<PAGE>

                                   EXHIBIT 13

                  PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
                     FOR FISCAL YEAR ENDED DECEMBER 31, 2002


                                       55
<PAGE>
COMM BANCORP, INC.
CONTENTS

INTRODUCTION

 57  President's Message to Stockholders

 59  Consolidated Selected Financial Data

MANAGEMENT'S DISCUSSION AND ANALYSIS

 60  Forward-Looking Discussion

 61  Operating Environment

 67  Review of Financial Position

104  Review of Financial Performance

CONSOLIDATED FINANCIAL STATEMENTS

118  Independent Auditors' Report

119  Consolidated Statements of Income and Comprehensive Income

120  Consolidated Balance Sheets

121  Consolidated Statements of Changes in
     Stockholders' Equity

122  Consolidated Statements of Cash Flows

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

123  Summary of significant accounting policies

141  Cash and due from banks

141  Investment securities

143  Loans, nonperforming assets and allowance for loan losses

146  Commitments, concentrations and contingent liabilities

148  Premises and equipment, net

149  Other assets

151  Deposits

152  Short-term borrowings

153  Fair value of financial instruments

153  Employee benefit plan

154  Income taxes

156  Parent Company financial statements

157  Regulatory matters

162  Summary of quarterly financial information
     (unaudited)

MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000

163  Operating Environment

164  Review of Financial Position

172  Review of Financial Performance

DIRECTORS AND OFFICERS

175  Boards of Directors and Corporate Officers

OTHER INFORMATION

179  Locations

180  Stockholder Information


                                       56
<PAGE>
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS

What does the idea of rising mean to you?
Does it mean building upon the past to create a higher level of quality?
Does it mean growing a family...a business...a future?

To all of us at Comm Bancorp, Inc. it means rising above the crowd, in terms of
our financial performance, our banking infrastructure, and our teamwork. It
means rising to a higher level of success.

This year, net income reached a record $5.2 million, and earnings per share rose
$0.28 or 11.8 percent to $2.65. Our balance sheet rose accordingly, posting
solid growth of $26.0 million or 5.6 percent. Our strong financial success has
been accomplished through a variety of sources--strengthening our existing
branch network, expanding into new market areas, striving for the highest
standards of customer service and recognizing the importance of each of our
employees in achieving our goals.

How we do business rose to a higher level. We have implemented some strategic
objectives that we feel are necessary to better serve our existing customers and
will also lay the groundwork for future growth. We opened two new community
banking offices, relocated a third, and planned to venture into a new market
area. Our fifteenth office, an ancillary office in Carbondale, Pennsylvania,
redirects traffic from an existing branch in this city, one of our busiest
locations. The relocation of our outdated Clifford, Pennsylvania office into a
new modern facility was completed early in 2003. These changes offer added
convenience and ensure that our customers receive the best possible service. Our
sixteenth office, located in Scranton, Pennsylvania, opened for business in
August. This office, which is positioned in a predominantly commercial area,
offers many opportunities for growth.

On the horizon for 2003 is the opening of our seventeenth community banking
office in Tannersville, Pennsylvania. A new market area for us, this office will
be located in the heart of the Poconos, one of the fastest developing urban
markets in Pennsylvania.

Our technological expertise rose in 2002 as well. This year, security became a
top priority and we responded to the call, implementing Homeland Tracker, a
customer security system. In order to raise the standards of customer service,
we installed a Marketing Customer Information File ("MCIF") system and deposit
and loan platform systems. While the MCIF system allows us to manage our
customer relationships more dynamically, the platform systems streamline
workflow which allows us to service customers more efficiently. We also brought
automated teller machine ("ATM") processing in-house; customer account balances
are now immediately updated for ATM transactions. In addition, we began
replacing or upgrading our ATMs to comply with the latest Americans with
Disability Act standards.


                                       57
<PAGE>
COMM BANCORP, INC.
PRESIDENT'S MESSAGE TO STOCKHOLDERS (CONTINUED)

We are not stopping there. This coming year we will be implementing a
comprehensive document imaging system. The benefits of document imaging are
numerous. This system will provide the ability to electronically organize and
store documents and records to facilitate the immediate and secure retrieval of
information. Finally, we will be initiating InTouch(sm), a secure, 24-hour
automated customer service line. Customers will be able to access their account
via the telephone at any time from any place.

But technology cannot be effective without a dedicated and customer-focused work
force. People are the driving force behind Comm Bancorp, Inc. They are what
bring our customers and us together. They are the means by which we can help our
customers grow their families, their businesses, and their future! To that end,
we are working with a nationally recognized human resource consulting firm to
make our pay scales and benefits structure competitive with the marketplace in
an effort to acquire and retain the finest team in the region.

The year 2002 has seen us rising--and plans are in place to make 2003 a
continuation of the rising spirit all of us have come to equate with Comm
Bancorp, Inc.

Let us all rise together!

Sincerely,


/s/ William F. Farber, Sr.
--------------------------
William F. Farber, Sr.
President and Chief Executive Officer,
Chairman of the Board


                                       58
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                          2002         2001         2000         1999         1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>          <C>          <C>
CONDENSED STATEMENTS OF FINANCIAL PERFORMANCE:
Interest income .........................................  $  29,284    $  31,012    $  29,583    $  27,812    $  27,224
Interest expense ........................................     12,216       15,131       15,212       14,022       13,960
                                                           ---------    ---------    ---------    ---------    ---------
  Net interest income ...................................     17,068       15,881       14,371       13,790       13,264
Provision for loan losses ...............................      1,100          720          420          535          855
                                                           ---------    ---------    ---------    ---------    ---------
  Net interest income after provision for loan losses ...     15,968       15,161       13,951       13,255       12,409
Noninterest income ......................................      4,145        2,835        2,457        2,112        2,673
Noninterest expense .....................................     13,530       11,870       11,069        9,429        9,364
                                                           ---------    ---------    ---------    ---------    ---------
  Income before income taxes ............................      6,583        6,126        5,339        5,938        5,718
Provision for income tax expense ........................      1,383        1,426        1,139        1,338        1,218
                                                           ---------    ---------    ---------    ---------    ---------
  Net income ............................................  $   5,200    $   4,700    $   4,200    $   4,600    $   4,500
                                                           =========    =========    =========    =========    =========

CONDENSED STATEMENTS OF FINANCIAL POSITION:
Investment securities ...................................  $ 124,203    $ 120,357    $  71,246    $ 105,630    $ 109,626
Net loans ...............................................    319,830      307,102      294,245      273,051      244,090
Other assets ............................................     42,385       32,899       54,249       28,431       34,535
                                                           ---------    ---------    ---------    ---------    ---------
  Total assets ..........................................  $ 486,418    $ 460,358    $ 419,740    $ 407,112    $ 388,251
                                                           =========    =========    =========    =========    =========

Deposits ................................................  $ 437,213    $ 416,205    $ 378,721    $ 362,483    $ 344,253
Short-term borrowings ...................................                                             5,500
Long-term debt ..........................................                                   36           39           41
Other liabilities .......................................      3,872        3,305        3,365        3,615        4,223
Stockholders' equity ....................................     45,333       40,848       37,618       35,475       39,734
                                                           ---------    ---------    ---------    ---------    ---------
  Total liabilities and stockholders' equity ............  $ 486,418    $ 460,358    $ 419,740    $ 407,112    $ 388,251
                                                           =========    =========    =========    =========    =========

PER SHARE DATA:
Net income ..............................................  $    2.65    $    2.37    $    2.11    $    2.17    $    2.04
Cash dividends declared .................................       0.82         0.74         0.70         0.57         0.37
Stockholders' equity ....................................  $   23.31    $   20.67    $   18.95    $   17.43    $   18.00
Cash dividends declared as a percentage of net income ...      30.83%       31.23%       33.21%       26.00%       18.14%
Average common shares outstanding .......................  1,960,140    1,984,180    1,995,834    2,125,164    2,205,545

SELECTED RATIOS (BASED ON AVERAGE BALANCES):
Net income as a percentage of total assets ..............       1.10%        1.07%        1.03%        1.16%        1.19%
Net income as a percentage of stockholders' equity ......      11.99        11.82        11.72        12.02        11.71
Stockholders' equity as a percentage of total assets ....       9.13         9.02         8.81         9.66        10.18
Tier I capital as a percentage of adjusted total assets .       8.77         8.82         8.71         8.60         9.46
Net interest income as a percentage of earning assets ...       4.09         4.08         4.04         4.01         4.06
Loans, net, as a percentage of deposits .................      74.33%       75.41%       79.17%       73.20%       73.88%

SELECTED RATIOS AND DATA (BASED ON PERIOD END BALANCES):
Tier I capital as a percentage of risk-weighted assets ..      12.10%       12.80%       12.85%       13.24%       17.69%
Total capital as a percentage of risk-weighted assets ...      13.19        13.86        14.04        14.49        18.94
Allowance for loan losses as a percentage of loans, net .       1.16%        1.04%        1.10%        1.37%        1.63%
Full-time equivalent employees ..........................        196          182          169          167          161
Locations ...............................................         16           14           14           14           12
</TABLE>

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.


                                       59
<PAGE>
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
118 and Management's Discussion and Analysis 2001 versus 2000 beginning on page
163.

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
government monetary and fiscal policies affect banking both directly and
indirectly. Inflation, recession, unemployment, volatile interest rates, tight
money supply, real estate values, international conflicts and other factors
beyond our control may also adversely affect our future results of operations.
Our management team, consisting of the Board of Directors and executive
officers, expects that no particular factor will affect the results of
operations. 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.

In originating loans, some credit losses are likely to occur. This risk of loss
varies with, among other things:

      -     General economic conditions;

      -     Loan type;

      -     Creditworthiness and debt servicing capacity of the borrower over
            the term of the loan; and

      -     The value and marketability of the collateral securing the loan.


                                       60
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We maintain an allowance for loan losses based on, among other things:

      -     Historical loan loss experience;

      -     Known inherent risks in the loan portfolio;

      -     Adverse situations that may affect a borrower's ability to repay;

      -     The estimated value of any underlying collateral; and

      -     An evaluation of current economic conditions.

We currently believe that the allowance for loan losses is adequate, but we
cannot assure that nonperforming loans will not increase in the future.

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 improve, assurance cannot be given that this improvement
will occur. Further adverse changes to economic conditions would likely impair
loan collections and may have a materially adverse effect on the consolidated
results of operations and financial position.

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

OPERATING ENVIRONMENT:

The recession that began in the first quarter of 2001 appeared to have ended in
the beginning of 2002. Accommodative monetary and fiscal policies supported the
improvement in economic conditions through the first part of the year. Household
spending remained solid and businesses began to increase outlays for certain
types of capital equipment. As economic growth picked up, the Federal Open
Market Committee ("FOMC") maintained its target federal funds rate at 1.75
percent. However, the recovery was slow and was characterized by much
uncertainty. By the later part of the year, forward momentum in the economy had
noticeably diminished. Equity prices fell in the wake of corporate scandals.
Geopolitical tensions in the Middle East boosted oil prices and added to the
uncertainty about the economic outlook. Businesses became reluctant to increase
investment and restock inventories. Once again companies trimmed production and
payrolls. Consumer spending decelerated in response to rising unemployment and
declining household


                                       61
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

wealth from further deterioration in the value of their stock portfolios. Given
these circumstances, the FOMC at their meeting on November 6, 2002, lowered the
target federal funds rate 50 basis points to 1.25 percent. Despite these many
adversities, the United States economy was able to post moderate growth in 2002.
The gross domestic product, the total value of all goods and services produced
within the United States, grew 2.9 percent in 2002.

Consumer spending, an important source of support for economic growth, increased
3.1 percent in 2002, an improvement compared to the growth of 2.5 percent in
2001. Growth in disposable personal income ("DPI"), low interest rates and
rising home values were the primary factors driving the growth in spending. DPI,
rising 5.9 percent in 2002, was instrumental in supporting consumer spending.
Due to lower interest rates, consumers were able to stretch their paychecks
further and increase their purchasing power. In addition, historically low
mortgage rates strengthened the housing sector by increasing the number of
buyers entering the market as these lower rates made it more affordable to own a
home. Strong increases in home prices increased the equity for most homeowners,
and many converted the equity to cash through refinancing and used the proceeds
for home improvements. However, these factors are not without limitations.
Economists argue that the growth in DPI was due, for the most part, to one-time
fiscal stimuli which included tax cuts and the extension of unemployment
benefits. Once these benefits expire, growth in DPI will have to rely solely on
increases in wages and salaries. Furthermore, a slight increase in mortgage
rates could cause a slowdown in the housing market and refinancing activity.

As previously mentioned, numerous corporate scandals involving fraud and other
wrong doings shook the economy and the equity markets in 2002. Equity values
plummeted, which caused household wealth to decline. In an effort to restore
confidence in the equity markets, on July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002 (the "Act"). This Act, the purpose of which
was to strengthen the independent audit process and improve corporate
accountability, was largely a reaction to the magnitude and frequency of
incidents of alleged accounting fraud. The objectives, among others, of the Act
were:

      -     To create a Public Company Accounting Oversight Board in order to
            regulate audits and independent auditors under the oversight and
            control of the Securities and Exchange Commission;

      -     To increase the responsibility and involvement of audit committees
            in the financial reporting process;


                                       62
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

      -     To specify and expand the types of services and circumstances that
            can impair the auditor's independence;

      -     To accelerate and enhance certain disclosure requirements for public
            companies; and

      -     To hold Chief Executive Officers and Chief Financial Officers
            personally responsible for the accuracy and completeness of their
            company's periodic reports and related financial information.

At December 31, 2002, we were compliant with all of the requirements under the
Act effective thus far and will adopt and implement all of the remaining
requirements as they become effective. The adoption of these requirements did
not have, nor are they expected to have, a material effect on our operating
results or financial position.

Overcapacity, weak earnings and corporate governance scandals plagued the
business sector in 2002. In order to restore profits, businesses focused their
efforts on containing costs through cutting jobs and curtailing investment.
Nonresidential investment fell 5.7 percent in 2002, after falling 5.2 percent in
2001. A resurgence in business investment is needed for the economy to improve.
Recently the pieces required for a rebound in the business sector began falling
into place. Profits are slowly recovering, corporate balance sheets are
stronger, investor panic is subsiding and businesses are finding it harder to
keep postponing new investment. As a result, business spending is expected to
pick up in 2003.

Employment conditions worsened in 2002 for the second consecutive year, as
businesses continued to cutback on payrolls. Nearly 1.2 million jobs were
eliminated over the past two years. Similar to 2001, goods-producing industries
sustained large job losses in 2002, while jobs in service- producing industries
increased slightly. The manufacturing sector continued to be the weakest segment
of the labor market. As a result, the National unemployment rate rose to 6.0
percent in 2002 from 5.8 percent in 2001. However, productivity continued to
grow, increasing 4.8 percent in 2002, the fastest pace since 1950. Much of the
growth resulted from businesses cutting payrolls and using the existing
workforce more intensively. These productivity gains will be important to the
overall recovery as they are expected to induce businesses to boost investment.


                                       63
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

National, Pennsylvania and our market area's unemployment rates at December 31,
2002 and 2001, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                       2002     2001
-------------------------------------------------------------------------------
<S>                                                               <C>      <C>
National......................................................     6.0%     5.8%
Pennsylvania..................................................     6.0      5.1
Lackawanna County.............................................     5.1      5.3
Susquehanna County............................................     6.3      6.3
Wayne County..................................................     6.0      5.5
Wyoming County................................................     5.9%     4.5%
</TABLE>

The Commonwealth of Pennsylvania exhibited a much larger increase in
unemployment as compared to the Nation. The unemployment rate for the
Commonwealth rose to 6.0 percent in 2002 from 5.1 percent in 2001. Employment
conditions varied in our four-county market area. Lackawanna County exhibited
slight improvement in employment conditions, as evidenced by a reduction in the
unemployment rate to 5.1 percent in 2002, from 5.3 percent in 2001. However,
conditions weakened in Wayne and Wyoming Counties. The unemployment rates for
these two counties increased to 6.0 percent and 5.9 percent in 2002, compared to
5.5 percent and 4.5 percent in 2001. Susquehanna County's unemployment rate
remained unchanged at 6.3 percent.

Despite uncertainty in the economy and variations in our own market area's
employment conditions, several announcements have recently been made that should
favorably affect the economic and employment conditions of our local
communities. Nova Cruz Products, Inc., a Dover, New Hampshire-based company that
manufactures electric motorbikes, is locating an 18,000 square-foot plant in
Scranton, Lackawanna County. In addition, AdvancePCS, a national health
improvement company will open a new mail service facility in the greater
Wilkes-Barre area that will create 750 new jobs within three years. These new
jobs include pharmacists, pharmacy technicians, management and other
professional services. Furthermore, Geometric International, an Edison, New
Jersey company that manufacturers specialty tape products, is planning the
construction of a 20,000 square-foot plant in nearby Monroe County. This new
facility is scheduled for completion in 2004 and is expected to create 335 new
jobs. Finally, Wal-Mart recently opened a new distribution center, also in
Monroe County. Wal-Mart currently employs 550 people at this center and is
planning to add another 450 positions.

Despite the slowdown in the economy and the deterioration in employment
conditions, the banking industry remained well capitalized and profitable,
posting record earnings in 2002. The strong earnings performance was
characterized by improved net interest margins, growth in noninterest


                                       64
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

income, higher gains on sales of securities and containment of noninterest
expense. These positive aspects far outweighed the negative effect of credit
losses that resulted in increased provisions. In addition, banks exhibited
strong balance sheet growth. For all Federal Deposit Insurance Corporation
("FDIC")-insured commercial banks, total assets grew 8.0 percent. Strong
consumer demand for residential mortgages resulted in loans, net of unearned
income, growing 7.0 percent. Demand for deposit products was also strong. Total
deposits for these institutions grew 7.1 percent. Noninterest-bearing deposits
increased 7.4 percent, while interest-bearing deposits rose 7.1 percent. Much of
the demand for interest-bearing accounts was concentrated in savings accounts as
consumers opted to keep their funds liquid. The capital position for these banks
improved, as stockholders' equity increased 9.1 percent. The Tier I risk- based
capital and total risk-based capital ratios for FDIC-insured institutions
increased to 10.0 percent and 12.8 percent at December 31, 2002, from 9.9
percent and 12.7 percent at the end of 2001.

As previously mentioned, profitability for all FDIC-insured commercial banks
improved as net income reached $90.1 billion in 2002, an increase of 21.8
percent over last year. Return on average assets ("ROAA") and return on average
equity ("ROAE") for these institutions improved considerably. These banks posted
ROAA of 1.33 percent and ROAE of 14.53 percent in 2002 compared to 1.15 percent
and 13.12 percent in 2001. Net interest income improved 10.2 percent. The cost
of funds for these banks fell 131 basis points which led to a 35.7 percent
reduction in interest expense. Noninterest income rose 9.2 percent due in large
part to strong mortgage banking activity. In addition, investment portfolios
continued to appreciate in value. FDIC-insured banks capitalized on this
appreciation recording gains on the sale of investment securities of $6.5
billion in 2002, an increase of 45.6 percent over 2001. Furthermore, these banks
were able to contain costs, as noninterest expense rose only 4.6 percent
compared to last year. There were some negative aspects, as both noncurrent
assets levels and net charge-offs increased for these banks resulting in a 10.6
percent increase in loan loss provisions. However, the positive aspects well
outweighed the credit problems of these institutions. If the economy improves in
2003, most banks are expected to experience relatively strong financial results.

Contrary to the results for the overall banking industry, FDIC-insured
commercial banks located in Pennsylvania recorded a reduction in earnings for
the second straight year. For these banks, net income declined $24.0 million in
2002 after decreasing $137.0 million last year. Reduced net interest income due
to declining margins and lower levels of noninterest income factored into the
earnings decline. For these banks, the yield on


                                       65
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

earning assets decreased 131 basis points, which overshadowed a 124 basis point
improvement in their cost of funds. As a result, insured Pennsylvania insured
commercial banks experienced a retraction in their net interest margin of 7
basis points. In addition, these banks were not successful in improving fee
income, as noninterest income declined 4.7 percent in 2002 compared to 2001.
Partially offsetting the reduction in revenues was a 38.1 percent decrease in
loan loss provisions. Moreover, similar to all FDIC- insured commercial banks,
Pennsylvania banks were also successful in controlling expenses.

Despite reporting record earnings in 2002, stock prices fell for the overall
banking industry, but not to the magnitude experienced by the major industrial
composite indices. The Dow Jones Industrial Average, the Standard & Poor's 500
and the NASDAQ Stock Market(R) Composite declined 16.8 percent, 23.4 percent and
31.5 percent. Stock value declines had a direct effect on reducing the merger
and acquisition activity for not only the banking industry but throughout all
industries. Specifically for the banking industry, the depressed values caused a
22.8 percent decline in the number of deals announced and a 30.8 percent
decrease in the number of branch sale transactions in 2002. In addition, deal
values also fell, both the median price-to-earnings and the median price-to-book
dropped, as well as the premium paid for deposits in branch sales. Merger and
acquisition activity is expected to pick up slightly in 2003 as financial
institutions continue their search for new areas of growth. For a discussion of
recent Statement of Financial Accounting Standards ("SFAS") issued by the
Financial Accounting Standards Board ("FASB") related to business combinations
and intangible assets, refer to the note entitled, "Summary of significant
accounting policies-Business combinations, intangible assets and disposable
activities" in the Notes to Consolidated Financial Statements to this Annual
Report.

The economic outlook for 2003 is full of uncertainty. The speed of an
improvement hinges upon a pickup in business investment and continued strength
in consumer spending. However, with the economy growing below its potential, it
is highly susceptible to shocks that may hinder confidence and curtail spending.
The current environment is full of potential shocks including the war with Iraq,
higher oil prices, continued threats of terrorist attacks and the possible
emergence of new corporate scandals. The potential for a double-dip recession
remains a significant concern to us and the overall banking industry.


                                       66
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

REVIEW OF FINANCIAL POSITION:

We are located in Northeastern Pennsylvania and offer traditional bank products
and services, including loans, deposits and trust 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 sixteen full-service branch banking offices located within a
four-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.

We consider Community Bank's sixteen offices 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.

Over the past few years, the strategic focus of our company shifted as we
expanded into more populated urban areas with a higher concentration of
commercial activity. In line with this strategic change, we hired additional
corporate relationship officers whose responsibility is to develop comprehensive
banking relationships, including loans, deposits and ancillary services, with
commercial entities. In August 2002, we opened a community banking office in
Scranton, Lackawanna County, Pennsylvania, one of the major business districts
in Northeastern Pennsylvania. As a result, new commercial business relationships
changed the composition of both our loan and deposit portfolios. We plan to
continue our strategy of developing new commercial markets in 2003. On September
12, 2002, we purchased land in Tannersville, Monroe County, Pennsylvania, to
construct a full-service community banking office. This new office, which is
scheduled for completion in the third quarter of 2003, will be located in the
heart of the Poconos, one of the fastest developing regions of Pennsylvania.

We experienced strong growth in our balance sheet in 2002. The change in our
strategic focus, coupled with economic and market conditions, influenced the
$26.0 million or 5.6 percent growth in total assets to


                                       67
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

$486.4 million at December 31, 2002, from $460.4 million at the end of 2001.
Total assets averaged $475.0 million in 2002, an increase of $34.3 million or
7.8 percent compared to 2001. As a percentage of average total assets, average
earning assets equaled 94.7 percent in 2002 and 94.8 percent in 2001. Sustained
low interest rates caused an 89 basis point reduction in our tax-equivalent
yield on average earning assets to 6.81 percent in 2002 from 7.70 percent in
2001.

Loans, net of unearned income, rose $13.3 million or 4.3 percent to $323.6
million at December 31, 2002. More important than the actual growth in our loan
portfolio was the change in its composition. Two predominant factors impacted
this change, our shift in focus and the strength of the housing market.
Development of commercial relationships directly led to a 34.5 percent increase
in commercial loans, including commercial mortgages and commercial lease
financing. In addition, these loans represented 51.7 percent of our total loan
portfolio at December 31, 2002, compared to 40.1 percent at year-end 2001. The
strong housing market, coupled with historically low mortgage rates, created
intense demand for mortgage- related loans. Activity in our secondary mortgage
division escalated and the volume of refinancings remained strong. However,
since the majority of mortgage loans originated or refinanced are subsequently
sold in the secondary market, residential mortgage loans, including construction
loans, declined 17.3 percent and partially offset the growth in commercial
loans. Loans averaged 6.2 percent higher in 2002 and represented 70.8 percent of
average earning assets. The tax-equivalent yield on the loan portfolio fell 88
basis points to 7.50 percent in 2002 from 8.38 percent in 2001.

Weak corporate earnings, numerous accounting scandals and escalating
geopolitical risks caused a high degree of uncertainty in the equity markets,
and in turn, drove up demand for low-risk bank deposits. Our deposits rose $21.0
million or 5.0 percent from the previous year-end. We experienced marked
increases in our noninterest-bearing deposits and savings accounts. Similar to
reductions in general market rates, our cost of deposits declined 103 basis
points to 3.23 percent in 2002 from 4.26 percent in 2001.

Our capital position improved at December 31, 2002, as evidenced by an 11.0
percent growth in stockholders' equity. Our book value grew to $23.31 per share,
compared to $20.67 per share at the end of 2001. Record earnings and an increase
in accumulated other comprehensive income, relating entirely to market
appreciation on our investment portfolio, contributed to the improvement.


                                       68
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

In addition to developing the new market areas, we took certain actions in 2002
that strengthened our existing branch network and information systems. In the
second quarter of 2002, we opened our fifteenth community banking office in
Carbondale, Pennsylvania. The purpose of this office was to improve customer
service by redirecting traffic from our existing Carbondale office, one of our
busiest locations. In January of 2003, we completed the relocation of our
outdated Clifford office into a new modern facility.

With regard to our information systems, we installed a Marketing Customer
Information File ("MCIF") and deposit and loan platform systems. The MCIF houses
all of our customer accounts in one central database. Through queries and custom
reports, we are able to manage our customer relationships more dynamically,
target certain segments within our market area and provide a higher level of
personalized service. Our new deposit and loan platform systems interface
directly with our core operating system. These systems streamline workflow,
reduce processing time and cut down on the number of clerical errors, thereby
allowing us to service our customers more efficiently.

Technological improvements scheduled for 2003 include the development of an
enterprise-wide, document-imaging system and the installation of InTouch(sm), a
secure automated customer service line. The document-imaging system will
integrate all divisions through a common relational database. The system will
provide cold archival storage of reports and the ability to scan and store
deposit, loan and other application documents at a central location. The system
will create greater operating efficiency through fast, accurate retrieval of
information concurrently throughout our organization. Through InTouch(sm),
customers will be to able access their accounts, check balances and transfer
funds between accounts at any time via the telephone.

