Manager

LISA A. HAHN
Commercial Loan Officer

DAVID A. JONES
Director of Mortgage Lending

SHARON A. KOHANSKI
Commercial Loan Officer

RICHARD J. LAPERA
Internal Auditor

GARY S. LAVELLE
Director of Consumer Lending

ANNETTE M. LYNCH
Loan Administration Officer

PAMELA S. MAGNOTTI
Compliance Officer

MARY ANN MUSHO
Human Resources Director

MICHAEL A. NARCAVAGE
Vice President
Chief Operations Officer

TIMOTHY P. O’BRIEN
Vice President
Director of Commercial Lending

ROBERT P. O’MALLEY
Indirect Loan Officer

M. EVELYN PANTZAR
Vice President

JOHN PASH, III
Comptroller

MARY BETH PASQUALICCHIO
Director of Marketing

JAMES R. PIETROWSKI
Commercial Loan Officer

MARK D. RENZINI, CPA
Director of Wealth Management

CHERYL A. RUPP
Simpson Branch Manager

THOMAS A. SALUS
Credit Administration Officer

SCOTT A. SEASOCK
Executive Vice President
Chief Financial Officer

RONALD K. SMITH
Branch Administrator

TAMI L. SNYDER
Information Services Officer

HAROLD F. STOUT
Tunkhannock Branch Manager

BRIAN C. URBAS
Clifford, Forest City and Lakewood Regional Manager

ANN E. VADELLA
Carbondale Branch Manager

STEPHANIE A. WESTINGTON, CPA
Finance and Planning Officer

LOUIS J. ZEFRAN
Business Development Officer

208

Comm Bancorp, Inc.
DIRECTORS AND OFFICERS (CONTINUED)

BOARD OF DIRECTORS

Comm Realty Corporation

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

SCOTT A. SEASOCK

ERIC G. STEPHENS

OFFICERS

Comm Realty Corporation

THOMAS A. SALUS
President

STEPHANIE A. WESTINGTON, CPA
Treasurer

MICHAEL J. GAGLIARDI
Secretary

BOARD OF DIRECTORS

Community Leasing Corporation

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

JOSEPH J. MUSKEY

ERIC G. STEPHENS

OFFICERS

Community Leasing Corporation

JOSEPH J. MUSKEY
President

STEPHANIE A. WESTINGTON, CPA
Treasurer

JAMES R. PIETROWSKI
Secretary

BOARD OF DIRECTORS

Comm Financial Services Corporation

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

JOHN P. KAMEEN

MARK D. RENZINI, CPA

OFFICERS

Comm Financial Services Corporation

GEORGE J. COBB
President

JOHN PASH, III
Treasurer

MARY ANN MUSHO
Secretary

MEMBERSHIP

Community Abstract Services, LLC

WILLIAM F. FARBER, SR.
Community Bank and Trust Company

MICHAEL C. COWLEY
Cowley Law Firm

OFFICERS

Community Abstract Services, LLC

MICHAEL C. COWLEY
President and Managing Partner

SCOTT A. SEASOCK
Vice President

STEPHANIE A. WESTINGTON, CPA
Treasurer

WILLIAM R. BOYLE
Secretary

209

Comm Bancorp, Inc.
OTHER INFORMATION

LOCATIONS

Community Bank and Trust Company

Carbondale Branches*
37 Dundaff Street
Carbondale, PA 18407
570-282-7500

92 Brooklyn Street
Carbondale, PA 18407
570-282-2276

Clarks Summit Branch*
125 N. State Street
Clarks Summit, PA 18411
570-586-6876

Clifford Branch*
60 Main Street
Clifford, PA 18413
570-222-3168

Dickson City Branch*
1601 Main Street
Dickson City, PA 18519
570-489-8900

Eaton Township Branch*
Cross Country Complex
Route 29
Eaton Township, PA 18657
570-836-1008

Eynon Branch*
Eynon Plaza
Route 6
Eynon, PA 18403
570-876-4881

Forest City Branch*
521 Main Street
Forest City, PA 18421
570-785-3181

Lake Winola Branch*
Winola Plaza
Lake Winola, PA 18625
570-378-3195

Lakewood Branch
18 Como Road, Suite D
Lakewood, PA 18439
570-798-2900

Montrose Branch*
61 Church Street
Montrose, PA 18801
570-278-3824

Nicholson Branch*
57 Main Street
Nicholson, PA 18446
570-942-6135

Scranton Branch*
601 W. Lackawanna Avenue
Scranton, PA 18504
570-558-3600

Simpson Branch*
347 Main Street
Simpson, PA 18407
570-282-4821

Tannersville Branch*
Route 611
Tannersville, PA 18372
570-619-6620

Tunkhannock Branch*
Route 6 West
Tunkhannock, PA 18657
570-836-5555

Kingston**
840 W. Market Street
Kingston, PA 18704
570-714-4708

Trust Services
125 N. State Street
Clarks Summit, PA 18411
800-217-3501

Loan Operations Center
1212 S. Abington Road
Clarks Summit, PA 18411
570-586-0377