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 collateralized mortgage obligations ("CMOs") of
U.S. Government-sponsored agencies, which provide a source of liquidity, and
intermediate-term, tax-exempt state and municipal obligations, which mitigate
our income tax burden.

There are certain risks inherent in the portfolio that may negatively impact our
liquidity and profitability. Two of the major risks affecting


                                       69
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

our portfolio are market or IRR and timing risk. Understanding these and other
inherent risks and their potential effects are essential in effectively managing
the investment portfolio.

Market or IRR, the greatest risk to our portfolio, relates to the inverse
relationship between bond prices and market yields. This risk is defined as the
risk that increases in general market interest rates will result in market value
depreciation. 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. In
addition to affecting the market value of the investment portfolio, interest
rate changes can have a significant impact on the amount and timing of cash flow
receipts, which are an important source of funding for our loan portfolio. As
interest rates increase, prepayments on underlying mortgages generally decline,
which could materially reduce the cash flows available from these investments.
Conversely, should interest rates decline, cash flows from CMOs generally
increase, leaving an investor with a surplus of liquidity that must be
reinvested at lower rates.

The FOMC held monetary policy constant for most of 2002. However, throughout the
summer and early fall, weak economic growth, coupled with future uncertainty due
to escalating tensions between the United States and the Middle East and
evidence of corporate wrongdoings, forced the FOMC to change their stance from
balanced to weakness. The FOMC, at their meeting on November 6, 2002, lowered
the federal funds rate 50 basis points to 1.25 percent. U.S. Treasury rates
likewise fell and closed the year appreciably lower. Since our investment
portfolio primarily consists of fixed-rate bonds, changes in market interest
rates had 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 two-year and ten-year U.S. Treasuries, which affect the
values of our mortgage-backed securities, including CMOs, and tax-exempt state
and municipal obligations. The yield on the two-year U.S. Treasury, which
started the year at 3.07 percent, rose 65 basis points to 3.72 percent at March
31, 2002, in anticipation of an economic recovery. However, when the economy
failed to gain momentum, the yield fell 211 basis points and closed 2002 at 1.61
percent. Similarly, the ten-year U.S. Treasury rose 35 basis points, from 5.07
percent at the end of 2001 to 5.42 percent at March 31, 2002, before falling 159
basis points to 3.83 percent at year-end. Due to the decline in market interest
rates, the aggregate value of our investment portfolio appreciated $2,923.
Specifically, the net unrealized holding gain on mortgage-backed securities
improved $702 from $547 at December 31, 2001, to $1,249 at December 31, 2002,
and the net unrealized holding gain on state and municipal obligations rose
$2,181, from $314 to $2,495.


                                       70
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We reported net unrealized holding gains, included as a separate component of
stockholders' equity, of $2,584, net of income taxes of $1,331, at December 31,
2002, and $655, net of income taxes of $337, at December 31, 2001. We realize
that although the decline in interest rates in 2002 had a positive effect on
market value and our capital position, should interest rates rise, the market
value of our investments and our stockholders' equity could be negatively
impacted. In order to monitor the potential effects a 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, 2002,
indicated that should general market rates increase by 100, 200 and 300 basis
points, we would anticipate declines of 2.1 percent, 4.7 percent and 7.6 percent
in the market value of our portfolio. Our IRR exposure with regard to market
value depreciation improved in comparison to the end of 2001. At December 31,
2001, we anticipated market value depreciation of 3.6 percent, 7.2 percent and
10.8 percent given the same rate shocks.

In addition to monitoring the effects interest rate changes have on the value of
our investments, we measure how our cash receipts from principal repayments on
our CMOs will change given rate fluctuations of plus or minus 100 basis points.
Based on our investment portfolio at December 31, 2002, we expect to receive
$41.2 million from repayments in 2003 if rates do not change. If rates go up 100
basis points from their current level, we expect repayments to decline to $26.0
million in 2003. Conversely, if rates go down 100 basis points from their
current level, we expect repayments to increase to $51.6 million in 2003.

In order to limit the effects of IRR on market value, we restrict the duration
of individual securities and the portfolio as a whole. In order to mitigate
fluctuations in the timing of cash flows, we purchase and hold only classes of
CMOs that possess the highest quality with respect to their structure and
composition. Furthermore, we monitor and evaluate the performance of 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 on
our investment portfolio improved to 8.8 percent in 2002, from 6.9 percent in
2001. In 2002, our portfolio did not outperform the Lehman Brothers'
aggregate-bond index, a benchmark used by most investment managers, as was the
case in 2001. This index scored a total return of 11.7


                                       71
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

percent in 2002. However, our investment portfolio outperformed the average
total return of 7.1 percent for the eight community banks located in our market
area. In addition, our investment portfolio ranked in the upper one- fifth among
all FDIC-insured bank holding companies, based on a study from an independent
national investment performance ranking company, with respect to total return
over the previous 12 months.

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. This risk measure improved from 1.6 years in 2001 to 1.0
year in 2002. Despite the improvement, according to the same independent ranking
company, our portfolio ranking did not change from the middle one-third of
FDIC-insured bank holding companies with regard to low risk. However, the risk
associated with our portfolio was less than that of the same eight community
banks, whose average life for their portfolio was 1.7 years.

Investment securities increased $3.8 million to $124.2 million at December 31,
2002, from $120.4 million at December 31, 2001. The investment portfolio
averaged $110.2 million and equaled 24.5 percent of average earning assets in
2002, compared to $99.7 million and 23.9 percent in 2001. The tax-equivalent
yield on our investment portfolio fell 50 basis points to 5.81 percent in 2002
from 6.31 percent in 2001. For the most part, the yield decline was due to a 72
basis point decline in the yield on taxable investments. The tax-equivalent
yield on tax-exempt investments declined only 2 basis points to 7.50 percent.

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

<TABLE>
<CAPTION>
                                      2002                 2001                 2000                 1999                 1998
                               -----------------    -----------------    -----------------    -----------------    ----------------
DECEMBER 31                      AMOUNT       %       AMOUNT       %       AMOUNT       %       AMOUNT      %        AMOUNT     %
-----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>
U.S. Treasury securities ....                                            $  3,001     4.21%   $  3,595     3.40%   $ 11,060   10.09%
U.S. Government agencies ....  $ 10,350     8.33%   $  1,067     0.89%      1,025     1.44       1,635     1.55         637    0.58
State and municipals ........    35,003    28.18      41,790    34.72      20,075    28.18      34,781    32.93      40,007   36.49
Mortgage-backed securities ..    77,579    62.46      75,558    62.78      45,269    63.54      63,523    60.14      55,834   50.93
Equity securities ...........     1,271     1.03       1,942     1.61       1,876     2.63       2,096     1.98       2,088    1.91
                               --------   ------    --------   ------    --------   ------    --------   ------    --------  ------
  Total .....................  $124,203   100.00%   $120,357   100.00%   $ 71,246   100.00%   $105,630   100.00%   $109,626  100.00%
                               ========   ======    ========   ======    ========   ======    ========   ======    ========  ======
</TABLE>


                                       72
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Proceeds from the sale of available-for-sale securities amounted to $15.1
million in 2002. The majority of the investments sold were state and municipal
obligations. These obligations had short call provisions and were sold to reduce
the risk of the issuer calling the bond and refunding the monies to us. Net
gains recognized on the sale of investment securities totaled $322 in 2002. We
did not sell any securities in 2001. Repayments from investment securities
totaled $34.5 million in 2002 and $25.2 million in 2001.

Purchases of investment securities totaled $51.2 million in 2002. We purchased
short-term, high-quality premium mortgage-backed securities with a cost of $39.1
million and a weighted-average yield of 3.33 percent in order to reduce the
degree of market risk in the portfolio. Given the low interest rate environment,
premium mortgage-backed securities became undervalued as investors became
worried about prepayment risk associated with these types of bonds. We mitigated
the prepayment risk associated with these types of securities by purchasing only
high quality bonds with superior payment structures. Should interest rates rise,
these bonds should not depreciate in value to the same extent as par or discount
bonds, since they carry interest rates that would then be offered in the
marketplace. We also purchased short-term investments of U.S. Government
agencies having a cost of $10.3 million and a weighted-average yield of 2.13
percent, and intermediate-term tax-exempt obligations of local school districts
and municipalities having a cost of $1.8 million and a weighted-average tax-
equivalent yield of 3.44 percent. Purchases totaled $74.6 million in 2001,
consisting of $50.4 million in short-term CMOs and $24.2 million in
intermediate-term state and municipal obligations.

At December 31, 2002, investment securities with an amortized cost of $37.4
million were pledged to secure deposits, to qualify for fiduciary powers and for
other purposes required or permitted by law. At December 31, 2001, the amortized
cost of pledged securities equaled $44.8 million. The fair value of such
securities equaled $38.4 million at December 31, 2002, and $45.5 million at
December 31, 2001.

The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at December 31,
2002, is summarized as follows. The weighted-average yield, based on amortized
cost, has been computed for state and municipals on a tax-equivalent basis using
the prevailing statutory tax rate of 34.0 percent. The distributions are based
on contractual maturity with the exception of mortgage-backed securities, CMOs
and equity securities. Mortgage-backed securities and CMOs are presented based
upon estimated cash flows, assuming no change in the current interest rate
environment. Equity


                                       73
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

securities with no stated contractual maturities are included in the "After ten
years" maturity distribution. Expected maturities may differ from contracted
maturities, or estimated maturities for mortgage-backed securities and CMOs,
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.

MATURITY DISTRIBUTION OF AVAILABLE-FOR-SALE PORTFOLIO

<TABLE>
<CAPTION>
                                                       AFTER ONE          AFTER FIVE
                                     WITHIN            BUT WITHIN         BUT WITHIN            AFTER
                                    ONE YEAR           FIVE YEARS          TEN YEARS          TEN YEARS             TOTAL
                                ----------------------------------------------------------------------------------------------
DECEMBER 31, 2002                AMOUNT    YIELD    AMOUNT     YIELD    AMOUNT     YIELD   AMOUNT     YIELD    AMOUNT    YIELD
------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>     <C>         <C>      <C>        <C>     <C>        <C>     <C>         <C>
Amortized cost:
U.S. Government agencies ......                    $10,263     2.13%                                          $ 10,263    2.13%
State and municipals .......... $ 1,095    4.61%       505     4.49     $7,177     7.92%   $23,731    7.23%     32,508    7.25
Mortgage-backed securities ....  42,112    4.68     34,183     4.82         35     6.76                         76,330    4.74
Equity securities .............                                                              1,187    6.02       1,187    6.02
                                -------            -------              ------             -------            --------
  Total                         $43,207    4.68%   $44,951     4.20%    $7,212     7.91%   $24,918    7.17%   $120,288    5.21%
                                =======            =======              ======             =======            ========

Fair value:
U.S. Government agencies ......                    $10,350                                                    $ 10,350
State and municipals .......... $ 1,103                518              $7,878             $25,504              35,003
Mortgage-backed securities ....  42,515             35,027                  37                                  77,579
Equity securities .............                                                              1,271               1,271
                                -------            -------              ------             -------            --------
  Total ....................... $43,618            $45,895              $7,915             $26,775            $124,203
                                =======            =======              ======             =======            ========
</TABLE>

For a discussion of recent SFASs issued by the 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.

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. 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.

Many economic factors impacted loan demand in 2002. A large number of banks
experienced a runoff in commercial and industrial loans, while demand for
residential mortgages flourished. Slow growth in aggregate demand and low prices
hindered corporate profits. Business investment, which was almost


                                       74
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

nonexistent, resulted in a lackluster demand for commercial and industrial
loans. According to the "October 2002 and January 2003 Senior Loan Officer
Opinion Surveys on Bank Lending Practices," issued by the Board of Governors of
the Federal Reserve System, domestic banking institutions reported that business
loan demand was decidedly weaker. In addition, these institutions tightened
lending standards and terms for commercial and industrial loans in response to
concerns about the economic outlook. Total commercial and industrial loans
outstanding at all commercial banks declined for the second straight year,
falling $60.8 billion or 5.9 percent to $965.3 billion at December 31, 2002,
from $1,026.1 billion at the end of last year.

However, a strong housing market, influenced by historically low interest rates
and high home prices, drove up the demand for residential mortgages. Home
mortgage rates hit historic lows in 2002, while the value of homes continued to
appreciate. The average rate on a fixed-rate first mortgage fell 102 basis
points to 6.05 percent at year-end 2002 from an already low 7.07 percent at the
end of the previous year. The median prices on both new and existing homes
averaged 4.3 percent and 6.5 percent higher in 2002 compared to last year. Sales
of both new and existing homes reached record levels in 2002. In addition, the
further reduction in rates and appreciation in home values resulted in another
round of mortgage refinancings as some homeowners refinanced for the second and
third time. Mortgage refinancings had a twofold effect, it helped increase home
mortgage debt but slowed the demand for consumer credit, consumer borrowing not
secured by real estate. The "October 2002 Senior Loan Officer Opinion Survey on
Bank Lending Practices," reported a substantial increase in the percentage of
homeowners that used the appreciation in home values to add to their loan
balances at the time of refinancing, an arrangement referred to as "cash-out"
refinancing. The most common uses of funds from cash-out refinancing, according
to the survey, were to repay other consumer debt and to pay for home
improvements. Loans secured by real estate at all commercial banks rose 15.0
percent in 2002, while consumer loans outstanding increased at a much lower rate
of 4.6 percent.


                                       75
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

DISTRIBUTION OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                           2002               2001               2000               1999               1998
                                     -----------------  ----------------   ----------------   ----------------   ----------------
DECEMBER 31                            AMOUNT     %       AMOUNT     %       AMOUNT     %       AMOUNT     %      AMOUNT      %
---------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
COMMERCIAL, FINANCIAL AND OTHERS..   $ 90,747   28.05%  $ 71,512   23.05%  $ 49,476   16.63%  $ 43,907   15.86%  $ 31,044   12.51%
REAL ESTATE:
  CONSTRUCTION....................      5,398    1.67      5,285    1.70      3,546    1.19      3,164    1.14      2,108    0.85
  MORTGAGE........................    193,012   59.65    195,915   63.13    205,771   69.16    198,423   71.67    186,004   74.96
CONSUMER, NET.....................     32,631   10.08     36,346   11.71     37,800   12.70     30,830   11.14     28,984   11.68
LEASE FINANCING, NET..............      1,787    0.55      1,264    0.41        937    0.32        526    0.19
                                     --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
  LOANS, NET OF UNEARNED INCOME...    323,575  100.00%   310,322  100.00%   297,530  100.00%   276,850  100.00%   248,140  100.00%
                                               ======             ======             ======             ======             ======
LESS: ALLOWANCE FOR LOAN LOSSES...      3,745              3,220              3,285              3,799              4,050
                                     --------           --------           --------           --------           --------
    NET LOANS.....................   $319,830           $307,102           $294,245           $273,051           $244,090
                                     ========           ========           ========           ========           ========
</TABLE>

At December 31, 2002, our loans, net of unearned income, totaled $323.6 million,
an increase of $13.3 million or 4.3 percent from $310.3 million at December 31,
2001. With regard to the composition of our portfolio, our focused efforts on
developing commercial business relationships led to an increase in commercial
loans, including commercial mortgages and lease financing of $42.9 million or
34.5 percent to $167.3 million at year-end 2002 from $124.4 million at the end
of last year. Commercial loans and leases grew $19.8 million or 27.1 percent,
while commercial real estate loans rose $23.1 million or 44.8 percent.
Commercial loans, including commercial mortgages and lease financing,
represented 51.7 percent of total loans, net of unearned income, at December 31,
2002, compared to 40.1 percent at year-end 2001. Although demand for mortgages
escalated in 2002, the outstanding balance of residential mortgages, including
construction loans, declined $26.0 million or 17.4 percent to $123.6 million at
the end of 2002 from $149.6 million at December 31, 2001. New mortgages and
loans refinanced in 2002, were for the most part, subsequently sold in the
secondary market. Consumer loan demand subsided in 2002. Indirect lending
through local automobile dealerships is a predominant portion of our retail
lending activities. Automobile manufacturers continued to offer very attractive
financing incentives in order to boost their sales. We could not compete with
these incentives, and as a result, consumer loans decreased $3.6 million to
$32.7 million at December 31, 2002, from $36.3 million at the end of 2001.

As previously mentioned, refinancing activity was brisk throughout 2002 due to
the historically low mortgage rates. Price appreciation in home values caused a
significant percentage of homeowners to increase their mortgage debt by
cashing-out and using the additional proceeds for home improvements or to payoff
other higher-costing debt. We continued to experience strong refinancing
activity in 2002. The number of refinanced mortgages totaled


                                       76
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

212, with an aggregate dollar volume of $18.2 million in 2002 and 219, with an
aggregate dollar volume of $16.8 million in 2001. In addition, more than 40.0
percent of our refinancing customers opted to cash-out when they refinanced in
2002 and 2001.

We also experienced significant activity in our secondary mortgage banking
program due to the favorable mortgage rates. Mortgages originated and
subsequently sold in the secondary market totaled $39.7 million in 2002, an
increase of $22.0 million or 124.3 percent compared to $17.7 million in 2001. We
realized net gains on the sale of these loans, included in noninterest income,
of $919 in 2002, compared to $356 in 2001. In addition, we had $3.9 million of
residential mortgage loans held for sale at December 31, 2002, compared to $1.9
million at year-end 2001. Residential mortgage loans serviced for the Federal
National Mortgage Association increased $34.2 million to $56.1 million at
December 31, 2002, from $21.9 million at the end of 2001.

Our loans, net of unearned income, averaged $318.2 million in 2002, an increase
of $18.5 million or 6.2 percent compared to $299.7 million in 2001. We
strengthened our relationships with local municipal authorities during 2002, as
evidenced by a $5.2 million increase in average tax-exempt loans. Average loans,
as a percentage of earning assets, equaled 70.8 percent in 2002, compared to
71.7 percent in 2001. In comparison, for our peer group, a group of 409 bank
holding companies located within the Federal Reserve District of Philadelphia
with consolidated assets between $300.0 million and $500.0 million, average
loans, as a percentage of average total assets, remained relatively constant
over the two-year period. This ratio equaled 65.3 percent in 2002 and 65.7
percent in 2001.

The prime rate remained at 4.75 percent for the first ten months of 2002. In
November, the prime rate fell 50 basis points when the FOMC once again eased
monetary policy by lowering the federal funds rate. As a result of the
continuation of the historically low interest rate environment, loans repriced
downward throughout 2002 and the weighted-average tax-equivalent yield on our
loan portfolio declined 88 basis points to 7.50 percent in 2002 from 8.38
percent in 2001. The majority of the decline occurred in the first and second
quarters. The weighted-average tax-equivalent yield fell 35 basis points in the
first quarter to 7.78 percent from 8.13 percent in the fourth quarter of 2001,
and another 25 basis points in the second quarter to 7.53 percent. Interest
rates are expected to stabilize in 2003, however, our loan portfolio's yield is
expected to continue downward as one-, three- and five-year adjustable-rate
loans reprice and new loans are originated at comparatively lower yields versus
the yields on repayments of existing loans.


                                       77
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The maturity distribution and repricing information of the loan portfolio by
major classification at December 31, 2002, is summarized as follows:

MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                           AFTER ONE
                                               WITHIN      BUT WITHIN     AFTER
DECEMBER 31, 2002                             ONE YEAR     FIVE YEARS   FIVE YEARS     TOTAL
---------------------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>          <C>
Maturity schedule:
Commercial, financial and others...........   $ 34,542     $ 15,508      $ 40,697    $ 90,747
Real estate:
  Construction.............................      5,398                                  5,398
  Mortgage.................................     18,090       49,683       125,239     193,012
Consumer, net..............................     11,928       17,398         3,305      32,631
Lease financing, net.......................        656        1,131                     1,787
                                              --------     --------      --------    --------
    Total..................................   $ 70,614     $ 83,720      $169,241    $323,575
                                              ========     ========      ========    ========

Repricing schedule:
Predetermined interest rates...............   $ 30,140     $ 73,189      $ 75,255    $178,584
Floating- or adjustable-interest rates.....     83,701       60,846           444     144,991
                                              --------     --------      --------    --------
    Total..................................   $113,841     $134,035      $ 75,699    $323,575
                                              ========     ========      ========    ========
</TABLE>

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 $113.8 million from repayments on
loans and investment securities during 2003. 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 35.2 percent of the loan portfolio is expected to reprice within
the next 12 months. Adjustable-rate loans again increased significantly, as we
continue to place greater emphasis on commercial lending activities.
Adjustable-rate loans totaled $145.0 million at December 31, 2002, an increase
of $47.4 million or 48.6 percent from $97.6 million at the end of 2001.
Moreover, these loans were only $76.0 million at December 31, 2000.
Adjustable-rate loans accounted for 44.8 percent of


                                       78
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

our loan portfolio at December 31, 2002, compared to 31.5 percent at year-end
2001. Heightened refinancing activity, coupled with an increase in the volume of
loans sold in the secondary market, caused a reduction in our residential
mortgage loans. As a result, the amount of fixed-rate loans decreased $34.1
million to $178.6 million at December 31, 2002, from $212.7 million at December
31, 2001.

Additionally, our secondary mortgage 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.

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.

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. We also consider and limit
the risk associated with concentrations of credit that arise from lack of
geographic and industry diversification when managing the portfolio. For a
further discussion of financial instruments with off-balance sheet risk and the
risks associated with concentrations of credit refer to the note entitled,
"Commitments, concentrations and contingent liabilities," in the Notes to
Consolidated Financial Statements to this Annual Report.

ASSET QUALITY:

Throughout the nation, as well as locally, asset quality weakened in 2002 and is
expected to continue deteriorating in 2003. A key indicator to this trend is the
mounting number of bankruptcy cases. Increasing consumer debt levels and rising
unemployment rates were the primary forces causing the staggering number of
bankruptcy cases. Total consumer credit outstanding in the United States
increased by $54.4 billion in 2002, while total revolving debt outstanding rose
$15.8 billion. With debt at record levels, unforeseen layoffs, due to the
slowdown in the economy, have forced many consumers


                                       79
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

into bankruptcy. According to data released by the Administrative Office of the
U.S. Courts, the number of personal bankruptcy cases filed nationally for the 12
months ended September 30, 2002, increased 6.0 percent from the previous year.
However, the number of businesses filing for bankruptcy in the United States
declined by 3.9 percent. Bankruptcy filings in Pennsylvania grew by 5.5 percent
in 2002. Similar to the National results, personal cases in Pennsylvania rose
6.2 percent, while the number of business filings declined 18.0 percent. The
number of bankruptcy filings more than doubled in our immediate market area.
According to the U.S. Bankruptcy Court in Wilkes-Barre, Pennsylvania, the number
of cases filed rose 140.3 percent to 12,675 in 2002 from 5,274 in 2001. Based on
recent statistics, the outlook for 2003 does not appear any better. The total
number of bankruptcies filed in the United States during the three months ended
December 31, 2002, the first quarter of the Judiciary's fiscal year, rose 8.3
percent in comparison to the same three months of the previous year.

As a result, nonperforming loans and leases for all FDIC-insured commercial
banks increased $5.6 billion to $60.5 billion at December 31, 2002, from $54.9
billion at year-end 2001. For all commercial banks, the ratio of nonperforming
assets to total assets increased to 0.94 percent at the end of 2002. In
addition, net charge-offs increased 21.7 percent. Smaller community banks, banks
with assets up to $1.0 billion, experienced the worst deterioration.
Pennsylvania commercial banks also experienced asset quality deterioration. The
ratio of nonperforming assets to total assets weakened to 0.64 percent at
December 31, 2002, from 0.59 percent at December 31, 2001.

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 lending
officers and branch managers are forwarded to the Directors' Loan Committee.
This Committee, comprised of senior lending management and board members,
attempts to assure the quality of the loan portfolio through careful analysis of
credit applications, adherence to credit policies and


                                       80
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

examination of outstanding loans and delinquencies. These procedures assist in
the early detection and timely follow-up of problem loans. Credits in excess of
$1.0 million are subject to approval by our Board of Directors.

Credit risk is also minimized by quarterly internal loan reviews of our
portfolio. In addition, we contract with an external loan review company to
perform independent reviews of our portfolio. These reviews aid management in
identifying deteriorating financial conditions of borrowers, allowing them to
assist customers in remedying these situations. The results of the latest
independent loan review conducted by the external loan review company at
September 30, 2002, indicated no material differences from the assets identified
through our internal loan review program.

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 management to have serious doubts
as to the borrower's ability to comply with present loan repayment terms.


                                       81
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DISTRIBUTION OF NONPERFORMING ASSETS

<TABLE>
<CAPTION>
DECEMBER 31                                                  2002     2001     2000     1999     1998
-----------------------------------------------------------------------------------------------------
<S>                                                        <C>      <C>      <C>      <C>      <C>
Nonaccrual loans:
Commercial, financial and others ........................  $  541   $  113   $  141   $  166   $   78
Real estate:
  Construction ..........................................
  Mortgage ..............................................   1,213    1,045    1,469    2,272    2,223
Consumer, net ...........................................     238      190       74       33        7
Lease financing, net ....................................
                                                           ------   ------   ------   ------   ------
    Total nonaccrual loans ..............................   1,992    1,348    1,684    2,471    2,308
                                                           ------   ------   ------   ------   ------

Restructured loans ......................................                       124      149      174
                                                           ------   ------   ------   ------   ------

Accruing loans past due 90 days or more:
Commercial, financial and others ........................      97      107       23      726      131
Real estate:
  Construction ..........................................
  Mortgage ..............................................     281      372      449    2,768    1,035
Consumer, net ...........................................     132      225      353      471      387
Lease financing, net ....................................
                                                           ------   ------   ------   ------   ------
    Total accruing loans past due 90 days or more .......     510      704      825    3,965    1,553
                                                           ------   ------   ------   ------   ------
    Total nonperforming loans ...........................   2,502    2,052    2,633    6,585    4,035
                                                           ------   ------   ------   ------   ------
Foreclosed assets .......................................      40    1,818    1,391      359      240
                                                           ------   ------   ------   ------   ------
    Total nonperforming assets ..........................  $2,542   $3,870   $4,024   $6,944   $4,275
                                                           ======   ======   ======   ======   ======

Ratios:
Nonperforming loans as a percentage of loans, net .......    0.77%    0.66%    0.88%    2.38%    1.63%
Nonperforming assets as a percentage of loans, net ......    0.79%    1.25%    1.35%    2.51%    1.72%
</TABLE>

Contrary to the deteriorating asset quality trends experienced by most banks,
our asset quality improved in comparison to the previous year. We attribute our
asset quality improvement to the success of our special assets function in the
timely possession and disposal of foreclosed properties. However, with the
knowledge that our asset quality performance was historically inferior to the
banking industry prior to 2002, coupled with the threat of a slowdown in the
local economy, we will strive to strengthen our underwriting standards, loan
review efforts and collection actions in order to further improve asset quality
in the future. Nonperforming assets declined $1,328 to $2,542 at December 31,
2002, from $3,870 at December 31, 2001. Our ratio of nonperforming assets as a
percentage of loans, net, improved to 0.79 percent at year-end 2002 from 1.25
percent at the end of last year. A $1,778 reduction in foreclosed assets was
directly responsible for the improvement. There were 14 properties totaling
$1,818 held in foreclosed assets at the end of 2001. During 2002, eight
properties totaling $320 were transferred into foreclosed assets. We sold 21 of
the 22 properties for $2,272 resulting in a net realized gain of $192. The one
remaining residential property has a carrying value of $40, which did not exceed
80.0 percent of its collateral value at December 31, 2002. Writedowns of
foreclosed assets charged to noninterest expense totaled $18 in 2002.