Remote ATM Location
Moses Taylor Hospital
700 Quincy Avenue
Scranton, PA 18510

Community Abstract Services, LLC

281 E. Grove Street
Clarks Green, PA 18411
570-587-3060

Comm Financial Services Corporation
125 N. State Street
Clarks Summit, PA 18411
570-586-0377

Community Leasing Corporation
125 N. State Street
Clarks Summit, PA 18411
570-586-0377

Comm Realty Corporation
125 N. State Street
Clarks Summit, PA 18411
570-586-0377

Klick ^SM Banking via the Internet
www.combk.com
800-820-4642, Ext. 109

InTouch ^SM Telephone Banking System
800-820-4642

* ATM Locations
** Loan production office

210

Comm Bancorp, Inc.
OTHER INFORMATION (CONTINUED)

Stockholder Information

Corporate Headquarters:
125 N. State Street
Clarks Summit, PA 18411

Legal Counsel:
Saidis, Flower & Lindsay
26 W. High Street
Carlisle, PA 17013

Independent Auditors:
Beard Miller Company LLP
One Windsor Plaza
7535 Windsor Drive
Suite 300
Allentown, PA 18195

Transfer Agent:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10007

Market Makers:
Automated Trading Desk
866-283-2831

Citadel Derivatives Group, LLC
312-395-2010

Citigroup Global Markets, Inc.
800-223-7743

Cohen Bros & Company
800-826-6096

E*Trade Capital Markets, LLC
800-638-8602

Ferris Baker Watts, Inc.
800-638-7411

Hill, Thompson, Magid and Co.
800-631-3083

Janney Montgomery, LLC
570-963-9203

Knight Equity Markets, LP
800-222-4910

UBS Securities, LLC
203-719-7400

Community Reinvestment:

Copies of Community Bank and Trust Company’s Community Reinvestment Statement may be obtained without charge by writing to Pamela S. Magnotti, Compliance Officer, at corporate headquarters.

Common Stock Market Information:

Shares of Comm Bancorp, Inc. common stock are listed on The NASDAQ Global Market^SM (“NASDAQ”) as CommBcp under the symbol “CCBP.” As of March 14, 2007, ten firms were listed on the NASDAQ system as market makers for the Company’s common stock.

The high and low closing sale prices and dividends per share of the Company’s common stock for the four quarters of 2006 and 2005 are summarized as follows:

					Cash
					Dividends
	High		Low		Declared
2006:
First Quarter	$	44.45	$	41.00	$	0.25
Second Quarter		44.50		39.94		0.25
Third Quarter		43.50		38.00		0.25
Fourth Quarter	$	43.80	$	40.00	$	0.25
2005:
First Quarter	$	43.00	$	40.50	$	0.23
Second Quarter		42.72		39.76		0.23
Third Quarter		43.16		39.25		0.23
Fourth Quarter	$	41.99	$	36.45	$	0.23

Dividend Reinvestment:

Comm Bancorp, Inc. offers a Dividend Reinvestment Plan whereby stockholders can increase their investment in additional shares of common stock without incurring fees or commissions. A prospectus and enrollment form may be obtained by contacting American Stock Transfer & Trust Company, Dividend Reinvestment Department, 59 Maiden Lane, New York, NY 10007, 1-800-278-4353.

Dividend Direct Deposit:

Comm Bancorp, Inc. stockholders not participating in the Dividend Reinvestment Plan may opt to have their dividends deposited directly into their bank account by contacting American Stock Transfer & Trust Company at 1-800-937-5449.

Website Information:

The Company files reports, proxy and information statements and other information electronically with the Securities and Exchange Commission (“SEC”) through the Electronic Data Gathering Analysis and Retrieval filing system. Stockholders and other interested parties may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov. Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC may be obtained without charge by writing to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411, Attn: Investor Relations or through our website at http://www.combk.com.

211

EX-16

EXHIBIT 16

August 24, 2006

Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549

RE: Comm Bancorp, Inc.

We have read the statements that we understand Comm Bancorp, Inc. will include under Item 4 of the Form 8-K/A report it will file regarding the recent change of auditors. We agree with such statements made regarding our firm. We have no basis to agree or disagree with other statements made under Item 4.

Yours truly,

/s/ Kevin R. Foley KRONICK KALADA BERDY & CO., P.C.

212

EX-21

EXHIBIT 21

LIST OF SUBSIDIARIES

Community Bank and Trust Company, incorporated under the laws of the Commonwealth of Pennsylvania as a state-chartered commercial banking institution and trust company.

Comm Realty Corporation, incorporated under the laws of the Commonwealth of Pennsylvania.

Community Leasing Corporation, incorporated under the laws of the Commonwealth of Pennsylvania. A subsidiary of Community Bank and Trust Company.

Comm Financial Services Corporation, incorporated under the laws of the Commonwealth of Pennsylvania. A subsidiary of Community Bank and Trust Company.

213

EX-31.(I)

EXHIBIT 31(i)

COMM BANCORP, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
Rule 13a-14(a)/15d-14(a)

I,	William F. Farber, Sr., President and Chief Executive Officer of Comm Bancorp, Inc., certify that:
1.	I have reviewed this Form 10-K for the year ended December 31, 2006, of Comm Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

214

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2007	/s/ William F. Farber, Sr.
	William F. Farber, Sr.
	President and Chief Executive Officer

215

COMM BANCORP, INC.

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
Rule 13a-14(a)/15d-14(a)

I,	Scott A. Seasock, Executive Vice President and Chief Financial Officer of Comm Bancorp, Inc., certify that:
1.	I have reviewed this Form 10-K for the year ended December 31, 2006, of Comm Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

216

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2007	/s/ Scott A. Seasock
	Scott A. Seasock
	Executive Vice President and Chief Financial Officer

217

EX-32

EXHIBIT 32

COMM BANCORP, INC.

CERTIFICATION PURSUANT TO
SECTION 1350

In connection with the Annual Report of Comm Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006, to be filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, William F. Farber, Sr., President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods covered by the Report.

Date: March 14, 2007	/s/ William F. Farber, Sr.
	William F. Farber, Sr.
	President and Chief Executive Officer

A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

218

COMM BANCORP, INC.

CERTIFICATION PURSUANT TO
SECTION 1350

In connection with the Annual Report of Comm Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006, to be filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Scott A. Seasock, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods covered by the Report.

Date: March 14, 2007	/s/ Scott A. Seasock
	Scott A. Seasock
	Executive Vice President and Chief Financial Officer

A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-99.(I)

EXHIBIT 99(i)

CHARTER
OF THE
JOINT AUDIT COMMITTEE
OF THE
BOARDS OF DIRECTORS
OF
COMM BANCORP, INC.
AND
COMMUNITY BANK AND TRUST COMPANY

Purpose

The purpose of the Joint Audit Committee (the “Committee”) of Comm Bancorp, Inc. and Community Bank and Trust Company (collectively, the “Company”) is to oversee the accounting and financial reporting processes and the audit functions. Specifically, the Committee assists the Boards of Directors’ oversight of:

• The integrity of the Company’s financial statements;

• The audit by the public accounting firm registered with the Public Company Accounting Oversight Board (the “registered public accounting firm”) of the Company’s financial reports;

• The Company’s reports on internal controls;

• The registered public accounting and internal auditing firms’ qualifications and independence; and

• The performance of the Company’s internal audit function.

In addition, the Committee shall undertake the responsibilities described in this Charter, oversee compliance with all significant applicable legal, ethical and regulatory requirements related to accounting and financial matters and report regularly to the Boards of Directors concerning its activities.

Membership

The Committee shall consist of at least three members, all of whom are members of the Company’s Board of Directors, in good standing. Each member must satisfy the independence requirements applicable to the Securities and Exchange Commission, The NASDAQ Global Market^sm and any related banking laws. Committee members shall have knowledge of the primary industries in which the Company operates and must be able to read and understand fundamental financial

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statements, including the Company’s consolidated balance sheet, statement of income and comprehensive income, statement of changes in stockholders’ equity and statement of cash flow. At least one member of the Committee must be a financial expert having past employment experience in finance or accounting, requisite professional certificate in accounting or comparable experience or background which results in the individual’s financial sophistication, including being, or having been, a chief executive officer or other senior officer with financial oversight responsibilities. On an annual basis, the entire Boards of Directors, based on the recommendations of the Nominating and Corporate Governance Committee, shall appoint members of the Committee and select the Committee chairperson.