                                       82
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Partially offsetting the reduction in foreclosed assets, was an increase in
nonperforming loans of $450. Nonaccrual loans increased $644, while accruing
loans past due 90 days or more declined $194. Our ratio of nonperforming loans
as a percentage of loans, net of unearned income, weakened slightly to 0.77
percent at December 31, 2002, from 0.66 percent at the end of 2001.

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 ("FFIEC") Interagency Policy
Statement and generally accepted accounting principles ("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 department 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.

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. Our systematic methodology was reviewed as
part of the scope of the most recent regulatory examination at September 30,
2001, and was deemed satisfactory by the regulators. We considered our allowance
for loan losses account adequate based on our application of our actual loss
experience factors used in the methodology.


                                       83
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

However, we were required to recognize an addition of $500 to the allowance for
loan losses account by October 15, 2002, to provide for unexpected losses.
Regulators arrived at the $500 amount by applying the estimated average industry
loss experience factors defined in the December 21, 1993, FFIEC Interagency
Policy Statement, in order to quantify their assessment of the adequacy of the
allowance account. The estimated average industry loss experience factors used
by the regulators were materially greater than the actual historical loss
experience factors of our bank used in our methodology. We recognized the entire
$500 addition by June 30, 2002.

For 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 management to have serious doubts as to the
borrower's ability to comply with present loan repayment terms.

DISTRIBUTION OF IMPAIRED LOANS

<TABLE>
<CAPTION>
DECEMBER 31                                            2002     2001     2000     1999     1998
-----------------------------------------------------------------------------------------------
<S>                                                  <C>      <C>      <C>      <C>      <C>
Nonaccrual loans:
Commercial, financial and others ................    $  541   $  113   $  141   $  166   $   78
Real estate:
  Construction ..................................
  Mortgage ......................................     1,213    1,045    1,469    2,272    2,223
Consumer, net ...................................       238      190       74       33        7
Lease financing, net ............................
                                                     ------   ------   ------   ------   ------
    Total nonaccrual loans ......................     1,992    1,348    1,684    2,471    2,308
                                                     ------   ------   ------   ------   ------

Restructured loans ..............................                         124      149      174
                                                     ------   ------   ------   ------   ------

Accruing loans:
Commercial, financial and others ................       889      407
Real estate:
  Construction ..................................
  Mortgage ......................................       485       65
Consumer, net ...................................       292      125
Lease financing, net ............................
                                                     ------   ------   ------   ------   ------
    Total accruing loans ........................     1,666      597
                                                     ------   ------   ------   ------   ------
    Total impaired loans ........................    $3,658   $1,945   $1,808   $2,620   $2,482
                                                     ======   ======   ======   ======   ======

Ratio:
Impaired loans as a percentage of loans, net ....      1.13%    0.63%    0.61%    0.95%    1.00%
</TABLE>


                                       84
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

At December 31, 2002 and 2001, we had a recorded investment in impaired loans of
$3,658 and $1,945. The recorded investment in impaired loans averaged $2,831 in
2002 and $2,476 in 2001. At December 31, 2002, the amount of recorded investment
in impaired loans for which there was a related allowance for loan losses and
the amount of the allowance was $2,500 and $877. Comparatively, the amount of
these loans and their related allowance was $910 and $403, at December 31, 2001.
The amount of recorded investment for which there was no related allowance for
loan losses was $1,158 and $1,035 at December 31, 2002 and 2001. During 2002,
activity in the allowance for loan losses account related to impaired loans
included a provision charged to operations of $944, losses charged to the
allowance of $477 and recoveries of impaired loans previously charged-off of $7.
The 2001 activity in the allowance for loan losses account related to impaired
loans included a provision charged to operations of $483, losses charged to the
allowance of $498 and recoveries of impaired loans previously charged-off of
$13. Interest income related to impaired loans would have been $201 in 2002 and
$194 in 2001, had the loans been current and the terms of the loans not been
modified. Interest recognized on impaired loans amounted to $176 in 2002 and
$276 in 2001. Included in these amounts was interest recognized on a cash basis
of $176 and $276. Cash received on impaired loans applied as a reduction of
principal totaled $493 in 2002 and $349 in 2001. There were no commitments to
extend additional funds to customers with impaired loans at December 31, 2002
and 2001.


                                       85
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                         2002                2001                2000                1999                1998
                                   ----------------    ----------------    ----------------    ----------------    ----------------
                                           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
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>     <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>     <C>
Allocated allowance:
Specific:
Commercial, financial and others . $  597      0.44%   $  174      0.17%   $   65      0.12%   $  617      0.38%   $  630      0.39%
Real estate:
  Construction ...................
  Mortgage .......................    173      0.53       135      0.36       312      0.87       159      1.61       163      1.21
Consumer, net ....................    107      0.16        94      0.10       229      0.11       161      0.09       164      0.12
Lease financing, net .............
                                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
    Total specific ...............    877      1.13       403      0.63       606      1.10       937      2.08       957      1.72
                                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------

Formula:
Commercial, financial and others .    367     27.61     1,433     22.88     1,011     16.51     1,042     15.48     1,202     12.12
Real estate:
  Construction ...................             1.67                1.70                1.19                1.14                0.85
  Mortgage .......................  2,071     59.12       800     62.77       848     68.29       902     70.06       889     73.75
Consumer, net ....................    419      9.92       452     11.61       472     12.59       476     11.05       529     11.56
Lease financing, net .............             0.55                0.41                0.32                0.19
                                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
    Total formula ................  2,857     98.87     2,685     99.37     2,331     98.90     2,420     97.92     2,620     98.28
                                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
    Total allocated allowance ....  3,734    100.00%    3,088    100.00%    2,937    100.00%    3,357    100.00%    3,577    100.00%
                                             ======              ======              ======              ======              ======
Unallocated allowance ............     11                 132                 348                 442                 473
                                   ------              ------              ------              ------              ------
    Total ........................ $3,745              $3,220              $3,285              $3,799              $4,050
                                   ======              ======              ======              ======              ======
</TABLE>

The allocated element of the allowance for loan losses account increased $646 to
$3,734 at December 31, 2002, from $3,088 at December 31, 2001. The change
resulted from an increase in the specific portion of $474 for the impairment of
loans individually evaluated under SFAS No. 114, coupled with an increase in the
formula portion of $172 for the impairment of loans collectively evaluated under
SFAS No. 5. The increase in the specific portion resulted from an increase in
the volume of loans individually evaluated for impairment. The percentage of
loans specifically evaluated for impairment increased to 1.1 percent of loans,
net of unearned income, at December 31, 2002, from 0.6 percent at the end of
2001. The increase in the formula portion was due to the overall growth of the
loan portfolio. The total volume of loans collectively evaluated for impairment
increased $11.5 million or 3.7 percent to $319.9 million at December 31, 2002.
Partially mitigating the effect of the increase in volume was a reduction in our
historical loss percentages for loans to commercial, financial and others and
mortgage loans.


                                       86
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

At December 31, 2002, the unallocated element was $11, compared to $132 at
year-end 2001. We believe that the decline in the unallocated element is
acceptable due to the fact that our ratio of net charge-offs to average loans
outstanding has consistently declined since December 31, 2000. In addition, our
current level of net charge-offs fell below the average historical level. Our
ratio of net charge-offs to average loans was 0.18 percent in 2002. In
comparison, the historical ratio of net charge-offs to average loans for the
previous eight quarters averaged 0.22 percent.

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, which equaled 149.7 percent at December 31, 2002, indicated that our
allowance account was more than able to absorb all potential losses associated
with nonperforming loans. Due to a reduction in the balance of foreclosed
assets, our coverage ratio for total nonperforming assets improved to 147.3
percent at December 31, 2002, from 83.2 percent at December 31, 2001.

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

<TABLE>
<CAPTION>
DECEMBER 31                                                            2002      2001      2000      1999      1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>       <C>       <C>       <C>       <C>
Allowance for loan losses at beginning of period .................   $3,220    $3,285    $3,799    $4,050    $3,798
Loans charged-off:
Commercial, financial and others .................................      167        85       580       587       410
Real estate:
  Construction ...................................................
  Mortgage .......................................................      222       493       158       108       119
Consumer, net ....................................................      317       338       291       269       260
Lease financing, net .............................................        3
                                                                     ------    ------    ------    ------    ------
    Total ........................................................      709       916     1,029       964       789
                                                                     ------    ------    ------    ------    ------

Loans recovered:
Commercial, financial and others .................................       31        25        29        57        67
Real estate:
  Construction ...................................................
  Mortgage .......................................................       11        26         4        50        46
Consumer, net ....................................................       92        80        62        71        73
Lease financing, net .............................................
                                                                     ------    ------    ------    ------    ------
    Total ........................................................      134       131        95       178       186
                                                                     ------    ------    ------    ------    ------
Net loans charged-off ............................................      575       785       934       786       603
                                                                     ------    ------    ------    ------    ------
Provision for loan losses ........................................    1,100       720       420       535       855
                                                                     ------    ------    ------    ------    ------
Allowance for loan losses at end of period .......................   $3,745    $3,220    $3,285    $3,799    $4,050
                                                                     ======    ======    ======    ======    ======

Ratios:
Net loans charged-off as a percentage of average loans outstanding     0.18%     0.26%     0.32%     0.30%     0.24%
Allowance for loan losses as a percentage of period end loans ....     1.16%     1.04%     1.10%     1.37%     1.63%
</TABLE>


                                       87
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The allowance for loan losses was $3.7 million at December 31, 2002, and $3.2
million at December 31, 2001. The allowance for loan losses, as a percentage of
loans, net of unearned income, increased to 1.16 percent at year-end 2002,
compared to 1.04 percent at the end of the previous year. The increase in this
ratio was primarily due to us recording a higher provision and lower net
charge-offs. In comparison, our peer group reported an allowance ratio equal to
1.31 percent and 1.27 percent at December 31, 2002 and 2001.

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 declined $210 or 26.8 percent to $575 in 2002 compared to $785
in 2001. As a percentage of average loans outstanding, net charge-offs equaled
0.18 percent in 2002 and 0.26 percent in 2001. For our peer group, net
charge-offs, as a percentage of average loans outstanding, were 0.18 percent in
2002 and 2001.

DEPOSITS:

The household sector remained strong as consumers supported the economy and its
recovery in 2002. Gradual income growth for individuals in 2002, coupled with a
reduction in their income taxes, resulting from the Economic Growth and Tax
Relief Act of 2001, led to a 5.9 percent rise in their disposable income.
Despite this increase, personal spending grew in 2002 at the same 3.1 percent
level as was reported in the prior year. Uncertainty about economic conditions,
continued volatility in the stock market and escalating tensions with regard to
Iraq, caused consumers to be more cautious with their spending. As a result,
personal savings, which is affected by income and spending, rose to 3.9 percent
in 2002 from 2.3 percent last year.

With the stock market still out of favor with investors, banks once again reaped
the benefits from increased savings. FDIC-insured commercial banks posted strong
deposit growth for the second year in a row. For these institutions, total
deposits increased $312.0 billion or 7.1 percent in 2002 after increasing $212.0
billion or 5.1 percent in 2001. Noninterest-bearing deposits rose $64.3 billion
or 7.4 percent to $936.5 billion at December 31, 2002, from $872.2 billion at
the end of 2001. Interest-bearing deposits increased $247.7 billion or 7.1
percent. Similar to 2001, the majority of the growth in interest-bearing
accounts was in low-cost savings accounts, as depositors chose to keep funds
liquid rather than locking in long-term at low rates. For FDIC-insured
Pennsylvania banks, deposits grew $2.6 billion or 2.0 percent in 2002.


                                       88
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Our deposit base is a 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. Our deposits were influenced by a number of internal and
external factors in 2002, including the opening of two new branch offices, our
focus on developing commercial business relationships, the effects of stock
market volatility on savings patterns, and consumer preferences for liquidity
and stability during periods of uncertainty. Similar to the banking industry, we
also experienced strong deposit growth. Our total deposits grew $21.0 million or
5.0 percent to $437.2 million at December 31, 2002, from $416.2 million at the
end of 2001. Noninterest-bearing accounts rose $4.7 million or 10.4 percent,
while interest-bearing accounts increased $16.3 million or 4.4 percent.
Commercial checking accounted for 55.1 percent of the growth in our
noninterest-bearing accounts in 2002, reflecting our emphasis on developing
relationships with the commercial sector and the expansion of our branch
network. Due to consumer preference for liquidity, the majority of our growth in
interest-bearing deposits was concentrated in our savings accounts, which
increased $32.6 million or 36.3 percent. Time deposits less than $100 and time
deposits $100 or more decreased $2.1 million and $7.3 million. Commercial
interest-bearing transaction accounts, which include NOW accounts, money market
accounts and savings accounts to commercial customers, increased $7.4 million or
28.9 percent.

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

<TABLE>
<CAPTION>
                                     2002                 2001                 2000                 1999                 1998
                              -----------------    -----------------   ------------------    -----------------    -----------------
                               AVERAGE  AVERAGE     AVERAGE  AVERAGE     AVERAGE  AVERAGE     AVERAGE  AVERAGE     AVERAGE  AVERAGE
YEAR ENDED DECEMBER 31         BALANCE     RATE     BALANCE     RATE     BALANCE     RATE     BALANCE     RATE     BALANCE     RATE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>
INTEREST-BEARING:
MONEY MARKET ACCOUNTS ......  $ 19,073     1.92%   $ 29,390     3.76%   $ 20,710     3.55%   $ 19,466     3.12%   $ 17,643     3.13%
NOW ACCOUNTS ...............    38,125     1.37      29,099     1.75      25,569     2.37      24,671     2.45      21,366     2.19
SAVINGS ACCOUNTS ...........   108,137     1.88      79,616     2.25      73,171     2.52      67,920     2.38      64,113     2.58
TIME DEPOSITS LESS THAN $100   185,508     4.44     185,015     5.47     175,522     5.66     181,164     5.42     175,954     5.61
TIME DEPOSITS $100 OR MORE .    27,861     3.79      32,075     5.03      32,302     5.98      22,710     5.69      23,936     5.89
                              --------             --------             --------             --------             --------
  TOTAL INTEREST-BEARING ...   378,704     3.23%    355,195     4.26%    327,274     4.60%    315,931     4.41%    303,012     4.60%
NONINTEREST-BEARING ........    49,441               42,235               37,953               36,757               32,550
                              --------             --------             --------             --------             --------
  TOTAL DEPOSITS ...........  $428,145             $397,430             $365,227             $352,688             $335,562
                              ========             ========             ========             ========             ========
</TABLE>

Total deposits averaged $428.1 million in 2002, an increase of $30.7 million or
7.7 percent from $397.4 million in 2001. Noninterest-bearing deposits averaged
$7.2 million or 17.1 percent higher in 2002, while average interest-bearing
accounts grew $23.5 million or 6.6 percent. As previously mentioned, the growth
in interest-bearing accounts reflected customer preference for liquidity.
Average savings accounts increased $28.5


                                       89
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

million or 35.8 percent, as deposits having stated maturities, average time
deposits less than $100 and time deposits $100 or more, declined $3.7 million.
Average money market accounts declined $10.3 million, while average NOW accounts
increased $9.0 million. A significant portion of money market accounts and NOW
accounts are comprised of deposits of local area school districts and municipal
organizations. The change in these accounts is reflective of the cyclical nature
of these deposits.

The banking industry experienced a significant reduction in fund costs, as
deposits continued to reprice downward in 2002. As a percentage of average
earning assets, the cost of funds for FDIC-insured commercial banks fell 131
basis points to 2.09 percent in 2002 from 3.40 percent in 2001. Insured
Pennsylvania banks reported a similar reduction in their cost of funds. The cost
of deposits for these institutions fell 124 basis points to 2.08 percent in 2002
from 3.32 percent in 2001.

We regularly monitor interest rates of local competitors and prevailing market
rates when establishing interest rates on our deposit products. Deposit rates
for banks within our market area declined gradually over the course of the year.
Excess liquidity and longer-term certificates of deposit repricing at lower
rates factored into the decline. Interest rates for certificates of deposit in
our market area were relatively stable for the first six months of 2002. The
average cost of a six-month, 12-month and 60-month certificate of deposit for
community banks in our market area was 2.47 percent, 2.73 percent and 4.12
percent at January 1, 2002. Competition for certificates of deposit eased, as
banks in our market area experienced an abundance of liquidity. By the end of
the third quarter, the average rate for a six-month certificate declined to 2.08
percent, while the rate for the 12-month certificate declined to 2.50 percent.
Due to steepening in the yield curve for U.S. Treasuries, longer-term
certificates edged up slightly. The average rate for a 60-month certificate
increased to 4.21 percent at September 30, 2002. When the FOMC eased monetary
policy at their meeting on November 6, 2002, banks immediately reacted by
lowering their certificate of deposit rates. As a result of the aforementioned
influences, the average rate on a six-month certificate of deposit declined 82
basis points from the beginning of the year to 1.65 percent at December 31,
2002. Similar reductions were evidenced in the 12-month and 60-month
certificates of deposit over the same period as these certificates fell 71 basis
points to 2.02 percent and 32 basis points to 3.80 percent.

We also experienced a significant reduction in our fund costs. Our cost of
deposits decreased 103 basis points to 3.23 percent in 2002, from 4.26 percent
in 2001. The decline in fund costs occurred gradually throughout the year.
Deposit costs averaged 3.49 percent in the first quarter of 2002,


                                       90
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

25 basis points lower compared to 3.74 percent in the fourth quarter of 2001.
Average deposit costs declined by another 14 basis points in the second quarter,
19 basis points in the third quarter and 23 basis points in the fourth quarter.
In September of 2002, in an effort to mitigate IRR exposure by attempting to fix
our future cost of fund through taking advantage of the historically low
interest rate environment, we favorably priced long-term certificates. In
addition, we initiated a new 90-month certificate of deposit with a promotional
rate to entice depositors to invest monies for a longer period. We were the only
bank in our market area to offer this term for certificates of deposit. Through
these actions, we effectively lengthened our time deposit portfolio at
relatively lower rates of interest. Specifically, the average cost of this long
term funding was approximately 175 basis points cheaper than was the cost of six
month certificates of deposit offered locally in the fourth quarter of 2000. Our
deposit costs may decline further in the near term due to the continued low
interest rate environment. However, should economic conditions rebound, the FOMC
may begin raising interest rates, which would negatively impact our cost of
funds.

Volatile deposits, time deposits $100 or more, decreased $7.3 million to $24.5
million at December 31, 2002, from $31.8 million at year-end 2001. A local
school district had funds on deposit with us specifically designated for an
expansion project. In 2002, this expansion project was completed and all
designated funds were withdrawn. Large denomination time deposits averaged $27.9
million in 2002 and $32.1 million in 2001. Our average cost of these funds
declined 124 basis points to 3.79 percent in 2002, from 5.03 percent in 2001.
Large denomination certificates of deposit are typically short-term, high-cost
funds. Due to their volatile nature, these deposits are not considered a stable
source of liquidity. We continued to be less reliant on this type of funding as
compared to our peer group in 2002. Our ratio of average volatile deposits, as a
percentage of average total assets, equaled 5.9 percent in 2002, compared to
12.3 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

<TABLE>
<CAPTION>
DECEMBER 31                                        2002      2001      2000      1999      1998
-----------------------------------------------------------------------------------------------
<S>                                             <C>       <C>       <C>       <C>       <C>
Within three months ..........................  $ 3,020   $10,720   $17,281   $ 3,752   $ 7,956
After three months but within six months .....    3,333     4,648     3,357     5,240     4,939
After six months but within twelve months ....    8,230    11,619     5,761     5,411     8,802
After twelve months ..........................    9,961     4,823     7,327     8,850     5,391
                                                -------   -------   -------   -------   -------
  Total ......................................  $24,544   $31,810   $33,726   $23,253   $27,088
                                                =======   =======   =======   =======   =======
</TABLE>


                                       91
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

In addition to deposit gathering, we have in place, a secondary source of
liquidity to fund operations through exercising existing borrowing arrangements
with the FHLB-Pgh. For 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. We had only minimal
reliance on this type of funding in 2002 and 2001.

MARKET RISK SENSITIVITY:

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

In accordance with regulation, each bank is required to develop its own IRR
management program depending on its structure, including certain fundamental
components which are mandatory to ensure sound IRR management. These elements
include appropriate board and management oversight, as well as a comprehensive
risk management process that effectively identifies, measures, monitors and
controls risk. Should a bank have material weaknesses in its risk management
process or high exposure relative to its capital, the bank regulatory agencies
will take action to remedy these shortcomings. Moreover, the level of a bank's
IRR exposure and the quality of its risk management process is a determining
factor when evaluating a bank's capital adequacy.


                                       92
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The responsibility for our market risk sensitivity management has been delegated
to the Asset/Liability Committee ("ALCO"). Specifically, ALCO utilizes several
computerized modeling techniques to monitor and attempt to control the influence
that market rate changes have on rate sensitive assets ("RSA") and rate
sensitive liabilities ("RSL").

We utilize the tabular presentation alternative in complying with quantitative
and qualitative disclosure rules. Information with respect to maturities and
fair values of other financial instruments at December 31, 2002, is summarized
as follows. For expected maturity distributions, other 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-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 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.


                                       93
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

MARKET RISK DISCLOSURES

<TABLE>
<CAPTION>
                                                              EXPECTED MATURITY DATE
                                                                                                    THERE-                     FAIR
                                         2003        2004        2005        2006        2007        AFTER        TOTAL        VALUE
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>          <C>         <C>         <C>         <C>         <C>          <C>          <C>
Other financial assets:
Cash and due from banks ..........   $ 10,883                                                                  $ 10,883     $ 10,883
Average interest rate ............
Federal funds sold ...............     10,500                                                                    10,500       10,500
Average interest rate ............       1.16%                                                                     1.16%
Investment securities:
U.S. Treasuries and agencies .....                $10,263                                                        10,263       10,350
Average interest rate ............                   2.13%                                                         2.13%
State and municipals .............      1,095         190     $   200     $    55     $    60     $ 30,908       32,508       35,003
Average interest rate ............       4.61%       5.91%       2.77%       4.85%       5.38%        7.39%        7.25%
Mortgage-backed securities .......     42,112      15,797      13,684       4,275         427           35       76,330       77,579
Average interest rate ............       4.68%       4.82%       4.82%       4.82%       4.82%        6.76%        4.74%
Equity securities ................                                                                   1,187        1,187        1,271
Average interest rate ............                                                                    6.02%        6.02%
                                     --------     -------     -------     -------     -------     --------     --------     --------
  Total ..........................     43,207      26,250      13,884       4,330         487       32,130      120,288      124,203
  Average interest rate ..........       4.68%       3.78%       4.79%       4.82%       4.89%        7.34%        5.21%
Loans held for sale, net .........      3,916                                                                     3,916        3,997
Average interest rate ............       5.84%                                                                     5.84%
Net loans:
Fixed-rate .......................     29,791      23,154      19,892      16,216      13,079       74,385      176,517      182,667
Average interest rate ............       8.40%       8.22%       8.10%       7.93%       7.95%        7.82%        8.02%
Adjustable-rate ..................     40,005       2,680       2,036       1,473       4,221       92,898      143,313      143,313
Average interest rate ............       5.07%       6.35%       5.69%       6.03%       5.85%        6.21%        5.88%
                                     --------     -------     -------     -------     -------     --------     --------     --------
  Total ..........................     69,796      25,834      21,928      17,689      17,300      167,283      319,830      325,980
  Average interest rate ..........       6.49%       8.03%       7.88%       7.77%       7.44%        6.93%        7.06%
Accrued interest receivable ......      2,164                                                                     2,164        2,164
Average interest rate ............
                                     --------     -------     -------     -------     -------     --------     --------     --------
  Total ..........................   $140,466     $52,084     $35,812     $22,019     $17,787     $199,413     $467,581     $477,727
                                     ========     =======     =======     =======     =======     ========     ========     ========

Other financial liabilities:
Noninterest-bearing deposits .....   $ 10,462     $ 9,466     $ 8,469     $ 7,473     $ 6,477     $  7,473     $ 49,820     $ 49,820
Average interest rate ............
Interest-bearing liabilities:
Money market, NOW and savings ....     37,561      33,985      30,408      26,831      23,253       26,829      178,867      178,867
Average interest rate ............       1.37%       1.37%       1.37%       1.37%       1.37%        1.37%        1.37%
Time deposits ....................     95,003      14,136      38,227      22,561      34,048        4,551      208,526      212,112
Average interest rate ............       3.15%       4.22%       4.95%       4.65%       4.90%        4.97%        4.04%
                                     --------     -------     -------     -------     -------     --------     --------     --------
  Total ..........................    132,564      48,121      68,635      49,392      57,301       31,380      387,393      390,979
  Average interest rate ..........       2.65%       2.21%       3.36%       2.87%       3.47%        1.89%        2.81%
Accrued interest payable .........      1,358                                                                     1,358        1,358
Average interest rate ............
                                     --------     -------     -------     -------     -------     --------     --------     --------
  Total ..........................   $144,384     $57,587     $77,104     $56,865     $63,778     $ 38,853     $438,571     $442,157
                                     ========     =======     =======     =======     =======     ========     ========     ========
</TABLE>

Investment securities having an amortized cost of $43.2 million and a
weighted-average tax-equivalent yield of 4.68 percent were scheduled to mature
within one year at December 31, 2002. Net loans scheduled to mature within the
same time frame equaled $69.8 million with a weighted-average tax-equivalent
yield of 6.49 percent. In addition, there were $3.9 million in loans held for
sale with a weighted-average yield of 5.84 percent at the end of 2002. Total
interest-earning assets scheduled to mature within one


                                       94
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

year were $127.4 million with a weighted-average tax-equivalent yield of 5.42
percent. With respect to interest-bearing liabilities, based on historical
withdrawal patterns, interest-bearing transaction accounts, defined as money
market, NOW and savings accounts, of $37.6 million with a weighted-average cost
of 1.37 percent were scheduled to mature within one year. In addition, time
deposits totaling $95.0 million with a weighted- average cost of 3.15 percent
were scheduled to mature in the same time frame. Total interest-bearing
liabilities scheduled to mature within one year equaled $132.6 million with a
weighted-average cost of 2.65 percent.

Limitations of the market risk disclosure model include, among others,
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, as the volume of cash flows may
increase or decrease. Loan information is presented based on payment due dates,
which may materially differ from actual results due to prepayments caused 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.

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, 2002, are summarized as follows:


                                       95
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

CHANGES IN FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
                                                          FAIR VALUE
                                              -----------------------------------
DECEMBER 31, 2002                             +100 BPS        LEVEL     -100 BPS
--------------------------------------------------------------------------------
<S>                                           <C>          <C>        <C>
Other financial assets:
Cash and due from banks ...................   $ 10,883     $ 10,883     $ 10,883
Federal funds sold ........................     10,500       10,500       10,500
Investment securities .....................    121,684      124,203      126,148
Loans held for sale, net ..................      3,997        3,997        3,997
Net loans .................................    318,750      325,980      333,860
Accrued interest receivable ...............      2,164        2,164        2,164
                                              --------     --------     --------
  Total ...................................   $467,978     $477,727     $487,552
                                              ========     ========     ========

Other financial liabilities:
Noninterest-bearing deposits ..............   $ 49,820     $ 49,820     $ 49,820
Money market, NOW and savings accounts ....    178,867      178,867      178,867
Time deposits .............................    208,219      212,112      216,174
Accrued interest payable ..................      1,358        1,358        1,358
                                              --------     --------     --------
  Total ...................................   $438,264     $442,157     $446,219
                                              ========     ========     ========
</TABLE>

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.

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.


                                       96
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

INTEREST RATE SENSITIVITY

<TABLE>
<CAPTION>
                                                          DUE AFTER        DUE AFTER
                                                       THREE MONTHS         ONE YEAR
                                         DUE WITHIN      BUT WITHIN       BUT WITHIN        DUE AFTER
DECEMBER 31, 2002                      THREE MONTHS   TWELVE MONTHS       FIVE YEARS       FIVE YEARS         TOTAL
-------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>              <C>              <C>           <C>
Rate-sensitive assets:
Investment securities .................    $  9,567        $ 34,051         $ 45,895         $ 34,690      $124,203
Loans held for sale, net ..............       3,916                                                           3,916
Loans, net of unearned income .........      76,475          37,366          134,035           75,699       323,575
Federal funds sold ....................      10,500                                                          10,500
                                           --------        --------         --------         --------      --------
  Total ...............................    $100,458        $ 71,417         $179,930         $110,389      $462,194
                                           ========        ========         ========         ========      ========

Rate-sensitive liabilities:
Money market accounts .................                    $ 17,878                                        $ 17,878
NOW accounts ..........................                      38,592                                          38,592
Savings accounts ......................                                     $122,397                        122,397
Time deposits less than $100 ..........    $ 30,538          52,827           96,666         $  3,951       183,982
Time deposits $100 or more ............       3,020          11,563            9,361              600        24,544
                                           --------        --------         --------         --------      --------
  Total ...............................    $ 33,558        $120,860         $228,424         $  4,551      $387,393
                                           ========        ========         ========         ========      ========

Rate-sensitivity gap:
  Period ..............................    $ 66,900        $(49,443)        $(48,494)        $105,838
  Cumulative ..........................    $ 66,900        $ 17,457         $(31,037)        $ 74,801      $ 74,801

RSA/RSL ratio:
  Period ..............................        2.99            0.59             0.79            24.26
  Cumulative ..........................        2.99            1.11             0.92             1.19          1.19
</TABLE>

At the end of 2001, we were liability rate sensitive with a cumulative one-year
RSA/RSL ratio of 0.74. As previously mentioned, this indicated that if interest
rates increase our earnings would have been negatively impacted. Given the
current low interest rate environment, we took certain steps in 2002 in order to
mitigate our potential IRR exposure should interest rates rise. Specifically,
our goal was to increase the amount of RSA repricing within one year and extend
the repricing time frame for RSL. In order to accomplish this, the majority of
the investment securities we purchased in 2002 were short-term mortgage-backed
securities. The amount of investment securities scheduled to reprice within one
year increased $21.2 million to $43.6 million at December 31, 2002, from $22.4
million at the end of 2001. With regard to RSL, we offered promotional rates on
our 60- and 90-month certificates of deposit in an attempt to extend the average
maturities of these types of funds. Time deposits less than $100 repricing
within one year totaled $83.4 million at year-end 2002, a decrease of $33.5
million in comparison to the previous year. Conversely, the aggregate amount of
time deposits less than $100 having maturities of 60 and 90 months increased
from $16.5 million at December 31, 2001, to $40.2 million at December 31, 2002.
As previously mentioned, the average cost of this long term funding is
comparatively cheaper than the cost of even the shortest term time deposits
offered throughout our market area just two years ago. Moreover,


                                       97
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

time deposits $100 or more repricing within one year decreased $12.4 million
from the end of 2001. At December 31, 2002, RSA repricing within one year
totaled $171.9 million, an increase of $17.5 million from $154.4 million at
year-end 2001. RSL repricing within one year decreased $52.9 million to $154.4
million at the end of 2002 from $207.3 million one year earlier. As a result,
our gap position changed from liability rate sensitive to asset rate sensitive
at December 31, 2002, as indicated by an RSA/RSL ratio of 1.11. This ratio fell
within our asset/liability guidelines of 0.70 and 1.30. This 1.11 ratio
indicates that should general market rates increase, the likelihood exists that
net interest income would be favorably affected. Conversely, a decline in
general market rates would likely have an adverse effect on net interest income.
However, these forward-looking statements are qualified in the aforementioned
section entitled "Forward-Looking Discussion" in this Management's Discussion
and Analysis.

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

As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Given
instantaneous and parallel shifts in general market rates of plus or minus 100
basis points, our projected net interest income for the 12 months ended December
31, 2003, will not change materially from model results using current interest
rates. We will continue to monitor our IRR position in 2003 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.


                                       98
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

LIQUIDITY:

Liquidity is essential to our continuing operations as it gives us the ability
to generate cash at a reasonable cost to fulfill our lending commitments and
support our asset growth, while satisfying the withdrawal demands of our
customers and meeting our borrowing requirements. Our principal sources of
liquidity are core deposits, and loan and investment payments and prepayments.
Providing a secondary source of liquidity is our 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. We manage liquidity daily, thus enabling us to effectively monitor
fluctuations in our liquidity position and to adapt our position according to
market fluctuations. We believe our liquidity is adequate to meet both present
and future financial obligations and commitments on a timely basis. There are
presently no known trends, demands, commitments, events or uncertainties that
have resulted or are reasonably likely to result in material changes with
respect to our liquidity.

We employ a number of analytical techniques in assessing the adequacy of our
liquidity position. One such technique is the use of ratio analysis related to
our reliance on noncore funds to fund our investments and loans maturing after
2003. Our noncore funds consist of time deposits in denominations of $100 or
more. These funds 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, 2002, our net noncore funding dependence ratio, the difference
between noncore funds and short- term investments to long-term assets, was
negative 7.5 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 10.0 percent at the end of 2002. Negative
ratios indicated that at December 31, 2002, 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 17.1 percent and 7.7 percent,
relied on noncore funds as a 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.


                                       99
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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 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 increased $7.5 million to $21.4 million at December 31, 2002, from
$13.9 million at the end of 2001. Net cash provided by operating and financing
activities, partially offset by net cash used in investing activities, caused
the increase. Net income of $5.2 million was the primary source of the $5.6
million in cash provided by operating activities in 2002.

Net cash used in investing activities totaled $16.5 million in 2002. Proceeds
received from sales and repayments of investment securities were more than
offset by purchases of investment securities and a net increase in lending
activities. We received $34.5 million from repayments and $15.1 million from
sales of investment securities. Purchases of securities totaled $51.2 million.
Net cash used in lending activities equaled $14.0 million.

An increase in deposits, reduced by net cash dividends paid and common stock
repurchases, predominantly caused the $18.4 million in net cash provided by
financing activities. Transaction accounts increased $30.4 million, which was
partially offset by a decline in time deposits of $9.4 million in 2002. We paid
net cash dividends of $1.4 million, and repurchased and retired shares of our
common stock for $1.2 million during the year ended December 31, 2002.

We anticipate our liquidity position to remain stable in 2003. Due to continued
stock market volatility and uncertainty of economic conditions, investors may
remain cautious and continue to favor traditional bank deposit products.
However, we cannot guarantee movements in the stock market or changes in
economic conditions. Should conditions rebound, deposit growth may subside.
Regardless of changes in the economy or stock market, 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 2003.


                                      100
<PAGE>
COMM BANCORP, INC.
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. A solid capital base provides depositors and stockholders with a
margin of safety, while allowing us to take advantage of profitable
opportunities, support future growth and provide protection against any
unforseen 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.

Our stockholders' equity increased $4.5 million to $45.3 million at December 31,
2002, from $40.8 million at December 31, 2001. Stockholders' equity improved
$2.64 on a per share basis to $23.31 at year-end 2002, from $20.67 at the end of
2001. The primary factor contributing to the capital improvement was net income
of $5.2 million. Net cash dividends of $1.4 million, common stock repurchases of
$1.2 million and a net unrealized gain on investment securities of $1.9 million
also affected stockholders' equity.

We periodically purchase shares of our common stock under a Board-approved stock
repurchase program. Under this program, we repurchased and retired 37,933 shares
for $1.2 million in 2002, 16,229 shares for $0.5 million in 2001 and 57,400
shares for $2.1 million in 2000. At December 31, 2002, 47,809 shares authorized
under the program were available to be repurchased. We plan to buyback the
available shares in 2003, if upon analysis, such repurchases meet our targeted
internal rate of return and after-tax return on investment.


                                      101
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We declared dividends of $1,603 or $0.82 per share in 2002 and $1,468 or $0.74
per share in 2001. Our dividend payout ratio was 30.8 percent and 31.2 percent
in 2002 and 2001. It is the intention of our Board of Directors to continue to
pay cash dividends in the future. However, these decisions are based on our
operating results, financial and economic conditions, capital and growth
objectives, appropriate dividend restrictions and other relevant factors. The
primary source of funds for payment of dividends has been the dividends received
from our subsidiary, Community Bank. Community Bank's ability to pay dividends
is subject to federal and state regulations. Accordingly, Community Bank,
without prior regulatory approval, may declare dividends to us totaling $6,359
at December 31, 2002.

Stockholders may automatically reinvest their dividends in shares of our common
stock through our dividend reinvestment plan ("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. During the years ended December 31, 2002 and 2001, 6,161
shares and 7,371 shares were issued under this plan.

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.


                                      102
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Our and Community Bank's capital ratios at December 31, 2002 and 2001, 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

<TABLE>
<CAPTION>
                                                                                           MINIMUM TO BE WELL
                                                                                            CAPITALIZED UNDER
                                                                   MINIMUM FOR CAPITAL      PROMPT CORRECTIVE
                                                    ACTUAL           ADEQUACY PURPOSES      ACTION PROVISIONS
DECEMBER 31                                     2002      2001       2002         2001        2002       2001
-------------------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>         <C>          <C>         <C>        <C>
Basis for ratios:
Tier I capital to risk-weighted assets:
  Consolidated ...........................  $ 41,544  $ 38,746    $13,730      $12,111
  Community Bank .........................    39,809    37,099     13,706       12,069     $20,559    $18,103
Total capital to risk-weighted assets:
  Consolidated ...........................    45,289    41,966     27,459       24,222
  Community Bank .........................    43,554    40,319     27,412       24,138      34,265     30,172
Tier I capital to total average assets
 less intangible assets:
  Consolidated ...........................    41,544    38,746     18,950       17,570
  Community Bank .........................    39,809    37,099    $18,910      $17,513     $23,637    $21,892

Risk-weighted assets:
  Consolidated ...........................   315,360   285,478
  Community Bank .........................   314,764   284,427
Risk-weighted off-balance sheet items:
  Consolidated ...........................    27,882    17,296
  Community Bank .........................    27,882    17,296
Average assets for Leverage ratio:
  Consolidated ...........................   473,746   439,256
  Community Bank .........................  $472,744  $437,836

Ratios:
Tier I capital as a percentage of risk-
 weighted assets and off-balance sheet
 items:
  Consolidated ...........................      12.1%     12.8%       4.0%         4.0%
  Community Bank .........................      11.6      12.3        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 ...........................      13.2      13.9        8.0          8.0
  Community Bank .........................      12.7      13.4        8.0          8.0        10.0       10.0
Tier I capital as a percentage of total
 average assets less intangible assets:
  Consolidated ...........................       8.8       8.8        4.0          4.0
  Community Bank .........................       8.4%      8.5%       4.0%         4.0%        5.0%       5.0%
</TABLE>

We and Community Bank have consistently maintained regulatory capital ratios
well above the minimum levels of 4.0 percent and 8.0 percent required for
adequately capitalized institutions. Our risk-based capital ratios declined
slightly in 2002 from 2001 but remain strong. The increase


                                      103
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

in total risk-weighted assets and off-balance sheet items was greater than the
increase in both Tier I and total capital. Specifically, total risk-weighted
assets and off-balance sheet items rose $40.5 million or 13.4 percent, while
Tier I capital increased $2.8 million or 7.2 percent and total capital grew $3.3
million or 7.9 percent. The ratio of Tier I capital to risk-weighted assets was
12.1 percent and 12.8 percent at December 31, 2002 and 2001, and our total
capital to risk-weighted assets ratio was 13.2 percent at year-end 2002,
compared to 13.9 percent at the end of 2001. Community Bank's Tier I risk-based
and total risk-based capital ratios also declined for reasons similar to those
discussed for the consolidated ratios. Our Leverage ratio remained constant at
8.8 percent at December 31, 2002 and 2001, while Community Bank's Leverage ratio
decreased to 8.4 percent from 8.5 percent. 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, 2002 and 2001. There are no conditions or events since this
notification that we believe have changed Community Bank's category.

REVIEW OF FINANCIAL PERFORMANCE:

Our net income totaled $5.2 million in 2002, an increase of $0.5 million or 10.6
percent compared to $4.7 million in 2001. On a per share basis, earnings rose
$0.28 to $2.65 in 2002 from $2.37 in 2001. Earnings were favorably affected by
greater net interest income and strong growth in noninterest income. Higher
noninterest expense and an increase in the provision for loan losses partially
offset the increase in revenue. ROAA and ROAE were 1.10 percent and 11.99
percent in 2002, compared to 1.07 percent and 11.82 percent in 2001. Market
appreciation of our available-for-sale investment securities resulted in other
comprehensive income, net of income taxes, of $1.9 million in 2002 and $0.2
million in 2001. For the years ended December 31, 2002 and 2001, comprehensive
income amounted to $7.1 million and $4.9 million.

Tax-equivalent net interest income increased $1.4 million or 8.2 percent in
2002. A $2.9 million or 19.2 percent decline in interest expense was partially
offset by a $1.5 million or 4.8 percent decrease in tax- equivalent interest
revenue. A significant decline in our cost of funds primarily caused the
reduction in interest expense. Growth in earning assets was more than offset by
a decrease in their tax-equivalent yield causing tax-equivalent interest revenue
to fall. Our net interest margin was 4.09 percent in 2002 and 4.08 percent in
2001.


                                      104
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Noninterest income rose 46.2 percent when comparing 2002 and 2001. Service
charges, fees and commissions increased 17.1 percent, while net gains realized
on the sale of loans nearly tripled. An addition to our allowance for loan
losses account of $500, required by regulators as a result of their most recent
examination, was primarily responsible for the increase in our provision for
loan losses. Noninterest expense increased 14.0 percent in 2002. The majority of
the increase resulted from a 20.0 percent rise in employee-related costs.

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 rates; and

      -     The level of nonperforming assets.

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

Bank earnings were positively affected by strong gains in net interest income in
2002. The net interest margin for all FDIC-insured commercial banks widened 18
basis points to 4.09 percent in 2002 from 3.91 percent in 2001. The improvement
primarily resulted from a 131 basis point decline in the cost of funds. In times
of falling interest rates, deposit rates


                                      105
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

generally decrease more slowly than general interest rate levels. Market rates
were consistently low in 2002, after falling 475 basis points in 2001. Bank
deposit costs finally reacted to the lower rate environment. Partially
mitigating the effects of lower fund costs for FDIC-insured banks, was a 51
basis point decrease in the weighted-average tax-equivalent yield on earning
assets. Pennsylvania banks did not benefit from the low interest rate
environment, like the overall banking industry, as they experienced a reduction
in their net interest margin. For these banks, the yield on earning assets fell
131 basis points in 2002, while their cost of funds, as a percentage of average
earning assets, fell 124 basis points. As a result, their average net interest
margin compressed 7 basis points to 3.70 percent in 2002 from 3.77 percent in
2001. Similar to all FDIC-insured banks, banks in our peer group reported
improved net interest margins in 2002. This group's tax-equivalent margin
increased 10 basis points to 4.32 percent in 2002 from 4.22 percent in 2001.

Similar to all banks, we consider the maintenance of an adequate net interest
margin to be of primary concern. The current economic environment has the
potential to pose problems for all banks. If economic growth does not increase,
given low inflation and possible deflationary conditions, the FOMC may lower
interest rates further. Rate-sensitive loans, tied to prime, will once again
reprice downward. However, deposit rates, already near acceptable minimums, may
have less room to reprice downward, which may consequently cause margins to
compress. 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.


                                      106
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

NET INTEREST INCOME CHANGES DUE TO RATE AND VOLUME

<TABLE>
<CAPTION>
                                               2002 VS. 2001                      2001 VS. 2000
                                       -----------------------------      ----------------------------
                                            INCREASE (DECREASE)                INCREASE (DECREASE)
                                              ATTRIBUTABLE TO                   ATTRIBUTABLE TO
                                         TOTAL                             TOTAL
                                        CHANGE       RATE     VOLUME      CHANGE       RATE     VOLUME
                                        ------       ----     ------      ------       ----     ------
<S>                                    <C>        <C>         <C>         <C>       <C>         <C>
Interest income:
Loans:
  Taxable ..........................   $(1,582)   $(2,646)    $1,064      $  831    $  (221)    $1,052
  Tax-exempt .......................       330       (103)       433        (264)       (80)      (184)
Investments:
  Taxable ..........................       (67)      (486)       419          52       (128)       180
  Tax-exempt .......................       186        (20)       206         178        (89)       267
Federal funds sold .................      (419)      (468)        49         603        (35)       638
                                       -------    -------     ------      ------    -------     ------
    Total interest income ..........    (1,552)    (3,723)     2,171       1,400       (553)     1,953
                                       -------    -------     ------      ------    -------     ------

Interest expense:
Money market accounts ..............      (738)      (612)      (126)        370         45        325
NOW accounts .......................        14       (125)       139         (96)      (204)       108
Savings accounts ...................       240       (474)       714         (56)      (308)       252
Time deposits less than $100 .......    (1,872)    (2,149)       277         170       (278)       448
Time deposits $100 or more .........      (558)      (452)      (106)       (318)      (304)       (14)
Short-term borrowings ..............                                        (150)        (1)      (149)
Long-term debt .....................        (1)                   (1)         (1)                   (1)
                                       -------    -------     ------      ------    -------     ------
    Total interest expense .........    (2,915)    (3,812)       897         (81)    (1,050)       969
                                       -------    -------     ------      ------    -------     ------
    Net interest income ............   $ 1,363    $    89     $1,274      $1,481    $   497     $  984
                                       =======    =======     ======      ======    =======     ======
</TABLE>

Tax-equivalent net interest income improved $1,363 or 8.0 percent to $18,394 for
the year ended December 31, 2002, from $17,031 for the same period of 2001. The
improvement resulted from growth in average earning assets over that of our
interest-bearing liabilities and a greater decline in our cost of funds compared
to the decline in our tax-equivalent yield on earning assets.

Interest-earning assets averaged $449.7 million in 2002, an increase of $31.9
million or 7.6 percent compared to $417.8 million in 2001. Average
interest-bearing liabilities rose $23.5 million or 6.6 percent to $378.7 million
in 2002, from $355.2 million in 2001. Specifically, with regard to average
earning assets, loans, net of unearned income, grew $18.5 million which
increased tax-equivalent net interest revenue by $1,497. Investment


                                      107
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

securities averaged $10.6 million higher, while average federal funds sold grew
$2.8 million. These volume variances favorably affected tax-equivalent net
interest revenue by $625 and $49. Overall, tax-equivalent net interest revenue
improved $2,171 due to the changes in the volume of average earning assets.
Average balances of interest-bearing liabilities also grew in 2002, causing
interest expense to rise $897, which offset some of the favorable effects to net
interest income caused by the growth of average earning assets. Growth in
average savings accounts accounted for approximately 80.0 percent of the change
due to volume in average interest-bearing liabilities. As previously mentioned,
we experienced increased demand for deposits due to developing commercial
business relationships and consumers seeking the stability of bank deposits.
Growth in business deposit relationships was concentrated in our cash management
savings accounts. In addition, due to uncertainty in economic conditions and
very low interest rates, consumers opted for savings accounts in order to keep
their funds liquid. As a result, our average savings accounts increased $28.5
million to $108.1 million in 2002, from $79.6 million in 2001, which resulted in
a $714 increase in interest expense.

Also affecting our tax-equivalent interest revenue and interest expense was the
impact variations in interest rates had on our yield on earning assets and our
cost of funds. Historically low interest rates sustained throughout 2002 caused
a significant decline in both the yield on our earning assets and our cost of
interest-bearing liabilities. Our tax-equivalent yield on earning assets fell 89
basis points to 6.81 percent in 2002 from 7.70 percent in 2001, which resulted
in a reduction in interest revenue of $3,723. The low interest rates had an even
greater effect on our cost of funds which declined 103 basis points to 3.23
percent in 2002 from 4.26 percent last year. The lower fund costs equated to a
$3,812 improvement in interest expense and more than offset the negative effects
caused by the decline in yields. We experienced significant reductions in rates
paid on all major deposit categories. Accounting for the majority of the
reduction in interest expense was a decline of 103 basis points in the average
cost of time deposits less than $100. Time deposits less than $100 continued to
reprice at lower rates, which resulted in a reduction in interest expense of
$2,149. In addition, rates on money market and savings accounts fell 184 basis
points and 37 basis points from 2001 to 2002 causing favorable rate variances of
$612 and $474. Furthermore, reductions of 124 basis points and 38 basis points
in the average rate paid for large denomination time deposits and NOW accounts
favorably affected net interest income by $452 and $125. With respect to earning
assets, tax-equivalent loan and investment yields fell 88 basis points and 50
basis points, while the yield on federal funds sold declined 252 basis points.
The reduction in tax-equivalent yields on loans, investments and federal funds
sold caused


                                      108
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

declines in interest revenue of $2,749, $506 and $468. Our net interest spread
widened 14 basis points to 3.58 percent in 2002, from 3.44 percent in 2001. As
previously mentioned, we also experienced a slight improvement in our
tax-equivalent net interest margin to 4.09 percent for the year ended December
31, 2002, from 4.08 percent for the same period last year.

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 statutory tax rate of 34.0 percent.


                                      109
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

SUMMARY OF NET INTEREST INCOME

<TABLE>
<CAPTION>
                                                              2002                               2001
                                                 ------------------------------      -----------------------------
                                                            INTEREST   AVERAGE                 INTEREST   AVERAGE
                                                  AVERAGE   INCOME/    INTEREST      AVERAGE   INCOME/    INTEREST
                                                  BALANCE   EXPENSE      RATE        BALANCE   EXPENSE      RATE
                                                 --------   --------   --------      --------  --------   --------
<S>                                              <C>        <C>        <C>           <C>       <C>        <C>
ASSETS:
Earning assets:
Loans:
  Taxable ...................................    $304,849    $22,811      7.48%     $291,514    $24,393      8.37%
  Tax-exempt ................................      13,386      1,043      7.79         8,179        713      8.72
Investments:
  Taxable ...................................      72,155      3,552      4.92        64,172      3,619      5.64
  Tax-exempt ................................      38,060      2,856      7.50        35,490      2,670      7.52
Federal funds sold ..........................      21,241        348      1.64        18,451        767      4.16
                                                 --------    -------                --------    -------
    Total earning assets ....................     449,691     30,610      6.81%      417,806     32,162      7.70%
Less: allowance for loan losses .............       3,488                              3,426
Other assets ................................      28,748                             26,323
                                                 --------                           --------
    Total assets ............................    $474,951                           $440,703
                                                 ========                           ========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts .......................    $ 19,073        367      1.92%     $ 29,390      1,105      3.76%
NOW accounts ................................      38,125        524      1.37        29,099        510      1.75
Savings accounts ............................     108,137      2,030      1.88        79,616      1,790      2.25
Time deposits less than $100 ................     185,508      8,240      4.44       185,015     10,112      5.47
Time deposits $100 or more ..................      27,861      1,055      3.79        32,075      1,613      5.03
Short-term borrowings .......................           8                 2.00             5                 5.00
Long-term debt ..............................                                              6          1      7.50
                                                 --------    -------                --------    -------
    Total interest-bearing liabilities ......     378,712     12,216      3.23%      355,206     15,131      4.26%
Noninterest-bearing deposits ................      49,441                             42,235
Other liabilities ...........................       3,435                              3,504
Stockholders' equity ........................      43,363                             39,758
                                                 --------                           --------
    Total liabilities and stockholders' equity   $474,951                           $440,703
                                                 ========    -------                ========    -------
    Net interest/income spread ..............                $18,394      3.58%                 $17,031      3.44%
                                                             =======                            =======
    Net interest margin .....................                             4.09%                              4.08%
Tax-equivalent adjustments:
Loans .......................................                $   355                            $   242
Investments .................................                    971                                908
                                                             -------                            -------
    Total adjustments .......................                $ 1,326                            $ 1,150
                                                             =======                            =======
</TABLE>

Note: Average balances were calculated using average daily balances. Average
balances for loans include nonaccrual loans. Interest income on taxable loans
include fees of $812 in 2002, $673 in 2001, $445 in 2000, $551 in 1999 and $560
in 1998. Available-for-sale securities, included in investment securities, are
stated at amortized cost with the related average unrealized holding gains of
$2,614 in 2002, $1,337 in 2001, $689 in 1999 and $2,829 in 1998, and an average
unrealized holding loss of $810 in 2000 included in other assets. Tax-
equivalent adjustments were calculated using the prevailing statutory tax rate
of 34.0 percent.