Authority

The Committee shall have sole authority for the selection, appointment, oversight and replacement of the registered public accounting and the internal auditing firms and approval of all terms of engagement, including compensation, for both audit and non-audit functions performed by these firms. The Committee shall be responsible to ensure the independence of the registered public accounting and internal auditing firms. Both the registered public accounting firm and the internal auditing firm are ultimately accountable to the Committee, as a representative of the stockholders. Accordingly, these firms will report directly to the Committee. The Committee shall review and concur in the appointment, replacement, reassignment or dismissal of the internal auditor of the Company. The Committee has the authority to engage independent counsel, accountants or other advisors, as it deems necessary, to carry out its duties. Appropriate funding for such engagements and those of the registered public accounting and internal auditing firms will be determined by the Committee and provided by the Company. The Committee shall also have the authority, to the extent it deems necessary or appropriate, to require the Company to provide the Committee with the support of one or more of the Company’s employees to assist it in carrying out its duties. The Committee may, at any time, request any officer or employee of the Company or any independent counsel, accountants or other advisors to attend a meeting of the Committee or to meet with any members of, or appointed representative of, the Committee.

Responsibilities

The Committee shall meet regularly and shall be responsible for assisting the Boards of Directors’ oversight of the integrity of the Company’s financial statements, the audit by the registered public accounting firm of the Company’s financial reports and the

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Company’s reports on internal controls, the registered public accounting and internal auditing firms’ qualifications and independence, and the performance of the Company’s internal audit function.

The Committee shall be responsible for the interaction between the registered public accounting firm and the Company, including the resolution of any disagreements between management and this firm regarding accounting processes and financial reporting.

The Committee shall obtain from the registered public accounting firm a written statement delineating all relationships between the auditor and the Company, consistent with Independence Standards Board Standard No. 1, and shall engage in a dialogue with such firm with respect to any disclosed relationships or services that may impact the objectivity and independence of the firm.

The Committee shall approve, in advance, all non-audit services, which may be performed by the registered public accounting firm. The Committee shall evaluate any proposed non-audit services to ensure these services are permissible by applicable laws or regulations.

The Committee shall review and approve the scope of the registered public accounting firm’s engagement and the plans of the internal auditing firm and the internal auditor of the Company in order to assure completeness of coverage, eliminate redundancy and promote the effective use of audit resources.

The Committee shall review the registered public accounting firm’s management letter and management’s response to this letter. The Committee shall also review all internal audit reports, and the reports provided by regulatory agencies, along with management’s response to these reports. The Committee shall ensure all audit findings of the registered public accounting and internal auditing firms have been resolved satisfactorily and within a timely manner.

The Committee shall review, in conjunction with the registered public accounting and internal auditing firms, and the Company’s internal auditor, executive and financial management, all critical accounting policies, practices and financial disclosures and the adequacy and effectiveness of the internal controls. When so indicated, the Committee should review management’s handling of any item that may have a material impact on the financial statements and identify material inadequacies and reportable conditions in the internal controls over financial reporting and compliance with laws and regulations.

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The Committee shall have procedures in place which allow for the receipt and retention of, and response to, complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting and auditing matters.

The Committee shall review, on an annual basis, the charter of the Joint Audit Committee, reassessing the adequacy of this charter, and recommend any proposed changes to the Boards of Directors. The Committee shall ensure management’s timely public disclosure of any such amendments in accordance with regulatory guidelines, and in all events, post the amended charter on the Company’s website.

The Committee shall prepare the report to be included in the Company’s annual proxy statement.

The Committee shall review and approve all related party transactions.

Review with Finance management any significant changes to GAAP policies or standards.

Participate in a telephonic meeting among Finance Management, the Internal Audit Executive and the independent auditors before each earnings release to discuss the earnings release, financial information, use of any non-GAAP information, and earnings guidance.

Review and discuss with Finance management, internal Audit Executive and independent auditors the Company’s quarterly and periodic reports. Consider and review any significant findings and changes required in planned scope of their audit plan.

Reliance on Information

In performing their responsibilities, Committee members are entitled to rely on good faith and information, opinions, reports or statements prepared or presented by one or more officers or employees of the Company whom the Committee members reasonably believe to be reliable and competent in the matters presented, independent counsel, accountants or other advisors as to matters which the Committee members reasonably believe to be within the professional or expert competence of such person, or another committee of the Boards of Directors as to matters within its designated authority which the Committee members reasonably believe to merit confidence.

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