                                      110
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

SUMMARY OF NET INTEREST INCOME (CONTINUED)

<TABLE>
<CAPTION>
            2000                              1999                              1998
------------------------------      ------------------------------      ------------------------------
           INTEREST   AVERAGE                  INTEREST   AVERAGE                  INTEREST   AVERAGE
 AVERAGE   INCOME/    INTEREST       AVERAGE   INCOME/    INTEREST       AVERAGE   INCOME/    INTEREST
 BALANCE   EXPENSE      RATE         BALANCE   EXPENSE      RATE         BALANCE   EXPENSE      RATE
--------   --------   --------      --------   --------   --------      --------   --------   --------

<S>        <C>        <C>           <C>        <C>        <C>           <C>        <C>        <C>
$278,931    $23,562      8.45%      $249,789    $20,879      8.36%      $240,658    $20,587      8.55%
  10,228        977      9.55          8,381        634      7.56          7,267        603      8.30

  60,810      3,567      5.87         76,500      4,463      5.83         61,138      3,645      5.96
  31,915      2,492      7.81         35,956      2,863      7.96         38,276      3,089      8.07
   2,679        164      6.12          3,282        162      4.94         10,164        556      5.47
--------    -------                 --------    -------                 --------    -------
 384,563     30,762      8.00%       373,908     29,001      7.76%       357,503     28,480      7.97%
   3,492                               3,997                               3,881
  25,797                              26,293                              23,797
--------                            --------                            --------
$406,868                            $396,204                            $377,419
========                            ========                            ========

$ 20,710        735      3.55%      $ 19,466        608      3.12%      $ 17,643        552      3.13%
  25,569        606      2.37         24,671        605      2.45         21,366        467      2.19
  73,171      1,846      2.52         67,920      1,618      2.38         64,113      1,654      2.58
 175,522      9,942      5.66        181,164      9,822      5.42        175,954      9,864      5.61
  32,302      1,931      5.98         22,710      1,293      5.69         23,936      1,409      5.89
   2,374        150      6.32          1,393         73      5.24            185         11      5.95
      37          2      7.50             40          3      7.50             43          3      7.50
--------    -------                 --------    -------                 --------    -------
 329,685     15,212      4.61%       317,364     14,022      4.42%       303,240     13,960      4.60%
  37,953                              36,757                              32,550
   3,402                               3,810                               3,213
  35,828                              38,273                              38,416
--------                            --------                            --------
$406,868                            $396,204                            $377,419
========    -------                 ========    -------                 ========    -------
            $15,550      3.39%                  $14,979      3.34%                  $14,520      3.37%
            =======                             =======                             =======
                         4.04%                               4.01%                               4.06%

            $   332                             $   215                             $   206
                847                                 974                               1,050
            -------                             -------                             -------
            $ 1,179                             $ 1,189                             $ 1,256
            =======                             =======                             =======
</TABLE>


                                      111
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

PROVISION FOR LOAN LOSSES:

The banking industry continued to face asset quality problems in 2002. For all
FDIC-insured commercial banks, nonperforming assets rose $6.4 billion or 10.2
percent in 2002 after increasing $12.0 billion or 27.9 percent in 2001. As a
percentage of total assets, nonperforming assets, rose to 0.94 percent at
December 31, 2002, from 0.92 percent at the end of 2001. In addition, net
charge-off levels increased 21.6 percent. As a result, banks increased their
provision for loan losses $4.6 billion or 10.6 percent in 2002. For Pennsylvania
banks, the ratio of nonperforming assets, as a percentage of total assets,
increased to 0.64 percent in 2002 from 0.59 percent in 2001. For these banks,
which recorded staggering loan charge-offs in 2001, net charge-offs declined
$617.9 billion or 54.6 percent.

We evaluate the adequacy of the allowance for loan losses account on a quarterly
basis utilizing our systematic analysis in accordance with procedural
discipline. We take into consideration certain factors such as composition of
the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs,
prevailing economic conditions and other relevant factors when determining the
adequacy of the allowance for loan losses account. We make monthly provisions to
the allowance for loan losses account in order to maintain the allowance at the
appropriate level indicated by our evaluations. Based on our most recent
evaluation at December 31, 2002, we believed that the allowance was adequate to
absorb any known or potential losses in our portfolio.

The provision for loan losses equaled $1,100 in 2002, an increase of $380
compared to $720 in 2001. As previously mentioned, we were required by
regulators to recognize an additional $500 to the allowance for loan losses
account. The regulators arrived at this amount by applying the estimated average
industry loss experience factors defined in the December 21, 1993, FFIEC
Interagency Policy Statement. These factors differed from the factors we
applied, which are based on our average actual historical loss experience for
the latest eight quarters.

NONINTEREST INCOME:

The composite of all FDIC-insured banks experienced strong growth in noninterest
income in 2002, while insured Pennsylvania banks realized a decline in
noninterest income. For all FDIC-insured commercial banks, noninterest income
increased $14.4 billion or 9.2 percent in 2002. On the contrary, noninterest
income for Pennsylvania banks declined $244.7 million or 4.7 percent in 2002.


                                      112
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Our noninterest income totaled $4,145 in 2002 and $2,835 in 2001. Included in
noninterest income in 2002 were gains on the sale of investment securities of
$322. Adjusting for these gains, noninterest income improved $988 or 34.9
percent over the previous year. As a result of the strong housing market and
favorable mortgage rates in 2002, activity in our secondary mortgage division
flourished. We benefitted by recording gains on the sale of residential
mortgages of $919 in 2002, an increase of $563 or 158.1 percent, compared to
$356 in 2001. Service charges, fees and commissions rose $425 or 17.1 percent to
$2,904 in 2002, compared to $2,479 in 2001.

Fee-based revenue growth is important to improving profitability, as it lessens
reliance on traditional, spread-based income. Our ratio of noninterest income,
not including gains on the sale of investments, as a percentage of average total
assets, improved dramatically. This ratio rose to 0.80 percent in 2002, from
0.64 percent in 2001. The improvement in our ratio brings our noninterest income
levels more in line with that of our peer group, which exhibited ratios of 0.93
percent in 2002 and 0.92 percent in 2001.

NONINTEREST EXPENSE:

For the most part, banks were able to keep costs contained in 2002. For all
FDIC-insured commercial banks, noninterest expense rose by a modest 4.6 percent.
In addition, the average efficiency ratios for these banks improved to 55.7
percent in 2002, from 57.7 percent in 2001, while noninterest expense, as a
percentage of average earning assets, remained at 4.0 percent for the years
ended December 31, 2002 and 2001. Insured Pennsylvania banks were also
successful in containing costs. Noninterest expense, as a percentage of average
earning assets, for these banks remained constant at 4.1 percent for 2002 and
2001.

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.


                                      113
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

For the year ended December 31, 2002, noninterest expense amounted to $13,530,
an increase of $1,660 or 14.0 percent, from $11,870 for the same period of 2001.
The majority of this increase occurred from a 20.0 percent change in
employee-related costs. In 2002, net occupancy and equipment expense rose $173
or 10.3 percent and other expenses increased $358 or 7.9 percent. The increase
in expenses negatively impacted our productivity measures. This was evidenced by
a weakening in our operating efficiency and overhead ratios, two industry ratios
that measure productivity. The operating efficiency ratio, noninterest expense
divided by net interest income and noninterest income, weakened to 63.8 percent
in 2002, from 63.4 percent in 2001. Similarly, our overhead ratio, defined as
noninterest expense as a percentage of average total assets, weakened to 2.8
percent in 2002 from 2.7 percent in 2001. By contrast, our peer group's
productivity improved. The efficiency ratio for this group improved to 63.5
percent in 2002 from 65.5 percent in 2001.

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

NONINTEREST EXPENSE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                             2002      2001      2000      1999      1998
-----------------------------------------------------------------------------------------------
<S>                                             <C>       <C>       <C>       <C>       <C>
Salaries and employee benefits expense:
Salaries and payroll taxes ..................   $ 5,623   $ 4,755   $ 4,419   $ 4,169   $ 3,767
Employee benefits ...........................     1,144       883       800       655       678
                                                -------   -------   -------   -------   -------
  Salaries and employee benefits expense ....     6,767     5,638     5,219     4,824     4,445
                                                -------   -------   -------   -------   -------

Net occupancy and equipment expense:
Net occupancy expense .......................       836       766       781       610       532
Equipment expense ...........................     1,017       914       911       735       761
                                                -------   -------   -------   -------   -------
  Net occupancy and equipment expense .......     1,853     1,680     1,692     1,345     1,293
                                                -------   -------   -------   -------   -------

Other expenses:
Marketing expense ...........................       482       381       365       322       401
Other taxes .................................       399       407       315       320       273
Stationery and supplies .....................       465       389       406       431       437
Contractual services ........................     1,494     1,320     1,183       916     1,006
Insurance, including FDIC assessment ........       187       169       164       124        93
Other .......................................     1,883     1,886     1,725     1,147     1,416
                                                -------   -------   -------   -------   -------
  Other expenses ............................     4,910     4,552     4,158     3,260     3,626
                                                -------   -------   -------   -------   -------
    Total noninterest expense ...............   $13,530   $11,870   $11,069   $ 9,429   $ 9,364
                                                =======   =======   =======   =======   =======
</TABLE>

Salaries and employee benefits expense constitutes the majority of our
noninterest expense. Total personnel costs rose $1,129 or 20.0 percent to $6,767
in 2002 from $5,638 in 2001. Salaries and payroll taxes increased $868, while
employee benefits expense rose $261. Salaries and employee benefits expense
increased as a result of staffing our two new community banking offices in 2002,
as well as the addition of several corporate relationship officers and related
staff. Higher health insurance premiums


                                      114
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

and employer matching contributions to our newly established 401(k) primarily
caused the increase in employee benefits expense. Discretionary annual
contributions to the defined contribution plan increased $36 to $114 in 2002
from $78 in 2001. Matching contributions under the 401(k) feature of the plan
totaled $111 in 2002.

Opening our new Carbondale and Scranton community banking offices in 2002
primarily caused the $173 or 10.3 percent increase in occupancy and equipment
expense. Also contributing to the increase were the costs associated with the
implementation of the MCIF and loan and deposit platform systems.

In January of 2003, we completed the relocation of our Clifford office into a
new facility. This project had an aggregate cost of $680, which was funded
through normal operations. Additionally, on September 12, 2002, we acquired land
in Tannersville, Pennsylvania, for $695 to construct a branch facility. This
project has an estimated aggregate cost of $1,630 and should be completed by the
end of the third quarter of 2003. The Tannersville project will also be funded
through normal operations.

In addition, we plan to enhance our information systems by implementing an
enterprise-wide, document-imaging system, and installing InTouch(sm), a secure
automated customer service line. We expect net occupancy and equipment expense
to increase as a result of additional maintenance and depreciation related to
the aforementioned projects.

For a discussion on recent SFASs and consensus positions of the Emerging Issues
Task Force issued by the FASB related to net occupancy and equipment expense,
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 increased $358 or 7.9 percent to $4,910 in 2002 from $4,552 in
2001. Higher marketing-related costs, supply costs and contractual services
factored into the rise in other expenses. The 26.5 percent increase in marketing
costs and 19.5 percent rise in stationery and supplies occurred as a result of
additional expenses associated with the opening of the offices and developing
commercial business relationships. The increase in contractual services
primarily resulted from an increase in costs associated with originating loans
for sale in the secondary market. Heightened activity with regard to this area
of business caused an increase in appraisal fees and credit report and search
costs.


                                      115
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We will attempt to minimize increases in our noninterest expenses in 2003
through close monitoring and employing various control techniques. However, the
costs associated with opening the new offices and implementing planned
technological improvements in 2003 may offset such actions.

Our deposits are insured by the FDIC and are subject to deposit insurance
assessments to maintain the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC places each insured bank into one of nine risk categories based
on the bank's capitalization and supervisory evaluations provided to the FDIC by
the bank's primary federal regulator. An insured bank's assessment rate is then
determined by the risk category into which it is classified. Recently, the FDIC
decided to retain the existing BIF assessment schedules of $0.00 per 100 dollars
of deposits for banks classified in the highest capital and supervisory
evaluation category and $0.27 per 100 dollars of deposits for banks classified
in the lowest category. We were classified in the highest capital and
supervisory evaluation category at December 31, 2002, and will be exempt from
paying a BIF assessment for the first half of 2003.

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 2002 at $0.0170 and
first quarter of 2003 at $0.0168 per 100 dollars of BIF- assessable deposits.
Our FICO assessments were $72 and $71 for the years ended December 31, 2002 and
2001.

INCOME TAXES:

Despite higher earnings in 2002, our income tax expense decreased $43 to $1,383
for the year ended December 31, 2002, from $1,426 for the same period of 2001.
Our effective tax rate improved from 23.3 percent in 2001 to 21.0 percent in
2002. A higher level of tax-exempt income was primarily responsible for the
improvement. Tax-exempt interest revenue as a percentage of total interest
revenue increased from 7.2 percent in 2001 to 8.8 percent in 2002. Our tax
position remained favorable in comparison to our peer group, whose effective tax
rate improved to 24.3 percent in 2002 from 26.5 percent in 2001. We expect
income tax expense to remain constant in 2003 as higher levels of pretax income
are offset through greater amounts of tax-exempt income. In addition to income
on tax-exempt loans and investments, we utilize investment tax credits available
through our investment in an elderly and low- to moderate-income residential
housing program to mitigate our tax burden. By utilizing these credits, we
reduced our income tax expense by $80 in 2002 and 2001. The aggregate amount of
tax credits available from this project that will be recognized over ten years
ending 2003 is $895.


                                      116
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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


                                      117
<PAGE>
COMM BANCORP, INC.
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Comm Bancorp,
Inc. and subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 Comm Bancorp, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

February 4, 2003


/s/ Kronick Kalada Berdy & Co.
--------------------------------
KRONICK KALADA BERDY & CO., P.C.
Kingston, Pennsylvania


                                      118
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                            2002           2001           2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>            <C>
INTEREST INCOME:
Interest and fees on loans:
  Taxable ..............................................................   $    22,811    $    24,393    $    23,562
  Tax-exempt ...........................................................           688            471            645
Interest and dividends on investment securities available-for-sale:
  Taxable ..............................................................         3,481          3,499          3,437
  Tax-exempt ...........................................................         1,885          1,762          1,645
  Dividends ............................................................            71            120            130
Interest on federal funds sold .........................................           348            767            164
                                                                           -----------    -----------    -----------
    Total interest income ..............................................        29,284         31,012         29,583
                                                                           -----------    -----------    -----------

INTEREST EXPENSE:
Interest on deposits ...................................................        12,216         15,130         15,060
Interest on short-term borrowings ......................................           150
Interest on long-term debt .............................................                            1              2
                                                                           -----------    -----------    -----------
    Total interest expense .............................................        12,216         15,131         15,212
                                                                           -----------    -----------    -----------
    Net interest income ................................................        17,068         15,881         14,371
Provision for loan losses ..............................................         1,100            720            420
                                                                           -----------    -----------    -----------
    Net interest income after provision for loan losses ................        15,968         15,161         13,951
                                                                           -----------    -----------    -----------

NONINTEREST INCOME:
Service charges, fees and commissions ..................................         2,904          2,479          2,065
Net gains on sale of loans .............................................           919            356             18
Net gains on sale of investment securities available-for-sale ..........           322                           374
                                                                           -----------    -----------    -----------
    Total noninterest income ...........................................         4,145          2,835          2,457
                                                                           -----------    -----------    -----------

NONINTEREST EXPENSE:
Salaries and employee benefits expense .................................         6,767          5,638          5,219
Net occupancy and equipment expense ....................................         1,853          1,680          1,692
Other expenses .........................................................         4,910          4,552          4,158
                                                                           -----------    -----------    -----------
    Total noninterest expense ..........................................        13,530         11,870         11,069
                                                                           -----------    -----------    -----------
Income before income taxes .............................................         6,583          6,126          5,339
Provision for income tax expense .......................................         1,383          1,426          1,139
                                                                           -----------    -----------    -----------
    Net income .........................................................         5,200          4,700          4,200
                                                                           -----------    -----------    -----------

OTHER COMPREHENSIVE INCOME:
Unrealized holding gains on investment securities available-for-sale ...         3,245            372          2,180
Reclassification adjustment for gains included in net income ...........          (322)                         (374)
Income tax expense related to other comprehensive income ...............           994            126            614
                                                                           -----------    -----------    -----------
    Other comprehensive income, net of income taxes ....................         1,929            246          1,192
                                                                           -----------    -----------    -----------
    Comprehensive income ...............................................   $     7,129    $     4,946    $     5,392
                                                                           ===========    ===========    ===========

PER SHARE DATA:
Net income .............................................................   $      2.65    $      2.37    $      2.11
Cash dividends declared ................................................   $      0.82    $      0.74    $      0.70
Average common shares outstanding ......................................     1,960,140      1,984,180      1,995,834
</TABLE>

See Notes to Consolidated Financial Statements.


                                      119
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31                                                                                    2002        2001
---------------------------------------------------------------------------------------------------------------
ASSETS:
<S>                                                                                        <C>         <C>
Cash and due from banks ................................................................   $ 10,883    $ 13,934
Federal funds sold .....................................................................     10,500
Investment securities available-for-sale ...............................................    124,203     120,357
Loans held for sale, net ...............................................................      3,916       1,885
Loans, net of unearned income ..........................................................    323,575     310,322
  Less: allowance for loan losses ......................................................      3,745       3,220
                                                                                           --------    --------
Net loans ..............................................................................    319,830     307,102
Premises and equipment, net ............................................................     11,861       9,702
Accrued interest receivable ............................................................      2,164       2,483
Other assets ...........................................................................      3,061       4,895
                                                                                           --------    --------
    Total assets .......................................................................   $486,418    $460,358
                                                                                           ========    ========

LIABILITIES:
Deposits:
  Noninterest-bearing ..................................................................   $ 49,820    $ 45,079
  Interest-bearing .....................................................................    387,393     371,126
                                                                                           --------    --------
    Total deposits .....................................................................    437,213     416,205
Accrued interest payable ...............................................................      1,358       1,879
Other liabilities ......................................................................      2,514       1,426
                                                                                           --------    --------
    Total liabilities ..................................................................    441,085     419,510
                                                                                           --------    --------

STOCKHOLDERS' EQUITY:
Common stock, par value $0.33, authorized 12,000,000 shares, issued and outstanding:
 2002, 1,944,769 shares; 2001, 1,976,541 shares ........................................        642         652
Capital surplus ........................................................................      6,484       6,396
Retained earnings ......................................................................     35,623      33,145
Accumulated other comprehensive income .................................................      2,584         655
                                                                                           --------    --------
    Total stockholders' equity .........................................................     45,333      40,848
                                                                                           --------    --------
    Total liabilities and stockholders' equity .........................................   $486,418    $460,358
                                                                                           ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      120
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                  ACCUMULATED
                                                                                                        OTHER           TOTAL
                                                           COMMON       CAPITAL      RETAINED   COMPREHENSIVE    STOCKHOLDERS'
FOR THE THREE YEARS ENDED DECEMBER 31, 2002                 STOCK       SURPLUS      EARNINGS     INCOME(LOSS)         EQUITY
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>           <C>        <C>              <C>
BALANCE, DECEMBER 31, 1999 ...........................   $    672      $  6,199      $ 29,387        $   (783)       $ 35,475
Net income ...........................................                                  4,200                           4,200
Dividends declared: $0.70 per share ..................                                 (1,395)                         (1,395)
Dividend reinvestment plan: 7,015 shares issued ......          2           217                                           219
Repurchase and retirement: 57,400 shares .............        (19)         (172)       (1,882)                         (2,073)
Net changes in other comprehensive income (loss) .....                                                  1,192           1,192
                                                         --------      --------      --------        --------        --------
BALANCE, DECEMBER 31, 2000 ...........................        655         6,244        30,310             409          37,618
Net income ...........................................                                  4,700                           4,700
Dividends declared: $0.74 per share ..................                                 (1,468)                         (1,468)
Dividend reinvestment plan: 7,371 shares issued ......          2           201                                           203
Repurchase and retirement: 16,229 shares .............         (5)          (49)         (397)                           (451)
Net changes in other comprehensive income (loss) .....                                                    246             246
                                                         --------      --------      --------        --------        --------
BALANCE, DECEMBER 31, 2001 ...........................        652         6,396        33,145             655          40,848
Net income ...........................................                                  5,200                           5,200
Dividends declared: $0.82 per share ..................                                 (1,603)                         (1,603)
Dividend reinvestment plan: 6,161 shares issued ......          2           201                                           203
Repurchase and retirement: 37,933 shares .............        (12)         (113)       (1,119)                         (1,244)
Net changes in other comprehensive income (loss) .....                                                  1,929           1,929
                                                         --------      --------      --------        --------        --------
BALANCE, DECEMBER 31, 2002 ...........................   $    642      $  6,484      $ 35,623        $  2,584        $ 45,333
                                                         ========      ========      ========        ========        ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      121
<PAGE>
COMM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                         2002        2001        2000
-----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................   $  5,200    $  4,700    $  4,200
Adjustments:
  Provision for loan losses ............................................      1,100         720         420
  Depreciation, amortization and accretion .............................      2,292       2,079       1,788
  Amortization of loan fees ............................................       (138)       (117)       (101)
  Deferred income tax expense (benefit) ................................        (41)        157         393
  Gains on sale of investment securities available-for-sale ............       (322)                   (374)
  Losses (gains) on foreclosed assets ..................................       (174)         61         125
  Losses on disposition of equipment ...................................                      4          24
  Changes in:
    Loans held for sale, net ...........................................     (2,031)     (1,823)        (62)
    Accrued interest receivable ........................................        319        (469)        152
    Other assets .......................................................       (199)        (93)        329
    Accrued interest payable ...........................................       (521)       (135)         38
    Other liabilities ..................................................         88         (43)       (421)
                                                                           --------    --------    --------
      Net cash provided by operating activities ........................      5,573       5,041       6,511
                                                                           --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available-for-sale .........     15,064                  16,734
Proceeds from repayments of investment securities available-for-sale ...     34,499      25,173      21,758
Purchases of investment securities available-for-sale ..................    (51,224)    (74,647)     (2,395)
Proceeds from sale of foreclosed assets ................................      2,272         976         399
Net increase in lending activities .....................................    (14,010)    (14,924)    (23,069)
Purchases of premises and equipment ....................................     (3,121)       (854)     (1,027)
                                                                           --------    --------    --------
      Net cash provided by (used in) investing activities ..............    (16,520)    (64,276)     12,400
                                                                           --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
  Money market, NOW, savings and noninterest-bearing accounts ..........     30,404      30,592       4,722
  Time deposits ........................................................     (9,396)      6,892      11,516
  Short-term borrowings ................................................                             (5,500)
Payments on long-term debt .............................................                    (36)         (3)
Proceeds from the issuance of common shares ............................        203         203         219
Repurchase and retirement of common shares .............................     (1,244)       (451)     (2,073)
Cash dividends paid ....................................................     (1,571)     (1,450)     (1,364)
                                                                           --------    --------    --------
      Net cash provided by financing activities ........................     18,396      35,750       7,517
                                                                           --------    --------    --------
      Net increase (decrease) in cash and cash equivalents .............      7,449     (23,485)     26,428
      Cash and cash equivalents at beginning of year ...................     13,934      37,419      10,991
                                                                           --------    --------    --------
      Cash and cash equivalents at end of year .........................   $ 21,383    $ 13,934    $ 37,419
                                                                           ========    ========    ========

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
  Interest .............................................................   $ 12,737    $ 15,266    $ 15,174
  Income taxes .........................................................      1,348       1,193         952
Noncash items:
  Transfers of loans to foreclosed assets ..............................        320       1,464       1,556
  Unrealized gains on investment securities available-for-sale, net ....   $ (1,929)   $   (246)   $ (1,192)
</TABLE>

See Notes to Consolidated Financial Statements.


                                      122
<PAGE>
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 sixteen
full-service branches located within the Lackawanna, Susquehanna, Wayne and
Wyoming counties of Northeastern Pennsylvania.

Community Bank's primary product is loans to finance one-to-four family
residential properties. Other lending products include loans to individuals and
small- and medium-sized businesses. 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 Division.

Community Leasing Corporation provides equipment lease financing to small- and
middle-market commercial customers. Comm Financial Services Corporation engages
in selling insurance products and services and in providing asset 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.

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.

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


                                      123
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    Summary of significant accounting policies (continued):

BASIS OF PRESENTATION:

The consolidated financial statements of the Company have been prepared in
conformity with 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 the 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.

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: (i) economic characteristics; (ii) products and
services; (iii) operating processes; (iv) customer bases; (v) delivery systems;
and (vi) regulatory oversight. The Company's sixteen branch banking offices, all
similar with respect to these characteristics, have exhibited similar long-term
financial performance. Therefore, they were aggregated into a single operating
segment.

Community Leasing Corporation, Comm Financial Services Corporation and Comm
Realty Corporation did not meet the quantitative thresholds for required segment
disclosure under GAAP.

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 and intangible assets. Actual results could differ from those
estimates.


                                      124
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 date. 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 Allowance for Loan 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 Statement of Financial Accounting Standards ("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 30 days or more; and (iii) any loans internally
classified as substandard, doubtful, loss, special mention or watch. 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 payments and the
contractual 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


                                      125
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 recorded
investment in the loan, including accrued interest and net deferred loan fees,
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


                                      126
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 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 substandard, special mention or
watch; (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 marginal;
and (iii) identified loans to be collectively evaluated for impairment and not
having an internal loan grading classification. 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 marginal are based on
actual historical loss experience and current environmental factors for the
Company's portfolio of loans having these loan grading classifications. Loans
collectively evaluated under SFAS No. 5 and not internally classified 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


                                      127
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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.

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 80.0 percent of fair
market value for residential properties or 75.0 percent of fair market value for
commercial properties based upon estimates derived through independent
appraisals. However, proceeds realized from sales may ultimately be higher or
lower than those estimates.

Intangible assets include goodwill that resulted from the acquisition of The
First National Bank of Nicholson and a core deposit intangible that resulted
from the assumption of deposit liabilities in the acquisition of two branches.
These assets are periodically evaluated for impairment with a charge to earnings
recorded in the current period or a change in the amortization period if future
benefits are not fully derived from these assets.


                                      128
<PAGE>
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, 2002 and 2001.

The Company classifies debt securities 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, 2002 and 2001.

Investment securities are designated as available-for-sale when they are to be
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, except for restricted equity investment securities of the
Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh") and the Federal Reserve Bank
of Philadelphia ("FRB") which 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.

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, except for mortgage-backed securities, where amortization or accretion
is prorated based on principal repayments.


                                      129
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Management periodically evaluates each investment security to determine if a
decline in fair value below its amortized cost is other than temporary. 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.

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, 2002 and 2001.

On January 1, 2001, the Company adopted SFAS Nos. 133 and 138. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. An entity is required to recognize all
derivatives as either assets or liabilities in the consolidated balance sheets
and measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and the
resulting designation. If certain conditions are met, a derivative may be
specifically designated as: (i) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (iii) a hedge of foreign currency exposures. SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
amended SFAS No. 133 by addressing a limited number of issues causing
implementation difficulties for a large number of entities. The adoption of
these Statements did not have a material effect on operating results or
financial position, as the Company has no instruments that qualify as
derivatives or hedges.

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


                                      130
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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, 2002
and 2001, accordingly, no valuation allowance was deemed necessary.

LOANS:

Loans, including direct financing leases, are stated at outstanding principal
balances, net of unearned interest and deferred loan fees. 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. Unearned interest on leases and installment loans 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. For direct financing
leases, any gain or loss realized upon disposal of equipment returned at the end
of the lease term is included in other income or expense.

On January 1, 2002, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others." SOP 01-6 eliminates differences in accounting and disclosure
requirements established by the respective AICPA Audit and Accounting Guides,
"Banks and Savings Institutions," "Audits of Credit Unions," and "Audits of
Finance Companies," where such differences are not warranted. In addition, SOP
01-6 carries forward accounting guidance for transactions unique to certain
financial entities. SOP 01-6 applies to all banks, savings institutions, credit
unions and other entities subject to the aforementioned AICPA Audit and
Accounting Guides. The adoption of SOP 01-6 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


                                      131
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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, 2002 and 2001.

The Company recognizes interest income on impaired loans 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 80.0 percent of its fair market value for residential
properties or 75.0 percent of its fair market value for commercial properties 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 costs to maintain the
assets are included in other expenses. No allowance for losses has been
established subsequent to the acquisition of foreclosed assets during the three
years ended December 31, 2002. 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 twelve
months.


                                      132
<PAGE>
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 LOSSES:

The allowance for loan losses account is established through charges to earnings
as a provision for loan losses. 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.

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 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. The cost of routine maintenance
and repairs is expensed as incurred. The cost of major replacements, renewals
and betterments are capitalized. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are eliminated and any
resulting gain or loss is reflected in


                                      133
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

noninterest income or noninterest expense. Depreciation is computed principally
using the straight-line method based on the following useful lives:

<TABLE>
<S>                                                                  <C>
Premises ........................................................    15-45 years
Equipment .......................................................     3-10 years
Leasehold improvements ..........................................       15 years
</TABLE>

On July 1, 2000, the Company adopted the Financial Accounting Standards Board's
("FASB") Emerging Issues Task Force ("EITF") Issue No. 00-2, "Accounting for Web
Site Development Costs," which provides accounting guidance for certain web site
development costs. The costs addressed in Issue No. 00-2 include those related
to the planning stage, web site application and infrastructure development
stage, graphics development, content development and operating stage. During
2000, the Company capitalized costs of $71 incurred for the development of its
web site. During 2001, the web site became fully operational. According to this
EITF, any costs incurred during the operating stage should be expensed as
incurred. Costs related to the operation of the web site, included in other
expenses, totaled $32 in 2002 and $28 in 2001. No costs were incurred in 2000
related to the operation of the web site.

On August 16, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 amends SFAS No. 19, "Financial Accounting
and Reporting by Oil and Gas Companies." SFAS No. 143 applies to all entities
and addresses financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to the legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and normal operations of a long- lived asset, except for certain obligations of
lessees. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The adoption of this Statement on January
1, 2003, is not expected to have a material effect on the operating results or
financial position of the Company.

MORTGAGE SERVICING RIGHTS:

Mortgage servicing rights are recognized as a separate asset when servicing
rights are 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


                                      134
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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.

BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND DISPOSAL ACTIVITIES:

On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations,"
which superseded Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." Previously, under APB No. 16, business combinations were
accounted for using one of two methods, the pooling-of-interests method or the
purchase method. SFAS No. 141 eliminated the pooling-of-interests method and
required that the purchase method be used for all business combinations
initiated after June 30, 2001. The adoption of this Statement did not have a
material effect on the operating results or financial position of the Company.

On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142, which superseded APB Opinion No. 17,
"Intangible Assets," changed the accounting for goodwill, including goodwill
recorded from past business combinations, from an amortization method to an
impairment only approach. The Company includes goodwill in other assets and
prior to the adoption of SFAS No. 142, amortized goodwill on a straight-line
basis over 15 years. Upon adoption of this Statement, amortization of goodwill
ceased and is now 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, except for such losses included in the calculation of a gain or loss
from discontinued operations. The adoption of SFAS No. 142 affected the results
of operations by eliminating the annual amortization expense on goodwill of
$218. During 2002, there were no impairment losses recognized upon the initial
application of this Statement or as a result of periodic impairment testing.


                                      135
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This Statement replaced SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of business.
This Statement also amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 established
a single accounting model for long-lived assets to be disposed of by sale and
resolved significant implementation issues related to SFAS No. 121. The adoption
of this Statement did not have a material effect on the operating results or
financial position of the Company.

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of the provisions of this Statement on January
1, 2003, is not expected to have a material effect on the operating results or
financial position of the Company.

On October 1, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain
Financial Institutions." This Statement provides guidance on the accounting for
the acquisition of a financial institution. Except for acquisitions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" and FASB Interpretation No. 9, "Applying APB
Opinion No. 16 and 17 When a Savings and Loan Association or a Similar
Institution is Acquired in a Business Combination Accounted for by the Purchase
Method," and requires that those transactions be accounted for in accordance
with SFAS Nos. 141 and 142. In addition, this Statement amends SFAS No. 144 to
include in its scope long-term customer relationship intangible assets of
financial institutions. The adoption of SFAS No. 147 did not have a material
effect on the operating results or financial position of the Company.


                                      136
<PAGE>
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 is included
in other assets and amortized on a straight-line basis over eight years.
Management, on a periodic basis, reviews the core deposit intangible and
evaluates events or changes in circumstances that may indicate impairment in the
carrying amount of this asset. Impairment, if any, is measured based on the
amount by which the carrying amount of this intangible asset exceeds its fair
value. As of December 31, 2002, there were no events or changes in circumstances
that would lead management to believe that the carrying amount of this asset may
not be recoverable.

TRUST 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. Trust income is recorded on a cash basis, which is not materially
different than if reported on an accrual basis, and is included in noninterest
income. Revenue from trust services did not meet any of the quantitative
thresholds for required segment disclosure under SFAS No. 131.

EXTINGUISHMENT OF DEBT:

On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." Furthermore, SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale- leaseback transactions and the
required accounting for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The provisions related to the rescission
of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, and
the provisions related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. The adoption of the provisions of
SFAS No. 145 did not, and are not expected to, have a material effect on the
operating results or financial position of the Company.


                                      137
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 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.

The Company's assets that were considered financial instruments approximated
96.9 percent and 96.8 percent of total assets at December 31, 2002 and 2001,
respectively. Liabilities that were considered financial instruments
approximated 99.4 percent and 99.7 percent of total liabilities at December 31,
2002 and 2001, respectively. 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.


                                      138
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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 frequently and with no
significant credit risk, fair values are based on carrying values. The fair
values of all other 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.

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 demand 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.

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.


                                      139
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

COMMITMENTS: 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 value approximates the recorded deferred fee amounts
and is included in net loans.

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 $411 in 2002, $332 in
2001 and $328 in 2000.

INCOME TAXES:

The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. 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.

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.


                                      140
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

EARNINGS PER COMMON SHARE:

The Company had no dilutive potential common shares outstanding during the
three-year period ended December 31, 2002, 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 $3,214 and $1,432 at
December 31, 2002 and 2001, respectively. These reserve requirements averaged
$1,988 in 2002 and $1,000 in 2001.

Community Bank maintains compensating balances with the FRB and various other
correspondent banks, most of which are not required, to offset specific charges
for check clearing and other services. Balances maintained for this purpose were
$5,198 and $9,092 at December 31, 2002 and 2001, respectively. Compensating
balances with correspondent banks averaged $5,716 in 2002 and $5,169 in 2001.

3.    INVESTMENT SECURITIES:

All investment securities were classified as available-for-sale for the years
ended December 31, 2002 and 2001. The amortized cost and fair value of
available-for-sale securities at December 31, 2002 and 2001, are summarized as
follows:

<TABLE>
<CAPTION>
                                 AMORTIZED   UNREALIZED   UNREALIZED        FAIR
DECEMBER 31, 2002                     COST        GAINS       LOSSES       VALUE
--------------------------------------------------------------------------------
<S>                              <C>         <C>          <C>           <C>
U.S. Government agencies .......  $ 10,263       $   87                 $ 10,350
State and municipals ...........    32,508        2,495                   35,003
Mortgage-backed securities .....    76,330        1,349         $100      77,579
Equity securities ..............     1,187           84                    1,271
                                  --------       ------         ----    --------
  Total ........................  $120,288       $4,015         $100    $124,203
                                  ========       ======         ====    ========
</TABLE>

<TABLE>
<CAPTION>
                                 AMORTIZED   UNREALIZED   UNREALIZED        FAIR
DECEMBER 31, 2001                     COST        GAINS       LOSSES       VALUE
--------------------------------------------------------------------------------
<S>                              <C>         <C>          <C>           <C>
U.S. Government agencies .......  $  1,007       $   60                 $  1,067
State and municipals ...........    41,476          647         $333      41,790
Mortgage-backed securities .....    75,011          900          353      75,558
Equity securities ..............     1,871           71                    1,942
                                  --------       ------         ----    --------
  Total ........................  $119,365       $1,678         $686    $120,357
                                  ========       ======         ====    ========
</TABLE>


                                      141
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3.    INVESTMENT SECURITIES (CONTINUED):

Proceeds from the sales of available-for-sale securities amounted to $15,064 in
2002 and $16,734 in 2000. There were no sales of investment securities in 2001.
Gross gains of $322 and $383 were realized on the sale of securities in 2002 and
2000, respectively. There were no gross losses realized on the sale of
securities in 2002. Gross losses of $9 were realized on the sale of securities
in 2000. The income tax provision applicable to net realized gains amounted to
$109 in 2002 and $127 in 2000.

Net unrealized holding gains and losses on available-for-sale securities are
included as a separate component in stockholders' equity. The Company had net
unrealized holding gains of $2,584, net of deferred income taxes of $1,331 at
December 31, 2002, and $655, net of deferred income taxes of $337 at December
31, 2001.

Investment securities with an amortized cost of $37,424 at December 31, 2002,
and $44,792 at December 31, 2001, 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 $38,416 at December 31, 2002, and $45,458 at
December 31, 2001.

The maturity distribution of the amortized cost, fair value and weighted-
average tax-equivalent yield of the available-for-sale portfolio at December 31,
2002, is summarized in the table that follows. The weighted- average yield based
on amortized cost has been computed for state and municipals on a tax-equivalent
basis using the statutory tax rate of 34.0 percent. The distributions are based
on contractual maturity with the exception of mortgage-backed securities,
including collateralized mortgage obligations ("CMOs"), and equity securities.
Mortgage-backed securities and CMOs have been presented based upon estimated
cash flows, assuming no change in the current interest rate environment. Equity
securities, which primarily consist of stock of the FHLB-Pgh and FRB, with no
stated contractual maturities are included in the "After ten years" maturity
distribution. Expected maturities may differ from contracted maturities, or
estimated maturities for mortgage-backed securities and CMOs, because borrowers
have the right to call or prepay obligations with or without call or prepayment
penalties.


                                      142
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3.    INVESTMENT SECURITIES (CONTINUED):

<TABLE>
<CAPTION>
                                                     AFTER ONE           AFTER FIVE
                                    WITHIN           BUT WITHIN          BUT WITHIN            AFTER
                                   ONE YEAR          FIVE YEARS          TEN YEARS           TEN YEARS             TOTAL
                              -----------------------------------------------------------------------------------------------
DECEMBER 31, 2002              AMOUNT    YIELD     AMOUNT    YIELD    AMOUNT    YIELD     AMOUNT    YIELD     AMOUNT    YIELD
-----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>      <C>        <C>      <C>       <C>      <C>        <C>      <C>        <C>
Amortized cost:
U.S. Government agencies ...                      $10,263    2.13%                                           $ 10,263   2.13%
State and municipals .......  $ 1,095    4.61%        505    4.49     $7,177    7.92%    $23,731    7.23%      32,508   7.25
Mortgage-backed securities .   42,112    4.68      34,183    4.82         35    6.76                           76,330   4.74
Equity securities ..........                                                               1,187    6.02        1,187   6.02
                              -------             -------             ------             -------             --------
  Total ....................  $43,207    4.68%    $44,951    4.20%    $7,212    7.91%    $24,918    7.17%    $120,288   5.21%
                              =======             =======                                =======             ========

Fair value:
U.S. Government agencies ...                      $10,350                                                    $ 10,350
State and municipals .......  $ 1,103                 518             $7,878             $25,504               35,003
Mortgage-backed securities .   42,515              35,027                 37                                   77,579
Equity securities ..........                                                               1,271                1,271
                              -------             -------             ------             -------             --------
  Total ....................  $43,618             $45,895             $7,915             $26,775             $124,203
                              =======             =======             ======             =======             ========
</TABLE>

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, 2002 and 2001. All securities are
considered "investment grade," receiving a rating of "Baa" or higher from
Moody's or "BBB" or higher from Standard and Poor's rating services at December
31, 2002.

4.    LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES:

The major classifications of loans outstanding, net of unearned interest of
$2,685 and $3,055 and loan fees of $445 and $447 at December 31, 2002 and 2001,
respectively, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                 2002            2001
--------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Commercial, financial and others ....................   $ 90,747        $ 71,512
Real estate:
  Construction ......................................      5,398           5,285
  Mortgage ..........................................    193,012         195,915
Consumer, net .......................................     32,631          36,346
Lease financing, net ................................      1,787           1,264
                                                        --------        --------
    Total ...........................................   $323,575        $310,322
                                                        ========        ========
</TABLE>

Fixed-rate loans totaled $178,584 and $212,701, while loans with adjustable
interest rates were $144,991 and $97,621, respectively, at December 31, 2002 and
2001.


                                      143
<PAGE>
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):

The maturity distribution of the loan portfolio by major classification at
December 31, 2002, is summarized as follows:

<TABLE>
<CAPTION>
                                                  AFTER ONE
                                       WITHIN     BUT WITHIN     AFTER
DECEMBER 31, 2002                     ONE YEAR    FIVE YEARS   FIVE YEARS      TOTAL
-------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>           <C>
Maturity schedule:
Commercial, financial and others ...  $ 34,542     $ 15,508     $ 40,697     $ 90,747
Real estate:
  Construction .....................     5,398        5,398
  Mortgage .........................    18,090       49,683      125,239      193,012
Consumer, net ......................    11,928       17,398        3,305       32,631
Lease financing, net ...............       656        1,131        1,787
                                      --------     --------     --------     --------
    Total ..........................  $ 70,614     $ 83,720     $169,241     $323,575
                                      ========     ========     ========     ========
</TABLE>

Loans outstanding to directors, executive officers, principal stockholders or to
their affiliates totaled $6,107 at December 31, 2002, and $2,553 at December 31,
2001. Advances and repayments during 2002 totaled $4,740 and $1,186,
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, 2002 and 2001.

At December 31, 2002, the majority of the Company's loans were at least
partially secured by real estate in Lackawanna, Susquehanna, Wayne and Wyoming
counties of Northeastern Pennsylvania. Therefore, a primary concentration of
credit risk is directly related to the real estate market in Northeastern
Pennsylvania. 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, 2002, 2001 and 2000, is summarized as
follows:

<TABLE>
<CAPTION>
                                                   2002        2001        2000
-------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>
Balance, January 1 ..........................   $ 3,220     $ 3,285     $ 3,799
Provision for loan losses ...................     1,100         720         420
Loans charged-off ...........................      (709)       (916)     (1,029)
Loans recovered .............................       134         131          95
                                                -------     -------     -------
Balance, December 31 ........................   $ 3,745     $ 3,220     $ 3,285
                                                =======     =======     =======
</TABLE>


                                      144
<PAGE>
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, 2002 and 2001, is
summarized as follows:

DECEMBER 31                                                      2002       2001
--------------------------------------------------------------------------------
Nonaccrual loans:
Commercial, financial and others ...........................   $  541     $  113
Real estate:
  Construction .............................................
  Mortgage .................................................    1,213      1,045
Consumer, net ..............................................      238        190
Lease financing, net .......................................
                                                               ------     ------
    Total nonaccrual loans .................................    1,992      1,348
                                                               ------     ------

Accruing loans past due 90 days or more:
Commercial, financial and others ...........................       97        107
Real estate:
  Construction .............................................
  Mortgage .................................................      281        372
Consumer, net ..............................................      132        225
Lease financing, net .......................................
                                                               ------     ------
    Total accruing loans past due 90 days or more ..........      510        704
                                                               ------     ------
    Total nonperforming loans ..............................    2,502      2,052
Foreclosed assets ..........................................       40      1,818
                                                               ------     ------
    Total nonperforming assets .............................   $2,542     $3,870
                                                               ======     ======

Information relating to the recorded investment in impaired loans at
December 31, 2002 and 2001, is summarized as follows:

DECEMBER 31                                                      2002       2001
--------------------------------------------------------------------------------
Impaired loans:
With a related allowance ...................................   $2,500     $  910
With no related allowance ..................................    1,158      1,035
                                                               ------     ------
  Total ....................................................   $3,658     $1,945
                                                               ======     ======

The analysis of changes affecting the allowance for loan losses related to
impaired loans for each of the three years ended December 31, 2002, 2001
and 2000, is summarized as follows:

<TABLE>
<CAPTION>
                                                         2002     2001     2000
-------------------------------------------------------------------------------
<S>                                                     <C>      <C>      <C>
Balance, January 1 ..................................   $ 403    $ 405    $ 613
Provision for loan losses ...........................     944      483      116
Loans charged-off ...................................    (477)    (498)    (324)
Loans recovered .....................................       7       13
                                                        -----    -----    -----
Balance, December 31 ................................   $ 877    $ 403    $ 405
                                                        =====    =====    =====
</TABLE>


                                      145
<PAGE>
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, 2002, 2001 and 2000, are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                2002      2001       2000
-----------------------------------------------------------------------------------------------
<S>                                                                <C>       <C>        <C>
Gross interest due under terms ................................    $   201   $   194    $   293
Interest income recognized ....................................        176       276        104
                                                                   -------   -------    -------
Interest income not recognized (recognized in excess of due) ..    $    25   $   (82)   $   189
                                                                   =======   =======    =======

Interest income recognized (cash-basis) .......................    $   176   $   276    $   104

Average recorded investment in impaired loans .................    $ 2,831   $ 2,476    $ 2,473
</TABLE>

Cash received on impaired loans applied as a reduction of principal totaled $493
in 2002, $349 in 2001 and $264 in 2000. There were no commitments to extend
additional funds to customers with impaired loans at December 31, 2002 and 2001.

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, 2002
and 2001, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                      2002       2001
--------------------------------------------------------------------------------
<S>                                                           <C>        <C>
Commitments to extend credit ...............................  $48,478    $28,726
Unused portions of home equity and credit card lines .......    6,892      5,464
Commercial letters of credit ...............................      986      1,007
                                                              -------    -------
  Total ....................................................  $56,356    $35,197
                                                              =======    =======
</TABLE>

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


                                      146
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

5.    COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):

card lines and commercial letters of credit is represented by the contractual
amounts of those 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. Commercial letters of
credit are conditional commitments issued by the Company to support customers in
the purchase of commercial goods. These letters of credit are automatically
renewable upon their anniversary date unless canceled prior to such date at the
option of the Company.

To reduce credit risk related to the use of off-balance sheet credit- related
financial instruments, the Company might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on the Company's
credit evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment and
real estate. Allowance for credit losses, if any, on off-balance sheet
commitments is reported separately as a liability. No allowance was deemed
necessary at December 31, 2002 and 2001. These commitments are generally issued
for one year or less and often expire unused in whole or in part by the
customer.

The Company provides deposit and loan products and other financial services to
individual and corporate customers in its four-county market area of Lackawanna,
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. 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.


                                      147
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

5.    COMMITMENTS, CONCENTRATIONS AND CONTINGENT LIABILITIES (CONTINUED):

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, 2002 and 2001, 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, 2002 and 2001, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                     2002     2001
--------------------------------------------------------------------------------
<S>                                                          <C>         <C>
Land ......................................................  $ 3,525     $ 2,374
Premises ..................................................    9,587       8,699
Leasehold improvements ....................................      291         291
Furniture and equipment ...................................    7,826       6,767
                                                             -------     -------
  Total premises and equipment ............................   21,229      18,131
Less: accumulated depreciation ............................    9,368       8,429
                                                             -------     -------
  Premises and equipment, net .............................  $11,861     $ 9,702
                                                             =======     =======
</TABLE>

Depreciation charged to noninterest expense amounted to $962 in 2002, $856 in
2001 and $832 in 2000. Occupancy expense has been reduced by rental income from
premises leased to others in the amount of $61 in 2002 and $59 per year in 2001
and 2000.

Certain facilities are leased under operating lease agreements expiring at
various dates until the year 2022. Three leases contain escalation clauses that
provide for inflation adjustments. The effect of such adjustments are included
in the following table. One lease contains renewal options that provide for
extensions of four consecutive five year periods. 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 $147 in 2002, $106 in 2001 and $110 in 2000.


                                      148
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

6.    PREMISES AND EQUIPMENT, NET (CONTINUED):

Future minimum annual rentals required under noncancellable leases are
summarized as follows:

<TABLE>
<S>                                                                       <C>
2003 ..................................................................   $  134
2004 ..................................................................       99
2005 ..................................................................       92
2006 ..................................................................       93
2007 ..................................................................       93
2008 and thereafter ...................................................      539
                                                                          ------
  Total ...............................................................   $1,050
                                                                          ======
</TABLE>

On December 7, 2001, Community Bank acquired land in Clifford, Pennsylvania, for
$201 to relocate an existing branch facility. This project with an aggregate
cost of $680 was completed January 6, 2003.

On September 12, 2002, Community Bank acquired land in Tannersville,
Pennsylvania, for $695 to construct a branch facility. This project has an
estimated aggregate cost of $1,630 and will be funded through normal operations.
This project should be completed by the end of the third quarter of 2003.

7.    OTHER ASSETS:

The major components of other assets at December 31, 2002 and 2001, are
summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                      2002       2001
--------------------------------------------------------------------------------
<S>                                                            <C>        <C>
Goodwill ...................................................   $  349     $  349
Core deposit intangible ....................................      810      1,080
Deferred income taxes ......................................                 452
Foreclosed assets ..........................................       40      1,818
Mortgage servicing rights ..................................      466        192
Other ......................................................    1,396      1,004
                                                               ------     ------
  Total ....................................................   $3,061     $4,895
                                                               ======     ======
</TABLE>

Effective January 1, 2002, goodwill is subject to impairment testing and is no
longer subject to periodic amortization, accordingly, there was no amortization
expense of goodwill in 2002. Amortization expense of goodwill amounted to $218
per year for 2001 and 2000. There was no goodwill acquired in 2002, 2001 and
2000.


                                      149
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

7.    OTHER ASSETS (CONTINUED):

The gross carrying amount and accumulated amortization of the core deposit
intangible was $2,178 and $1,368 at December 31, 2002, and $2,178 and $1,098 at
December 31, 2001. Amortization expense of the core deposit intangible amounted
to $270 per year in 2002, 2001 and 2000. The core deposit intangible will be
fully amortized in 2005. Estimated future amortization expense the Company will
incur is $270 per year in 2003, 2004 and 2005.

The net costs of operating foreclosed assets, including gains and losses on the
sale of such properties, were $181 in 2001 and $191 in 2000. The operation of
foreclosed assets generated net revenue of $59 in 2002.

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 Balance Sheets. The
unpaid principal balances of mortgage loans serviced for others were $56,112 at
December 31, 2002, and $21,906 at December 31, 2001. Custodial escrow balances,
maintained in connection with the loan servicing and included in demand
deposits, were $110 and $150 December 31, 2002 and 2001, respectively.

The analysis of the changes in the balances of mortgage servicing assets for
each of the three years ended December 31, 2002, 2001 and 2000, is summarized as
follows:

<TABLE>
<CAPTION>
                                                         2002     2001     2000
-------------------------------------------------------------------------------
<S>                                                     <C>      <C>      <C>
Balance, January 1 ...................................  $ 192    $  47    $  49
Additions ............................................    377      173        8
Amortization .........................................   (103)     (28)     (10)
                                                        -----    -----    -----
Balance, December 31 .................................  $ 466    $ 192    $  47
                                                        =====    =====    =====
</TABLE>

At December 31, 2002, 2001 and 2000, the fair value of the mortgage servicing
assets approximated their carrying value, therefore, no valuation allowance was
deemed necessary.


                                      150
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

8.    DEPOSITS:

The major components of interest-bearing and noninterest-bearing deposits at
December 31, 2002 and 2001, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                      2002       2001
--------------------------------------------------------------------------------
<S>                                                          <C>        <C>
Interest-bearing deposits:
  Money market accounts ...................................  $ 17,878   $ 26,846
  NOW accounts ............................................    38,592     36,598
  Savings accounts ........................................   122,397     89,760
  Time deposits less than $100 ............................   183,982    186,112
  Time deposits $100 or more ..............................    24,544     31,810
                                                             --------   --------
    Total interest-bearing deposits .......................   387,393    371,126
Noninterest-bearing deposits ..............................    49,820     45,079
                                                             --------   --------
    Total deposits ........................................  $437,213   $416,205
                                                             ========   ========
</TABLE>

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 $4,968 at December 31,
2002, and $4,632 at December 31, 2001.

The maturity distribution of time deposits $100 or more at December 31, 2002 and
2001, is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                     2002        2001
--------------------------------------------------------------------------------
<S>                                                          <C>         <C>
Within three months .......................................  $ 3,020     $10,720
After three months but within six months ..................    3,333       4,648
After six months but within twelve months .................    8,230      11,619
After twelve months .......................................    9,961       4,823
                                                             -------     -------
  Total ...................................................  $24,544     $31,810
                                                             =======     =======
</TABLE>

Interest expense on time deposits $100 or more amounted to $1,055 in 2002,
$1,613 in 2001 and $1,931 in 2000.

The aggregate amounts of maturities for all time deposits at December 31, 2002,
are summarized as follows:

<TABLE>
<S>                                                                     <C>
2003 ................................................................   $ 95,003
2004 ................................................................     14,136
2005 ................................................................     38,227
2006 ................................................................     22,561
2007 ................................................................     34,048
2008 and thereafter .................................................      4,551
                                                                        --------
  Total .............................................................   $208,526
                                                                        ========
</TABLE>


                                      151
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

8.    DEPOSITS (CONTINUED):

The aggregate amount of deposits reclassified as loans was $950 at December 31,
2002, and $188 at December 31, 2001. Management evaluates transaction accounts
that are overdrawn for collectibility as part of its evaluation for credit
losses. At December 31, 2002 and 2001, no allowance was deemed necessary for
these accounts. During 2002 and 2001, 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, 2002, the MBC was $208,314. Interest accrues daily on the line
based on the rate 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, 2002 and 2001,
nor were there short-term borrowings outstanding at any month-end during 2002
and 2001. The average daily balance and weighted-average rate on aggregate
short-term borrowings, which consisted entirely of the FHLB- Pgh line of credit,
was $8 at 2.0 percent in 2002 and $5 at 5.0 percent in 2001.


                                      152
<PAGE>
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, 2002 and 2001,
is summarized as follows:

<TABLE>
<CAPTION>
                                                         2002                    2001
                                                 --------------------    --------------------
                                                 CARRYING        FAIR    CARRYING        FAIR
DECEMBER 31                                         VALUE       VALUE       VALUE       VALUE
---------------------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>         <C>
Financial assets:
Cash and cash equivalents .....................  $ 21,383    $ 21,383    $ 13,934    $ 13,934
Investment securities available-for-sale ......   124,203     124,203     120,357     120,357
Loans held for sale, net ......................     3,916       3,997       1,885       1,885
Net loans .....................................   319,830     325,980     307,102     316,019
Accrued interest receivable ...................     2,164       2,164       2,483       2,483
                                                 --------    --------    --------    --------
  Total .......................................  $471,496    $477,727    $445,761    $454,678
                                                 ========    ========    ========    ========

Financial liabilities:
Deposits without stated maturities ............  $228,687    $228,687    $198,283    $198,283
Deposits with stated maturities ...............   208,526     212,112     217,922     221,397
Accrued interest payable ......................     1,358       1,358       1,879       1,879
                                                 --------    --------    --------    --------
  Total .......................................  $438,571    $442,157    $418,084    $421,559
                                                 ========    ========    ========    ========
</TABLE>

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.

Effective January 1, 2002, the Board of Directors ratified an amendment to the
defined contribution plan to include 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 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 bi-weekly
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.


                                      153
<PAGE>
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 $114 in 2002, $78 in 2001
and $89 in 2000. Matching contributions under the 401(k) feature of the plan
totaled $111 in 2002. Contributions to the plan are included in salaries and
employees benefits expense.

12.   INCOME TAXES:

The current and deferred amounts of the provision for income tax expense for
each of the three years ended December 31, 2002, 2001 and 2000, are summarized
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                2002       2001      2000
-------------------------------------------------------------------------------
<S>                                                <C>        <C>       <C>
Current .......................................    $ 1,424    $ 1,269   $   746
Deferred ......................................        (41)       157       393
                                                   -------    -------   -------
  Total .......................................    $ 1,383    $ 1,426   $ 1,139
                                                   =======    =======   =======
</TABLE>

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,
2002, 2001 and 2000, is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                 2002      2001      2000
-------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>
Federal income tax at statutory rate ............   $ 2,238   $ 2,083   $ 1,815
Differences resulting from:
  Tax-exempt interest, net ......................      (783)     (656)     (671)
  Goodwill ......................................        74        74
  Residential housing program tax credit ........       (80)      (80)      (80)
  Other .........................................         8         5         1
                                                    -------   -------   -------
    Federal income tax on income before
     income taxes ...............................   $ 1,383   $ 1,426   $ 1,139
                                                    =======   =======   =======
</TABLE>

Sources of change in deferred income taxes and the related tax effects for
each of the three years ended December 31, 2002, 2001 and 2000, are
summarized as follows:

YEAR ENDED DECEMBER 31                                 2002      2001      2000
-------------------------------------------------------------------------------
Allowance for loan losses .......................   $  (160)  $    64   $   211
Loans, net of unearned income ...................         1         4        25
Accrued interest receivable .....................         6       101        60
Premises and equipment, net .....................       101        88       139
Core deposit intangible .........................       (43)      (43)      (42)
Other ...........................................        54       (57)
                                                    -------   -------   -------
  Change in deferred income taxes affecting the
   statements of income .........................       (41)      157       393
Deferred income taxes on investment securities
 recognized in stockholders' equity .............       994       126       614
                                                    -------   -------   -------
    Total change in deferred income taxes .......   $   953   $   283   $ 1,007
                                                    =======   =======   =======


                                      154
<PAGE>
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, 2002 and 2001, are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31                                                       2002      2001
--------------------------------------------------------------------------------
<S>                                                             <C>       <C>
Deferred tax assets:
  Allowance for loan losses .................................   $1,001    $  841
  Loans, net of unearned income .............................      151       152
  Accrued interest receivable ...............................       54        60
  Core deposit intangible ...................................      214       171
  Other .....................................................        3        57
                                                                ------    ------
    Total ...................................................    1,423     1,281
                                                                ------    ------
Deferred tax liabilities:
  Investment securities available-for-sale ..................    1,331       337
  Premises and equipment, net ...............................      593       492
                                                                ------    ------
    Total ...................................................    1,924       829
                                                                ------    ------
    Net deferred tax assets (liabilities) ...................   $ (501)   $  452
                                                                ======    ======
</TABLE>

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, however, they pay a tax on capital. This tax is included in
other expenses.

Income tax expense related to unrealized holding gains and the reclassification
adjustments included in other comprehensive income for each of the three years
ended December 31, 2002, 2001 and 2000, were calculated using the prevailing
statutory tax rate of 34.0 percent and are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                 2002       2001       2000
-------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>        <C>
Income tax expense:
  Unrealized holding gains on investment securities
   available-for-sale ...........................................   $ 1,103    $   126    $   741
  Reclassification adjustment for gains included in net income ..      (109)                 (127)
                                                                    -------    -------    -------
    Income tax expense related to other comprehensive income ....   $   994    $   126    $   614
                                                                    =======    =======    =======
</TABLE>


                                      155
<PAGE>
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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                             2002     2001      2000
------------------------------------------------------------------------------------------
<S>                                                            <C>       <C>       <C>
Income:
Dividends from subsidiaries .................................  $ 2,715   $ 1,719   $ 3,832
Management fees from subsidiaries ...........................      222       194       212
Other income ................................................        7         3         6
                                                               -------   -------   -------
  Total income ..............................................    2,944     1,916     4,050
                                                               -------   -------   -------
Expense:
Occupancy and equipment expenses ............................       76        76        77
Other expenses ..............................................      279       429       480
                                                               -------   -------   -------
  Total expenses ............................................      355       505       557
                                                               -------   -------   -------
Income before income taxes and undistributed income of
 subsidiaries ...............................................    2,589     1,411     3,493
Income tax benefits .........................................     (124)     (111)     (122)
                                                               -------   -------   -------
Income before undistributed income of subsidiaries ..........    2,713     1,522     3,615
Equity in undistributed income of subsidiaries ..............    2,487     3,178       585
                                                               -------   -------   -------
  Net income ................................................  $ 5,200   $ 4,700   $ 4,200
                                                               =======   =======   =======
</TABLE>

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31                                                       2002      2001
--------------------------------------------------------------------------------
<S>                                                            <C>       <C>
Assets:
Cash ........................................................  $    15   $    91
Investment in bank subsidiary ...............................   43,543    39,155
Investment in nonbank subsidiary ............................      447       407
Investment securities available-for-sale ....................      122       109
Other assets ................................................    1,843     1,727
                                                               -------   -------
  Total assets ..............................................  $45,970   $41,489
                                                               =======   =======

Liabilities:
Dividends payable ...........................................  $   408   $   375
Other liabilities ...........................................      229       266
                                                               -------   -------
  Total liabilities .........................................      637       641
Stockholders' equity ........................................   45,333    40,848
                                                               -------   -------
  Total liabilities and stockholders' equity ................  $45,970   $41,489
                                                               =======   =======
</TABLE>


                                      156
<PAGE>
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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                             2002       2001       2000
---------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>
Cash flows from operating activities:
Net income ..................................................   $ 5,200    $ 4,700    $ 4,200
Adjustments:
  Equity in undistributed income of subsidiaries ............    (2,487)    (3,178)      (585)
  Depreciation and amortization .............................        76        294        294
  Changes in:
    Other assets ............................................      (192)       (61)      (266)
    Other liabilities .......................................       (41)       (83)      (384)
                                                                -------    -------    -------
      Net cash provided by operating activities .............     2,556      1,672      3,259
                                                                -------    -------    -------

Cash flows from investing activities:
Proceeds from repayments of investment securities ...........                             599
Capital contribution in nonbank subsidiary ..................       (20)       (30)      (505)
                                                                -------    -------    -------
      Net cash provided by (used in) investing activities ...       (20)       (30)        94
                                                                -------    -------    -------

Cash flows from financing activities:
Issuance of common stock ....................................       203        203        219
Repurchase and retirement of common shares ..................    (1,244)      (451)    (2,073)
Cash dividends paid .........................................    (1,571)    (1,450)    (1,364)
                                                                -------    -------    -------
      Net cash used in financing activities .................    (2,612)    (1,698)    (3,218)
                                                                -------    -------    -------
      Net increase (decrease) in cash .......................       (76)       (56)       135
      Cash at beginning of year .............................        91        147         12
                                                                -------    -------    -------
      Cash at end of year ...................................   $    15    $    91    $   147
                                                                =======    =======    =======
</TABLE>

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


                                      157
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

14.   REGULATORY MATTERS (CONTINUED):

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 $6,359 at December 31, 2002.

Although subject to the aforementioned regulatory restrictions, the Company's
consolidated retained earnings at December 31, 2002 and 2001, 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, 2002, the maximum amount available for transfer from Community Bank to the
Parent Company in the form of loans amounted to $4,355. At December 31, 2002 and
2001, there were no loans outstanding, nor were any advances made during 2002
and 2001.

The Company and Community Bank are subject to certain regulatory capital
requirements administered by the federal banking agencies, which are defined by
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


                                      158
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

14.   REGULATORY MATTERS (CONTINUED):

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 where 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 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, 2002 and 2001, 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.


                                      159
<PAGE>
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, 2002 and 2001,
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:

<TABLE>
<CAPTION>
                                                                                         MINIMUM TO BE WELL
                                                                                          CAPITALIZED UNDER
                                                                    MINIMUM FOR CAPITAL   PROMPT CORRECTIVE
                                                       ACTUAL         ADEQUACY PURPOSES   ACTION PROVISIONS
                                                -----------------------------------------------------------
DECEMBER 31, 2002                                 AMOUNT    RATIO       AMOUNT   RATIO       AMOUNT   RATIO
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>     <C>          <C>     <C>          <C>
Tier I capital to risk-weighted assets:
  Consolidated ..............................   $ 41,544     12.1%     $13,730     4.0%
  Community Bank ............................     39,809     11.6       13,706     4.0      $20,559     6.0%
Total capital to risk-weighted assets:
  Consolidated ..............................     45,289     13.2       27,459     8.0
  Community Bank ............................     43,554     12.7       27,412     8.0       34,265    10.0
Tier I capital to total average assets
 less intangible assets:
  Consolidated ..............................     41,544      8.8       18,950     4.0
  Community Bank ............................   $ 39,809      8.4%     $18,910     4.0%     $23,637     5.0%

Risk-weighted assets:
  Consolidated ..............................   $315,360
  Community Bank ............................    314,764
Risk-weighted off-balance sheet items:
  Consolidated ..............................     27,882
  Community Bank ............................     27,882
Average assets for Leverage ratio:
  Consolidated ..............................    473,746
  Community Bank ............................   $472,744
</TABLE>

<TABLE>
<CAPTION>
                                                                                         MINIMUM TO BE WELL
                                                                                          CAPITALIZED UNDER
                                                                    MINIMUM FOR CAPITAL   PROMPT CORRECTIVE
                                                       ACTUAL         ADEQUACY PURPOSES   ACTION PROVISIONS
                                                -----------------------------------------------------------
DECEMBER 31, 2001                                 AMOUNT    RATIO       AMOUNT   RATIO       AMOUNT   RATIO
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>     <C>          <C>     <C>          <C>
Tier I capital to risk-weighted assets:
  Consolidated ..............................   $ 38,746     12.8%     $12,111     4.0%
  Community Bank ............................     37,099     12.3       12,069     4.0      $18,103     6.0%
Total capital to risk-weighted assets:
  Consolidated ..............................     41,966     13.9       24,222     8.0
  Community Bank ............................     40,319     13.4       24,138     8.0       30,172    10.0
Tier I capital to total average assets
 less intangible assets:
  Consolidated ..............................     38,746      8.8       17,570     4.0
  Community Bank ............................   $ 37,099      8.5%     $17,513     4.0%     $21,892     5.0%

Risk-weighted assets:
  Consolidated ..............................   $285,478
  Community Bank ............................    284,427
Risk-weighted off-balance sheet items:
  Consolidated ..............................     17,296
  Community Bank ............................     17,296
Average assets for Leverage ratio:
  Consolidated ..............................    439,256
  Community Bank ............................   $437,836
</TABLE>


                                      160
<PAGE>
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, 2002, 2001 and 2000,
37,933 shares, 16,229 shares and 57,400 shares having an aggregate cost of
$1,244, $451 and $2,073, respectively, were purchased and retired under the
program. At December 31, 2002, 47,809 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 with the Securities and Exchange Commission
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, 2002,
2001 and 2000, 6,161 shares, 7,371 shares and 7,015 shares, respectively, were
issued under the DRP.


                                      161
<PAGE>
COMM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                                           2002                                         2001
                                         --------------------------------------    ---------------------------------------
QUARTER ENDED                            MARCH 31  JUNE 30   SEPT. 30   DEC. 31    MARCH 31   JUNE 30    SEPT. 30  DEC. 31
---------------------------------------  --------  -------   --------   -------    --------   -------    --------  -------
<S>                                      <C>       <C>       <C>        <C>        <C>        <C>        <C>       <C>
INTEREST INCOME:
Interest and fees on loans:
  Taxable .............................   $5,767    $5,686     $5,684    $5,674     $6,115     $6,056     $6,162   $ 6,060
  Tax-exempt ..........................      168       177        177       166         94         94        124       159
Interest and dividends on investment
 securities available-for-sale:
  Taxable .............................    1,023       942        804       712        710        798        916     1,075
  Tax-exempt ..........................      512       504        439       430        316        448        484       514
  Dividends ...........................       22        17         17        15         31         31         31        27
Interest on federal funds sold ........       23        68        164        93        304        239        153        71
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Total interest income .............    7,515     7,394      7,285     7,090      7,570      7,666      7,870     7,906
                                          ------    ------     ------    ------     ------     ------     ------   -------

INTEREST EXPENSE:
Interest on deposits ..................    3,180     3,111      3,036     2,889      3,913      3,912      3,796     3,509
Interest on long-term debt ............                                                  1
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Total interest expense ............    3,180     3,111      3,036     2,889      3,914      3,912      3,796     3,509
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Net interest income ...............    4,335     4,283      4,249     4,201      3,656      3,754      4,074     4,397
Provision for loan losses .............      370       370        195       165        180        180        180       180
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Net interest income after
     provision for loan losses ........    3,965     3,913      4,054     4,036      3,476      3,574      3,894     4,217
                                          ------    ------     ------    ------     ------     ------     ------   -------

NONINTEREST INCOME:
Service charges, fees and commissions        774       679        763       688        562        718        598       601
Net gains on sale of loans ............      185       172        208       354         21         52        156       127
Net gains on sale of investments ......                 69         17       236
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Total noninterest income ..........      959       920        988     1,278        583        770        754       728
                                          ------    ------     ------    ------     ------     ------     ------   -------

NONINTEREST EXPENSE:
Salaries and employee benefits ........    1,581     1,690      1,721     1,775      1,289      1,367      1,446     1,536
Net occupancy and equipment ...........      451       450        458       494        413        475        409       383
Other                                      1,240     1,176      1,249     1,245        918      1,135      1,200     1,299
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Total noninterest expense .........    3,272     3,316      3,428     3,514      2,620      2,977      3,055     3,218
                                          ------    ------     ------    ------     ------     ------     ------   -------
Income before income taxes ............    1,652     1,517      1,614     1,800      1,439      1,367      1,593     1,727
Provision for income tax expense ......      338       291        344       410        369        307        363       387
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Net income ........................    1,314     1,226      1,270     1,390      1,070      1,060      1,230     1,340
                                          ------    ------     ------    ------     ------     ------     ------   -------

OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on
 investment securities available-
 for-sale .............................       29     1,990      1,561      (335)       502       (246)     1,256    (1,140)
Reclassification adjustment for gains
 included in net income ...............                (69)       (17)     (236)
Income tax expense (benefit) related
 to other comprehensive income (loss)..       10       653        525      (194)       171        (84)       426      (387)
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Other comprehensive income
     (loss), net of income tax ........       19     1,268      1,019      (377)       331       (162)       830      (753)
                                          ------    ------     ------    ------     ------     ------     ------   -------
    Comprehensive income ..............   $1,333    $2,494     $2,289    $1,013     $1,401     $  898     $2,060   $   587
                                          ======    ======     ======    ======     ======     ======     ======   =======

PER SHARE DATA:
Net income ............................   $ 0.67    $ 0.62     $ 0.65    $ 0.71     $ 0.54     $ 0.53     $ 0.62   $  0.68
Cash dividends declared ...............   $ 0.20    $ 0.20     $ 0.21    $ 0.21     $ 0.18     $ 0.18     $ 0.19   $  0.19
</TABLE>


                                      162
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING ENVIRONMENT:

A fall in equity markets, cutbacks in capital spending and finally the September
11, 2001, terrorist attacks caused a slowdown in the United States economy in
2001. The gross domestic product, the total value of goods and services produced
within the United States, grew only 0.3 percent in 2001, the worst annual
performance since a 0.5 percent decline recorded in 1991.

The slowdown in 2001 was business driven, as companies cutback on investment.
Manufacturers, faced with unusually high inventory levels, were forced to
drastically cut production and payrolls, as domestic demand subsided.
Concurrently, foreign economies also slowed, which further reduced the demand
for production. As a result, exports in 2001 fell 11.2 percent. The airline,
transportation and hospitality industries experienced severe reductions in
demand, which caused significant job losses. In response to the struggling job
market, the consumer confidence level, which started the year at 128.3 plummeted
to 84.9 by the end of 2001.

The Federal Open Market Committee in response to signs of rapid deterioration in
the economy, aggressively lowered the federal funds rate 475 basis points, in
ten steps, from 6.50 percent at year-end 2000 to 1.75 percent at December 31,
2001.

As previously mentioned, employment conditions deteriorated in 2001. The
National unemployment rate rose to 5.8 percent in 2001, from 4.0 percent in
2000. The unemployment rate for the Commonwealth of Pennsylvania rose to 5.1
percent in 2001 from 4.4 percent in 2000. Job losses for the Commonwealth
totaled 26.9 thousand in 2001. Unemployment conditions in our four-county market
area mirrored that of the Nation. A total of 2,337 jobs were lost in our
immediate market area in 2001. Another 752 jobs were lost in neighboring
communities. Lackawanna and Susquehanna Counties experienced significant
weakening in employment conditions. The unemployment rates for these two
counties increased to 5.3 percent and 6.3 percent in 2001, compared to 3.7
percent and 4.2 percent in 2000. Wyoming County also experienced a rise in its
unemployment rate to 4.5 percent in 2001 from 3.9 percent in 2000, while Wayne
County's unemployment rate remained unchanged at 5.5 percent.

Despite this economic decline, the banking industry posted record earnings in
2001. Specifically, banks earned $74.0 billion in 2001, an increase of $3.0
billion or 4.2 percent compared to $71.0 billion in 2000. Net interest income
improvement and significant investment security gains were the factors which led
to the increased earnings. However, the record earnings,


                                      163
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

were limited by rising loan loss provisions due to asset quality problems and
growth in fee income. Commercial banks posted solid growth in their balance
sheets. For all Federal Deposit Insurance Corporation ("FDIC")- insured banks,
total assets increased $324.6 billion or 5.2 percent to $6,569.2 billion at
December 31, 2001, from $6,244.6 billion at December 31, 2000. The growth in the
balance sheet was primarily driven by deposit growth, as banks experienced
subdued demand for loan products.

Contrary to the results for the overall banking industry, Pennsylvania
commercial banks experienced a retraction in net income of $137.0 million. These
banks recorded higher loan loss provisions and lower net interest margins in
2001. Pennsylvania banks exhibited only modest growth in their balance sheets.
Total assets increased only $3.9 billion or 2.1 percent to $193.5 billion at
December 31, 2001, from $189.6 billion at December 31, 2000. Deposits rose only
1.4 percent, while loans, net of unearned income, fell 14.4 percent.

Bank stocks, despite falling slightly, significantly outperformed the Standard &
Poor's ("S&P") 500 in 2001, which declined 13.0 percent. Similarly, the NASDAQ
Stock Market(R) Composite and the New York Stock Exchange recorded losses of
21.0 percent and 10.2 percent. In comparison, the SNL All Bank Index was down
1.2 percent. This uncertainty in the stock markets caused a decline in merger
and acquisition activity for all industries, including the banking industry, as
companies focused on their own businesses rather than making deals. There were
173 bank deals announced in 2001, the lowest number since 1990. In addition to
the number of deals falling, deal prices declined. Both the price to book and
the price to earnings fell for the fourth year in a row. The average price to
book and average price to earnings were 1.9 times and 19.2 times in 2001,
compared to 2.0 times and 19.6 times in 2000. Conversely, the number of branch
sales in 2001 increased to a record 999 branches. However, the median premium on
core deposits fell to 6.00 percent in 2001 from 7.55 percent in the previous
year. Merger activity in Pennsylvania was constant at six deal announcements in
2001 and 2000. Similar to the Nation, the average price of Pennsylvania deals
fell. The average price to book and average price to earnings were 1.8 times and
18.3 times in 2001, compared to 2.1 times and 21.2 times in 2000.

REVIEW OF FINANCIAL POSITION:

Our total assets grew $40.7 million or 9.7 percent to $460.4 million at December
31, 2001, from $419.7 million at December 31, 2000. Total assets averaged $440.7
million in 2001, an increase of $33.8 million or 8.3


                                      164
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

percent, compared to $406.9 million in 2000. The composition of our earning
assets changed in 2001, as excess deposits not used to fund loan demand were
directed to the purchase of investment securities. The decline in general market
interest rates and the asset composition change caused a 30 basis point drop in
our tax-equivalent yield on average earning assets to 7.70 percent in 2001 from
8.00 percent in 2000. In 2001, the investment portfolio grew $49.2 million or
69.1 percent while experiencing a 22 basis point decline in tax-equivalent
yield. Loans, net of unearned income, increased $12.8 million or 4.3 percent in
2001, while the tax-equivalent yield on our loan portfolio fell 11 basis points.
Total deposits grew significantly, $37.5 million or 9.9 percent in 2001, while
our cost of deposits fell 34 basis points. Our stockholders' equity increased
$3.2 million in 2001. On a per share basis, stockholders' equity equaled $20.67
at the end of 2001, compared to $18.95 at the end of the previous year.

INVESTMENT PORTFOLIO:

The principal gauge in determining the wealth improvement generated from the
investment portfolio is total return. The total return on our investment
portfolio declined to 6.9 percent in 2001, from 9.6 percent in 2000. However,
our total return outperformed The Lehman Brothers' aggregate-bond index, a
benchmark used by most investment managers, which scored a total return of 5.1
percent. In addition, our investment portfolio ranked in the upper one-fifth
among all FDIC-insured bank holding companies, according to an independent
national investment performance ranking company, with respect to total return
over the past three years.

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. This risk measure improved slightly from 1.9 years in
2000 to 1.6 years in 2001. Our portfolio ranking in 2001 was in the middle
one-third of banks located in the United States with regard to low risk.

The continued decline in general market rates in 2001 had a positive effect on
the aggregate value of our investment portfolio, which appreciated $372 in 2001.
We reported net unrealized holding gains of $655, net of income taxes of $337,
at December 31, 2001, and $409, net of income taxes of $211, at December 31,
2000.


                                      165
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Our investment securities totaled $120.4 million at December 31, 2001, an
increase from $71.2 million at December 31, 2000. As a percentage of total
assets, the investment portfolio equaled 26.2 percent at year-end 2001, compared
to 17.0 percent at the end of 2000. The investment portfolio averaged $99.7
million in 2001, an increase of $7.0 million or 7.6 percent, from $92.7 million
in 2000. The tax-equivalent yield on our investment portfolio fell to 6.31
percent in 2001 from 6.53 percent in 2000.

We did not sell any securities in 2001. Proceeds from the sale of
available-for-sale securities amounted to $16.7 million in 2000. We recognized
$374 in net gains on the sale of investment securities in 2000. Repayments from
investment securities totaled $25.2 million in 2001 and $21.8 million in 2000.
Investment securities purchased were $74.6 million in 2001, compared to $2.4
million in 2000.

At December 31, 2001, investment securities with an amortized cost of $44.8
million were pledged to secure our deposits, to qualify for fiduciary powers and
for other purposes required or permitted by law. At December 31, 2000, the
amortized cost of pledged securities equaled $41.9 million. The fair value of
such securities equaled $45.5 million at December 31, 2001, and $41.7 million at
December 31, 2000.

LOAN PORTFOLIO:

At December 31, 2001, our loans, net of unearned income, totaled $310.3 million
compared to $297.5 million at December 31, 2000. The majority of the $12.8
million or 4.3 percent growth occurred in the fourth quarter of 2001, with all
of the growth concentrated in our commercial loan portfolio. Commercial loans
and leases grew $22.4 million or 44.4 percent to $72.8 million at year-end 2001
from $50.4 million at the end of 2000. On the retail side, both residential
mortgages and consumer loans declined in 2001 which offset some of the
commercial loan growth. The $8.1 million decrease in residential mortgages,
including construction loans, resulted from repayments and refinancing activity,
as new mortgage loans were, for the most part, originated for sale in the
secondary market. Consumer loans decreased $1.5 million in 2001. Average loans
were $299.7 million in 2001 compared to $289.2 million in 2000. Due to the 475
basis point reduction in the prime rate in 2001, our loan yields fell
progressively throughout the year. Overall, the weighted-average tax-equivalent
yield on our loan portfolio declined to 8.38 percent in 2001 from 8.49 percent
in 2000.

Our volume of refinanced residential mortgages increased significantly by $11.9
million or 242.9 percent. The number of refinanced mortgages in 2001 totaled
219, with an aggregate dollar volume of $16.8 million, compared to 60, with an
aggregate dollar volume of $4.9 million in 2000.


                                      166
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

We experienced significant activity in our secondary mortgage banking program.
We sold $17.7 million of residential mortgage loans in 2001. This was an
increase of $16.9 million in comparison to $0.8 million in 2000. We realized net
gains on the sale of these loans, included in noninterest income, of $356 in
2001, compared to $18 in 2000. In addition, we had $1.9 million of residential
mortgage loans held for sale at December 31, 2001, compared to $62 at year-end
2000. At December 31, 2001 and 2000, residential mortgage loans serviced for the
Federal National Mortgage Association totaled $21.9 million and $5.9 million.

In the normal course of business, we are a party to financial instruments with
off-balance sheet risk to meet the financing needs of our customers. These
instruments include commitments to extend credit, unused portions of home equity
and credit card lines and commercial letters of credit. Our exposure related to
off-balance sheet commitments was $35.2 million at December 31, 2001, and $31.1
million at December 31, 2000.

Our adjustable-rate loans totaled $97.6 million at December 31, 2001, an
increase of $21.6 million or 28.4 percent from $76.0 million at the end of 2000.
Heightened refinancing activity, coupled with an increase in the volume of loans
sold in the secondary market, caused a reduction in our residential mortgage
loans. As a result, the amount of fixed-rate loans decreased $8.8 million to
$212.7 million at December 31, 2001, from $221.5 million at December 31, 2000.

ASSET QUALITY:

Our asset quality improved slightly in comparison to the previous year, as
evidenced by a decline in nonperforming assets to $3,870 at December 31, 2001,
from $4,024 at the end of 2000. As a percentage of loans, net of unearned
income, nonperforming assets equaled 1.25 percent at December 31, 2001, compared
to 1.35 percent at the end of 2000. Nonperforming loans improved $581 in 2001.
Our ratio of nonperforming loans as a percentage of loans, net of unearned
income, improved to 0.66 percent at December 31, 2001, from 0.88 percent at the
end of 2000.

At December 31, 2001 and 2000, we had a recorded investment in impaired loans of
$1,945 and $1,808. The recorded investment in impaired loans averaged $2,476 in
2001 and $2,473 in 2000. At December 31, 2001, the amount of recorded investment
in impaired loans for which there was a related allowance for loan losses and
the amount of the allowance was $910 and $403. Comparatively, the amount of
these loans and their related allowance was $1,684 and $405, at December 31,
2000. The amount of recorded


                                      167
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

investment for which there was no related allowance for loan losses was $1,035
and $124 at December 31, 2001 and 2000. During 2001, activity in the allowance
for loan losses account related to impaired loans included a provision charged
to operations of $483, losses charged to the allowance of $498 and recoveries of
impaired loans previously charged-off of $13. In 2000, activity in the allowance
for loan losses account related to impaired loans included a provision charged
to operations of $116 and losses charged to the allowance of $324. There were no
recoveries of impaired loans in 2000. Interest income related to impaired loans
would have been $194 in 2001 and $293 in 2000, had the loans been current and
the terms of the loans not been modified. Interest recognized on impaired loans
amounted to $276 in 2001 and $104 in 2000. Included in these amounts was
interest recognized on a cash basis of $276 and $104. Cash received on impaired
loans applied as a reduction of principal totaled $349 in 2001 and $264 in 2000.

Our 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 Statement of Financial
Accounting Standards ("SFAS") No. 114, and a formula portion for the impairment
of those loans collectively evaluated under SFAS No. 5.

The allocated element of the allowance for loan losses account increased $151 to
$3,088 at December 31, 2001, from $2,937 at December 31, 2000. The change
resulted from an increase in the formula portion of $354 for the impairment of
loans collectively evaluated under SFAS No. 5, partially offset by a $203
reduction in the specific portion, representing the impairment of loans
individually evaluated under SFAS No. 114. At December 31, 2001, the unallocated
element was $132, compared to $348 at year-end 2000.

At December 31, 2001, our coverage ratio, the allowance for loan losses account
as a percentage of nonperforming loans, equaled 156.9 percent, compared to 124.8
percent at the end of the previous year. Our allowance covered 83.2 percent and
81.6 percent of nonperforming assets at December 31, 2001 and 2000. The
improvement in the coverage ratio directly resulted from an improvement in our
asset quality.

Our allowance for loan losses was $3.2 million at December 31, 2001, and $3.3
million at December 31, 2000. As a percentage of loans, net of unearned income,
our allowance for loan losses equaled 1.04 percent at year-end 2001, compared to
1.10 percent at the end of the previous year. The decline in this ratio was
primarily due to the growth of our loan portfolio. Net charge-offs amounted to
$785 or 0.26 percent of average loans outstanding in 2001, compared to $934 or
0.32 percent in 2000.


                                      168
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DEPOSITS:

Our total deposits increased significantly, to $416.2 million at December 31,
2001, from $378.7 million at December 31, 2000. Noninterest-bearing deposits
increased $5.8 million to $45.1 million at the end of 2001 from $39.3 million at
year-end 2000. In addition, total interest-bearing deposits increased $31.7
million or 9.3 percent to $371.1 million at December 31, 2001, from $339.4
million at the end of 2000. Increases in savings accounts, NOW accounts and time
deposits less than $100 were partially offset by declines in money market
accounts and time deposits $100 or more. Total deposits averaged $397.4 million
in 2001, compared to $365.2 million in 2000. With respect to average balances,
we experienced growth in all major deposit categories except for large
denomination time deposits. We experienced a significant reduction in our cost
of deposits, which decreased 34 basis points to 4.26 percent in 2001, from 4.60
percent in 2000.

Volatile deposits, time deposits $100 or more, decreased $1.9 million to $31.8
million at December 31, 2001, from $33.7 million at year-end 2000. Large
denomination time deposits averaged $32.1 million in 2001 and $32.3 million in
2000. Our average cost of these funds declined significantly, 95 basis points to
5.03 percent in 2001, from 5.98 percent in 2000.

Available short-term borrowings consist of a line of credit and advances with
the Federal Home Loan Bank of Pittsburgh ("FHLB-Pgh"). We had no short-term
borrowings outstanding under the line of credit agreement at December 31, 2001
and 2000. The average daily balance and weighted-average rate on aggregate
short-term borrowings was $5 at 5.0 percent in 2001 and $2,374 at 6.3 percent in
2000. There were no short-term borrowings outstanding at any month-end during
2001. The maximum amount of all short- term borrowings outstanding at any
month-end was $11,200 during 2000. Short-term borrowings during 2001 and 2000
consisted entirely of the FHLB- Pgh line of credit.

We had no long-term debt outstanding at December 31, 2001. Long-term debt at
December 31, 2000, consisted entirely of a 7.5 percent fixed-rate, amortizing
advance from the FHLB-Pgh Community Investment Program. The contractual maturity
date of this advance was September 2, 2009. We decided to prepay this advance in
full on February 26, 2001. The average daily balance on long-term debt in 2001
was $6 with a weighted-average rate of 7.5 percent. For 2000, the average daily
balance was $37 with a weighted- average rate of 7.5 percent.


                                      169
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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
contract 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, 2001, investment securities having
an amortized cost of $22.1 million and a weighted-average tax-equivalent yield
of 6.70 percent were scheduled to mature within one year. Net loans scheduled to
mature within the same time frame equaled $69.0 million with a weighted-average
tax-equivalent yield of 7.18 percent. In addition, there were $1.9 million in
loans held for sale with a weighted-average yield of 6.53 percent at the end of
2001. Total interest-earning assets scheduled to mature within one year were
$93.0 million with a weighted-average tax-equivalent yield of 7.05 percent.
Aggregate financial assets scheduled to mature within one year totaled $109.4
million at December 31, 2001. With respect to interest-bearing liabilities,
based on historical withdrawal patterns, interest-bearing transaction accounts,
defined as money market, NOW and savings accounts, of $32.2 million with a
weighted-average cost of 2.06 percent were scheduled to mature within one year.
In addition, time deposits totaling $140.1 million with a weighted-average cost
of 4.33 percent were scheduled to mature in the same time frame. Total
interest-bearing liabilities scheduled to mature within one year equaled $172.3
million with a weighted-average rate of 3.91 percent. Aggregate financial
liabilities scheduled to mature within one year totaled $183.6 million at
December 31, 2001.

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, 2001,
indicated fair value declines of 2.7 percent in other financial assets and 0.6
percent in other financial liabilities given a parallel and instantaneous rise
of 100 basis points in interest rates. Conversely, a 100 basis point decline in
general market interest rates would result in fair value appreciation of 3.2
percent in other financial assets and 0.6 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.


                                      170
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

At December 31, 2001, our cumulative one-year RSA/RSL ratio was 0.74. Although a
declination from 0.91 at December 31, 2000, the ratio fell within our
asset/liability guidelines of 0.70 and 1.30. Our three-month RSA/RSL ratio also
decreased. This ratio equaled 2.54 at December 31, 2001, compared to 2.67 at
December 31, 2000. Similar to the one-year ratio, the volume of RSL repricing
within three months increased, while the volume of RSA decreased.

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 at December 31, 2001, indicated a parallel and
instantaneous shift in general market interest rates of plus 100 basis points
would cause net interest income to decrease by $495 or 2.8 percent. Conversely,
a shift of the same magnitude in the opposite direction would cause a $471 or
2.7 percent increase in net interest income.

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, 2001,
our net noncore funding dependence ratio was 2.3 percent, compared to negative
3.4 percent at December 31, 2000. Our net short-term noncore funding dependence
ratio equaled 1.1 percent at the end of 2001, compared to negative 5.5 percent
at year-end 2000. At December 31, 2001, these ratios indicated that we had a
slight degree of reliance on noncore deposits and borrowings to fund our
long-term assets, namely loans and investments. Conversely, our ratios at
year-end 2000 indicated long- term assets were not dependent on funding from
noncore deposit sources. The increased reliance on noncore deposit sources
primarily resulted from the $25.5 million reduction in federal funds sold.

Our liquidity position is further explained by analyzing our Consolidated
Statements of Cash Flows. Cash and cash equivalents decreased $23.5 million to
$13.9 million at December 31, 2001, from $37.4 million at the end of 2000. Net
cash used in investing activities more than offset net cash provided by
operating and financing activities and caused the decline in cash and cash
equivalents. Net income of $4.7 million was the primary source of the $5.0
million in cash provided by operating activities in 2001.

In 2001, net cash used in investing activities totaled $64.3 million. Factors
primarily responsible for the net cash outflow were investment securities
purchases of $74.6 million and a net increase in lending activities of $14.9
million, partially offset by repayments of investment securities of $25.2
million.


                                      171
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

An increase in deposits, reduced by net cash dividends paid and common stock
repurchases, predominantly caused the $35.8 million in net cash provided by
financing activities. Specifically, transaction accounts increased $30.6
million, while time deposits rose $6.9 million in 2001. We paid net cash
dividends of $1.2 million, and repurchased and retired 16,229 shares of common
stock for $0.5 million during the year ended December 31, 2001.

CAPITAL ADEQUACY:

Our stockholders' equity totaled $40.8 million at December 31, 2001, and $37.6
million at December 31, 2000. Net income in 2001 of $4.7 million was the basis
for the capital improvement. Net cash dividends declared of $1.3 million, common
stock repurchases of $0.5 million and a positive net change in other
comprehensive income of $0.3 million also influenced stockholders' equity.

Total dividends declared amounted to $1,468 or $0.74 per share in 2001, compared
to $1,395 or $0.70 per share in 2000. Our dividend payout ratio was 31.2 percent
in 2001 and 33.2 percent in 2000. During the years ended December 31, 2001 and
2000, 7,371 shares and 7,015 shares were issued under our dividend reinvestment
plan. Under our stock repurchase program, we repurchased and retired 16,229
shares for $0.5 million in 2001 and 57,400 shares for $2.1 million in 2000.

Our risk-based capital position remained stable at December 31, 2001, in
comparison to the end of 2000. Our ratio of Tier I capital to risk-weighted
assets was 12.8 percent at December 31, 2001 and 2000, and our total capital to
risk-weighted assets ratio was 13.9 percent at year-end 2001, compared to 14.0
percent at the end of 2000. Our Leverage ratio improved slightly to 8.8 percent
at December 31, 2001, in comparison to 8.7 percent at December 31, 2000.

REVIEW OF FINANCIAL PERFORMANCE:

Our net income totaled $4.7 million in 2001, an increase of $0.5 million or 11.9
percent compared to $4.2 million in 2000. On a per share basis, earnings equaled
$2.37 in 2001 and $2.11 in 2000. Higher net interest income, partially offset by
increased noninterest expense, was the primary factor contributing to the
earnings improvement. Return on average assets and return on average equity were
1.07 percent and 11.82 percent in 2001, compared to 1.03 percent and 11.72
percent in 2000. We recorded other comprehensive income, net of income taxes, of
$0.2 million in 2001 and $1.2 million in 2000. For the years ended December 31,
2001 and 2000, comprehensive income amounted to $4.9 million and $5.4 million.


                                      172
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Tax-equivalent net interest income improved $1.5 million or 9.5 percent to $17.0
million for the year ended December 31, 2001, from $15.5 million for the same
period of 2000. We increased our provision for loan losses to $720 in 2001 from
$420 in 2000. Noninterest income totaled $2,835 in 2001, an increase of $378
from $2,457 in 2000. Service charges, fees and commissions rose $414 to $2,479
in 2001, from $2,065 in 2000. Noninterest expense increased $801 or 7.2 percent
to $11,870 in 2001 from $11,069 in 2000.

NET INTEREST INCOME:

Tax-equivalent net interest income amounted to $17,031 for the year ended
December 31, 2001. For the same period of 2000, tax-equivalent net interest
income was $15,550. The $1,481 or 9.5 percent improvement primarily related to
growth in our average earning assets over that of our interest-bearing
liabilities. Average interest-earning assets grew $33.2 million in 2001, causing
tax-equivalent net interest revenue to improve $1,953. Partially offsetting this
positive change was an increase of $969 in interest expense resulting from
growth of $25.5 million in average interest-bearing liabilities.

Tax-equivalent net interest income was also favorably affected by a steeper
decline in our fund costs as compared to the yield on earning assets. A 35 basis
point decline in our cost of funds reduced interest expense by $1,050. Partially
offsetting this gain was a 30 basis point reduction in the yield on our earning
assets which lowered tax-equivalent interest revenue by $553.

PROVISION FOR LOAN LOSSES:

Our provision for loan losses equaled $720 in 2001, an increase of $300 compared
to $420 in 2000. We considered the increase appropriate in light of an overall
increase in the loan portfolio, greater emphasis placed on commercial lending,
increased volumes of net charge-offs and the uncertainty of economic conditions.

NONINTEREST INCOME:

Our noninterest income amounted to $2,835 for the year ended December 31, 2001,
compared to $2,457 for the same period of 2000. Included in noninterest income
in 2000 were gains on the sale of investment securities of $374. Service
charges, fees and commissions increased $414 or 20.0 percent to $2,479 in 2001
from $2,065 in 2000. Heightened activity in our secondary mortgage banking
division resulted in an increase in gains on the sale of residential mortgage
loans of $338 for the year ended December 31, 2001.


                                      173
<PAGE>
COMM BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 VERSUS 2000 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NONINTEREST EXPENSE:

Our noninterest expense totaled $11,870 for the year ended December 31, 2001, an
increase of $801 or 7.2 percent, from $11,069 for the same period of 2000.
Salaries and employee benefits expense and other expenses rose, while net
occupancy and equipment expense declined slightly. Despite the overall increase,
our productivity improved over the previous year. The operating efficiency ratio
improved to 63.4 percent in 2001, from 65.8 percent in 2000.

Our total personnel costs equaled $5,638 in 2001, an increase of $419 or 8.0
percent compared to $5,219 in 2000. The $336 or 7.6 percent increase in salaries
and payroll taxes was primarily due to normal merit increases and promotions,
the addition of corporate relationship officers and further staffing
requirements associated with the centralization of the loan division.
Additionally, our employee benefits expense rose by $83 or 10.4 percent, as the
cost of providing health insurance to employees continued to rise.

For the year ended December 31, 2001, net occupancy and equipment expense
totaled $1,680, a slight decrease of $12 from $1,692 for the same period of
2000. Net occupancy expense decreased by $15, which was partially offset by a
slight increase of $3 in equipment expense.

Our other expenses amounted to $4,552 for the year ended December 31, 2001. This
was a $394 or 9.5 percent increase compared to $4,158 for the same period of
2000. The rise resulted primarily from increased Pennsylvania Bank Shares Tax,
contractual services and costs associated with maintaining foreclosed
properties.

INCOME TAXES:

For the year ended December 31, 2001, our income tax expense was $1,426, an
increase of $287, compared to $1,139 for the same period of 2000. Our effective
tax rate increased from 21.3 percent in 2000 to 23.3 percent in 2001. Higher
earnings before income taxes, coupled with a lower level of tax-exempt income,
were primarily responsible for the increase in the effective tax rate.


                                      174
<PAGE>
COMM BANCORP, INC.
DIRECTORS AND OFFICERS

BOARD OF DIRECTORS
COMM BANCORP, INC.

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

JOHN P. KAMEEN
SECRETARY
Publisher, The Forest City News

WILLIAM A. KERL
President, Carbondale Concrete Company, Inc.,
Kerl Coal, Oil and Trucking Company, Inc.

ERWIN T. KOST
President, Kost Tire Distributors, Inc.

WILLIAM B. LOPATOFSKY
Retired

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
President, J.J. Motors, Inc.

THEODORE W. POROSKY
Owner, Porosky Lumber Company

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

BOARD OF DIRECTORS
COMMUNITY BANK AND TRUST COMPANY

DAVID L. BAKER
Senior Vice President

THOMAS M. CHESNICK
Retired

WILLIAM F. FARBER, SR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD

JUDD B. FITZE
Attorney, Farr, Davis & Fitze

JOHN P. KAMEEN
SECRETARY
Publisher, The Forest City News

WILLIAM A. KERL
President, Carbondale Concrete Company, Inc.,
Kerl Coal, Oil and Trucking Company, Inc.

ERWIN T. KOST
President, Kost Tire Distributors, Inc.

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
President, J.J. Motors, Inc.

ERIC G. STEPHENS
Auto Dealer, H.L. Stephens and Son

DIRECTORS EMERITUS

MICHAEL T. GOSKOWSKI
Owner, Kartri Sales Mfg.

WILLIAM B. LOPATOFSKY
Retired

JOSEPH P. MOORE, JR.
President, Elk Mountain Ski Resort, Inc.

THEODORE W. POROSKY
Owner, Porosky Lumber Company


                                      175
<PAGE>
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.

SUSAN F. MANCUSO
Mancuso and Mancuso
Accounting & Tax Service

CLIFFORD BRANCH

WILLIAM F. FARBER, JR.
Farber's Restaurants

THOMAS J. LOPATOFSKY, JR.
Lenox Propane

SEAN P. MCGRAW
Attorney, McGraw, Peterson & Nepa

PATRICK J. OLIVERI
Oliveri's Crystal Lake Hotel

ERIC G. STEPHENS
H.L. Stephens and Son

EATON TOWNSHIP,
LAKE WINOLA AND
TUNKHANNOCK BRANCHES

JUDD B. FITZE
Attorney, Farr, Davis & Fitze

DOUGLAS A. GAY
Gay's True Value, Inc.

GLEN C. LAYAOU
Eaton Hills Development Corp.,
Layaou Construction Co.

HOWARD D. TRAUGER
Trauger's, Inc.

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.

STEVEN D. TOURJE
NEP Telephone Company

MONTROSE BRANCH

EDGAR B. BAKER
Consultant

DUANE L. JERAULD
Retired

THOMAS R. KERR
Tom Kerr Chevrolet

DONNA L. WILLIAMS
Livestock Dealer/Farmer

NICHOLSON BRANCH

RICHARD S. LOCHEN
Lochen's Market

MARK W. NOVITCH
Sherwood's Freightliner Western Star Sterling

DAVID E. SCHMIDT, JR.
The Proctor and Gamble
Paper Products Co.

SIMPSON BRANCH

FRANCIS LAPERA
Lapera Oil Company, Inc.

ROBERT M. MCDONNELL
McDonnell's Restaurant

GERALD G. SALKO, D.D.S.
Dentist


                                      176
<PAGE>
COMM BANCORP, INC.
DIRECTORS AND OFFICERS (CONTINUED)

OFFICERS
COMMUNITY BANK AND TRUST COMPANY

CAROL AMES
Lake Winola Branch Manager

DAVID L. BAKER
Senior Vice President

ROY W. BATTAGLIA
Clarks Summit Branch Manager

WILLIAM R. BOYLE
Senior Vice President
Chief Credit Officer

THOMAS A. BYRNE
Vice President
Commercial Loan Officer

DEBRA CARR
Dickson City Branch Manager

ROBERT DAVIS
Assistant Vice President
Commercial Loan Officer

KATHLEEN DELEO
Internal Loan Review Officer

WILLIAM F. FARBER, SR.
President and Chief Executive Officer
Chairman of the Board

JAY S. FENDRICK
Senior Trust Officer

STEPHANIE A. GANZ, CPA
Vice President of Finance

DEBRA GAY
Eaton Township Branch Manager

DONALD GIBBS
Scranton Branch Manager

DAVID A. JONES
Vice President
Mortgage Department

SHARON A. KOHANSKI
Assistant Vice President
Commercial Loan Officer

RANDOLPH LACROIX
Clifford Branch Manager

GARY LAVELLE
Vice President
Senior Loan Operations Officer

KATHLEEN LOCH
Factoryville Branch Manager

ANNETTE LYNCH
Loan Administrator

PAMELA S. MAGNOTTI
Compliance Officer

MARY ANN MUSHO
Human Resources Director

MICHAEL NARCAVAGE
Vice President
Chief Operations Officer

TIMOTHY O'BRIEN
Vice President
Commercial Loan Officer

ROBERT O'MALLEY
Indirect Loan Officer

M. EVELYN PANTZAR
Vice President
Internal Auditor

JOHN PASH
Comptroller

MARY BETH PASQUALICCHIO
Marketing Director

VICTORIA L. RANDIS
Eynon Branch Manager

CHERYL RUPP
Simpson Branch Manager

WALTER SARAFINKO
Vice President
Branch Administrator

SCOTT A. SEASOCK
Executive Vice President
Chief Financial Officer

THOMAS W. SHEPPARD
Vice President
Commercial Loan Officer

RONALD K. SMITH
Vice President
Montrose Branch Manager

TAMI L. SNYDER
Vice President
Information Services

HAROLD STOUT
Tunkhannock Branch Manager

BRIAN URBAS
Forest City Branch Manager

STEVEN URSICH
Carbondale Branch Manager

PAUL WALSH
Lakewood Branch Manager

LOUIS ZEFRAN
Business Development Officer


                                      177
<PAGE>
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

GARY LAVELLE
President

STEPHANIE A. GANZ, CPA
Treasurer

THOMAS A. BYRNE
Secretary

BOARD OF DIRECTORS
COMMUNITY LEASING CORPORATION

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

SCOTT A. SEASOCK

ERIC G. STEPHENS

OFFICERS
COMMUNITY LEASING CORPORATION

ERIC G. STEPHENS
President

STEPHANIE A. GANZ, CPA
Treasurer

THOMAS A. BYRNE
Secretary

BOARD OF DIRECTORS
COMM FINANCIAL SERVICES CORPORATION

WILLIAM F. FARBER, SR.
CHAIRMAN OF THE BOARD

JOHN P. KAMEEN

SCOTT A. SEASOCK

OFFICERS
COMM FINANCIAL SERVICES CORPORATION

GEORGE COBB
President

JOHN PASH
Treasurer

MARY ANN MUSHO
Secretary


                                      178
<PAGE>
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

FACTORYVILLE BRANCH*
97 College Avenue
Factoryville, PA 18419
570-945-5137

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
Lake Como Road
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

TUNKHANNOCK BRANCH*
Route 6 West
Tunkhannock, PA 18657
570-836-5555

WILKES-BARRE**
601 Baltimore Drive
Wilkes-Barre, PA 18702
570-270-7240

TRUST SERVICES
125 N. State Street
Clarks Summit, PA 18411
800-217-3501

REMOTE ATM LOCATIONS
Keystone College
College Avenue
LaPlume, PA 18440

Moses Taylor Hospital
700 Quincy Avenue
Scranton, PA 18510

COMM REALTY 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 FINANCIAL SERVICES CORPORATION
125 N. State Street
Clarks Summit, PA 18411
570-586-0377

KLICK(SM) BANKING VIA THE INTERNET
www.combk.com
Customer Service:
800-820-4642, Ext. 109


*ATM Locations

**Limited Purpose Office


                                      179
<PAGE>
COMM BANCORP, INC.
OTHER INFORMATION (CONTINUED)

STOCKHOLDER INFORMATION

CORPORATE HEADQUARTERS:
125 North State Street
Clarks Summit, PA 18411

LEGAL COUNSEL:
Saul Ewing LLP
Penn National Insurance Plaza
2 North Second Street, 7th Floor
Harrisburg, PA 17101

INDEPENDENT AUDITORS:
Kronick Kalada Berdy & Co., PC
190 Lathrop Street
Kingston, PA 18704

TRANSFER AGENT:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10007

MARKET MAKERS:
Ferris, Baker, Watts, Inc.
100 Light Street
Baltimore, MD 21202
800-638-7411

Janney, Montgomery, Scott, LLC
1801 Market Street
Philadelphia, PA 19103
800-211-2663

M.H. Meyerson & Co., Inc.
525 Washington Blvd.
Jersey City, NJ 07303-0260
201-459-9500

Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
888-231-7226

Sandler O'Neill & Partners, LP
9 West 57th Street, 19th Floor
New York, NY 10019
212-933-2705

SEC REPORTS AND ADDITIONAL INFORMATION:

Copies of Comm Bancorp, Inc.'s Annual Report on Form 10-K and Quarterly Reports
on Form 10-Q filed with the Securities and Exchange Commission or additional
financial information concerning Comm Bancorp, Inc. may be obtained without
charge by writing to Scott A. Seasock, Chief Financial Officer, at corporate
headquarters.

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 Stock
Market(R) ("NASDAQ") as CommBcp under the symboL "CCBP". As of March 19, 2003,
five 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 2002 and 2001 are summarized as follows:

<TABLE>
<CAPTION>
                                                                         CASH
                                                                       DIVIDENDS
2002:                                               HIGH       LOW     DECLARED
                                                   ------     ------   ---------
<S>                                                <C>        <C>      <C>
First Quarter ..................................   $32.00     $29.00     $0.20
Second Quarter .................................    38.00      31.50      0.20
Third Quarter ..................................    35.97      32.01      0.21
Fourth Quarter .................................   $35.50     $32.76     $0.21
2001:
First Quarter ..................................   $32.00     $25.00     $0.18
Second Quarter .................................    30.85      26.00      0.18
Third Quarter ..................................    31.00      26.00      0.19
Fourth Quarter .................................   $32.00     $26.50     $0.19
</TABLE>

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 and Trust Company at 1-800-937-5449.

WORLD WIDE WEB INFORMATION:

The Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are
filed electronically through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), which performs automated collection, validation,
indexing, acceptance and forwarding of submissions to the Securities and
Exchange Commission and is accessible by the public on the Internet at
http://www.sec.gov/edgarhp.htm.

Additional financial and nonfinancial information can be accessed electronically
using the Company's web site at http://www.combk.com.


                                      180